Supply Chain Benchmarking

How J&J Pharmaceutical R&D revamped global sourcing

By Rhonda Griscti

Johnson & Johnson Pharmaceutical R&D

The Johnson & Johnson Pharmaceutical Research & Development (J&JPRD) Global Pharmaceutical R&D Sourcing (GPS) organization supports the pharmaceuticals’ indirect (R&D) spend. Reporting through the chief financial and operations officer, GPS comprises approximately 80 staff located in North America, Europe and Asia.

Today, the GPS mission is to optimize total cost, attract supplier innovation and ensure business continuity. Areas of focus include people and organization, value creation, relationship management and equity protection. Prior to 2008, however, the GPS landscape appeared quite different.

In 2008, GPS recognized the need to define robust practices for managing the relationship with our entire supply base to drive sustainable delivery of value to the company. Prior to that time, focus was at the protocol or program-specific level with limited universal strategic vision.Category Management (CM) was identified as the optimal vehicle to enable GPS to deliver the greatest value to the enterprise. CM provided both the framework and tools to collaborate with our supplier networks in the form of innovation, business process improvement and other non-traditional sources of value. GPS adapted the tenets of CM and applied them to define and develop a unique Supplier Relationship Management Process and related tools for our diverse supplier network.

Recognizing that employing CM was not only new to the organization but would require a change in mindset, GPS first needed to define our pathway to success. We believed that supplier and stakeholder engagement would only be achieved if we presented ourselves as positive change agents. To articulate the vision we were driving towards, we designed a benchmarking program that would help to define our goals.

A benchmarking survey allowed us to understand our current position both internally and externally. A key component to our success in benchmarking was gaining a solid understanding of how external data would support creation of the strategy. This, in turn allowed us to identify which gaps the benchmarking data would fill and then to engage our stakeholders to successfully construct surveys and invite participants that matched the needs of the business. Recognizing that benchmarking other organizations is a lengthy, time-consuming process, a communication plan was developed to maintain excitement and enthusiasm among participants.

Our methodology of selecting and surveying others in industry relied on developing a strong understanding of the gaps in our current internal process. After initial construction of the survey, we piloted our survey questions with internal stakeholders to gather internal best practices that we would be able to share with all survey participants. Participants in the CM benchmarking survey were selected based upon conversations with our suppliers, industry research, and academic research. Our questions focused on finding methods to move from utilizing only Key Performance Indicators (critical performance measures that provide only a single view of performance in a given area) to Key Value Indicators (measurements of the value of the relationship) with suppliers.

One outcome of the best practices review with internal stakeholders and benchmarking with external companies is that we are now implementing KVIs with our key suppliers to continuously improve compliance and performance over time. The KVIs are aligned with the business requirements of our internal stakeholders and generated through five pillars, which are then rolled up as a Metrics Scorecard.

The KVIs include:

1)Quality, Compliance and Effectiveness – What must we excel at? Key Quality Indicators (KQI) of operational performance related to expected key outcomes, e.g. on-time/on budget/first time right enrollment, database lock and data delivery including effectiveness in communications and project management,

2)Financial Performance and Total Cost – How do we lookto cost effectiveness? Key Financial Indicators (KFI) on financial accountability for managing sponsor’s budgets, financial reporting and invoice compliance, contractual compliance and total cost improvement and financial transparency,

3)Innovation – What is our next breakthrough? Key Innovation Indicator (KII) of increased use of innovations by GPS and Supplier teams,

4)Supplier Satisfaction – How do suppliers see J&JPRDas a sponsor? External satisfaction indicators that helpGPSprovide needed support to suppliers in theircontinuous improvement efforts with J&JPRD, and

5)J&JPRD or Customer Satisfaction – Can we continueto improve and create value? Internal satisfactionindicators that help the supplier to deliver increasingly excellent performance against the business requirements and changing needs.

How does the Key Value Indicator scorecard work? Each KVI will deliver a score from a vital few performance metrics (items 1-3 above) and a Health check score (items 4-5 above) to indicate both whether the business requirements are met and the status of the relationship. This will serve as a baseline for a continuous improvement effort for building a supplier development plan. The scores are validated by the supplier and GPS teams and make up the metrics scorecard. Depending on the service type, the scores are tracked on a regular basis (e.g., project- or team-specific) and integrated into an annual performance and health score. The idea behind the scorecard is to jointly improve performance, build a continuous improvement plan, reward and incentivize for excellent performance, hold each party accountable towards the improvement plan, set realistic targets and help make better strategic outsourcing decisions based on facts and data.

