Building Global Supply Networks

By Bill Connell, Maxiom Group | October 9, 2012

Virtual pharma’s best practices for evaluating CMO needs

What is the high-level business model for a successful virtual pharma organization. How does a virtual pharma go about building a global supply chain? 

The high level business model of a virtual pharmaceutical company can involve a few external partners in a straight, streamlined supply chain for a single product, or it can be a large, highly complex “network of tens” of external partners for many products. From the start to end of the supply chain path, partners can include: API and raw materials suppliers, Contract Manufacturing Organizations (CMOs), packagers and 3PL distributors, sales distributors and order processing, and finally the customers.

Figure 1: Virtual Pharma Supply Chain

The supply chain can include partners for each of these boxes in Figure 1. Some virtual companies choose not to let the external partner have total control of the contracted activities. Limited control relationships typically occur with certain API/raw material suppliers and sales channels. Maintaining partial control over the external partners’ activities is generally a strategic decision to mitigate risk if a material supply is critical or expensive.  External processes in the middle of the supply chain — contract manufacturing, packaging, distribution and transportation, order processing — are typically wholly outsourced to partners.  For example, in limiting control with a sales partner, a virtual pharma could make the strategic decision to manage one specialty product, determining its own unique sales and distribution channel; all other products would remain in the virtual pharma partnership model.

Identifying Needs
How does a virtual pharma evaluate its requirements for choosing a CMO? The most important decision for a virtual company is selecting the supply chain partners, as they are only as strong as their weakest partner. Specifically with CMOs, a company must decide whether it wants to outsource manufacturing of drug product or drug substance. To do this it must evaluate its internal core competencies and the CMO’s expertise. Also, it must determine whether to outsource distribution, transportation, and other supply chain functions. These decisions outline the organization’s supply chain strategy and should account for the entire supply chain from customers back through to drug substance manufacturing.

After the organization’s unique requirements have been identified, the CMO selection strategy and operational plan should start with a formal RFQ process. First, a list of three to five potential CMO candidates is developed based on the company’s own industry knowledge, research, and experience. These CMO candidates are contacted and invited to respond to an RFQ, which outlines the requirements. These CMOs should be ranked based on their responses to the RFQ and the key selection factors listed above. Once two to three finalists have been identified, site visits should be arranged to assess on-site operations and a quality audit should be performed.
When making a final decision, cost is always important. However, for virtual pharma companies that do not control their own internal manufacturing and packaging facilities, the importance of the CMO’s quality and compliance history is the most critical factor.

Many companies still do not have the self-discipline and internal control to develop and routinely utilize a well-defined CMO RFQ process. Without a defined process, when a company adds a new product to their portfolio, they will incur unnecessary risk by contracting with a new CMO or packager that has not been sufficiently vetted.

So what type of considerations should a virtual pharma make based on its current CMO or supplier’s quality and compliance record?

If the partner is already a current CMO or supplier, then it should have passed the organization’s minimum quality and compliance requirements. Less severe quality issues are isolated incidents that are discovered and rectified quickly by the partner with a corrective and preventative action (CAPA). However, major quality issues occur when the CMO or supplier has a compliance issue in its plant’s overall quality system. In this case, it should make significant efforts to correct the failings of these systems, which can take months, stalling production. In this situation, alternative partners should be considered. CMOs or suppliers with particularly strong quality and compliance records should be considered when an organization needs to outsource for additional products or raw materials.

Contract/Relationship Management
This leads to the questions, “What types of elements must be in the contract agreement? What type of relationship should one have with material suppliers and CMOs? What should be the balance of control within the contract?”

Any negotiating and contracting process should be guided by a company’s legal department and incorporate the standard language. However, there are a few key areas of concern that vary based on the project and partner relationship:
1) quality and compliance,
2) supply levels and price,
3) liability terms, and
4) shipping and INCO (International Commerce) terms. 

