A.T.
Kearney Pharma Supply Chain Panel 2014
Preparing the Supply
Chain Pharma Needs
Pharma supply chains have not yet attained their full
potential. Complexity reduction, end-to-end inventory
management, supply chain segmentation, and greater
agility should top the agenda.
Preparing the Supply Chain Pharma Needs 1
The pharmaceutical industry is in the throes of major change. The many asset swaps and
deals making today’s headlines are merely the latest manifestation of a longer trend that
reveals deeper forces at work.
Earlier this year we wrote that in today’s constrained revenue environment, managing the
cost of goods sold (COGS) and improving operational performance in the future will set
companies apart from their rivals.1 And we found that operational transformation across four
dimensions—operations strategy, planning and reporting, execution excellence, and mindsets
and people—could free up $135 billion in cash.
Given the large prize at stake, we asked the participants in our 2014 Pharma Supply Chain Panel
about their supply chain performance and priorities for the year ahead. More than 30 large
global pharmaceutical companies took part, representing six of the world’s 10 largest companies
in the sector. Supply chain opinion leaders from around the world in all types of businesses
participated: prescription medicines, generics, vaccines, over-the-counter drugs, biotechnology,
and animal health (see figure 1). In this paper, we present the main findings from our 2014
panel and enrich them with our own observations on additional supply chain topics that are
hovering just below the radar screen.
Figure 1
The A.T. Kearney Pharma Supply Chain Panel covers a highly representative sample
of leading companies
Participants by global sales Coverage of top 10 global pharma companies
% Number of companies
>$12 billion Participating
6%
$7−$12 billion Not participating
23% $1−$6 billion 4
52% >$1 billion
6
19%
Participants by type Participants by function
% %
Prescription (exc. generics) Supply chain management
3% 3%
6% 6%
6% Generics Operations
Vaccines 14% Supply management
10%
Over-the-counter Finance
55%
Biotech
19% 77%
Animal health
Note: The top 10 are based on worldwide prescription sales in 2013.
Source: A.T. Kearney Pharma Supply Chain Panel 2014
Please see “It’s Time for a Step Change in Pharma Operations” at www.atkearney.com.
1
Preparing the Supply Chain Pharma Needs 1
Companies Have Significant Room to Improve
Our study shows that many pharmaceutical firms have significant potential to improve across
the main supply chain areas (see figure 2).2
Figure 2
Summary of benchmark results
Customer 94.5 178
Total
service 99.4 inventory 117
level (days)
(%) 99.5 53
+5% –34%
Forecast 61 Total 17
accuracy 90 supply 10
N-3 chain cost
(%) (% of COGS) 10
+48% –41%
Pharma average Pharma best practice Consumer best practice
Note: COGS is cost of goods sold.
Source: A.T. Kearney Pharma Supply Chain Panel 2014
• Customer service levels at the best pharma companies are world-class, at just a shade
below the best consumer goods companies. Average levels, however, are 5 percent lower,
and even seemingly small service-level differences of just 2 percentage points can translate
into 80 percent fewer stock-outs at non-generic prescription drug firms. These are worlds
of difference.
• Forecast accuracy is important to keeping inventories low—and production stable. Volatile
demand and complex finished goods portfolios can make this a daunting challenge. Several
companies (particularly non-generics) seem to have mastered the art, but the average
pharmaceutical firm is far from a state of excellence.
• Total inventory at best-in-class consumer goods firms accounts for 70 percent fewer days
of sales than at most pharma companies. Even the highest-performing members of our panel
have not managed to reduce the gap to fewer than 61 days (that is, about 34 percent). Given
the regulatory complexity and quality release times in pharma, consumer goods performance
might be unreachable. However, levels of below 100 days should be feasible if all the supply
chain systems are trimmed to world-class.
This section presents a broad overview of Pharma Supply Chain Panel participants’ performance. Companies taking part in the study
2
received detailed breakdowns of their own performance versus comparable groups of low, average, and high performers.
Preparing the Supply Chain Pharma Needs 2
• Total supply chain costs (as a percentage of COGS) at average performers present
a 40 percent difference from the best pharma industry supply chains—which, at around
10 percent, are comparable to those of best-in-class consumer goods companies. Thus,
supply chain costs at most pharma companies could be reduced by as much as
7 percentage points.
Although 92 percent of respondents see
complexity management as a strategic
priority, nearly 40 percent do not yet
actively tackle the issue.