Data gathered during the benchmarking exercise confirmed that the greatest opportunity for improvement was to the Supplier Relationship Management (SRM) stage of CM. The data identified the attributes that we needed to include in our SRM program to create a more robust and sustainableprogram that would deliver value to the enterprise. The tenets of our program included: Segmentation, Relationship Performance, Supplier Development, Supplier Collaboration and Continuous Improvement. How we then built on those key concepts make our program unique. We focused on the following:

1)Robust segmentation model based on 13 key drivers

2)Focus on Innovation & Sustainability

3)Health check to determine strengths/gaps in therelationship

In launching our program, we defined the segmentation model that drove selection of the suppliers for inclusion in the pilot. The supply base was segmented utilizing a multi-dimensional tool. Each of our procurement professionals was assigned ownership of a supplier. Next, we trained staff, business partners and suppliers in the new process. Pilot governance teams were launched, SRM goals were established, and measurable outcomes were realized within six months. The processes and tools continued to become more robust as our procurement professionals and suppliers worked within the SRM model.

Today, we are actively implementing the program. The data required for segmentation has been included in the Category Management process so that once the supplier selection is complete, the Sourcing Manager will apply the appropriate SRM tools for that supplier based on their segmentation.However, regardless of the supplier, the goal of the initial engagement remains the same.The parties need to actively discuss and gain alignment on the goals for the relationship including both sustainability and innovation goals.

To ensure that the program continues to meet the established goals and evolve, GPS has included Relationship Health Checks as part of the SRM program. A Relationship Health check is a comprehensive 360-degree review of the relationship that enables both companies to 1) understand current operations, 2) identify areas of difficulty or improvement opportunities and 3) discover the full value of a successful relationship.

The Health Check focuses on multiple dimensions including communication, sustainability, decision making, innovation, problem solving and trust. Once the survey is closed the data is analyzed and a report is provided to both parties for review and discussion. The visual output in the report creates a conversation between the parties. This conversation is not just the starting point for establishing next year’s relationship goals; it is also the vehicle by which we can continually maintain commitment and enthusiasm for SRM.

While the Health Check views multiple dimensions, we have found innovation to be the key contributor to success. Innovation, along with business process improvements, helped shift the value derived by the GPS organization away from one-off negotiated cost savings and instead toward achievable, sustainable top- and bottom-line benefits to the enterprise. The concept of Supplier Enabled Innovation (SEI) has been so successful that the organization identified a group to evaluate SEIs and apply funding and/or re-sources as needed. Today, it is not uncommon to see competitors collaborating to bring GPS and the overall organization innovative ideas.

This program resulted in a productivity increase per GPS staff member from 2% to more than 30% over a two-year period (2007-2009). GPS has created a competitive advantage by improving the relationships with a select number of suppliers to drive maximum value, improved compliance, and supplier performance.

In 2007, all value generated by GPS was delivered through negotiated value. Our delivery of value has evolved from a focus primarily on traditional cost saving to one of innovation and non-traditional value drivers. Today, approximately 50% of the value generated by the GPS organization is generated through non-traditional means including six sigma/lean process optimization and innovation. Today we are actively pursuing more than 25 supplier-enabled innovations. During the same time period, we also implemented a number of supplier sustainability initiatives that serve as a model for the organization. Finally, in several commodities, we have streamlined the processes to minimize both resources and time dedicated to the contracting process.

GPS publishes a quarterly dashboard that visually shows our progress on key SRM components: Innovation, Sustainability, Savings and Cycle Time improvements. The quarterly dashboard is a key component in our communication plan. By sharing information, we can celebrate our successes and facilitate an open dialogue to resolve issues and/or identify next best practices.

Our SRM program is designed to foster collaboration with our supplier networks and business partners to accelerate innovative solutions. This is achieved by creating incremental value in terms, processes or business models that are enabled by a Supplier Enabled Innovation process where J&JPRD has chosen not to, or cannot, meet the business need internally. During this process, we partner closely with our business stakeholder community to identify their unmet needs. We then approach our supply base to solicit their feedback, ideas, and solutions to these business challenges. Our efforts endeavor to spark new opportunity and deepen relationships with our suppliers as we strive to generate win-win opportunities now and in the future.

In summary, we are reaching benchmark levels of productivity. Our supplier relationships are quickly evolving beyond the tactical to the strategic, with a focus on shared value-added benefits including innovation and sustainability. Success in just one segment will not be game-changing for the organization — the key to success is in continuing to build value into each component of SRM.

Rhonda Griscti is senior director Category Strategy and Innovation, at J&J Global Pharma R&D Sourcing. She can be reached at rgriscti@its.jnj.com.