A Hard Look at Third-Party External Supply Networks

I had dinner recently with an old and very insightful Big Pharma colleague of mine and after speaking together, he revealed an important concern. "Gregg, I'm worried," he said. "I think the complexities of our current global supply chain outweigh our capability to control the network," he continued. He was talking about his company's third-party external supply network.

Gregg Brandyberry

It's a scary thought, the idea of being too big and complex to adequately control an organization's supply chain. But as my colleague and I discussed this in more detail, I definitely understood why he felt that way. For the past 20 years and especially the past decade, the industry has watched the evolution into "gigantic pharmaceutical drug-makers," such as Johnson & Johnson, Pfizer, Roche, Merck & Co, Novartis GlaxoSmithKline, and sanofi-aventis, all $40-billion-plus annual revenue behemoths.

These global giants are the results of mergers, acquisitions, and myriad comarketing, in-licensing, and other growth strategies to make up for the disappointing failures of traditional R&D. The resulting manufacturing "mash-ups" have created third-party external supply networks that are difficult to manage because of the number of CMOs involved, long-term contracts (some with substandard organizations), contracts with no provisions for ongoing cost reductions, and other nuances that result in the buying organization having a higher risk profile than desired.

Now, there is no doubt that making changes to the network can be difficult and expensive due to product registrations and other regulatory hurdles on a country-by-country basis. But if a company is willing to play a longer game, with a forward vision, it is possible for it to optimize its third-party external network to reduce all types of supply risk and ensure the ability to manufacture products cost effectively.

There is a new methodology, called collaborative optimization, which I've become familiar with through my work as senior advisor for A.T. Kearney Procurement and Analytic Solutions. The methodology has its roots in optimizing transportation logistics. It's been successfully used in many direct and indirect categories of spend as diverse as packaging, chemicals, and temporary labor and also to simultaneously optimize multiple categories of spend used in sequential manufacturing processes. It was designed for complex categories of spend when the complexity comes from many specifications, many potential suppliers with a multitude of capabilities, and regional or global manufacturing and distribution needs.

Collaborative optimization has three key components. First, it establishes deep analytics in the cost makeup of a product/service through the creation of a detailed cost breakdown. Second, it gives suppliers the ability to quote in multiple ways, including creatively (i.e., to quote on parts of the business that play to an individual supplier's strengths or to provide new ways to meet requirements more cost efficiently). This function is called expressive bidding and makes ups the "guts" of a new type of request for quotation that has an abundance of cost-rich information and cost-reduction ideas.

The real differentiator with collaborative optimization is the ability to use combinatorial optimization through an embedded combinatorial analyzer that allows for scenario comparisons to be rapidly generated. These comparisons determine the most desirable outcome based on what a corporation must have. This requirement might be the lowest total price or the best total cost when certain constraints are added. This method overcomes many of the limitations in today's procurement approaches by fostering creativity into the quotation process and handling large amounts of data in a fast and efficient way, thereby enabling the buying entity to determine the best solution for its specific needs. What I like the best about collaborative optimization is that it does not pit supplier against supplier the way traditional procurement practice often does. Instead, it identifies the best way forward that is beneficial to buyers and suppliers.

So, how could this methodology be applied to a third-party external network? To start, a corporation would need to decide it wants to fix the "mess" (a word used by the late, great systems thinker, Russell L. Ackoff, PhD, to describe most current state situations). The company also would need to recognize that the fix might take 5 to 10 years to fully implement. For a corporation that was willing to play the long game using collaborative optimization, the benefits would be substantial. One benefit is that it allows a company to identify where new contract-manufacturing opportunities should be sourced. It also allows a company to understand where existing contract manufacturing should be sourced and if there is a financial or risk-based business case to support working through regulatory and contractual barriers. This method also ensures that the best CMO network had been identified to reduce risk and provide real cost competitiveness.

When a company thinks about its the third-party external supply network, a crucial question to consider is whether the company is using a CMO's total capabilities across its total product requirements on a global basis. From my experience, which includes more than 30 years in procurement, the supply chain, and related operations, including 10 years as vice-president of procurement of global systems and operations at GlaxoSmithKline, I'm fairly confident that the answer would be "no." And that reply is really no fault of an individual or an organization. It goes back to what my colleague and I were discussing: the complexities of what an organization is dealing with are greater than its ability to control unless there is a commitment to develop a long-term vision and a willingness to use different approaches in managing a third-party external supply network. Collaborative optimization offers the potential for annual incremental savings and potentially a lower overall risk profile.

The key factor for effective supplier management is that once a company has established what its end-state third-party external network should look like and what suppliers should constitute that network, it is imperative that there is an ongoing collaborative environment in place that ensures that future supply partners are always incented to improve and innovate. This evaluation may make an organization take a hard look at the skills (or lack thereof) that it has in place to support third-party external manufacturing. My guess is that there are some gaps in relationship management. Identifying and filling those gaps is a first crucial step in improving supplier management.

Gregg Brandyberry is CEO of Wildfire Commerce, and senior advisor for A.T. Kearney Procurement and Analytic Solutions, tel. 215-327-5739, greggbrandyberry@yahoo.com.