This Pharma major is doing the right thing by “talking” to its suppliers
Pharmaceutical industry - defensive and an inelastic sector as far as demand is concerned - is known to be relatively less impacted by this recession. But then, it is far from remaining immune and certainly cannot escape unscathed. The lay-off announced by the leading pharma players (Sanofi 650 US sales reps, Novartis 550 US sales reps, Merck ~8000 jobs, AstraZeneca 1400, Wyeth ~5000 and GSK 1000) is proof enough of the problems present in this industry. Though the problems stem from poor drug discovery and expiration of patents, the recession is certainly compounding the situation. Naturally, belt-tightening is high on the corporate agenda with inefficient supply chains ranking at the very top among all the belt-tightening opportunities available.
Perhaps, this particular pharma major forecasted the grim situation today and timely dug a path of making their supply chain lean and efficient; a path they are currently treading that should hopefully lead them to supplier collaboration nirvana. They realize that in this complex world of extended supply chains, there is an increasing reliance on partners – in this case, suppliers and third-party logistic providers - to execute and manage their critical supply chain functions. The company wants to move away from the traditional purchase order process (which offers minimal information exchange) to a full-blown supplier collaboration model which involves providing accurate forecast and stock information to suppliers and have them manage the replenishment. In effect, they want to arm suppliers with the required visibility and give them the flexibility to manufacture economically within agreed parameters. And they are not resorting to this Vendor Managed Inventory (VMI) process for their routine, low-priority buying needs but are instead doing so for their direct material namely Active Product Intermediaries (API’s) and formulations.
What do they hope to achieve? For starters, with this free flow of information, they want to reduce inventory and free up the locked cash. Reducing warehouse space requirements and shortening the lead times, besides freeing up resources involved in cutting purchase orders, is definitely on their “expected benefits” menu. But the biggest benefit, in my view, is the strong positive message they are sending out to their supplier community. By truly integrating them in its supply chain, the pharma major is setting the foundations for a strong long-term relationship thereby sowing the seeds for exponential wins to accrue.
Why are they doing it now? It is not that they hadn’t thought about VMI before. In fact, they have this process up and running but in a nascent manner. They now want it to be scalable and standardized. They realize that in this era of complex contract manufacturing and volatile demand, the “talking” is even more necessitated.
Comments
Hi Amit
Is VMI really collaboration? I would have thought collaboration would go much further to shared views of the same information and the ability to perform shared what-if analysis. Perhaps this is the collaboration nirvana to which you refer and to which we should aspire.
While VMI is undoubtedly an improvement from a complete lack of visibility, much of the time the focus is too much on financial engineering by shifting inventory on to the suppliers books, and too little about working differently with suppliers.
I think the biggest gains in the pharma supply chain can be achieved through collaboration in the distribution of finished goods. Levels of items past expiry can be reduced, as can all inventory levels, without affecting customer service levels.
Posted by: Trevor Miles | March 18, 2009 9:29 PM
Thanks Trevor for sharing your thoughts. It is always heartening to hear different perspectives.
Very true that collaborating during distribution would reduce obsolescence; so can be said during contract manufacturing itself. The nature of this industry, with its high error sensitivity, is such that the sooner (in the supply chain) collaboration starts, the better. True supply chain synchronization would be when cost is not simply pushed back into the supply chain to be passed on later, but rather is pushed out of the supply chain by enabling all players in the supply chain to plan based on timely, accurate information. Thus your point that collaboration should go much further to include what-if analysis on same information views is spot on. VMI is a way of collaborating - certainly not the start and end of it – and more so when that way involves sharing forecast data with contract manufacturers and offering them the freedom to decide product lots and sizes so as to manufacture economically.
Posted by: Amit Tambi | March 20, 2009 5:32 AM
Amit,
Forecasts can be shared without the VMI model. Pharma majors would obviously have systems which would enable suppliers to see their requirement on a day to day or weekly basis apart from forecast details. I see VMI more as a method to spin off your inbound logistics activities. VMI takes care that your plant gets items when you need thereby improving your cash to cash cycle time.The 3PL provider would keep in touch with your suppliers based on your requirement and would consolidate half truck loads into full truck loads by going for a milk run system. There are definite benefits involved in VMI , but I dont see forecast sharing as a big benefit in setting up a VMI system.
Posted by: Venkataraghavan | March 23, 2009 8:48 AM
Venkat – sorry for the delay in responding to your comment.
Forecasts can certainly be shared irrespective of the inventory management model one adopts. My comments above were in response to VMI and collaboration; they were not to suggest that forecast sharing is a benefit derived from setting up a VMI system. In fact, it is the vice versa. Taking a step back, the company wants to adopt VMI for its direct materials for several reasons including those that you have listed above (but excluding moving inventory off their books). And for enabling their suppliers to manufacture in the most efficient way, they have to share their forecast. Thanks.
Posted by: Amit | March 30, 2009 8:40 AM