Maximizing Your CMO Relationship

Outsourcing Trends
The contract pharmaceutical outsourcing market is large, and it is growing. In 2002, the market was estimated at $8 billion; it is expected to grow to more than $10 billion during the next several years. ¹

Pharmaceutical and biopharmaceutical companies are outsourcing a significant portion of their manufacturing costs. Generally, smaller companies are outsourcing more of their manufacturing costs than are large pharmaceutical companies, following a virtual company model and relying on contract manufacturers for a substantial amount of their capabilities. These smaller companies are finding that it is critical to treat outsourcing relationships as true partnerships, rather than as tactical matters of convenience.

Many large pharmaceutical companies are outsourcing 20% or less of their overall manufacturing costs; however, this percentage is expected to increase in the future. Consequently, large pharmaceutical companies find it increasingly important to have sound contract manufacturing business processes in place to select and manage contract manufacturers.

Pharmaceutical and biopharmaceutical companies are using outsourcing partners for a variety of manufacturing activities (see Figure 1). The mix of activities is expected to change and expand further upstream in the supply chain, including R&D services, as companies decide which core competencies to maintain internally and which operations are appropriate to outsource. Primary drivers for the change in mix are industry consolidation and a manufacturing capacity shortfall. Recently merged pharmaceutical companies are rationalizing their assets and are opting to engage contract manufacturers to bridge any critical gaps and reduce manufacturing costs.

Outsourcing Challenges
All of our survey’s participants recognized outsourcing as a critical part of their operational strategies. However, much of the industry’s actions are inconsistent with this finding. Companies often spend significant time identifying opportunities to outsource and selecting outsourcing partners and invest relatively little time on actually managing the outsourcing relationships. Identification and selection are crucial steps of the outsourcing process, but it is through the ongoing management of the relationships that the real benefits of outsourcing are realized. Examples of common inconsistencies include:

• Pharmaceutical and biopharmaceutical companies often take a casual approach to managing contract manufacturers. They primarily use contracts to manage the relationships. However, contracts only contain the boundary conditions and guidelines to which the relationship will be managed and do not contain sufficient detail to manage day-to-day operations and decisions.

• Companies articulate performance metrics but seldom compile them; those that do compile performance metrics often do not use them (see Figure 2). More than 15% of companies do not review the metrics at all and nearly 10% only review them annually. Further, participants make limited use of these metrics to award contract manufacturers with additional business.

• The responsibility for managing the individual or portfolio of contract manufacturing relationships is unclear, especially in some large pharmaceutical companies. Outsourcing decisions are often made at a tactical level. In large companies, it can be difficult to even know the number of outsourcing partners in the portfolio.

• Some companies embark on integrating information systems with their outsourcing partners before defining the logistics of the working relationships. This approach can complicate the information systems projects and distract the companies from working on the partnerships’ higher priority fundamentals.

Practical Solutions to Leading-Edge Performance
Businesses can address these outsourcing challenges by applying the practical solutions that many leading companies use. Figure 3 illustrates the four critical elements that best-in-class companies employ in their strategies to manage contract manufacturers.

Process—Defining What Is Accomplished and Where
Clearly defined and documented processes are critical to managing outsourcing relationships successfully. About half the survey participants have documented processes, thus eliminating ambiguity over roles and responsibilities. In addition, defined processes allow companies to apply what they have learned from past relationships to new ones.

Top companies also use Joint Service Agreements (JSAs) as a mechanism for managing ongoing contract manufacturing relationships. A JSA is a document that facilitates day-to-day interaction between companies. It describes how to address the logistical issues between the companies such as organization, communication pathways, tools, processes and mechanisms for resolving issues. JSAs are different from contracts in that contracts are based on protecting critical interests of all those involved, while JSAs serve as a description of how the parties will work together routinely. Unlike a contract, a JSA is not a legal document; the JSA is written simply and can easily be amended by those directly involved with the relationship.

