Packaging And Labeling: Should You Outsource?
By Stephen McIndoe BEng CEng MIET, VP Consulting, Be4ward
My previous article discussed the different aspects of technology required to the support the labeling and artwork process. In this article, I will look at the question of whether or not to outsource some or all of the activities involved in your labeling and artwork process.
For this purpose, we will define outsourcing, as the hiring of an external organization to provide all, or part, of a business capability. You already very likely outsource part of the overall packaging component supply process by employing an external printing company to make and print the majority of your printed packaging components. This is outsourcing in the context that we mean it here. We are excluding the hiring of individuals to fulfill particular roles on a temporary or contract basis from the outsourcing discussion.
Before we go any further, let us make it clear that it is highly unlikely, if not impossible, that any organization will be able to outsource the whole of the artwork capability. As we have discussed several times, the cross-functional, global and cross-organization nature of the process means that, at minimum, some aspects of the process are highly likely to remain in-house.
Considerations For Outsourcing
So why would you outsource some or all of the artwork capability? We will look at the following drivers for outsourcing as a way of helping you answer this question:
- Does the activity bring competitive advantage?
- What is the risk that failure of the process presents?
- What is the scale of activities?
- What are the external opportunities?
- What internal capabilities are available?
The basic concept of competitive advantage, when considering outsourcing, is that if a capability is considered to give significant competitive advantage, then there is value in becoming excellent at it. Furthermore, there is value in not letting your competitors know exactly how you do all of it. Let us remind ourselves of some of the things that an artwork capability does and you can then consider if any of these give your business a competitive advantage.
New Artwork Is A Product
Creating new artwork is synonymous with developing new products and your business may be based on launching a significant number of new products each year. For example, this may be as a result of a strong product development pipeline, the short lifecycle of your products, or, perhaps, it is due to an aggressive acquisition plan. In any of these situations, your ability to develop new packaging designs successfully that are in line with external regulatory requirements, on time and to a high quality, is imperative to the success of your business strategy.
If your business has a strategic imperative to expand products into new markets rapidly, then – in a similar way to launching new products – your business will not meet its strategic objectives unless it is capable of successfully delivering the associated packaging designs on time and to the right quality. Again, this requires certain aspects of your artwork capability to be “best in class”. Perhaps you operate in a business where your products change or evolve frequently. In this situation, you will frequently find that the artwork changes are on the critical path of product delivery.
Increasingly, governments and other large purchasing organizations are doing business through tenders. Often, tenders have specific packaging requirements which must be met and, therefore, new or revised packaging is required for each new tender. This all puts a high quality, fast turn-around artwork capability at the forefront of delivering this business.
If, after considering the above discussion on competitive advantage, you may conclude that there are particular areas where an artwork capability will give your organization significant value, then this should influence your thinking when considering outsourcing. That is not to say that it should preclude outsourcing options; indeed it may drive you to consider outsourcing certain activities to best in class suppliers. However, it should also ensure you consider the competitive implications of outsourcing decisions.
The Consequences Of Failure
Another factor to take into consideration when considering outsourcing is the consequences of failure of the process. Clearly, where artwork is concerned, the consequences of a single failure to the pharma company leading to a recall can be significant: loss of sales, direct costs, management distraction, brand reputation damage, and increasing external regulator scrutiny. The consequences of failure of the process to those performing outsourcing services are likely to be much less severe, unless some form of punitive damages clause is included in the particular outsourcing contract. For this reason, a pharmaceutical company should carefully consider the overall design of the artwork capability, any outsourcing partner’s role, and where the key quality checks and decisions are being made.
The scale of your operation also has an impact on outsourcing decisions. For small organizations in particular, there is an interesting dilemma that needs to be considered carefully. On the one hand, as a small organization, you are unlikely to have the critical mass to enable you to develop an adequate internal capability for certain aspects of the overall artwork capability. On the other hand, as a small purchaser you are unlikely to have a great deal of leverage with potential suppliers. Larger organizations have the luxury of scale to allow them to consider keeping more of the required capabilities in-house.
A final thought about considering outsourcing opportunities is to review the capabilities you may already have within your organization, as some parts of your organization already have all or part of the capability you require. Either they will do the activity internally, or they may have already sorted out external service providers.
The final point we would make about considering external service providers as a way to provide parts of the artwork capability is that outsourcing will not magically fix an otherwise broken business process. If your current process is broken, you really only have two choices: fix it first and then outsource the appropriate parts or redesign it and implement the new process with the relevant new external service partners.
Assessing External Service Providers
There has been much written on the subject of service provider selection and we do not aim to repeat a lot of that knowledge base here. What we will cover here are the aspects of service provider selection that have proven to us to be important when it comes to artwork capability outsourcing.
