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Managing the Outsourcing Relationship

Mon, 04/09/2007 - 11:16am
Going beyond the basics
Outsourcing Makes Sense for Big Pharma

The drive behind outsourcing strategies at large pharmaceutical companies is decidedly financial. With the continued trend of industry consolidations, the successful pharmaceutical companies are growing larger. With size, natural and structural complexities enter into business operations for consolidating companies. The simple functions of manufacturing become bogged down in a litany of legal and procedural issues. A value chain analysis shows that large public companies earn the best return when they invest in product marketing, research and development of new products, and customer-focused supply chain improvements. Conversely, brick and mortar manufacturing has a low return on investment. Because of this, companies are strategically choosing to reduce head count, to reduce assets employed by selling or closing manufacturing facilities, and to focus upper management on sales and marketing, research and development, and supply chain. The companies employing this strategy have seen advantageous results: increased revenue growth, increased return on assets employed, increased sales per employee, and overall greater profitability, which means better shareholder value creation. In today's market, the question is not, "Should my company outsource its manufacturing?" The question is, "How do I select the best manufacturing service provider?"


Looking Beyond the Technical Specifications to a Total Business Relationship

When selecting a manufacturing partner, the common industry practice is to send the quality team to review potential candidates, resulting in a group of target companies that bid on projects. Finalists typically undergo a re-audit. Finally, qualification batches are produced and a final approval is given, usually followed by a contract of some form.


Broad Search > Screen Targets by Phone >
Quality Assurance Visits Subgroup > Quality Assurance Narrows Subgroup > Bid Process Identifies Winner >
Finalist Receives Comprehensive Quality Assurance Audit >
Trial Batches Produced > Contract Signed > Manufacturing Scale Up


The purpose of a basic audit is to review and confirm that the facility in consideration has the appropriate batching, materials handling, packaging, warehousing and shipping capabilities. Additionally, the Quality Assurance Team should verify that all the necessary Standard Operating Procedures (SOPs) are in place, that all necessary regulatory registrations are in place (FDA, alcohol licenses, HAZMAT training) and that these procedures are being followed.


A basic audit, however, does not sufficiently address all the qualities that should be found in ideal manufacturing partner. Pharmaceutical companies should look beyond the technical specifications of their potential manufacturing partners and should examine the total business relationship in three additional areas by performing a facilities audit, a human resources audit and most importantly, a strategic business audit.


The Facilities Audit

In a basic audit, there are many underlying issues not addressed by either party, only for a manufacturing partner to attempt to scale up new products or equipment and for the pharmaceutical company to discover an issue well into a program. To avoid the common pitfalls, ask the following questions to address the company's ability supply:

1. Is the water supply adequate? What pipe size is used? What Gallons per Minute? Is the system USP 29?
2. Will the electrical supply support the project's needs? What is the KVA of the facility? Does the company transform their own power to support any necessary expansion?
3. Does the company have the necessary compressed air supply to support expansion?
4. Is there adequate bulk materials storage if needed?
5. Does the company have any waste water restrictions or requirements? Is the overall waste water system adequate?


The Human Resources Audit

Pharmaceutical companies should never overlook the human resources of potential manufacturing partners. If new business is awarded to the manufacturing company, by definition there will be increased activity. Ensure that the human resources are adequate by reviewing the following topics:

1. Is the executive staff adequate and experienced? Typically, a pharmaceutical company should look for 15-20 years experience in all senior managers at manufacturing companies. If possible, at least a portion of that past experience should be with Blue Chip Companies.
2. Manufacturers should also require company-wide training program for a range of issues from forklift training to hygiene and current good manufacturing practices training. All trainings should be documented.
3. Evaluate turn-over. What is the stability of the executive team and the overall company? Turn-over is expected in the highly fluid environment in the US, so a succession plan must be in place. Request a copy of the plan confidentially.
4. Education is also critical. Does the company choose well-educated, degreed managers? Doe the company support continuing education?
5. Finally, what talent pool can the company draw from? Is unemployment high in the area? Unfortunately, if yes, this is a big plus for a growing company. Does the company have relationships with temporary hiring agencies that can be leveraged for a fast scale-up?


The Strategic Business Audit

The final area for discussion and review is the evaluation of the target manufacturer as a strategic business partner. This may be the most important element of the evaluation. Key areas for review include:

1. Are supply and demand balanced in your manufacturing market? If the answer is no, which way does the balance swing? If supply exceeds demand, watch out for the financial health of your potential company. If demand outstrips supply, you may want to evaluate newer players who don't already have deep allegiances that will make you a low priority customer.

2. Examine the company's market position. Does the manufacturing partner compete directly with you by manufacturing and marketing private label products or generic products or -- in the most extreme case -- their own national brands? This would mean you are exposing your volumes, formulations and packaging design to a "partner" that could become an aggressive competitor. Partnering with such a company would not be savvy choice, as the real value generation for pharmaceutical companies is in their resource and development, marketing and sales, and supply chain. This is information that would be applied directly toward competing against your products and brands. Interestingly, if the potential partner manufactures competitive brands for another brand company, but does not market them, this would be of benefit to you. The partner would have excellent experience and possibly completive materials pricing, but would never be compelled to share this imbedded knowledge.

3. Finally, calculate the company's ownership structure. Is it publicly owned? If so, the company may have profit pressures that may be a strain on your potential relationship. Is the owner a sole proprietorship? If so, is the owner is at an age where he or she may sell the company (say over 55 or worst case, over 65)? Is this a core business versus a volume utilization strategy for an industry player? If it is a utilization strategy, the probability that you will be "bumped-out" at some point is quite high. Also, how is the company funded? Most manufacturing companies have access to low-cost, tax-free bonds. Is the company financially savvy? Has it taken advantage of low-cost sources of capital?


Over all, manufacturing outsourcing only makes sense as the pharmaceutical industry moves forward. To select a quality manufacturing partner, perform the necessary quality audits, review the facility's capabilities, gain a comfort with the human resources plan, perform a complete technical review and always begin with a well-matched strategic business partner. If you take care to follow these steps in selecting a manufacturing partner up front, the desired results of your outsourcing relationship will fall into place with ease.

Broad Search > Strategic Business Review > Process
Engineering Visit > Preliminary Quality Audit > Run a Disciplined
Bid Process > Finalists Receives Quality Assurance Audit and Strategic Business Approval > Run Trial Batches > Confirm Assumptions >
Contract Signed > Manufacturing Scale Up
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