Pharma procurement at the cross roads – beyond cost reduction?

(We're delighted to welcome a guest post from Jonathan Betts, Sales and Marketing Director at Science Warehouse, e-catalogue and P2P experts)

The pharmaceutical industry stands at a cross roads. Major shifts in market dynamics are challenging the status quo while shareholders and customers are increasingly reluctant to fund innovation. Procurement enterprises have a significant part to play in the reshaping the industry has to undergo to drive value.

A new event, ProcureCon Pharma,  brought together 100 senior practitioners in Zurich recently  against an industry backdrop that is a lot less glittering than that of the city – the snow-covered Alps could be seen from the steps of the conference hotel. After years of boom pharma has entered a perfect storm of cost up/revenue down. The bad weather is being caused by:

-       The drugs bill – a quick and easy hit for governments in times of austerity

-       Product expiry – last year $43bn went off patent with a further $60bn yet to come

-       Less productive R&D – fewer products are entering the market

-       Geographic shift – China will be number 3 in the market by 2014

-       Price sensitivity – purchasers of drugs want demonstration of economic value and not just therapeutic efficacy.

This is combined with increased cost and complexity:

-       Proliferation of marketing channels usurping the traditional rep-physician interface

-       Accelerating R&D cost for each new product

-       Disaggregation of the supply chain as the industry becomes less vertically integrated

-       Increasingly fragmented markets with more specialist therapies.

Because of all this the feeling at the conference was that procurement’s time has come in pharma. There were examples of amazing successes, for example, corporate procurement at Novartis delivered over $1bn in savings last year (against £58bn in net sales). Even so, as Paula Gildert of Novartis says, the ‘winning strategy of cost reduction will not be the winning strategy of the future’.

So what is that strategy given the basic expectation of procurement is to deliver compliance and savings and the future is…yet further savings? For Novartis, and many at the conference, innovation to drive growth is where the future lies. But how can enterprises configured to drive cost reduction be flipped to grow the top line?

The business model of the future in pharma will be much more supplier intensive and procurement has a fundamental role in delivering supplier integration. Effectively managing critical relationships between outsource partners and internal project teams will be critical. There is also recognition that suppliers are true specialists in their areas and by opening the right channels procurement can create the environment to nurture innovation.

In order to deliver this procurement needs to complete the transition from a tactical / transactional role to a more value creating entity. Industries such as automotive and oil & gas have already done this but the pharma sector as a whole is behind the curve. This will require hard work on changing perceptions, as other areas of the business are uncomfortable with procurement moving out of its box.

What are the steps that procurement can take to begin delivering on its promise? Here are some of the thoughts that came out of the conference:

-       Segment the supplier base and build trust with those suppliers identified as strategic in order to encourage innovation

-       Get closer to the business to understand growth objectives in order to actively participate in it

-       Agree and set objectives in procurement that include measures of innovation – not just cost reduction.

All too often procurement is the barrier between internal stakeholders and suppliers rather than facilitator and this is something that should be addressed. The importance of talent management – recruiting and nurturing people with the necessary skills – to bring about this shift was emphasised time and again.

A very practical piece of advice came from Ashley Readshaw, CPO at AstraZeneca where they use a 2:1:2 approach to time management. 40% of time is spent working with partners in the business, 20% on admin and 40% working with suppliers. Senior procurement leaders need to start doing this to set the behaviour for the organisation.

Increasingly procurement capabilities will be required at the core of a successful pharmaceutical organisation, as procurement forms the natural bridge between the business and external world. Talented individuals with strong commercial skills and who want to make a difference are essential to manage the complexity of highly networked organisations. Encouragingly, in progressive organisations procurement has made the transition from transactional to strategic and is increasingly being seen as a key step in the progression to senior leadership.

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