Two critical factors that affect pharmaceutical supply chains

Comparing bids is a critical step since it affects the overall production cost and product margins. In our experience helping companies find the right suppliers and establishing resilient supply chains, we have noticed that there are two critical factors involved. This article overviews both of these factors and how they fit within a sourcing strategy.

Factor #1 - Internal evaluation of pharmaceutical sourcing activities

The generics industry often works with limited margins, which means that even a tiny change in internal processes can result in continuous savings. Day-to-day management often pushes strategic analysis to the back burner, but this activity is crucial. There are many frameworks in which we can evaluate internal processes, such as the Procurement Scorecard seen below. This is a simple matrix that classifies sourced into four different types of procurement: Leverage, Critical, Transaction and Market.

This matrix allows managers to quickly evaluate the cost and risk of every item that is sourced by the company. Working with a contract firm to evaluate the sourcing strategy can be helpful, particularly while working with extensive formulation portfolios or with limited human resources. The goal of this analysis is to provide decision-makers with a clear classification of the state of procurement of every item sourced.

The Leverage Quadrant groups items that can be bought in volume, such as chemicals and semi-finished products. Leverage items are often covered by long-term contracts, which means that they require intense research. In other words, sourcing items classified into this quadrant involves analyzing the cost, quality, delivery, packaging, logistics, inventory management, and even the sales support offered by the potential supplier. 

The Critical Quadrant includes items that require a lot of investment, are essential for manufacturing a certain formulation, or help to create a competitive advantage. This quadrant usually includes custom items that are tailored to the needs of the purchaser or have active patents with no available generic alternatives.

The Transaction Quadrant encompasses items with a limited supply and a lower total value. Usually, a limited number of suppliers offer these items, making the cost of searching for a new supplier outweigh any resulting savings. Some examples include one-time purchases, trade journal subscriptions, and emergency supplies needed at remote places. 

Finally, the Market Quadrant includes standard items with low to medium value, which many suppliers often offer. This category encompasses commodities such as standard packaging, and low-cost raw materials. 

Once every item has been classified, it is necessary to define a sourcing method for every formulation and pharmaceutical component and decide if a certain item needs to change its procurement strategy altogether. As decisions are implemented and suppliers are onboarded or phased out, the Procurement Scorecard can be used to analyze the effect of these changes over the overall sourcing management.

Factor #2 - Choosing the right sourcing strategy

Sourcing raw materials, manufacturing, distributing, and delivery can vary between different pharmaceutical products or different markets. Below is a general example of a pharmaceutical supply chain for a formulation marketed in the United States, as it can be seen by the inclusion of a PBM (Pharmacy Benefit Manager) who often mediates in the price negotiation between the manufacturer and the pharmacy.

Depending on certain characteristics, the strategy of a supply chain can be classified as: single, multiple, dual, parallel, network or triadic sourcing.

Single sourcing

This strategy is characterized by the buyer’s reliance on a single source due to a limited number of suppliers or special characteristics of the formulation. Suppliers often have an active role in product development, which deepens the relationship with the buyer. This is the strategy which can be seen in the example above.

Multiple sourcing

involves working with a set of prequalified suppliers that can deliver the formulation according to the specifications contained within the contract. Since suppliers compete with each other, this strategy is perceived as an adversarial approach to supply relationships, meaning that the buyer remains highly independent and may switch between suppliers easily.

Dual sourcing

This strategy splits the production between two similar or equivalent suppliers to reduce risk or when it is necessary to have the capacity to replenish a particular formulation in a shorter timeframe and thus reduce the volume of stock.

Delegated sourcing

This strategy involves assigning an entire part of the supply chain to a single supplier in order to reduce transaction costs.

Parallel sourcing

This strategy is for more active buyers who would like to work with each of the suppliers that provide the components required for a product, or that manage multiple sourcing strategies across different product lines. 

Network sourcing

The supply is managed in a hierarchical format in which suppliers are managed in different tiers, with at least two suppliers for every product line in which one is awarded a guaranteed percentage of the total production volume.

Triadic sourcing

This strategy is based on selecting similar suppliers for every product or every component. There are supply relationships between the buyer and each of the suppliers, as well as between both of the suppliers, increasing the interdependency between the two.

Renovating an existing supply chain

Leveraging the above two factors and implementing strategy changes might be difficult with organizations that are busy with day-to-day activities or which do not have enough time or resources. This is why The J. Molner Company has a team of pharmaceutical experts with years of experience in supply management who can work with the in-house team to build better and more resilient supply chains. By working with an external partner, companies benefit from having a broader understanding of industry trends, regulatory changes, and emerging technologies which affect pharmaceutical production.

Analyzing the factors described in this article are excellent first step to improve a sourcing strategy. By first evaluating the state of sourcing and then assigning a procurement strategy for every item, we are sure that pharmaceutical companies can find opportunities to allocate resources more efficiently and build better supply relationships.