Quality will be driven by the previously determined and well-documented  specifications of the raw materials and drug product. Agreed price and supply levels will be the outcome of negotiations with the external partner or the RFQ process.  INCO terms are an area that is often overlooked by companies, which creates liability gaps in the supply chain. Companies generally only address this area as a reactive measure once a costly negative incident occurs that uncovers the gap and forces the virtual pharma to foot-the-bill. Being proactive and the inserting the appropriate language at the time of contract can save a lot of pain later.  

Working with an external partner requires a strong relationship. A virtual pharma can work with its CMO/supplier to garner suggestions on how to continuously improve my processes. In fact, relationship building is essential due to the unique requirements of a small virtual pharma, which needs the “right” set of technical, quality and capacity capabilities. It is much more important to build a strong relationship between the two companies and make sure the negotiated agreement benefits both sides. Relationships start in the negotiation of the contract; incorporate gain-sharing terms and incentives, so that both parties share rewards of joint improvements.

Having a close relationship with a key external partner can allow for the sharing of more sensitive information due to mutual trust; this can help both parties in managing their internal strategic activities. For example, if a company is acquiring a new product and additional manufacturing volume is needed from one of the CMOs, a close relationship and a strong quality record can make a certain CMO the obvious choice.

Strategic Thinking
There are many differences in manufacturing and supply chain strategy for a virtual pharma versus a traditional pharmaceutical innovator/manufacturer. First, the virtual pharma model eliminates the high initial investment of owning the manufacturing process. The downside is a loss of control over the manufacturing part of the supply chain. Also, there are major differences in risk mitigation strategies (cost vs. control of supply chain), as well as the depth of products and patents, both of which affect the decision-making of the organization.

Thus, it’s important for a virtual pharma to define and integrate business continuity issues into the supply network strategy. Three key activities to having a business continuity focus in the network strategy are:
1) identifying material and supply gaps,
2) increasing transparency of information to eliminate knowledge transfer gaps, and
3) increasing efforts to make more robust processes with secondary suppliers and qualified CMOs/external partners.

So, what is the difference in strategy approaches for building my global supply network for the long term vs. the short term? The key difference is that a virtual organization is working with different deadlines. Short term, the organization may be focused on quickly getting a product to market, where the priority is the short timeline, as opposed to cost considerations. However, long-term strategy allows a refocus on lowering cost and implementing long-term business continuity initiatives through suppliers and external partners.

Tracking Performance
There are numerous ongoing scorecard metrics to track the performance of CMOs and suppliers. Which key performance indicators (KPIs) should a virtual pharma use to evaluate the global supply network?

An organization should strive for the 5-point “Perfect Order.” This means
1) on-time delivery,
2) delivered to the correct location,
3) invoiced at the correct price,
4) with the correct quantity ordered, and
5) perfect quality.

These are the basic attributes to track order performance; however, there are many more KPIs one can focus on, examples of these metrics are shown in Figure 2.

Figure 2: KPIs for managing external partners

Risk Mitigation
The pharma landscape has changed dramatically in the past 20 years. That evolution has opened the door to new business models, including the emergence of virtual pharma. Why can you have a successful virtual pharma today as opposed to 20 years ago?

Big pharma has been shedding global plants for years, and the two recent mega-mergers — Merck/Schering-Plough’s 15 plants and Pfizer/Wyeth’s 20 sites — have created an excess of pharma manufacturing sites, allowing CMOs to enter the market and service virtual pharmas that do not want to invest in internal manufacturing capabilities. CMOs develop their own internal technical expertise and can service many customers, while an individual virtual pharma can hedge financial risk/uncertainty associated with a small portfolio.  If virtual pharma manufacturing has special needs, it may only need a much smaller investment to upgrade the CMO’s manufacturing suite for its product, along with some training of CMO staff.

In this new environment, how does a virtual pharma manage the risk of working with several types of external parties located in different global regions?  What are the major types of risk to mitigate?

