Supply Chain in Pharmaceutical Industry: Pfizer and Eli Lily
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The purpose of this report is to critically assess current purchasing and supply management practices in pharmaceutical industry, while looking at such companies as “Pfizer Inc.” and “Eli Lilly and Company”. Globalization, technological advances and increased worldwide competition has led to more complex supply chains in the pharmaceutical industry. It is important to acknowledge the increased exposure of these supply chains to risk. ‘The purpose of risk management is to ensure that adequate measures are taken to protect people, the environment and assets form harmful consequences of the activities being undertaken’ (Aven, 2007).
2. Pharmaceutical Industry Overview
There are types of companies in the pharmaceutical industry: Multinational, R&D-based multinational organisations with a worldwide supply of prescription and over-the-counter products. Pfizer and Eli Lilly are both examples of such companies. They have manufacturing sites in many countries. Large basic manufacturers, which manufacture out-of-patent prescription and over-the-counter drugs. Smaller manufacturing companies that operate locally, producing both generic and branded products under license or a contract. Contractors or outsourcing partners, producing companies, which do not have their own product portfolio, but are involved in producing necessary intermediates, active ingredients or final products by providing outsourcing services to larger companies.
This report will look closely at such manufacturers as Pfizer and Eli Lilly, both global pharmaceutical companies with complex supply chains involved in production and distribution.
3.1 Supply Chain Management in Pharmaceutical industry
At the heart of achieving consistent quality products and building a service system, lies a clearly lined Supply Chain Management strategy. Compliance with storage and transportation technology will prevent any changes in the quality of the medicines. The availability of modern information systems will provide the ability to control the passage of the drugs across the stages of the supply chain. In the end, all of these facts provide an additional competitive advantage for the manufacturers of medicines (Enyinda, 2011). The complexity of the pharmaceutical markets increases the importance of supply chain management. There are several factors contributing to this, amongst which are the following:
An enormous range of existing medical products and pharmaceuticals;
Specific requirements for the transport technology and storage conditions suitable for different groups of drugs;
Difficulties in obtaining certificates, licenses and other permits;
Limited interchangeability of medicines;
Strictly limited shelf life;
Long-term supply of products;
The need for quality control during the procurement process;
The presence of a large number of counterfeit products in the market;
Planning the optimal demand for medicine (stock planning);
The need for professional training, distinct information environment, accounting systems and categorization and to ensure the traceability of medications and data.
These reasons determine the need to control the track of drugs across the supply chain, from the production phase up to the finishing phase, where the product gets delivered to the customer. An additional benefit for controlling the supply chain is the opportunity to track the emergence of counterfeit and substandard products in the process. Each customer, holding a box of medicine, should be able to distinguish its authenticity from the package. This requires the package to feature information about the manufacturer, expiration date, and all intermediaries involved in the distribution of medical products. If the medication is of poor quality, then it must be clear who is responsible: the manufacturer or the distributor. These are examples of procedures executed as part of risk management – the adoption and implementation of management decisions aimed at reducing the likelihood of an unfavorable outcome and minimise the potential losses caused by its implementation.
3.2 Supply Chain Management at Pfizer and Eli Lilly
The corporate responsibility report (2009) released by Pfizer shows an extraordinary level of complexity and interconnection of the supply chain (Appendix 1). It is one of the world’s largest pharmaceutical industries and
its supply chain management is aimed at delivering the best product quality while preserving a reputation of the company that is highly concerned with the ethical and environmental issues. Eli Lilly’s supply chain management shares similarities with Pfizer’s supply chain (Corporate Responsibility Update, 2013). Both of them ensure an effective process of drug distribution and requirements for logistics, such as storing, transportation, information technology, packaging, accounting etc. The companies mainly focus on building strong supplier relationship and maintaining supplier diversity, actively applying measures to fight the presence of counterfeit good in the market, and ensuring the correspondence of manufacturing plants with EHS requirements. Thus, these companies maintain quality, safety and effectiveness of medicines at all operational stages and meet the cost/benefit requirements for competitive advantage in the market.
