The cost of outsourcing is frequently understated. While contract manufacturing organizations often include a service or management
fee in their outsourced price, this should not be confused with the customer's cost of managing the contractor. This includes
costs for internal resources, management tools, and business process development required to operate effectively and efficiently.
On the other hand, when the relationship is not managed effectively, cost takes the form of a poorly run outsourced manufacturing
capability; where the costs may be measured in terms of yield, quality, or schedule, and can be much larger than the value
of the required management resources. When a company's primary focus is on cost reduction, there is a tendency toward bids
with limited support from the contractor. This is often exacerbated in smaller companies by the pressure to also cut internal
When resources for managing a contractor are not adequately planned for, supply chain management issues may manifest in a
number of areas. There may be a lack of proactive management activities, including an absence of key performance indicators
(KPIs) with which to monitor the contractor. A lack of KPIs typically results in poor understanding of how the contractor
is performing at a strategic level, which leaves the company blind to rising issues. There could also be a lack of resources
for handling issues as they arise with the contractor, in which case the problem takes an extended period to solve, or the
day-to-day activities suffer, or both.
CONSEQUENCES OF POOR MANAGEMENT
A lack of overall supply chain control not only contributes to an inefficient business model, but can inflict damage, in the
form of stockouts, allocations, or quality control issues. Supply chain visibility is a key issue at many biopharmaceutical
companies. Product cycle times for biologics are typically longer, and when they are distributed over several contract operations,
it becomes difficult to see how much material exists at each stage and where it resides. The result is additional buffer stocks
of inventory in the supply chain in order to compensate, and a large amount of effort spent tracking where materials are,
determining when product will be delivered, and expediting shipments of product.
A lack of supply chain control is particularly meaningful during a product recall. A company may think it has adequate operational
control over its supply chain and lot traceability, but with an extremely short deadline for ensuring that correct material
is recalled from the market, timely or immediate access to the information is critical. If the locations and amounts of specific
lots of product that must be recalled are not determined within the FDA's deadline, all of the product must be recalled. This
has tremendous negative ramifications on the market's perception of the product.
One company, for example, suffered from a combination of both problems. While quality and compliance were monitored closely,
the company was not measuring the performance of its supply chain contractor, and was unaware of product availability issues.
As delivery of product began to be impacted, a flurry of activity out of the supply chain group ensued. It was unclear where
the problem was. The situation worsened as less time was spent on activities like placing orders and checking order status
throughout the supply chain. Additional resources from other areas of the company were deployed to support the supply chain
group. Eventually the supply emergencies were addressed, but only on a case-by-case basis and without any actions that would
help to prevent the issues from recurring in the future.
Appropriate resources and funding are required for proper supply chain management. Even emerging companies have adequate funding
to manage contractor relationships, if it is planned for. Without the internal knowledge of what is required to run an outsourced
supply chain, the budgets are often not set up correctly, and resource expectations are set at a reduced level. The budget
cycle is usually an annual event taking into account next year's requirements. Sometimes it includes estimations as far out
as five years, and these tend to set the precedent for the amount of resources allocated to supply chain management. Then
once operations begin in earnest, the need for additional resources becomes apparent. It is understandable how this miscalculation
can be made, since the supply chain is an external function and often not defined to the level that internal functions are.
Unfortunately, the additional resource requirements may be identified outside of the budget process and therefore cannot be
remedied until the next budget cycle which can be up to a year away.