The Pharmaceutical Supply Chain: Supplier Management, Cost Reduction and Beyond (Part 3)

In the first two posts in this series looking at a recent PWC report analyzing the future of the life sciences supply chain (Part 1 and Part 2), I shared a number of insights examining procurement's increased relevance and focus across different manufacturing scenarios which are just as relevant for most manufacturing sectors as they are for the pharmaceutical marketplace. In today's post, I'll continue to explore the subject, by investigating two additional scenarios PWC posits for the future of life sciences manufacturing. I'll also offer up our view as to what procurement's evolving role might look like. I'll begin with the "low-cost provider" model PWC proposes, where "one of the prerequisites ... is a clear understanding of a company's operating costs, so that it can allocate those costs accurately among the different products and services in its portfolio." As important, under this model, "it's also essential to ensure that the cost of each product or service corresponds with the 'value' it provides."

Without question, the low-cost scenario is one that nearly all life sciences and broader manufacturing organizations will face for at least part of their product/SKU range. Yet it's not one that many companies are truly able to realize based on their procurement activities today. I believe the major mistake that companies make is simply "placing spend under management" through negotiation and purchasing automation. Rather, to truly become and remain low-cost players, procurement organizations must focus on developing an innate sense into overall supplier and supply chain cost structures, understanding the trade-offs inherent in both different direct and supplier decisions (e.g., material/ingredient composition, substitution, etc.).

PWC also suggests that companies pursuing this model will need to approach their supply chain with a keen "design for supply" eye that "optimizes the fit between a product's design and the efficiency with which it can be made" which, not surprisingly, "is something many firms are likely to find difficult." In other words, those that simply pursue a traditional procurement-led cost reduction model that focuses on supplier rationalization, vendor negotiation and compliance controls will come up materially short of the mark in this scenario.

Perhaps more interesting from an innovation standpoint than just becoming low-cost -- albeit through potentially radically different ways -- is the "service innovator" scenario PWC suggests as a potential future supply chain path. Service innovators by definition will "build supply chains that are capable both of manufacturing and distributing complex treatments, and of commissioning and managing a multitude of suppliers to provide supporting health management services." Does it sound like this model will require a radical departure from procurement and supply chain priorities and methods today? Absolutely. But at the same time, one could argue this model is already here in different markets for both virtual (e.g., integrated financial services products) and physical (e.g., A&D "power by the hour") goods models.

As pharmaceutical supply chains move to this model, they'll need to invest in systems and teams capable of managing highly diversified sets of suppliers that must work together not just to produce products, but to deliver specific outcomes and results. They'll also need to create incentive structures to further align interests beyond just preserving margin at different levels of the supply chain.

Stay tuned for the final post in this series as we investigate what is arguably the most interesting and challenging supply chain model that PWC proposes, which will require rapid re-prioritization of procurement -- and one that is most certainly relevant outside of life sciences as well.

Jason Busch

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