Outsourcing In The Pharma Industry – Make Or Buy

<p>PART I&nbsp;</p><p><strong>Outsourcing in the Pharma Industry &ndash; Make or Buy&nbsp;</strong></p><p>Yearly, outsourcing activities to external manufacturers are growing permanently in the pharmaceutical industry. This trend can be triggered by the attractiveness in terms of Profit &amp; Losses (P&amp;L) derived of labor cost optimization or due to lack of proper know-how internally among other drivers.&nbsp;</p><p>Main Reasons &nbsp;</p><p>A pharmaceutical company, the Company, could decide to outsource partially or totally some of its manufacturing or packaging or any other operative activities and entering in the outsourcing business motivated by some of the following reasons among others:&nbsp;</p><ul><li>Internal capacity constraints in the own sites&nbsp;</li><li>Lack of appropriate technology and/or specialized know-how internally.&nbsp;</li><li>Pharma-political or protectionist regulations to force the local production in countries where some international companies are present, but they do not have a manufacturing plant installed.&nbsp;</li><li>Commercial and business considerations about strategic or tactical opportunities.&nbsp;</li><li>Financial and taxation advantages.&nbsp;</li></ul><p>Apart from the previous considerations, during the last two decades one of the main factors to increase the outsourcing have been related to corporate decisions in order to optimize their number of factories around the world and reduce network complexity, impacting obviously in the relocation of that productions sometimes into other own company sites but other times, into external partners.&nbsp;</p><p>When the decision to outsource is taken it will demand to start a huge contracting process with some Contract Manufacturing Organization (CMO) that will need a high involvement of the industrial organization and other key internal business partners, such us legal, purchasing or procurement, finance, and others.&nbsp;</p><p>The company will be beginning a long process of relationship with the CMO that would travel through four main stages or processes.&nbsp;</p><p>Lifecycle of CMO management&nbsp;</p><p>a &ndash; Selection phase&nbsp;</p><p>During this stage the most competent and suitable manufacturer must be identified. Negotiations are started and finally the commercial, regulatory and quality agreements must be closed and signed. A fair and a proper selection process will be key and such adoption of a criteria concept that must be sustained during all this selection process.&nbsp;</p><p>b &ndash; Transfer phase&nbsp;</p><p>This process places the third-party manufacturer to be in accordance with the specifications set forth in the agreements or contracts. Several and technical activities are performed according to definitions and regulations. A multi-area project team should be defined between the Company and the CMO. Clear roles and responsibilities are mandatories.&nbsp;</p><p>c &ndash; Operation phase&nbsp;</p><p>The operational routine process supports the compliance of commercial supply of the relevant products in time, in quantity and in budget. During this stage the mutual support and respect to the agreements will feed the relationship continuously. Trust, customer orientation and a high service level mindset will be fundamentals during this time. The Company and the Third Party or CMO should redefine and/or reinforce the future of the relationship if needed after every follow up meeting to be done periodically.&nbsp;</p><p>d &ndash; Discontinuation phase&nbsp;</p><p>This process is the phasing out of the partnership in accordance with the provisions set forth in the discontinuation section of the selection phase.&nbsp;</p><p><strong>&nbsp;PART II&nbsp;</strong></p><p>Classification of CMOs&nbsp;</p><p>Several classifications are possible, but to facilitate our thought and approach, the following will help understanding some levels or ranking among CMOs, third parties or business partners.&nbsp;</p><p>1. Tactical partners&nbsp;</p><p>This CMO operates in certain circumstances or due to different business factors. This could be a transitory relationship. It could evolve into a more robust partnership if it fulfills all those required characteristics defined for a key partner.&nbsp;</p><p>2. Specialized partners&nbsp;</p><p>Specialized Partners are those CMOs that have specific technologies and/or skills that the Company does not currently possess, and it is not foreseen to acquire in a near future.&nbsp;</p><p>3. Key or Preferred partners&nbsp;</p><p>These CMOs are those that will allow us to construct a mid/long-term partnership. With this level of third parties a &ldquo;win-win&ldquo; environment must be discussed, constructed, and lived from the beginning of the relationship. These are the ideal partners.&nbsp;</p><p>Ideal Partnership&nbsp;</p><p>The secret of this relationship is detected and clearly will define the building of the attractiveness for both parties. &nbsp;</p><p>The Company should find an extension of its operations with the partner who should be open to share and sustain common objectives from the start point. &nbsp;</p><p>The CMO should find in the Company the guarantee of growing through the optimization of its site capacities due to its new volumes&nbsp;</p><p>Some essential topics that the Company must require from a CMO come from the four perspectives of the basic principles of Kaplan and Norton's original Balanced Scorecard model: Financial, Customer, Internal processes and Growth as follows:&nbsp;</p><p><span style="text-decoration: underline;">Financial perspective&nbsp;</span></p><p>Clear P&amp;L and breakdown of the CMO production costs&nbsp;</p><p>A very high CoGS (Cost of Goods Sold) improvement mindset&nbsp;</p><p>Permanent benchmark that derives in a proper competitiveness market position&nbsp;</p><p><span style="text-decoration: underline;">Customer perspective</span>&nbsp;</p><p>Knowledge and expertise of our portfolio or with similar products.