Making Outsourcing Work

What are the best practices for you?

by Patrick Kager

As today’s pharma and biotech companies become more dependent on third-parties for everything from research and development to manufacturing, improving these relationships has become essential. Based on extensive work and discussions with dozens of contract service providers and customers, we have developed a series of best practices to improve interactions between customers and suppliers.

Photo courtesy of Sandoz GmbH

Pharmaceutical and biotech companies are increasingly turning to contract service providers for everything from preclinical development services to contract manufacturing. Some large pharma companies have been explicit about their strategic direction. AstraZeneca recently announced that they would outsource all manufacturing within ten years because “[m]anufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brand-building . . . There are lots of people and organizations that can manufacture better than we can,” according to David Smith, AstraZeneca’s executive vice-president of operations. Although this announcement was partly retracted by the public relations department, the trend towards outsourcing is clear. However, as Baxter’s recent heparin crisis demonstrates, the outsourcing waters are filled with rocks that must be carefully navigated. This article discusses how improved management of the interactions between customers and suppliers are needed to ensure successful use of outsourcing relationships.

Why All This Outsourcing?

The rationale for outsourcing has been in place for many years (see “Gaining a Competitive Edge Through Strategic Outsourcing,” Contract Pharma, October 2000). In short, strategic outsourcing allows pharmas to access needed technologies, reduce costs and improve flexibility. The key is finding the right balance between internal and external capabilities and managing both effectively.

Managing Across the Interface

Out of sight should not mean out of mind. Most pharmas are internal-plant-centric – focusing most of their attention and managerial energy on the plants in their internal network. The executives responsible for overseeing internal plants have a seat at the manufacturing leadership table and linkages between the central technical and quality organization into each plant are typically direct and effective. By contrast, third-party supply management is typically tucked underneath a supply chain or purchasing group. Technical and quality linkages into the third-party organization tend to have limited bandwidth, resulting in limited insight about what is occurring at the third party. The result is that limited thought and attention are given to issues in the third-party supply base.

The biggest challenge to enhancing interaction is overcoming the contractual barrier that stands between a customer and contract supplier. The goals and incentives of the customer and supplier differ: the customer wants the highest quality, most flexibility and lowest cost arrangement; the supplier is looking for higher margins, longer firm commitment periods and standardized — rather than customized — quality standards. The supplier also has the challenge, unlike captive plants, of balancing the needs of many customers. A best practice for structuring customer and supplier interaction is to have explicit leads for commercial, technical, quality and supply planning issues. This approach can help compartmentalize the thorny commercial negotiations from the need for cooperation to achieve mutual goals of producing quality products in a robust fashion.

This approach is utilized by a leading biotechnology firm. Unlike many pharmaceutical firms that utilize third parties mostly for older, off-patent products, this biotechnology company relies on contract manufacturers for its newest products. In a comprehensive management structure, the company assigns one internal manufacturing general manager to oversee the relationship with either one or two contract manufacturers. This general manager has dedicated quality and technical resources assign to support the contract manufacturer. Additional support is obtained from internal departments, like QC or process engineering, as needed to support technical transfer and on-going production. The manufacturing general managers report up through a manufacturing executive and are on a parallel organizational footing with GMs of internal production sites.

Balancing Commercial Interest and Common Sense

Commercial terms and conditions create the most on-going tension in relationships between customers and their suppliers. It is tempting for customers to read a text on strategic sourcing and conclude that the best way to manage suppliers is to set them off against one another. Tools like e-auctions — originally designed for purchasing commodity items like stationery — are employed, with the result being increased distrust and poorer relationships with suppliers.

A major area of recent contention is negotiation of liability and intellectual property terms. Many pharmaceutical companies have taken a hard line on the need to push more liability onto suppliers. Some suppliers are being asked to absorb incidental costs, such as lost sales, in addition to direct costs, such as materials and API costs. Unlike big pharmaceutical companies with large balance sheets and healthy cash-flows, contract suppliers are not well positioned to absorb large risks. This puts them in a bet-the-company position, which can trigger behaviors that are detrimental to both parties.

Best practice approaches start with the recognition that companies are not just buying a product but rather initiating a complex relationship centered on a customized set of requirements. No two pharmaceutical products are alike and even products using a seemingly straightforward process, like wet granulation, have complex nuances, many of which are learned over time. Of course, no customer wants to overpay, but sensible sourcing strategies can ensure a fair price is obtained that works economically for both parties. However, an even larger cost is the need to switch suppliers, which can occur when poor economics result in poor performance by the supplier.

One specialty pharma company focused on jointly improving manufacturing processes and sharing the cost savings. This incentivizes both the supplier and customer to invest the money and human resources needed to come up with valid improvements. To encourage the supplier to make investments, it is given a four- or five-year volume commitment based on a percentage of actual product sales. However, the customer retains the ability to bring in a second source and to shift the work entirely after the commitment period has expired. This serves to keep the contract manufacturer’s pricing in overall alignment with market realities.

