Lean Six Sigma and Outsourcing

Don’t outsource a process you don’t understand

by Ronald D. Snee

Faced with few blockbuster drugs in the pipeline, competition from generics, and competition from abroad, pharmaceutical companies increasingly scrutinize their operations for ways to enhance the top and bottom line. In this environment, outsourcing manufacturing offers an attractive means for cutting bottom-line costs as well as expanding capabilities and resources that can enhance top-line revenues. But before committing to outsourcing, a pharmaceutical company should consider the inherent difficulty of turning a process over to an outside manufacturer. If the process is highly complex and poorly understood, the likelihood of serious problems is great.

A specialty pharmaceutical company entering into Phase III clinical trials with its first proprietary product needed someone to manufacture the clinical supplies until it could retrofit a facility. But the pharmaceutical company had manufactured the product only on a laboratory scale and did not understand the scaleup of an aseptic process. As a result, problems arose that were eventually traced to micro-contamination in the aseptic process due to improper technique. The drug failed the clinical trial, costing the specialty company time and money and necessitating a Phase IIIb clinical study.

Before outsourcing a process, companies should make sure that they fully understand it, that they have optimized it, and that they can transfer it along with a means for assessing and improving it. Lean Six Sigma can provide precisely the tools the client needs to accomplish those essential tasks before engaging a contract manufacturer and ensure that the company realizes the full strategic and financial benefits of outsourcing.

The Case for Outsourcing   

Among the many reasons to outsource manufacturing, the most frequently mentioned is cost-cutting. Contract manufacturers can often do the job less expensively. But there are other equally compelling reasons to undertake outsourcing, including these opportunities:

Expand resources: Outsourcing can free employees to work on the core business and spend their time on value-added activities. In addition, ongoing access to the contract manufacturer’s pool of dedicated resources can alleviate the need to purchase more equipment, hire new employees, or teach existing employees new skills. In short, it resembles expansion of facilities, but without long-term capital investment.  

Expand capabilities: Outsourcing can also increase the outsourcer’s core competencies in areas where new capabilities are required. The company can also gain the contract manufacturer’s outside perspective on complex questions and issues, as well as periodically get help with specialized tasks.

Increase speed to market: Ramping up manufacturing can be costly and time-consuming, delaying a drug’s market launch and giving competitors a window of opportunity. Because outsourcing is often faster than initiating the same activity in-house, companies can get to market more quickly and be more responsive to customers.

Against those significant advantages, companies must weigh the potential drawbacks. Will the arrangement create a drain on the client by requiring teams to train the CMO’s personnel? Does the client have the requisite experience in vendor management? Is the client technologically equipped to handle remote employees requiring connectivity? Further, if the primary goal is cost-cutting, then it may be desirable to avoid outsourcing by cutting costs elsewhere.

The Guiding Principles of Outsourcing

Once a company has determined that its organization and that of the contract manufacturer have the capability to execute an outsourcing arrangement and that the strategic and financial benefits make it worthwhile to do so, the client should determine whether it can successfully utilize a contract manufacturer, by following these guiding principles:

•    Don’t outsource a process you don’t understand. If you don’t understand the process, it’s unlikely that the CMO will.

•    Get rid of waste and non-value-added activity before you outsource the process. The goal should be to design a process for maximum efficiency and effectiveness in the CMO’s environment.  

•    If you want a process to perform in a consistent and predictable way, you have to plan for consistent and predictable performance. Because variation is inherent in all processes and, if uncontrolled, only increases, you must explicitly address variation if you are to increase the probability that the process will perform as it should. (Hoerl and Snee, 2002)

•    A process should be prepared for outsourcing. It is ready for transfer when it is documented, its key drivers are known and understood, it is capable of meeting customer specifications, and it is stable.

•    A methodology for assessing and improving performance should be provided as part of the transfer package. Because processes are unlikely to work flawlessly when transferred and the contract manufacturer may not have a methodology for optimizing the process, you should provide one.

•    Process performance should be confirmed at the new site. As you prepare to transfer the process, it is prudent to incorporate plans for a confirmation run at the new site.

Failure to understand and prepare a process prior to transfer can have consequences that range from inability of the process to work at all in the new environment to inability of process operators to run the process, out-of-specification products, and high levels of rework and defects. Analytical measurement variation may also be too high, rendering the process data of limited value in controlling the process. Ultimately, any or all of these problems can result in process operations that are too costly, undercutting the original rationale for the transfer.

For example, a major pharmaceutical company wanted to transfer a product to a CMO that would granulate, compress, coat, and print the tablets and then ship them back to the client for packaging. The company wanted to save time in getting the product transferred, due to capacity concerns at the location where it was being produced. Some aspects of the transfer were not fully assessed. The transfer soon ran into drying and coating issues. Equipment, particularly the coating/drying pans, differed from that of the client, although the contractor had assured all that the equipment was the same. There was no relative humidity control, and the coating of the tablets appeared mottled.

