In response to a rapidly changing market, pharmaceutical industry supply chains have become more complex and global in nature, increasing the potential risk of disruption. An integrated sales and operations planning (S&OP) strategy that links demand forecasting to effective supply chain management can help manage these risks. By breaking down organizational silos and improving communication, integrated S&OP processes can help pharma companies anticipate different scenarios that may interfere with supply chain performance and develop coordinated responses that optimize their operations.

Pharma trends and supply chain risk
The significant increase in outsourcing of pharmaceutical supply chain activities is a fundamental source of potential supply chain risk. Supply chains are stretched out across the globe, and this makes them susceptible to disruption from multiple factors or even a single event, such as a natural disaster or political turmoil.

The double-digit sales growth in emerging markets has significantly expanded global manufacturing, supply chain and distribution requirements. Products and brands must also be adapted to comply with various national regulations at the last steps in the supply chain, all of which complicates supply chain activities and planning.

As most generic drugs are made by multiple companies, demand can easily shift between companies, adding additional business risk to generic manufacturers. A failure to meet demand due to quality, price, or supply chain disruptions can rapidly result in a loss of business to competitors.

Increasingly, governments and national regulations are directly or indirectly controlling drug buyers, pushing down prices and revenues. Payers are installing utilization controls, which limit or dictate the circumstances around the specific use of drugs. The “all or nothing” nature of national drug tenders has a severe effect on supply chains, whether a tender is lost or won.

The negative effect of siloed planning and operations
A lack of coordinated planning can easily lead to the inefficient and misaligned management of day-to-day operational issues, resulting in crippling supply chain disruptions. Poorly synchronized supply chain planning and execution can damage companies as well as the health care system.

Uncoordinated planning can cause the dreaded “bullwhip” effect, when sales, operations and finance operate in silos and make plans that only address departmental needs rather than the strategic requirements of the company. A changing sales plan impacts the inventory plan that, in turn, disrupts production and purchasing plans. In the end, this ultimately hurts the financial plan.

Stock-outs are unacceptable in health care, especially in the case of critical life-saving drugs. But, high inventory costs, obsolete and expired inventory are also unpalatable. A balance between the two must be struck as excess inventory ties up capital. Companies may choose a risk averse path by carrying high inventories to meet potential or unplanned demand, or it may result from poor upstream supply chain visibility.

For contract manufacturers, delivery in-full on-time (DIFOT) is a critical metric used by sponsors. Failure to meet this objective not only negatively impacts customer satisfaction and loyalty, but, it may have financial impacts such as penalties for unmet milestones or a customer moving to another contract manufacturer.

Low manufacturing efficiencies and poor capacity utilization can also result from unsynchronized supply chain planning. Equipment must be maintained, calibrated, cleaned (including cleaning validation), scheduled, etc. Operators who are current, or have specialized training, may be required. Lack of coordinated planning can result in inefficient scheduling or allocation of untrained operators. Inaccurate planning may also leave equipment idle that could otherwise be used on other profitable projects.

Characteristics of an integrated S&OP approach
Typically, S&OP is an iterative management process where the executive team uses tools such as sales forecasts, scenario planning, inventory reports, etc., and stake holder agreement, to gain consensus and alignment between all functions of a company. However, integrated S&OP is more than just a process. It is an overarching philosophy that coordinates strategic, near term and daily planning to reduce risk and costs, while improving customer service. Departmental silos are removed and replaced by a single integrated demand, production, procurement and distribution plan for the entire company. Integrated S&OP shares some essential characteristics.

Effective collaboration between management and functional teams is essential for long-term success. Synchronized and agreed-to plans alert management to critical issues, helping them make decisions and resolve problems quickly. Effective collaboration ensures that everyone is managing and operating toward the same goals.

Collaboration cannot be effective without clear and formal communication between all functions of the business. Critical functions must share information in a timely manner, and work toward the common goal of determining the right number. Accurate distribution plans minimize distribution costs. Accurate production plans minimize production disturbances and unnecessary changeovers. Aligned procurement plans minimize purchasing costs and ensure materials arrive on time.

Successful companies ensure that all planning levels, strategic, tactical and operational are aligned. Operational plans are used to execute the day-to-day business functions, but to be truly effective the day-to-day plans must be in sync with the long-term strategy.

By creating various alternate scenarios companies can better stay ahead of potential problems and create responses to risks that are aligned with corporate and financial strategy. Scenario planning can also drive the development of an efficient agenda for the next S&OP meeting by outlining a list of critical problems and potential resolutions ensuring companies are prepared if one of these scenarios becomes a reality.

Benefits of Integrated S&OP
An integrated S&OP process can help pharmaceutical companies reduce costs, improve customer service and maximize profitability. Coordinating all functions of the supply chain and operations streamlines processes and reduces the “bullwhip” effect on the supply chain, lowering costs. Synchronized demand and supply plans drive improved product delivery, and create improved customer satisfaction and loyalty. Profitability can also be maximized by creating one plan agreed upon by all levels of the organization, minimizing pitfalls, and assuring compliance with corporate financial plans.

In the end, an integrated S&OP strategy improves supply chain visibility and enables a more efficient and agile supply chain structure.