Managing Your Supply Chain: An Interview with Jan Paul Zonnenberg
Leading pharmaceutical companies are seizing savings opportunities in supply-chain management more aggressively than their competitors, according to a recent benchmarking study from management consultants Pittiglio Rabin Todd & McGrath (PRTM; Weston, MA). Best-in-class pharmaceutical companies sustain a 40% advantage in cash-to-cash cycle time over average companies, as well as an advantage in total supply-chain management costs of 4.7% of revenue. And they hold only two-thirds as much inventory as their competitors.
To discover implications of this report for pharmaceutical manufacturers, Pharmaceutical Online spoke with Jan Paul Zonnenberg, a principal at PRTM, a leading consulting firm to high technology industries.
Supply chain management (SCM), according to Zonnenberg, involves managing all components of the supply chain, from a firm's suppliers' suppliers to its customers' customers.
"The goal of efficient SCM," Zonnenberg told Pharmaceutical Online, "is to manage all resources in an integrated manner across the various members of the supply chain, whether internal or external to your organization to achieve high levels of customer satisfaction at the minimum cost and levels of investment.
"Best-in-class pharmaceutical companies maintain 98.4% service levels. We define this level as shipping orders within a preset time frame, say 24 or 48 hours, and delivering these orders completely and accurately within four to five days. High service levels are very important to customers down the supply chain. Our research shows that a typical pharmaceutical company maintains a service level of about 95%. In today's competitive environment, improving service from 95% to 98.4% can generate increased revenue as well as provide savings."
Another indication of an efficient company, according to Zonnenberg, is a relatively high number of inventory turns. "Best-in-class companies have an inventory advantage of $23 to $47 million for each billion in sales. So for a $3-billion pharmaceutical company, becoming best-in-class could mean an inventory reduction of $69 to $141 million. That's a lot of money that could be used to free up cash flow, invest in R&D, or generate additional sales."
One usually associates large a inventory with the ability to respond to new orders more rapidly, since there is no shortage of product. Not so, says Zonnenberg.
"You'd be surprised to know that companies maintaining the highest service levels usually have the lowest inventories. The notion of 'more inventory, better service' is simply not true. The reason for this is that companies that manage their inventories efficiently also tend to have done a better job of minding the supply chain with regard to customer needs, and are consequently more flexible in supporting customers.
"The one essential message I tell all my clients is this: Don't build up inventory with the expectation that you're building better service. That might work for a month or two, but eventually it leads to a downward spiral of lower service and even higher inventory. Companies that optimize and integrate their supply chain can naturally meet changing dynamics of marketplace more efficiently."
Perhaps the most telling statistic on SCM defining best-in-class from second-tier companies is the cost of SCM. A typical pharmaceutical company spends 8.6% of its revenues managing its supply chain, whereas best-in-class companies spend just 3.9%.
SCM is becoming more important because of the changing economics within the drug industry. Zonnenberg explained that traditionally, pharmaceutical companies have been insensitive to cost and level of investment, primarily because their margins were so high. Today, with competition and other changes in the pharmaceutical marketplace, there is a renewed emphasis on freeing up investments and reducing costs. Not all pharmaceutical companies have emphasized the importance of supply chain management as an ideal. Best-in-class firms share information with everyone in their supply chain on a timely basis. This information includes forecasts, market numbers, competitive intelligence, marketing insights, and information on disease management. All this data translates into a better production plan -- not only for the manufacturer, but to all members of supply chain. These companies set up the supply chain to be agile and flexible, to meet changes in upside or downside demands."
Regulation, which Zonnenberg believes may be more stifling in pharmaceuticals than in any other industry, affects how companies deal with supply chain issues. "Changing the supply chain in a highly regulated environment is time-consuming and costly," he said. "Other industries can change suppliers, manufacturing locations, even manufacturing processes, almost at will. And many of our pharmaceutical clients would also change a lot of things overnight if they could: manufacturing sites, suppliers, batch sizes, packaging, etc. But they can't. It may take six to twelve months to obtain approval for even minor changes.
"But these roadblocks shouldn't be held as an excuse for doing nothing. Companies must recognize regulations as a part of doing business and manage change aggressively within the regulatory environment to stay competitive."
By Angelo DePalma
For more information: Jan Paul Zonnenberg, Principal, Life Science Industry Group, PRTM, 9 Riverside Rd., Weston, MA 02193. Fax: 781-647-2804.