life sciences, webinar, operations strategy

Featuring: Bob Bissett, Associate at OPS Rules, David Simchi-Levi, OPS Rules Chairman and Professor of Engineering at MIT

Host: Dan Gilmore, Supply Chain Digest 

Dan: Where do you see supply chain maturity in the Life Sciences markets versus say consumer goods, retail, high tech, etc.? 

David:  Ten years ago, when you talked to a pharmaceutical company there was very little interest in the supply chain. It was simple. Margins were very high. The focus was on how to make sure no customer orders were lost. Today the situation is different, many products are off the patent protection system and as a result prices and margins are down.  Therefore, there is pressure to reduce costs and focus on restructuring the supply chain.  But as you cut costs and restructure the network, many important supply chain issues start to emerge.  Indeed, the pharmaceutical industry is behind industries such as consumer goods where the margins have always been very small, so efficiencies and responsiveness were always important objectives to emphasize.

Dan: Bob, I am not an expert in the Pharmaceutical industry, but certainly reading the Wall Street Journal everyday you look at the difficulty Pharmaceutical companies are having with the blockbuster drugs and combine that with government pressure on pricing and everything else, it seems like the supply chain is the logical place to turn to keep the bottom line healthy.

Bob: All the Life Sciences companies have done work and made an effort to reduce cost and improve performance. But now we are at the point where there is pressure to make more fundamental changes in the way the industry manages its operations and that’s where there is an opportunity to introduce innovative supply chain and operations practices.

Dan: David, you seem to be equating complexity with having a long tail, but companies have many products that they have to maintain for regulatory or for other reasons, how can they manage their complexity? 

David:  No, we don’t equate complexity with the long tail. We focus on three levels of complexity: product complexity, process complexity, and organizational complexity, and our experience is that they are directly related.  That is, if you are able to reduce product complexity, you are able to identify ways to reduce process and organizational complexity.

Similarly, it is not necessarily possible to eliminate all products in the long tail.  Some of these products generate high revenue or high margins or they may drive sales of other products that generate high revenue.  The point that we are trying to make here is that there is a systematic, scientific method that companies can use to identify those in the long tail that you need to maintain for whatever reason and those that you should remove.  And, those products in the long tail that you keep, you may want to consider a different operations and/or consumer-pricing strategies that better aligns customer expectations with supply chain costs.  We are therefore suggesting a systematic process to identifying those products that are important and determining the best way to manage them.

Dan: David, everyone would love to reduce complexity, what are the real barriers to doing this that are specific to these industries?

David: In general, there are three barriers: 1. Understanding that these engagements are strategic, not tactical. 2. Complexity reduction is not only about eliminating SKUs.  Complexity management needs to include the appropriate supply chain segmentation.   Indeed, complexity reduction implies the need to segment the remaining SKUs by product, customer and channels and then, apply the appropriate supply chain strategy to each segment.  3. Finally, the challenge is to take advantage of synergies across the different supply chains. These synergies appear in 5 areas: product design, procurement, manufacturing, logistics, and product fulfillment. Therefore, complexity reduction is not just about eliminating SKUs, it is about your entire supply chain strategy.

Dan: Bob, in these industries where does reducing complexity rank on the CEO radar? Is it high in most cases?

Bob: It is a very important issue for most CEOs. By their nature, the pharmaceutical and other life sciences companies are very complex and therefore, they have complex and highly regulated processes. This has always been an issue of importance and increasingly so as supply issues have arisen.  In addition, these companies struggle with product proliferation and supply chain complexity created through mergers and acquisition as well as internal growth. Therefore, managing complexity is a key issue for the senior management of pharmaceutical companies.

David: We need to recognize one of the key challenges in this industry as well as others. This challenge has to do with the existence of different supply chains within the organization. This includes the development supply chain that deals with new product introduction and the fulfillment supply chain associated with the flow of physical products between different facilities. The challenge is that different executives are responsible for different supply chains. For example, the VP of engineering is responsible for the development supply chain, the VP of supply chain is responsible for the fulfillment side, and the VP of manufacturing for the manufacturing activities, etc.  These are different executives with different incentives and different objectives. The problem is that complexity reduction and management is an issue that needs to be at the center of those focusing on new product introduction, on manufacturing and on order fulfillment.  This requires an alignment of the development supply chain and the fulfillment supply chain, and for a lot of companies, this is a major challenge.

Dan: You talk about how forecasting can actually increase variability.  Are you saying that you shouldn’t forecast? It’s amazing how many companies hope to get rid of supply chain variability through improving their forecasts.  This is the number one initiative that many companies cite in surveys.  Are you saying don’t try to improve your forecast?

David: Not at all, I am not saying you shouldn’t focus on forecasting.  But it may not be the most effective way to reduce variability, as forecasting and demand-planning tools actually tend to increase variability in the supply chain, familiarly known as the bullwhip effect.  This is directly related to lead-time and therefore, one effective way to reduce the impact of variability is by cutting lead-time by as much as you can.  When you reduce lead-time, you reduce the increasing variability along the supply chain. Often, companies say that if we could just decrease forecast error by twenty or thirty percent, we will improve performance.  So a few years ago, we ran a survey trying to understand how companies compete in different industries. We classified how companies handle their supply chains into three categories: best in class, worst in class and average. Then, we looked at forecast accuracy. What do you think we found? We found that there was very little difference in forecast accuracy between the three categories. I am not saying forecast accuracy is not important. I am saying that it typically does not provide a competitive advantage.

Dan: Overall cost reduction is a focus for many companies in the current financial environment. Is there any risk in this?

David: Executives typically talk about reducing cost by all means. When you make this type of decision you need to recognize the need to align the customer value proposition, business strategy and operations strategy. In some cases, for example, for products under patent protection, the main focus should not be on cost, but on responsiveness.  Even for those products, where the focus is on efficiency such as generic drugs, there is a need to find the right balance between cost and service as well as cost and flexibility.  In addition, when you cut costs you start increasing risk.  Therefore, cutting cost, managing risk, maintaining the right level of flexibility and providing the right service level are all important objectives for the organization that need to be kept in balance.

Watch the full Life Sciences webinar here:

Register for our next webinar on Advanced Supplier Management November 15th at 11:30am ET below!


Written by Stephanie Stein, Marketing and Social Media Coordinator at OPS Rules Management Consultants

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