4 Risk Management
At the heart of risk management lies a targeted search and organization of work to reduce the risk, the art of receiving and increasing income in various uncertain economic situation. Risk management helps manage both everyday and exceptional activities of the supply chain. Hence, there is a traditional risk management and a risk management for volatile times (PWC, 2009). The process itself consists of several key steps: risk identification, risk assessment, risk control, and monitoring. Supply chain is a complex multi-structured system with active elements operating in a fast-evolving market environment. It includes supplier relationship development, pricing strategies, delivery conditions, customer relationship management, and product development. All these operations are associated with a considerable level of uncertainty.
4.1 Risk Identification
A risk is the possibility of an adverse situation or unsuccessful outcome of the organization’s activities in a particular area. Among the main causes of risk – not just a statistical possibility of an unfortunate situation, but also three other factors of internal and external logistics environment: uncertainty, chance, and opposite reaction (Kouvelis, 2012). Uncertainty – is the number of circumstances that can be anticipated in advance, but it cannot be determined to what extent they affect the bottom line of logistics activities. Chance – a number of circumstances, which arise independently of the overall situation, and usually under the influence of environmental factors. Opposition – it’s a deliberate resistance to the circumstances and the logistics process during the implementation. The presence of opposition characterized by actions by of opposing competitors, representatives of authorities, third parties or contractors which fail to follow the terms of the contract.
4.2 Risk Assessment
The risk analysis is conducted in order to examine the situation, identify and classify potential threats, hazards, and risk acceptance criteria (Kerzner, 1995). The process of risk assessment should be positioned as preventive action, and not as a response, which means they should precede the introduction of new or revised actions or procedures. Steps that are necessary to be taken in order to manage or reduce the risks must be implemented before these changes are introduced.
The main purpose of risk assessment is to channel resources, aimed at preventing the losses, to the area of the maximum risk. At the risk assessment stage, it is necessary to identify several types of possible losses, depending on the probability and severity. For example: Regular minor losses. Such losses are predictable and do not represent a serious threat to the efficient operation of the organization. For the most part, they are covered by insurance (e.g. insurance of vehicles belonging to the organization, staff health insurance, etc.). One-time major losses – the most serious group of risk factors, as they potentially threaten the very existence of the firm. Because these cases occur very rarely, their possibility can hardly be foreseen. Examples of such cases are rarely found in the history of the organization, but at the level of the entire industry.
4.3 Risk Control
Risk management should reflect the principles of elimination or reducing the risk to a practical minimum where possible, reducing the likelihood or consequences of potential acts of unlawful interference. The reasons for this can be the following: fluctuations in demand, forecast errors, resource failure, data inaccuracy, management decisions, miscommunication, or even such extreme cases such as political changes or altered environmental conditions. Risk itself cannot be eliminated but it can be managed. Suck companies as Pfizer and Eli Lilly are establishing strong relationship with their suppliers, based on ethical and business standards. Constant collaboration helps with achieving substantial operational benefits: lower transportation costs, and reduced packaging expenses (Qontro Business Profiles, 2008). Thus, close supplier control and collaboration with authorities allows reducing the likelihood of regular minor risks. For a company that seeks to improve their business, an integrated approach to logistics is required – a look at the logistics in the broader context of how to manage the supply chain.
In order to achieve the desired level of logistics costs while maintaining high levels of service, the company should focus on the distribution of efforts between internal logistics and outsourcing. Both companies operate globally, which leads to a necessity to resort to outsourcing. There is an increasing trend to outsource their tasks to Contract Manufacturing Organisations (CMOs) and Contract Research Organisations (CROs) (Cubisms, 2012, p.25-31.). One of the advantages of this is a better risk management, due to a possibility to share the burden of the decision with a partner and focusing more on core activities.
Along with that, it is vital to build an integrated information environment in which it will be possible to obtain the necessary data to improve the predictions of commercial requirements and improve the quality of communication at different stages of the supply chain, it will minimise the risks of the accumulation of goods in warehouses, or the lack of them, which, together with outsourcing processes and transportation, will provide an opportunity to reduce the overall logistics costs while maintaining a high level of service to clients and consumers. According to Blackett (2001), despite obvious advantages, outsourcing holds potential risks for both Pfizer and Lilly.