As a result of these failures, the transfer required 12 months longer than anticipated and ultimately cost more money and resources. Most of these problems and their financial consequences could have been avoided if the client had properly developed an understanding of the process and assessed the transfer capabilities needed for success.

Such inadequate transfer can have severe consequences in the marketplace. The nutritional division of a global company had a blockbuster product for which it had outsourced manufacturing. In the midst of high demand for the product, an estimated 5.9% of the product was rejected as over or under a key specification. Engineering SWAT teams swarmed over the process but after four months had managed only to reduce the amount of out-of-spec product to 5.4%. Operators and manufacturing managers had little data and were not looking effectively at the data they did have. Poor process controls were in place and process variation was too high — it could satisfy the lower specification but couldn’t satisfy the upper and lower specs simultaneously. When site management was urged to take a process perspective, they continued to focus on equipment and engineering. With the market sold out, the contract manufacturer was unable to produce the product, and neither the company nor the contract manufacturer having a proven methodology for process understanding, improvement, and control, the company missed out on significant revenue.

Contrast this with the experience of a global pharmaceutical company that fully understood its process before it transferred it and had in place a methodology for assessing it and improving it. Nevertheless, the process did not work at the new site, which was located in a different country. But because the client, using Lean Six Sigma methodology, fully understood the three key variables involved in the process, it could quickly be determined that the key change at the new site was the packaging material used in the new country. Employing one of the methodology’s analytical tools — Design of Experiments (DOE) — it was possible to determine the new settings for the three key variables to run effectively with the new packaging material.

The Power of Lean Six Sigma

Lean Six Sigma combines two of the world’s most powerful and proven improvement methodologies. Lean methods reduce waste, cycle time, and non-value added work, thereby improving information and material flow throughout the process. Six Sigma tools are used to identify root causes of variation in processes, shift the process average to an optimal level, and reduce variation around the average to find the best operating conditions, identify high-performance operating windows, and design robust products and processes. In the context of outsourcing, Lean Six Sigma can be used to develop process understanding and process controls prior to process transfer and to optimize the process at the contract manufacturer’s facility

Six Sigma’s DMAIC (Define, Measure, Analyze, Improve, Control) framework provides an overall infrastructure for the methodology (Snee and Hoerl, 2003). Within this framework, the tools that are appropriate for a particular problem — whether they are Lean or Six Sigma tools — are then applied in a highly structured, integrated sequence both for understanding and improving processes (see Table 1 below). While Lean focuses on the reduction of the seven types of waste, some of these types of waste are due to process variation, indicating the need for the integration of Lean and Six Sigma to achieve the best possible overall improvement. The broad use of the DMAIC framework adds predictability, discipline, and repeatability to efforts to understand, control, and improve processes (Snee and Hoerl, 2005).

Achieving Process Understanding and Process Transfer

Process understanding has been achieved when it is possible to predict the future performance of the process. A process can be said to be understood when:

•    Critical variables (Xs) that drive the process are known.

•    Critical uncontrolled (noise) variables that affect the process output are known and the process has been designed to be insensitive to these uncontrolled variations.

•    Measurement systems for process variables (Xs) and outputs (Ys) are in place and the amount of measurement variation is known.

•    Process capability is known.

•    Effective process control procedures and control plans are in place.

The DMAIC framework and Lean Six Sigma tools enable the client to achieve this comprehensive understanding and establish process performance prior to transfer. A project team begins by using process mapping to document the process by detailing the precise sequence of actions involved — not the ideal sequence, but the sequence that actually takes place — and identifies opportunities for improvement.  

Once there is a clear picture of the major steps in a process and its inputs and output variables, the cause and effect (C&E) matrix guides the team in determining which process variables and steps are critical to the performance of the process. Failure Modes and Effects Analysis (FMEA) enables the team to create a risk analysis to determine what can go wrong in the process. To establish process capability, the team calculates Cp and Cpk values to compare the variation of the process to its specification. To establish the quality of the process measurements, the team undertakes Gage Repeatability and Reproducibility studies.

If the capability of the process is insufficient, the team can undertake a multi-vari study designed to sample the process as it operates and identify the key process variables and uncontrolled noise variables causing most of the variation in the process outputs. To identify best operating conditions, the team can use Design of Experiments, an efficient method of experimentation that identifies, with a minimum of testing, key process input variables and their optimum settings that affect the mean and variation of the outputs. Finally, to assure consistent performance of the process, the team develops a control plan, which identifies the variables that process owners must monitor and details the actions to be taken when the variables indicate a problem.

At the CMO’s site, the goal is to ensure that the desired performance is attained. The performance of the process at the site is assessed against its performance at the outsourcer’s site. Lean Six Sigma methods can then be used to make any needed improvements. Going forward, the control plan and statistical process controls are instituted to monitor the process and assure its performance. Some might think that the successful production of three validation batches is a confirmation of process understanding. The three batch test is required for process validation but is not a good measure of process capability or demonstration of process understanding, as these batches are often produced under special circumstances and three batches is too small a sample.