&nbsp;</p><p>Research and development capacity and experience.&nbsp;</p><p>Agile market access and regulatory support background.&nbsp;</p><p>Local, regional, and international Health Authority (HA) permits and certifications.&nbsp;</p><p>Well known and good recognition in the market and industry.&nbsp;</p><p><span style="text-decoration: underline;">Internal processes perspective</span>&nbsp;</p><ul><li>Service level commitment&nbsp;</li><li>Full compliance with high standards established.&nbsp;</li><li>Lean mindset and continuous process improvement culture&nbsp;</li><li>Permanent innovation&nbsp;</li><li>Knowledge in free trade and bilateral agreements.&nbsp;</li><li>Export capability&nbsp;</li></ul><p><span style="text-decoration: underline;">Learning &amp; Growth perspective&nbsp;</span></p><ul><li>Service orientation and voice of customer (VoC) approach&nbsp;</li><li>Quality culture and learning mindset well established and lived.&nbsp;</li><li>Collaborative, proactivity, facilitation, and loyalty environment.&nbsp;</li><li>Winning attitude based on a win-win spirit.&nbsp;</li></ul><p>Of course, the above characteristics are only examples that intend to demonstrate the basis of this preferred partnership who should work absolutely in a &ldquo;long-term view&rdquo; agreement basis where that CMO always should be the &ldquo;first option&rdquo; to outsource a manufacturing or developing stage of a product to be externalized.&nbsp;</p><p>From the start of the relationship until a real and integrated partnership is achieved, we will surely transit the following phases:&nbsp;</p><p>Exploration: Everything will be new for both, and we will learn from each other. The road will be long so &ldquo;start small with few goals&rdquo;.&nbsp;</p><p>Cooperation: One-sided partnership. Consider ways to give as well as to receive.&nbsp;</p><p>Collaboration: Two-sided, limited partnership. Development of a strategic plan to extend, strengthen and improve the partnership.&nbsp;</p><p>Integration: Here we find a productive and mutually beneficial partnership. Actions are directed to rewarding and recognizing the partnership. It is necessary to nurture the partnership to keep it successful.&nbsp;&nbsp;</p><p><strong>PART III&nbsp;</strong></p><p>Pharma Business &ndash; OTC Market and related operations&nbsp;</p><p>Majority of pharmaceutical companies are mostly focused in &ldquo;ethical or prescription market (Rx)&rdquo; and &ldquo;over the counter&rdquo; (OTC) market. Their products are under the same &ldquo;Health Regulatory&rdquo; environment no doubt but their markets, OTC and Rx, are in essence different. &nbsp;One difference lies in the speed to react in front of the multiple competitors among other topics and due to this, OTC&rsquo;s current portfolios could be enlarged with new products that would arrive from companies that will become new CMOs for the network.&nbsp;</p><p>We could say OTC competition is a different league, where timing is essential, and it requires several specificities coming from the pharmaceutical industry as well as skills inherent to the retail business. Nowadays, it is not rare to recruit in areas such as marketing &amp; salespeople coming from P&amp;G, J&amp;J, PepsiCo, Coca-Cola, etc. to work in the OTC Pharma world where a proper media management is mandatory and customer loyalty could be constantly modified. The industrial operations will be triggered by these changes and redefined accordingly.&nbsp;</p><p>Speed, decision taking, response time, clear and assertive communication, among other factors, will be key to succeed in market share in the OTC world. This changing environment will require flexible and proactive collaborators, willing to openly discuss any issues to protect company&rsquo;s interests. Operations and supply chain management will move from a &ldquo;Sales-forecast deviation&rdquo; to a &ldquo;Sales-forecast management&rdquo; approach where a permanent, focused and fluid contact between operative and business areas will be fundamental.&nbsp;</p><p>External Manufacturing Team in a Pharma Company&nbsp;</p><p>A proper concept and a clear strategy need a high performing team to sustain and develop all the actions to reach the aim.&nbsp;</p><p>Teams should be enlarged according to new challenges. Existing teams dedicated mainly to quality, production, packaging, project management, finance aspects should be reinforced by technicians and experts that know the industrial network to permanently search alternatives to develop the best partnership for the company. Experts in market access, from the industrial point of view, with a high knowledge of the regulations, will be become crucial to compete in this game. A wide background on foreign trade and international commerce; regional free trade agreements and customs expertise shall be mandatory as well. &nbsp;</p><p>This internal, focused and dedicated outsourcing team, together with the best network of partners will be the success factors and the main difference between: The "success" or just "to maintain the status-quo" without any chance of growth and the "&ldquo;failure&rdquo;"...&nbsp;</p><p>Finally&hellip;&nbsp;</p><p>The pharma-political and economic environment is very dynamic and changing permanently, and the opportunities are growing year by year and under this context a proactive supply network will be a decisive and critical success factor to accompany the business strategy. &nbsp;</p><p>If &ldquo;Make or Buy&rdquo; is the question and the resultant is the outsourcing the Company must be prepared to give the best performance of their organization from the beginning. &nbsp;</p><p>Once more time, the best network plus a proper teamwork will be the answer to that dilemma&hellip;&nbsp;</p>
KR Expert - Edgardo Rodriguez

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