Our 2014 panelists admit that they struggled with a number of major supply chain challenges
last year (see figure 3). Product- and process-related complexity, arising from large portfolios
and a global footprint, was the one most frequently cited. Capacity constraints are another
common theme, especially as long regulatory lead times draw out the process of bringing new
production sites online.
Figure 3
Complexity, capacity, and quality issues top the list of challenges for 2013
Main supply chain challenges in 2013
(% of respondents)
Product and process complexity 58
Capacity issues 42
Quality-related supply issues 41
Supplier issues 32
Source: A.T. Kearney Pharma Supply Chain Panel 2014
A number of players have also faced quality-related supply issues. The U.S. Food and Drug
Administration’s (FDA) Office of Manufacturing and Product Quality issued 21 warning letters
in 2013 alone, and this number excludes the numerous letters issued by the FDA’s district
offices around the country. Learnings from past years show that remediation actions in
most cases have dramatic effects on supply chain performance—a much underestimated
industry issue.
Preparing the Supply Chain Pharma Needs 3
Complexity management, inventory reduction, supply chain segmentation, and agility
are top priorities for this year
While our study may have provided participants with concrete evidence of where and by how
much they can improve their supply chains, most already have an intuitive sense of the areas
that need to be addressed. More than three out of five respondents said that they will initiate
or reinforce initiatives to reduce complexity and optimize inventories across the supply chain,
and nearly half intend to address supply chain segmentation (see figure 4).
Figure 4
Complexity reduction and inventory optimization are on top of the 2014 strategic agenda,
followed by segmentation and agility
Major supply chain initiatives for 2014
(% of respondents)
Reduce complexity 61
Optimize inventories end-to-end 60
Segment your supply chain 45
Increase agility 42
Source: A.T. Kearney Pharma Supply Chain Panel 2014
Complexity in the pharma supply chain can arise from a number of sources, chief among them
the finished goods portfolio, production materials and versions, the supply network, the ratio
of production sites to markets served, and regulatory restrictions. Yet although complexity
management is high on the agenda at 92 percent of the companies, nearly 40 percent lack
clearly defined systems to keep it in check. Furthermore, many of those that do are biotech-
nology and OTC firms rather than branded prescription drug companies. Interestingly, at
generic drug companies, where complexity is the greatest due to their large portfolios of finished
products and molecules, only 33 percent stated that they already manage complexity actively.
Companies that successfully manage supply chain complexity define a strategy that distinguishes
complexity customers will pay for, track the actual cost of that complexity across the value chain,
and keep a close eye on how complexity evolves. In our experience, a best-in-class complexity
program can add 3 to 5 percentage points to a company’s EBIT margins.
To achieve end-to-end inventory optimization, the supply chain operating model must
support seamless interfaces with other functions and structures, with customers and
suppliers, and with the corporate strategy. The best-run supply chains manage their trade-
offs cross-functionally and globally using advanced analytics, a task that sounds simple but is
highly challenging in practice to bring to excellence. Besides analytical skills, performance
management and incentive models need to be designed around the contribution of each
area to the supply chain's common strategic goals (for example, operating asset
Preparing the Supply Chain Pharma Needs 4
effectiveness and reliability for manufacturing, on-time delivery for logistics, or forecast
accuracy for marketing).
While many companies in our panel say that they have different supply chain segments—
one even counted 10 different supply chains—fewer than half state that they actively design
segments and reconfigure them when warranted. Rather, segmentation at most firms originates
from organizational setup or legacy structures, based more on inertia than on a true need for
differentiation. When asked what elements they actually tailor to each segment-specific supply
chain, more than two-thirds of respondents cite the supply chain strategy itself (including
service levels, degree of flexibility, and cost and capital targets), followed by inventory and
customer replenishment policies. Generic pharma companies, feeling the stiff winds of market
competition, are the most advanced in differentiating supply chains in areas such as sales and
operations planning, execution teams, and supplier replenishment policies.
Fewer than half of respondents actively
segment their supply chains.
Leading drivers of supply chain segmentation are differentiated business service requirements,
demand patterns, and special product attributes. Types of customer interactions are also
beginning to influence supply chain thinking at some pharma companies. Differing supply
patterns do not yet appear to cause most companies to build separate supply chains.