The basic areas that need to be looked at when considering any outsource partner, and artwork capabilities are no exception, are:
- Ability to deliver the required service in the short term
- Quality compliance
- Service level
- Quality management system
- Cost and stability
- Strategic fit
The starting point for any external service provision is to define exactly what you want the external service provider to do for you. This definition is normally based on a detailed business process design and a consideration of the points at which the service provider will interface with your process. Having defined what you want the service provider to do, you need to document it, explain it to the potential service providers and check for understanding. Our recommendation would be to visit the potential service providers and talk through their understanding of the service provision with them, seeing where the service will be carried out, how they intend to do it and discussing it with operating staff who will be doing it.
In parallel with the above, you need to consider what quality control activities they need to have in place to ensure the quality of what they deliver. Depending on what they receive to start their process, it is also worth considering what quality control activities they might need to undertake to check any inputs they receive from you as well.
Along with the quality control activities, there needs to be an assessment of the potential service provider’s overall quality management system to ensure that it meets pharmaceutical quality standards. The cost of the service is always going to be important, no matter how large or small your organization. When comparing costs of potential providers, it is important to be able to compare like with like. Fortunately, when it comes to artwork-related services, much can be defined and contracted for on a rate card basis. For those of you not familiar with this term, we mean that the service can be defined as a number of deliverables and that a price can be defined for each deliverable. The long-term stability and viability of the service provider should also be of keen interest to a customer if a long-term relationship is intended, not least because the cost of switching suppliers is always very high.
When we talk about strategic fit, we are really talking about three things. Firstly, if you perform the service provider selection well, you are going to have a relationship with the service provider for a number of years. Therefore, it is important to select an organization with whom you are confident that you and your people are able to work. Secondly, you need to understand if the strategic direction of their organization fits with your strategic direction for the service.
Supplier Selection Approach
An approach to the assessment of artwork service providers that has proved successful involves the following steps:
- Define and agree selection method with steering team.
- Create a shortlist of potential service providers. A request for information (RFI) may be necessary here if you do not have access to knowledge about potential suppliers.
- Prepare a request for proposal (RFP) and quotation (RFQ) document and send to shortlisted providers and create the supplier selection criteria and weighting.
- Receive and analyse RFP/Qs.
- Visit service providers with a small team of your people.
- Hold a selection meeting with the team that performed the visits and make a supplier recommendation.
- Present findings and recommendation to steering team for final decision.
The ultimate decision about which service provider(s) to select would normally be made by the steering team in many organizations with the selection process being led by the procurement department with support from the business.
Establishing Supplier Contracts
Once selected, the contractual agreement about what a service provider is going to do for you will normally be captured in three key document elements. They may all be part of the same document or may be different documents; this often largely depends on current practice and authorship practices in an organization:
- Technical and quality agreement (TQA)
- Service level agreement (SLA)
The contract is normally the parent document, covering all the legalese associated with the service. It is often highly standard in nature and references the other documents, which describe what the service provider is going to do. The cost of the service is normally included in the main contract. This document is normally owned by the procurement and/or legal function.
The technical and quality agreement would normally describe in detail the service activities that the service provider will carry out and the interface of that service with your and any other relevant organizations. If appropriate, it should also reference any special tools or IT systems they will use. Finally, it should spell out the quality standards and quality management system that the supplier will use in delivering the service. This document is normally jointly owned by the artwork function and the quality function in the customer’s organization.
The service level agreement should primarily deal with agreements associated with the response times that the service provider will meet and the capacity they will ensure is available to the customer. This document is normally jointly owned by the procurement function and the artwork function in a customer organization.
Managing Service Providers
In managing artwork service providers, it must be recognized that you are managing a long-term professional relationship. Lasting relationships typically require a number of things to survive:
- Mutual benefit from the relationship
- Ongoing commitment and effort to make the relationship work from both sides
- Mutual respect
The initial agreement needs to be set up in a way that ensures both parties feel they are getting some significant benefit out of the relationship. We would suggest that a relationship based on the customer getting constant wins at the expense of the supplier always feeling like they lose may feel good for the customer for awhile, but the relationship is likely to be very difficult to manage and will end at the first opportunity that the supplier gets.
Like all relationships, it takes effort and commitment to make it work. Therefore, the management of the relationship should create the opportunities to put in this effort on both sides.
Outsourcing Doesn’t Come For Free
If you were under any illusion before reading this article that outsourcing was an easy option, we hope that you now see that it is not. That is not to say in any way that it is not a very worthwhile approach; it is just important to recognize that it needs different effort and skills to achieve successful results. You should also recognise that whilst you can outsource activities, you cannot outsource accountability.
As a customer, you need to recognize that successfully establishing and managing these relationships requires you to invest in a different set of skills and resources that requires constant and ongoing effort to make it work successfully. As a last thought on the topic, we would re-emphasize a basic mistake that is repeated time and time again: Don’t outsource a process that does not work; it will not solve the problem and will likely make things a lot worse.