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SCMMajority of pharmaceutical companies are persisting with decade old processes and routines.  They have transactional relationships with suppliers, lack of concerted efforts to progress ahead, and no vision to reap productivity rewards.  The reasons for continuing with these traditional practices include tax regimes, regulatory hurdles, and stable revenues from customers dependent on existing industry offerings.

Disruption—spurred by technological Innovation, fluctuating customer demand patterns, and more agile and creative competitors—has forced the pharmaceutical sector to think of ways to face these challenges, survive, and thrive.  One of the strategic response to this competitive disruption—by leading manufacturers—is to reexamine their manufacturing operations, embracing agile principles, reducing costs, revolutionizing procurement and distribution functions, and striving to achieve Operational Excellence.  Above all, they view their supply chain not as a cost center, but as a source of Competitive Advantage.

The increasing influence of generic drugs is another challenge for large multinational pharmaceuticals.  In the past, multinational companies (MNCs) dominated the market owing to possessing a number of high-market drugs protected under patents.  Patent protection afforded them the leverage to set high prices on each product.  The scenario is fast changing.  Expiry of high-market drugs patents is creating a huge opening for generic competitors and the space is widening compared to the past.

In the past, pharma manufacturers were able to counter the threat to generic competitors by developing new drugs.  However, this is becoming difficult and the new drugs pipeline is shrinking with time.  R&D expenditure has continuously gone up, however, drug approval from the authorities has not kept paced with it.  It has rather declined, straining the MNCs further.

Other disruptive factors include newer distribution methods, public health plans favoring generic drugs over proprietary ones due to cost effectiveness, the newer internet / mail delivery options displacing traditional pharmacy dispensing options.  Pharmacy chains—e.g. Walgreens—have given a leverage to the retailers to negotiate reduction in medicine prices where again generics have an edge over MNCs.

Moreover, the trend of drugs purchased through a formal tender process is increasingly gaining acceptance, adding to the difficulties of large pharma manufacturers.  Additionally, strict regulations are minimizing the cost benefits that MNCs traditionally enjoyed in the past.

All these factors have forced the pharma companies to reorganize their Supply Chains in a more flexible manner to manage complexities, bring in efficiency, and contain costs to compete in off-patent segment with generics.

Reorganization of a conventional pharmaceutical Supply Chain into an Agile, flexible, and inexpensive Supply Chain warrants developing Operational Excellence and Cost Reduction competencies.  This necessitates 5 strategic steps (phases):

  1. Avoid a one-size-fits-all approach to SCM
  2. Develop Agile product design and packaging capabilities
  3. Restructure the Supply Chain footprint
  4. Establish partnerships with 3rd party suppliers
  5. Enhance planning capabilities

Let’s discuss these steps in detail.

Step 1 – Avoid a One-size-fits-all Approach to SCM

Large pharma MNCs typically maintain the Supply Chain of all of their drugs with a single strategy of retaining high inventory and service levels.  Such a strategy can only work for products having a high profit margin, in a static environment.  It is not suitable for low-margin products, contrasting environments, and does not take into account fluctuations in demand patterns.  An appropriate approach is to implement a multiple Supply Chains model based on individual products and markets.

Step 2 – Develop Agile Product Design and Packaging Capabilities

The 2nd step in Pharma Supply Chain Reinvention involves quick distribution of different versions of products to markets based on demand. For low-margin products with high demand volatility, the Supply Chain Management Strategy should be to employ Pack-to-Order system.  The Pack-to-Order approach involves developing a version of a product that could be timely dispatched to several markets of varying demand across the globe.  This approach coupled with Postponement Strategy—where products are packed to order during later stages of production based on regional demand—assists in trimming down the inventory, reducing complicatedness, and enhancing Supply Chain nimbleness to demand volatility.

Interested in learning more about how to reinvent your Pharmaceutical Supply Chain?  You can download an editable PowerPoint on Pharmaceutical Supply Chain Reinvention here on the Flevy documents marketplace.

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Value ChainA traditional Value Chain involves a linear sequence of activities—from conversion of raw materials into components which are assembled into products.  The products are then distributed, marketed, sold, and serviced.  Management plans and execute strategies and operations based on this sequence.

This set of activities worked well for organizations in the past.  However, this linear progression does not encourage Innovation and provides little protection from the risk of being outperformed by rivals in today’s disruptive markets.  Such a competitive environment calls for implementing more robust ways of managing Customer Demand and Value Creation.

An effective approach to deal with this challenge is the Value Grid Analysis Model.  The Value Grid approach provides a perspective beyond traditional linear progression of activities, where organizations need to balance equilibrium between suppliers and manufacturers aside from concentrating only on reducing lead times.  It outlines new opportunities and risks for organizations.

The Value Grid Analysis provides a number of routes to improve Performance and reduce risks.  It encompasses the following 3 pathways—or dimensions:

  • Vertical pathway – using traditional Value Chain, companies find opportunities upstream or downstream from adjacent tiers in the existing Value Chain.
  • Horizontal pathway – companies look for opportunities from similar tiers in multiple (parallel) Value Chains.
  • Diagonal pathway – explore opportunities to create value across multiple value chains and tiers.

The Value Grid Framework necessitates diverting leadership attention towards 3 key opportunity areas to create Competitive Advantage:

  1. Customer Demand
  2. Information Access
  3. Multi-tier Penetration

Let’s dive deeper into the 3 opportunity areas.

Customer Demand

The first opportunity area to drive competitive advantage pertains to controlling internal and external customers’ demand.  It warrants a company to manage customer demand upstream (suppliers and companies that supply to suppliers) as well as downstream (customers).  By managing customer demand downstream, organizations control the decision makers responsible for the purchase decision.  When companies are unable to control the decision makers, they look for levers across the Value Chain to influence decisions.  These levers include direct advertisements to the end users, focusing on distributors, or incentivizing retailers to recommend a product.  Organizations also try to influence upstream, e.g., their R&D units, to create products which can be used in conjunction with the existing product range to boost their efficacy and benefits for the end-users, ultimately influencing consumers’ decisions downstream.

Information Access

The 2nd opportunity area involves linking information sharing to influence decision making.  A few manufacturers prefer to partner with those suppliers who openly disclose the information (capabilities, flexibility, and pricing structures) of their 2nd-tier suppliers with them.  This assists them in planning and helping the suppliers manage materials and prices better.

For instance, with increased tariff on imported steel and price of steel continuously going up, car manufacturers like Honda purchase steel in bulk and sell it to their suppliers at a reduced rate.  This helps them keep the prices of their cars down and compete better.

Multi-tier Penetration

Nonlinear thinking (Value Grid Model) enables the organizations to determine innovative solutions beyond the scope of traditional Value Chains.  To manage excess demand organizations take on multiple Value Chain tiers to control demand and buyers’ power.

Leading manufacturers evaluate multiple value chain points for their participation in order to scale.  They sell not only to Original Equipment Manufacturers but also in the aftermarket.  Supplying to more than one Value Chain tier allows organizations to withstand pressure from OEMs to reduce costs, demand shifts, and offers attractive margins.

Interested in learning more about the 3 opportunity areas of the Value Grid Analysis Framework?  You can download an editable PowerPoint on Value Grid Analysis here on the Flevy documents marketplace.

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You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro LibraryFlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:

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“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”

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