How to Reduce Unnecessary Compliance Costs

By identifying and eliminating non-value-added activities, drug manufacturers can avoid falling into the same cost-traps in the future.
Jun 30, 2010


James P. Catania
For biopharmaceutical companies, the total cost of current good manufacturing practice (cGMP) compliance has become a significant percentage of the cost of goods sold. Some of the cost is driven by increasing regulation. What drives much of the cost, however, is the evolution of activities that might be unnecessary. Successful organizations adopt an approach to compliance that focuses not only on the costs of quality assurance (QA), quality control (QC), and regulatory affairs activities, but also on the underlying and often hidden factors that drive excessive cost throughout all functional groups in the organization. They do so by applying some basic activity-costing principles to compliance functions that provide these savvy organizations with opportunities to simultaneously reduce cost and improve compliance effectiveness.

A MORE REVEALING WAY TO ANALYZE COMPLIANCE ACTIVITIES

Figure 1 shows the three basic activity–cost buckets into which an organization's activities can be separated.

When a percentage value-added analysis is conducted, compliance-related activities, particularly those associated with QA and QC, typically are categorized as business value added (BVA) activities. BVA activities are not directly involved in the conversion process (converting raw materials into product) but are essential because without them, the product can not be produced and sold.

This method of accounting for compliance can be useful but it conceals as much as it reveals. The activities and resources (costs) used to do what is actually necessary to meet regulatory requirements generally are only a fraction of the total spent by an organization. The problem begins with automatically categorizing all activities and costs associated with compliance-related functional groups as BVA. Many of the activities and associated costs are, in fact, non-value–added (NVA). These are NVA because they have nothing to do with the conversion process and they actually contribute nothing to achieving compliance.

Differentiating between BVA and NVA in compliance is challenging because it requires stepping back and looking at the function in a different way. Instead of automatically seeing compliance activities as BVA, we have to look more closely; and when we do, we find that many of those activities are in fact NVA.

NVA compliance activities arise in two ways:

  • they are driven directly by failure
  • they are driven by anticipation of failure.

The first step toward more cost-effective and improved compliance is to understand those two forms of NVA activities.