Pharmaceutical companies are best off limiting the liability risk to a reasonable amount and not looking to their suppliers to be their insurers against recalls. IP rights should protect the customer and their product, but some recognition must be given to the IP developed by the supplier, especially where the supplier is bringing a unique technology to the table.

Managing Technical Aspects

Technical ownership and change management are often poorly articulated within the supplier-customer relationship. Especially for older products, the technical know-how that the customer had may have been lost in a plant closure or downsizing. Suppliers are often faced with poorly understood processes and limited interest or funding from customers to gain scientific understanding and make improvements.

This situation, although not ideal, may have been tolerable in the past. But with the FDA’s GMP Initiative for the 21st Century, industry must move to a Quality by Design (QbD) approach rather than the traditional, well-documented compliance to a process that’s frozen in time. With QbD, the need for clear technical ownership and improvement plans is more pressing. A prerequisite, however, is a rethinking of how technical issues are handled.

The first element is defining a clear technical owner for each product. This technical owner could reside at the contract supplier or within the customer’s technical organization. For older products, where the technical knowledge no longer exists within the customer organization, a technical resource from the supplier is often best positioned to play this role. For newer, more strategic products, the customer organization is best served keeping the technical ownership role within the organization whenever possible. This will allow control over the technical specifications and support of subsequent transfers either to a second contract supplier or in-house.

Another best practice related to technical ownership involves forming fewer, but deeper, relationships with contact suppliers. One advantage is reduction in the variability of equipment and SOPs that need to be accommodated. This would allow newer products to be more tailored to the equipment types and brands available at the supplier. This can be particularly important for products falling outside the Biopharmaceutical Classification System Class I (highly soluble, highly permeable) or for extended release products. Otherwise additional bioequivalence studies could be req-uired, costing money and resulting in potential delays.

The final element of best practice technology management is to develop an agreed technology improvement plan for each product. This plan should outline the key objectives for product improvement, such as robustness and cost, and define the responsibility, funding and staffing mechanisms to achieve them.

Doing a Quality Job of Managing Quality

The quality linkages with contract suppliers can be confusing. Here we’ll divide them into quality assurance/audit (QA) considerations and quality control (QC) concerns.

Key considerations on the QA side of the ledger are lot release, investigations and overall quality compliance. For FDA-approved products, lot release often needs to be done by the license holder, while for EMEA markets the contract manufacturer can release if its Qualified Person falls under the mutual recognition framework.

Aspect	Examples of Best Practices	Examples of Other Common Practices	Comments
Contract Manufacturing (CM) team and ratios	“Virtual plant” parallel to manufacturing organization. Dedicated manufacturing and quality site managers. CM manager assigned to one or two commercial CMOs.	CM manager focused on contracting and spread too thin to engage effectively on technical or quality improvements.	Strategic supplies benefit from having small CM management to CMO ratios.
CM manager role description	CM manager is technical with business skills. Reports up to supply chain.	CM manager is business- and project management-oriented without technical skill set.	Technical background useful in order to understand and resolve issues.
Technical product owner	Technical product owner follows product over lifetime. Typically a process technology person.	Often there may not be a definitive technical product owner.	Importance of continuity over product lifecycle.
Quality leadership	External quality manager has technical background, hands off to QC for detailed methods questions.	Quality resources may be at internal plant with limited incentive to support third parties.	Technical background helps in addressing issues quickly.
CMO relationship	Collaborative – see CMOs more as partners than as “suppliers.”	Transaction-oriented and at arm’s-length.	Trade-off between efficiency and relationships.
Project/resource prioritization	Continuous project prioritization.	Prioritization is fragmented and not evaluated holistically across entire company.	Need to ensure that outsourced projects don’t “get lost” and thus become under-resourced.
Definition of KPIs	Defined as on-time, in-full to end-customers to include internal and external dependencies. Measured on an ongoing basis.	KPI measures not adjusted to reflect customer dependencies – e.g., API delivery, artwork approvals.	Important for KPIs to measure internal dependencies and impact to the end-customer.
Contracting philosophy	Actively encourages CMOs to improve process and cost.	CMOs given limited room to make improvements in the process, but still expected to deliver cost reductions.	Client expectations for CMOs to “think” rather than simply “do” can enable innovation and/or cost savings.
Time scale for interactions	Two-way expected response times.	Decision making and follow-through can be slow – client response times not tracked.	Clear response times across entire business process produce better results.
Evaluation of third-party economics	Detailed financial decision and broader strategic analysis. Must provide benchmark cost data. Encourage a full-costing method.	Incremental costing, which causes bias toward insourcing – most internal cost assumed fixed.	Sourcing decisions should use full costing for economically sound comparison.

Regardless of which company does the final market release, a best practice is to map out the overall lot review and release process from end-to-end. Key responsibilities and accountabilities need to be clearly defined. One important area is agreeing on what specific information will be needed to support batch-release by the customer. A best practice is to define specific reports and information needed rather than just shipping the entire batch record; in the case of a biologics product, this could be several hundred pages long. The supplier’s QA department will need to be relied upon to a great extent even when the final release is performed internally. A partnership approach between the two groups is the best practice approach.