Biopharma companies face an incredible range of risk in their business environment including quality and operations risk, technical risks, commercial risks, clinical risks, and even geographical and political risk. The virtualization of pharma supply chains can add additional business risks in each of these areas. Supply chain risk can include demand variability, competitive threats, currency fluctuations, and regulatory changes, while supply variability risks can include manufacturing yields, long cycle times, persistent quality and compliance issues, unplanned shutdowns and equipment problems, key material shortages, rising material costs, natural disasters, or geopolitical strife in the local country. One of the most critical problems is that virtual pharma organizations underestimate the risks they are exposed to and do not always have the mechanisms to mitigate them in their supply chain.

Effective supplier risks assessments and management is facilitated by a number of key elements, including:
  • targeted risk assessments beyond the conventional quality or supplier audit,
  • comprehensive internal and external supplier risk assessments,
  • proactive monitoring of suppliers’ critical risk elements, and
  • utilizing experienced pharma industry risk management practitioners to collect relevant data, perform analysis and provide risk mitigation recommendations.

Continuous Improvement
It’s critical for a virtual pharma to discuss performance with its suppliers, monthly, quarterly, yearly. How often should one re-evaluate the global supply network for new options, and when is it time to make a supplier change?

For monthly reviews, there should be cross-functional conference calls to review the KPIs, lead by the director of global supply. Other key staff that should participate on these calls are functional personnel in technical operations, supply planning, finance/accounting, and quality. Utilizing a matrix organization (as shown in Figure 3) with a senior supply director having cross-functional responsibility for a product or product group is a better way of coordinating and communicating virtual pharma’s efforts with their CMOs.

Figure 3: Matrix Organization Example 

Ongoing communication should begin at the initial site visit, and participants should include the pharma’s assigned quality lead and supply planner. On an ongoing basis, site visits should be held quarterly with the pharma’s global supply person. On a yearly basis, a face-to-face meeting with the CMO site director and the virtual pharma’s supply chain head should take place.

When it comes to reevaluation, once the CMO is in good standing, the virtual pharma can re-evaluate the frequency and manner of site visits, perhaps every six months or year. However, a regular meeting to discuss performance, current issues, and their future strategic plans is key to maintaining a productive and transparent business relationship.

Supplier changes must be made sometimes. This move should be considered if there are downward trends in KPIs, increased deviations, a slip in process controls, a downward trend in batch yields, another part of the manufacturing site that has been cited by a regulatory agency (FDA, Health Canada, etc.), substantial billing issues (e.g. extra charges), or regulatory and compliance issues.

How does a virtual pharma take into account the effects of global supply chain complexity when making changes or expanding of the global supply network?

Managing a virtual pharma’s complexity on an ongoing basis and during expansion requires due diligence and maintaining good relationships with external partners. Communi-cation will keep both sides up-to-date on activities and issues, making the partners more flexible and cooperative. Identifying key personnel on both sides of the relationship allows for coordinated efforts and reactive issue resolution. Developing a comprehensive transition plan/roadmap and checklist will be helpful to streamline efforts for any changes in the supply chain network.

If a virtual pharma already has a complex network of external partners (e.g. eight to 10 CMOs and two to three packagers), the company may elect to stay within its established pool of external partners when adding a new product to the portfolio. Here, the company needs to decide, “When do we not go through the standard RFQ process and instead approach one of our high performing partners?” Staying inside the established network will reduce or maintain the number of external partners; this manages the size and complexity of the external network, and rationalizes the pool of partners while maintaining a spread of supply chain risk.

Few things are as important to a global virtual pharma company than selecting the "right" CMO partners to manufacture, package, and distribute their products to their customers. Several key issues have been discussed, from identifying the needs, building the relationship, aligning strategies, tracking performance, mitigating risk, continuous improvement, and managing complexity. Managing CMO partners is a critical success factor for virtual pharma.

Bill Connell is vice president and Supply Chain Practice Leader at Maxiom Group, a strategic business and IT consulting firm exclusively serving the life sciences industry. He can be reached at bconnell@maxiomgroup.com

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