All of these drivers, based on logistical differences among customers and products, are a good
start to building segmented supply chains that truly differentiate at the point of sale. The trick
is to develop strategies that strike in each case the right balance between customization and
scale, and to define attributes around structure and policy (rather than around processes or IT
systems). We have seen best-in-class segmentations reduce inventories at pharma companies
by as much as 15 to 20 percent and lower supply chain costs by more than 10 percent, while
maintaining service levels.
Many factors are bringing supply chain agility to the top of the agenda in the pharmaceutical
industry. A wave of expiring patents, business acquisitions, new customer buying behaviors,
and competitive actions are increasing the need to react faster, challenging companies to step
up their game. In many industries, postponement of final manufacturing or distribution until
a customer order is received is helping companies to manage complexity and keep inventories
under control. Even major biotech and vaccine producers have started to decouple their supply
chains between primary and secondary packaging, which increases supply flexibility and allows
them to customize at the latest point possible.
Beyond moving decoupling points, agile supply chains periodically conduct scenario-based
planning exercises to be prepared for what might be just around the bend. To run smoothly, they
include mechanisms that interact closely and electronically with what’s going on in the
market—for example, what consumers want, what customers demand, and what is needed to
minimize the effects of market access restrictions. Decision-making processes are trimmed
for speed and efficiency, with everyone knowing who decides what and trade-offs systemati-
cally weighed and resolved. End-to-end visibility of performance keeps planning quick, lead
times short, inventories low, and assets highly utilized.
Preparing the Supply Chain Pharma Needs 5
Additional Elements for Future Success
While not on our panelists’ list of top five priorities for 2014, customer centricity and emerging
markets are two important topics that supply chain organizations in the pharmaceutical
industry need to have on their radar screen.
Fifty-two percent of the people we surveyed say that achieving supply chains with greater
customer centricity is a top priority. The challenge, nearly all agree, will be for the supply chain
to remain efficient as new routes to market evolve, perhaps radically, as collaboration increases
with payers, pharmacies, other retailers, and wholesalers (see figure 5). In fact, not a single
generic pharma company we spoke to expects the traditional pharmaceutical wholesale
model to survive.
Figure 5
Pharma supply chains must become more customer-centric, while keeping efficiency high
How important is it for your company to…
…make your supply chain more customer- …remain efficient while becoming more
centric, putting stakeholders at the center customer-centric?
of your activities? (% of respondents)
(% of respondents)
Low Low
priority priority
10% 8%
Medium
priority
Medium High 15% High
priority priority priority
38% 52% 77%
Source: A.T. Kearney Pharma Supply Chain Panel 2014
Emerging markets are another area that companies should be paying attention to. For some
time now pharmaceutical companies—particularly those with a mature product portfolio—have
been expecting much of their growth to come from developing economies. Therefore, what
started out as investments in low-cost production facilities have become tools to ensure market
access and serve local market growth, especially in light of limits to imports and forced out-
licensing. Nevertheless, most companies we spoke with are not planning to make significant
additional manufacturing investments in emerging markets, as the search for global efficiencies
returns to the fore. We believe the need to further move production toward Asian markets is
more than ever driven by regional market access, supply-demand matching, and cost efficiency
perspectives. The question is sure to stay on the operations top management agenda for the
foreseeable future.
Preparing the Supply Chain Pharma Needs 6
A Tough but Rewarding Road
Our study indicates that pharma supply chains have not yet reached their full potential.
Managing supply chain complexity, establishing end-to-end inventory management, driving
supply chain segmentation, and increasing agility—these are the topics that need to be at the
top of supply chain managers’ agendas and guide them to reach the next performance level.
While putting the topics on the road map is straightforward, addressing them in the pharma
context is anything but easy. All of them require cross-functional integration with close
involvement of external and internal partners. The improvement levers need to be integrated
in a coherent supply chain concept, as addressing them in an isolated way will not release
their full potential. Implementation requires top management commitment as well as disci-
plined and rigorous execution. This is challenging indeed, but it is the only way to reach best
practices. Industries such as consumer goods have proved that the effort pays off.
Authors
Oliver Scheel, partner, Düsseldorf Pablo Moliner, partner, Madrid
oliver.scheel@atkearney.com pablo.moliner@atkearney.com
Oliver Eitelwein, principal, Düsseldorf
oliver.eitelwein@atkearney.com
The authors would like to thank Arne Kreitz and Enzio Reincke for their valuable contributions to this paper.
Preparing the Supply Chain Pharma Needs 7
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