Benefits for Both Parties

For the client, Lean Six Sigma can help secure the multiple benefits that outsourcing promises: expanded resources and capabilities, faster time to market, and lower costs, all of which can add up to competitive advantage. For example, a generics pharmaceutical company that now routinely uses DOE techniques to create robust formulations and manufacturing processes has gained great flexibility in choosing the processes that can be most advantageously outsourced and in selecting CMOs.

CMOs can also reap significant benefits, including better process control, better process performance, higher product quality, lower costs, fewer process problems, and more satisfied employees and outsourcing customers. Just as important for both parties, the mastery of Lean Six Sigma can be applied throughout their operations, creating a culture of continuous improvement that continues to multiply the return on investment in the methodology far into the future.

Sometimes the rewards can be even greater. A CMO with a unique methodology needed to optimize the process and scaleup to meet the needs of a potential outsourcing customer. Using DOE techniques, the CMO successfully optimized formulation and the scale-up manufacturing process and won a major contract with the customer. It was so successful, in fact, that the larger pharmaceutical company, in order to obtain exclusive access to the process, bought the CMO at a premium.

© Ronald D. Snee, 2006

References

Hoerl, R. W. and R. D. Snee (2002) Statistical Thinking – Improving Business Performance, Duxbury Press, Pacific Grove, CA.

Snee, R. D. and R. W. Hoerl (2003) Leading Six Sigma – A Step-by-Step Guide Based on Experience with GE and Other Six Sigma Companies, Financial Times Prentice Hall, New York, NY.

Snee, R. D. and R. W. Hoerl (2005) Six Sigma Beyond the Factory Floor – Deployment Strategies for Financial Services, Health Care, and the Rest of the Real Economy, Financial Times Prentice Hall, New York, NY.

Ronald D. Snee, Ph.D. is Principal of Process and Organizational Excellence and Lean Six Sigma Initiative Leader at Tunnell Consulting in King of Prussia, PA. He earned a doctorate in applied and mathematical statistics from Rutgers University, New Brunswick, NJ. He has published four books and more that 165 articles on process improvement, quality and management. He can be reached at snee@tunnellconsulting.com

Table 1: Lean Six Sigma’s DMAIC Methodology

 

PHASE	FOCUS	KEY TOOLS
Define	•    Identify the problem clearly •    Determine its financial impact •    Select and organize the right people to lead the project	Value stream mapping •    Defines the customer’s needs, whether an external end-user of the product or service or an internal user of the process output •    Maps how a process or processes create value •    Enables focus on a particular process to improve Project charter •    Defines the project •    Forms a contract among all parties about what is to be accomplished
Measure	•    Better understand the process through various techniques of measurement	Process mapping or flow charting •    Details the sequence of actions involved in a process Cause and effect matrix •    Guides the team in determining which variables and steps in a process are critical to quality (CTQ) •    Indicates how strongly each variable and process step affects each CTQ •    Shows how the process might be failing to generate the greatest value possible Videotaping •    Documents physical flow of work for observable processes Measurement System Analysis (MSA) •    Assesses the quality of the measurements of process performance •    Encompasses all of the procedures, personnel, and technology used to assign a number to any of the priority steps identified by the C&E •    Ensures that the team can accurately measure the key variables of those steps Capability analysis •    Analyzes the process’ capability (compares the range of inherent variation in a stable process vs. process specifications), using data gathered from the process
Analyze	•    Subjecting data gathered in the Measure phase to a variety of analytical techniques •    Getting at the root causes of the variation or observed waste in the process •    Selecting and sequencing particular tools according to the kind of process under analysis	Videotape analysis •    Uncovers such forms of waste as waiting, process inefficiency, and waste of motion   Failure Modes and Effects Analysis (FMEA) •    Enables the team to do a risk analysis to determine what can go wrong in the process Multi-vari study •    Samples the process as it operates and identifies the key process and uncontrolled noise variables causing most of the variation in the process outputs
Improve	•    Identifying, testing, and implementing solutions •    Testing implemented solutions with a confirmatory study to ensure that the predicted improvements actually materialize	Design of Experiments (DOE) •    Resolves any remaining ambiguities about root causes •    Quantifies cause-effect relationships •    Determines optimal operating conditions Production smoothing •    By distributing the flow and mix of work more evenly over time, production smoothing helps eliminate the waste of waiting and overproduction. Production smoothing can also be used as a process design tool. Kaizen events •    These usually short — two- to five-day — events bring together groups of workers in intensive sessions designed to generate ideas for improving processes. Within the DMAIC framework, Kaizen events can be even more powerful because the root causes of the problem will already be known when the workers come together.
Control	•    Sustaining the gains achieved by the improvements implemented in the Improve phase	Control plan •    Identifies variables that process owners must monitor •    Details the actions to be taken when a problem is identified Statistical process control •    Continually plots data against variation limits in order to provide early warning of any occurrence that might warrant attention •    Enables process owners to take corrective action before output variations affect customers Standard work •    Provides personnel with detailed, standard work procedures for a process •    Helps eliminate human error, one of the most frequent causes of variation and waste