Performance—Measuring Contract Manufacturing Results
Most companies surveyed have defined metrics, but use them on a limited basis. Pharmaceutical and biopharmaceutical companies most commonly establish metrics for delivery performance, rejection rates and yield. (See Figure 4)
Typically, leading pharmaceutical and biotechnology companies jointly identify six to eight performance metrics with their contract manufacturing partners and establish a regular, open review process of those metrics between the two organizations to monitor performance. This practice sets a collaborative tone and ultimately leads to better performance from the contract manufacturer and the pharmaceutical company. In addition, best-in-class companies set improvement goals for metrics, just as they would for their own internal plants. Leading companies form joint improvement teams on key metrics and share the results with the contract manufacturers. Some companies take these practices a step further.

“We have contract manufacturers collect, maintain and report the metrics to us so that they take ownership for them,” explained one senior executive at a top life sciences manufacturer. “Also, we have them develop their own format for the [metrics] scorecard to further their ownership.”

Leading companies surveyed also use performance metrics as an objective criteria for awarding additional business to contract manufacturers. Data about historic performance are a key component in evaluating established contract manufacturers for potential new business opportunities.

Organization—Defining Who Is Responsible
A centralized management structure is key to making the most of contract manufacturing relationships. According to a senior contract manufacturing director, one of the benefits to centralization is that it “helps create consistency among contract manufacturer management relationships” across the company.

Companies benefit from centralization in global and local pursuits: “[It] allows us to leverage our (global) purchasing strength while maintaining local coordination,” explained an executive at a large pharmaceutical company.

Many companies also develop cross-functional teams to manage contract manufacturing relationships. These teams are often used to establish the relationships in their early stages and are not involved in managing the partnership on an ongoing basis. In addition, the teams often do not provide organizational alignment from the strategic through the tactical levels.

Best-in-class companies create organizational alignment to manage contract manufacturing relationships at three levels: executive, management, and operations. Because outsourcing is an important element of corporate strategy, the senior executives from both companies meet on a regular basis to review the health of the partnership and affirm the relationship’s strategic direction. At the management level, an inter-company cross-functional group including technical, production and business staff is created to manage the relationship’s ongoing aspects. Finally, at the operational level, cross-functional teams responsible for the day-to-day interface are formed to execute the processes. Leaders of all teams have clearly defined roles and responsibilities and are chosen based on possessing the necessary negotiation, technical and communication skills.

Information Systems—Providing Tools To Get Timely Information
Information technology is the final element that leading companies consider in building capability to manage contract manufacturing relationships. Information enables the use of process, performance metrics and organization.

Some companies have a casual approach to outsourcing, and this is reflected in the information systems they use to manage contract manufacturing relationships. E-mail, phone calls, live meetings, document sharing and fax are the most common tools used by companies to exchange information. Leading companies have integrated systems that provide data on a timely basis to allow all individuals at the company to make good decisions. This integration affords all parties the ability to identify and resolve issues before they arise.

Best-in-class companies define information technology plans for their contract manufacturing management in the context of their corporate information technology strategies and their defined contract manufacturing management processes. It is tempting for companies to try to implement the latest web-enabled sharing applications before the organizations’ processes and corporate IT strategies are clear. Implementing these applications prematurely can distract pharmaceutical companies from focusing on the right priorities of the contract manufacturing relationship.

Realizing Outsourcing’s Potential Through Partnership
Pharmaceutical and biopharmaceutical industry pressures have made—and will continue to make—outsourcing a critical strategy for improving the bottom line. The full benefits of working with contract manufacturers are realized by viewing contract manufacturers as partners, as well as implementing pragmatic approaches to process, performance metrics, organization, and information technology. Best-in-class companies view contract manufacturers as strategic partners: “Either both partners win, or they both lose,” one senior pharmaceutical executive concluded.

1. “Contract Manufacturing Will Explode,” Med Ad News, March 1, 2002.