INADEQUATE SUPPLY-CHAIN PRACTICES
The bio/pharmaceutical industry's lack of supply-chain sophistication spans the entire length of the chain, from input sourcing,
through production and inventory management, to distribution. At the front end of the chain, we need only be reminded of the
heparin disaster of a few years ago to appreciate the weaknesses in quality assurance and supplier management for key inputs.
At the distribution end of the supply, the bio/pharmaceutical industry has been under attack regarding counterfeiting and
security of supply. A recent article in Fortune magazine recounted last year's theft of $75 million of finished drug product from an Eli Lilly warehouse in Enfield, Connecticut
(1). The article highlighted the lax security at the warehouse, including failure to monitor security cameras that could have
caught the theft while it was taking place.
Supply-chain management weakness also can be seen in the way the industry manages its inventories. On average, global bio/pharmaceutical
companies turn their inventories a little more than twice a year. They typically have inventory on hand equivalent to about
180 days' worth of sale. By contrast, a best-practice consumer products firm, such as Procter and Gamble, turns its inventory
about six times a year and has about 60 days' worth of inventory on hand. As global bio/pharmaceutical companies try to maximize
their cash-on-hand to help weather the patent cliff and take advantage of licensing and acquisition opportunities, keeping
so much cash tied up in inventory is a competitive disadvantage.
OPPORTUNITY FOR CONTRACT SERVICES
The supply-chain management challenges facing the industry represent a major opportunity for providers of contract services,
especially those in manufacturing and packaging. Because of their critical position relative to both the upstream and downstream
segments of the supply chain, CMOs and packagers are well positioned to help bio/pharmaceutical companies manage their risk
and squeeze cost and inventory out of the system.
We have seen isolated instances of contract-service providers responding to supply-chain management opportunity (e.g., Patheon's
recent efforts to promote its services as a backup source of supply and Almac's short-run packaging services). We've also
seen major providers of third-party logistics services (3PL), such as UPS, make greater efforts to address the bio/pharmaceutical
However, the big opportunity will come when service providers figure out how to increase the flexibility and responsiveness
of their own operations. For instance, every day that a CMO can knock off the manufacturing schedule lock-in requirement from
its traditional three months can save its bio/pharmaceutical company clients millions of dollars in cash tied up in inventory.
The internal process changes necessary to achieve those scheduling improvements are likely to deliver substantial cost savings
and increased throughput. CMOs have traditionally focused on additions to processing technologies, equipment and gain-to-gain
incremental volume. Given the growing supply-chain challenges, a focus on operations excellence in the context of supply-chain
management is likely to yield greater performance for both the client and CMO and yield market share gains going forward.
Jim Miller is president of PharmSource Information Services, Inc., Springfield, VA, 703.383.4903, email@example.com
1. K. Eban, Fortune, Mar. 31, 2011, http://features.blogs.fortune.cnn.com/2011/03/31/drug-theft-goes-big/.