SOURCING OF ORGANIC COMPOUNDS
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DEVELOPING AND IMPLEMENTING A STRATEGIC SOURCING STRATEGY -
The new year's arrival made me ponder how purchasing is ///. Here are the top 10 purchasing changes in those 10 years.
Innovative Sourcing Strategies
The efficient allocation of capital, particularly in the “make or buy” decision, has the power to
increase earnings and shareholder value. The state of the pharmaceutical industry makes strategic
sourcing decisions more important and more urgent than ever. What are the benefits and possible
problems inherent in sourcing, and what are the best ways to innovate and implement a sourcing
The choices that leaders of pharmaceutical companies make in the allocation and management of
capital have the power to increase shareholder value, improve profitability, provide the resources to
fund strategic investments internally, and shorten response time and customer service.
Potential performance improvements like these are welcome at a time when pharmaceuticals are
struggling to maintain profit and growth scenarios, greater market competition, and increased
pressure from both society and government on their R&D pipelines, and to deliver healthcare
solutions at lower costs.
Strategic sourcing and supply management offers wise managers one of the powerful opportunities to
extract cash from the value chain and set the stage for continued product and service innovation and
growth. The key to unlocking the value in sourcing rests with an understanding of efficient capital
management. Capital drives everything. When the major players in the pharmaceutical industry were
generating strong positive cash flows, capital was not an issue. Now, however, to maintain acceptable
margins, these companies must run at a leaner pitch. This imperative for leaner operations added to
escalating cost pressures and the emergence of capable new manufacturing sources demands that
pharmaceutical companies now re-evaluate their in-house manufacturing operations.
Even if companies continue to do all, or just part of their manufacturing in-house-for proprietary,
quality, competitive, or even ‘insurance’ reasons, the potent combination of market forces has
already begun to change the rules of the game.
Typically, companies are willing to pay what amounts to a premium for in-house manufacturing,
particularly in the critical launch phase of a new product. However, as the product matures, the
market may very well accept these premiums.
The entrepreneurial biotechnology companies, for reasons of necessity, have already adopted
progressive sourcing strategies, and their example is serving as a wake-up call to companies with
traditional in-house manufacturing operations.
Capital and other cost pressures
After more than a decade of mergers, acquisitions, restructuring, and fundamental changes in the basis
of competition, our experience suggests that in-house pharmaceutical manufacturing operations are
often under-used, and burdened with overhead costless efficient than external alternatives. Some
drug makers are starting to see their in-house operations as non-core contributors to their overall
Underlying the wake up call is the experience of the 1970s, during which the FDA and European
Regulatory agencies understandably added essential requirements and controls. Pharmaceutical
companies responded with capital-laden facilities together with over-designed and over-demanding
business processes and policies relative to audit, assurance, regulatory and manufacturing functions.
Some of the companies proudly established policies and control procedures exceeding regulatory
agencies’ requirements, winning the hearts of the medical community. A deeply rooted culture of
delivering higher standards through bureaucratic operating procedures has grown and it is difficult to
change as these policies and procedures are perceived as threshold requirements in the face of growing
capital, cost and other competitive challenges.
During the high-growth, high-return days of the 1980s and eaarly 1990s, these basic business flaws
were easily absorbed in most companies’ bottom lines. Today, however, the changing power structure
in managed care, the regulatory environment, global access to information and markets, and the
ever-increasing pressure for new compounds put continuous pressure on pharmaceutical
Healthcare companies are working harder to maintain the same profit margins they saw in the 1980s.
This has led many companies to look beyond traditional boundaries for ways of creating new value.Escalating cost pressures, directly influenced by managed care, integrated health systems and
employers, have been accompanied by demands for more services and value, such as supply chain
integration with disease management programs. The result squeezes profits. Meanwhile, as market
competition allows every player the ability to ‘choose the best at the best price’, management will
continue to concentrate on R&D, sales, and marketing, the drivers for increasing shareholder value.
Add to this scenario the increased financial pressures from more complex development cycles,
requiring greater capital investment for development launch and production, and the subsequently
reduced patent protection time. This makes it more difficult to recover capital investment. This is
the essence of the problem. The demand at one end of the value chain for increased investment in
R&D and at the other end for marketing to stay competitive draws capital away from the
manufacturing process itself.
In the face of these competing demands for scarce financial resources, companies have launched
rationalization initiatives. In some cases, excess manufacturing capacity has led companies to
generate spin-off facilities and business units, thus fueling the nascent contract manufacturing
Until recently, this contract manufacturing market was fragmented and without clear leaders. Some
players have developed specialized skills, such as complex tableting or effervescents. BASF is an
example. But the market has been characterized by a large number of small suppliers, each with
limited capabilities and limited, if any, global coverage. There have also been problems of poor
compliance by some companies, and certain suppliers, spin-offs, and buy-outs from mergers were
often inflexible tailored to a limited number of products and technologies.
This contract market is now changing. Large pharmaceutical companies, having recognized the
problem are starting to cooperate to drive improvements in the supplier market. A number of
suppliers have recognized the opportunity and are trying to acquire critical mass in terms of
competence and volume. Specialty chemicals companies, for example, have come to see that a large
proportion of their products are commodities, with low margins and high sensitivity to the overall
With this new knowledge and vision, the chemical companies have begun to see themselves as life
science companies supplying active ingredients used by the large pharmaceuticals, and these are
companies with critical mass and global reach. The generic drug companies are another factor. For
them, partnerships with large pharmaceuticals may be an excellent fit in terms of core competence
for particular manufacturing operations.Benefits and advantages
As we noted earlier, the biotechnology companies have been among the earliest to adopt focused
sourcing strategies, not so much for strategic reasons, but rather because they have lacked the
necessary resources. The potential benefits they have seen could be realized by the large
THANKS AND REGARD'S
GLENMARK SCIENTIST , INDIA
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