Reputation is one of the priorities for such multinational organizations, which operate in the industry where customers are especially sensitive when it comes to purchasing from a honourable manufacturer. Outsourcing can be a subject of bad publicity in many cases, especially when a company contributes to a decreased employment locally while creating jobs abroad. Outsourcing can also lead to a decrease in quality of the manufactured product due to profit motivation of the outsourcing company with an attempt to lower their expenses and increase profits. In addition, there is a loss of possibility of rapid response to sudden unexpected changes in business conditions.
The effectiveness of risk management depends on the methods of monitoring and early warnings of any changes to the organization’s risk management program. Continuing audits are necessary, for both the risk management and compliance with the standards, to identify issues requiring further intervention (Kouvelis, 2012). It is vital to acknowledge that the organization is always in constant development and in a dynamic environment. All internal and external changes should be identified and taken into account in the current system of risk management. Monitoring must ensure the use of appropriate internal controls and provide understanding of and adherence to the procedures adopted by the risk management program. The system of continuous monitoring will allow to: Analyse the effectiveness of interventions used to change the degree of risk;. Provide the appropriate level and reliability of information. Accumulate the necessary knowledge and experience for the next steps in the analysis and assessment of risk and management methods and techniques.
5. Current Practices
Pfizer and Eli Lilly are both highly experienced in managing their complex supply chains in order to operate at lower costs, present a product of the highest quality, and maintain a reputation of reliable and ethical manufacturers. Despite of that, their supply chain is still threated by negative externalities, environmental factors, and operational and strategic management oversights. Successful supply chain risk management can prepare a company to be able to either reduce these risks or facilitate the effects of accepting them. The most common risks that pharmaceutical companies might encounter these days are (Ernst & Young, 2009): Justification of the product cost and estimating the price. The company can begin to analyse and justify the cost of the product in the early stages of its development, and to engage in negotiations with sponsors. Access to capital and its further distribution. In the pharmaceutical companies, there is a strong emphasis on the efficient allocation of financial resources and management of balance sheets. Improving the efficiency of the R&D department.
Pharmaceutical companies are beginning to break up the R&D departments in the smaller segments, which are more innovation-oriented and have a broader autonomy. There is also a question, whether a company should choose outsourcing to improve productivity and reducing the time to concentrate on a limited number of areas of drug development and a more responsible approach to the market demand for high-value product. Radical redesign of business models. A company can experiment with different business models in order to obtain the useful experience from the practice of other industries and explore new partnership models. It is extremely important to adopt the measures to ensure the effective implementation of the selected business models. Conformity of the product safety requirements.
In order to effectively manage complex global supply chains, comprehensive risk management techniques are applied, along with advance planning of post-marketing monitoring of the product and building a strong relationship with the customs authorities in order to enhance and protect against counterfeiting. Protection and use of the value of intellectual property. The way to ensure this is a patent law, which allows companies to assert their rights more confidently. Maintaining the component of the industry responsible for innovation. Companies are looking for an alternative to a fully integrated model of R&D. There are opportunities for more selective investment in certain types of drugs, along with reinvestment in staff. The integrity of the global supply chain. The Company can increase the effectiveness of a comprehensive inspection of third-party suppliers and pay more attention to regulatory and legal requirements, specific for the emerging markets, as well as to introduce more reliable methods of supply chain management and internal controls.
Providing better access to medicines, but limiting an access to those, suffering from substance dependence. Even though there is an increasing requirement to improve access to medicines, the company can develop in advance and implement a comprehensive approach to operations in emerging markets, combining innovative, pricing methodology and the development of local strategic partnerships. Reputation damage. Measures to ensure efficient risk management, careful selection of partners and maintaining high standards of product safety and transparency of information are crucial today.
A successful management of supply chains in pharmaceutical industries is a subject to multiple theories, numerous case studies and extreme thoughtfulness. Pharmaceutical firms are designed to provide the citizens and health care facilities with the entire range of medical products. In modern days, the activities of pharmaceutical companies take place in very difficult conditions. The main feature of the pharmaceutical product is its high social value. Successful supply chain management acts as an effective tool for organizing and managing the processes of movement of goods in the market of pharmaceutical products. If a pharmaceutical company wants to effectively compete in the industry, it must build their strategic and day-to-day activities based on the principles and methods of logistics. Moreover, the level of application of logistics practices can serve as a criterion for proper operation of pharmaceutical companies and the professionalism of its employees.