On the audit aspect of QA, the blend needed is often between familiarity with the supplier’s operations and enough distance to remain objective. Often the technology being used by the supplier is not one with which the customer has a great deal of expertise. In these cases, it will often require the length of a standard audit for a customer to understand the technology well enough to meaningfully review the quality aspects of the process. Assigning an auditor who has already been out to the supplier will make the audit much more meaningful, and greatly reduce the frustration suppliers feel in having to educate wave after wave of customer’s audit staff.

Quality control considerations are similar to the broader technical concerns but often less well understood. Analytical methods for many older products often use older, less robust techniques and finding the method developers within the customer organization is sometimes impossible. A key best practice is this area is to provide direct face-to-face communication, where possible, between the customer’s and the supplier’s QC staffs. Have the supplier’s QC staff travel to the customer’s site to witness the methods being run and then host the customer’s QC staff at the supplier’s site following the transfer. Although this can be seen as an additional expense, the payoff can be large, as there are often subtle nuances in how methods are run that are not obvious from the approved documents. Additionally, this contact between the QC groups lays the foundation for subsequent interactions regarding methods upgrades.

Keeping the Supply Chain Running Smoothly

Ensuring the smooth flow of product from the supplier to the marketplace is a key function of the supply chain management function. Challenging areas include: forecasting, coordination across suppliers and performance measurements.

The forecasting process requires the customer’s supply chain group to act as a conduit between the marketing organization and the contract manufacturer. Challenges can occur when demand for some markets is small and volatile. A best practice is for the internal group to work closely with marketing and other stakeholders, perhaps through a formal sales and operations planning (S&OP) process, to help smooth the demand and avoid surprises. Depending on the nature of the manufacturing process, suppliers typically require firm planning horizon’s of eight to twelve weeks, potentially longer for APIs and biologics.

Effective supply chain coordination requires solid planning tools, inventory management and supplier communications. In most instances, it’s the customer’s responsibility to order bulk actives, dose forming services and packaging. Each stage relies on receipt of materials from a prior stage. Having a complete view of the supply chain is critical to maintain adequate stocks of finished product and avoid excess inventory, which ties up working capital and can expire. Best practices call for robust planning processes and tools that span the multiple stages of the supply chain. These tools don’t necessarily have to be expensive high-end systems, but for simpler products can be built around a well-designed Excel model.

Performance measures are commonly used to measure supplier’s performance. The types of measures used vary somewhat, but all look at aspects of on-time delivery relative to an agreed forecast. The best practice approaches put the supplier’s performance in the context of the supply chain and other linkages that impact shipments, like quality investigations. Performance figures are adjusted to reflect situations such as the customer not getting API to a supplier on-time. This leads to better alignment of objectives between the customer and supplier and a focus on solving the root causes of low on-time performance, for both client and supplier.

Tracking Turnaround Times

There are a large number of interactions between customer and contract supplier. Many of these, such as change control requests, can impact the ability of the supplier to meet production schedules for one or more customers. Setting reasonable turnaround expectations for the various types of approvals can help structure the interactions and improve overall responsiveness of the supplier to the customer. Deadlines can also serve as a tool for those managers working directly with suppliers to get a quicker response from their internal regulatory, quality or technical colleagues.

One large pharma tracks 10 interaction timeframes, including change control request, quality investigations, packaging art-work change approvals and regulatory impact reviews (e.g., CBE-30 versus prior approval determinations). Performance on these measures is reviewed at the quarterly customer-supplier review session and affected departments are invited to discuss variances from agreed timeframes. As a result of this approach, the pharma company noted that interactions have become much smoother and the supplier no longer feels that requests are winding up in a “black hole.”

Putting It All Together

The biggest block to achieving the best practices described in this article are often cultural. Big pharma companies tend to be skeptical of third parties and in many ways third parties represent a threat to the internal manufacturing organization. This explains, for example, why the make-versus-buy financial analysis done by pharmaceutical companies is biased toward internal manufacturing by counting only marginal costs of internal production compared to the full price of external sourcing. Third parties also have their cultural biases and tend to be reactive and oriented to the shortterm. Often times, bringing the parties together in a productive fashion requires an experienced neutral organization to perform an assessment and provide specific improvement recommendations.

Many of the best practices uncovered through our discussions with customers and third-party suppliers rest on a simple principle: treating supplier’s plants more like ones in the company’s internal network. There will always remain important distinctions between an owned plant and suppliers, but many of the practices defined in this article are more about attitudes and approaches rather than hard-core economics. Other industries, like electronics and aerospace, have learned these lessons decades ago and are much more successful as a result. Earlier adapters in the biotech and pharma industry are also now seeing the benefits of a more thoughtful approach. With the increased regulatory, shareholder and customer pressures bearing down on the industry, now is the time to rethink and retool approaches to third party management across the board.

Patrick Kager is co-founder and principal of MedPharma Partners LLC, and has worked with numerous big pharma, biotech and specialty pharma manufacturing and R&D organizations on strategic and operational issues.