Appendix 1 – Pfizer Supply Chain (Corporate Responsibility Report, 2009) Aspects:
Pfizer’s major plants are located in Belgium, France, Germany, Ireland, Japan, Puerto Rico and the U.S. In the near future, Pfizer is planning on decreasing the internal network of manufacturing plants. Often facilities are let to other companies with an arrangement to supply Pfizer for a period of time. Thus, the company develops additional business to make the plant sustainable. Pfizer is planning to increase outsourced manufacturing of products from approximately 17% to 30% from 2010 until 2013. Main reasons are – capacity flexibility, cost competitiveness, and technology, while assuring supply chain integrity/reliability, product quality, and regulatory compliance.
Constantly investing in Technology & innovation, improving manufacturing processes for pharmaceutical active ingredients that not only decrease costs, but also are also environmentally friendly. Pfizer applied Lean Six Sigma principles, which assures that proficient and effective work processes are used to create and deliver consistently high-quality products to customers. Manufacturing plants are regularly inspected by various regulatory organizations for conformance with protocols. Pfizer piloted onsite quality audits of approximately 400 potential and existing raw material suppliers across the world during 2008. Suppliers who do not meet Pfizer’s quality requirements are forbidden to be a part of the supply chain until they are able to satisfy the requirements.
In limited cases, Pfizer has located competent quality specialists directly on site who provide everyday support for a set period of time. Pfizer uses innovative technologies and works closely with government agencies to remove counterfeit products from the supply chain. Pfizer is only working with suppliers that demonstrate acceptable performance in both EHS and labor practices. Evaluations help Pfizer manage business continuity, liability and reputation risks, while ensuring that supply management decisions support company values. Pfizer is a part of the PSCI (Pharmaceutical Supply Chain Initiative) – a group of pharmaceutical companies who share the goal of helping their suppliers to attain better environmental, health and safety performance and improving labor standards. Pfizer allocates resources and provides formal training in order to assist suppliers in improving EHS. Even though the training is aimed at improving EHS conditions, it also had a positive effect on supplier performance through enriched knowledge, management systems and capital investment.
Appendix 2 – Eli Lilly Supply Chain (Corporate Responsibility Report, 2012) Aspects:
Eli Lilly maintains relationships with thousands of suppliers of materials and services. Suppliers are categorized into three tiers, depending on their type of impact from a supply risk perspective: Tier A (general office supplies, travel services, IT, equipment, and catering), Tier B (raw materials and other common commodities used for packaging and manufacturing: packaging materials, waste disposal services, and energy), Tier C (suppliers of active ingredient suppliers, contract manufacturers, and R&D labs). Lilly is an active participant at the PSCI, which supports the values, designed to align with the principles of the United Nations Global Compact (Appendix 4); they represent high-level expectations set for industry suppliers in the areas of ethics, labour, EHS, and management systems.
Eli Lilly is actively engaged in efforts to combat counterfeiting. Anti-counterfeit office is working with global stakeholders in the supply chain to secure the reliability of Lilly’s products through legitimate distribution channels, adding improved anti-counterfeiting technology for Lilly products and packaging, seeking to eradicate major counterfeiters of Lilly products through targeted investigations, Internet monitoring, litigation, and prosecution, and allies with government and NGOs and trade associations to implement and administer anti-counterfeiting laws and increase awareness with health care experts and patients about the hazards of counterfeit drugs. Diversity in the workforce and in the supplier networks is critical. Supplier diversity development meets a business need by helping the supplier base be more reflective of the dissimilar marketplace. A supply base that can reflect the changing demographics promotes creativity and innovation.
Appendix 3 – UN Global Compact 10 Principle
Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle 2: make sure that they are not complicit in human rights abuses. Labour Standards
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour;
Principle 6: the elimination of discrimination in respect of employment and occupation. Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility;
Principle 9: encourage the development and diffusion of environmentally friendly technologies Anti-Corruption
Principle 10: Businesses should work against all forms of corruption, including extortion and bribery.
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