Demand-driven manufacturing for global growth

By Alfred Sherk, SherTrack

The high tech component industry faces similar challenges of marketing their products around the world from a relatively few world scale production facilities. In our view, their operating models can be usefully studied and adapted to meet the strategic needs of the global pharmaceutical companies.

Introduction

Approximately ten percent of the global population lives in the EU and the USA while the emerging markets contain nearly half of the world's people. Pharmaceutical demand in these emerging countries is growing at nearly five times the rate of demand in the developed world. Furthermore, the trend for healthcare "payors" to exert more control over purchasing decisions is creating more margin pressure in the developed markets. Not surprisingly, a key component of the leading global pharmaceutical companies' strategic initiatives is enhancing their ability to serve the emerging markets and serve them efficiently. Accordingly, the order-through-fulfillment process for their global markets is of strategic importance.

Current Operating Model

Most pharmaceutical companies align their commercial organizations with the local market regulatory agencies and the major market participants (the primary care and major payor organizations). These country or regional commercial organizations provide their demand requirements to the firm's global manufacturing organization to determine production requirements.

The typical pharmaceutical supply chain process consists of forecasting packaged demand by product for the next quarter, developing the appropriate inventory plans and then developing the production plans to meet the expected consumption. For many products, it is not unusual for the total end-to-end manufacturing cycle time to be over a year in duration from initiating the manufacture of the active pharmaceutical ingredients (APIs) to the packaging by specific dosage and labeling of the final product.

Forecast-based processes are recognized as being generally unresponsive to rapid changes in customer demand and they would be expected to perform inefficiently for supplying the rapidly growing emerging markets. Ninety day demand forecasts by the market units are needed to provide the tactical production planning input for the API's with inherently long production cycles. However, for the formulation and packaging processes with much faster production cycles, forecast-based processes are sluggish and unresponsive to near term demand fluctuations.

Alternative Models

The high tech component industry has similar characteristics to pharmaceutical companies. Their global, capital intensive world scale facilities feed regional market requirements, and retail / OEM customers have buying behaviors characteristic of the primary and secondary health care buyers. Punishingly short product life cycles (9 to 18 months) have forced the industry leaders to develop very responsive and efficient supply chains.

The component firms have tailored their supply networks to meet their customers' needs by tactically guiding order-to-fulfillment processes by forecasted demand, but driving production with actual orders. Final product production can be commenced less than two weeks before delivery to their OEM customers. It is determined by the need to replenish their OEM's raw material inventories and co-ordinate with product launches. The final kitting for local markets' retail packaging can be just days before it arrives at the stores, and for both segments, market pull drives production.

In practice, relatively few base substrates need to be made months in advance of the final product delivery and these are produced on the basis of expected 3 to 6 month demand requirements. At this stage of production, the inventory value and the risk of product obsolescence are relatively low.

The synthesis of forecast-based tactical planning with demand-driven manufacturing execution enables these firms to achieve the economies of world scale facilities and the nimbleness of custom manufacturing.

Demand-Driven Pharmaceutical Manufacturing

Similar to the base substrates, the production of long lead time APIs should be guided by the aggregation of global API demand. As a rule of thumb, if the production time for an API takes longer than 60 days, its production timing and quantities should be driven by the aggregated tactical demand plan. However, the Lean pull process, when augmented with predictive analytics, can create a highly responsive and efficient market-focused pharmaceutical supply chain.

The operational excellence discipline can provide the framework for the transformation to demand-driven manufacturing. Analyzing the entire end-to-end manufacturing life cycle with Lean methodologies will identify process "sleep" time (when intermediate products wait for further processing). The processes that create this sleep time need to be modified in order to compress the entire end-to-end throughput time. Novartis has been able to cut end-to-end throughput time by over 60% and sees the opportunity to reduce it by 90% for certain products^[i].

Once the Lean analysis has identified production activities that can be performed within 45 days of final delivery (e.g. formulation, dosage, packaging, labeling, etc.), the enabling process for co-coordinating these activities should be redesigned using the demand-driven (Lean pull) model. Advances in predictive analytics for interpreting incoming demand signals, makes this approach eminently feasible for complex manufacturing operations.

Finally, limit the operational use of demand forecasts so that they guide the production or procurement of long lead time APIs and the determination of capacity requirements by using demand-driven (Lean pull) for manufacturing execution.

Benefits of Demand-Driven Manufacturing

Lean based order-to-fulfillment processes are much more responsive to market needs than forecast-based approaches, with inherently shorter manufacturing throughput times. LEAN based processes' faster time to market improves both competitive market position and service level performance with less inventory. Holding fewer inventories as finished product reduces product exposure risk and is also reflective of a more efficient process.

For firms with strategic emphasis on the rapidly growing emerging markets, demand-driven manufacturing provides the means to operate a synergistic country market - global operations model based on true market demand in each country. Country specific inventory deployment that is kept in constant alignment with shifting demand is especially valuable in rapidly growing markets. Furthermore, organizational emphasis can shift from short term operational planning to greater collaboration with key participants in each market.

Footnote:

[i] "Thought Leader", Next Generation Pharmaceutical, GDS International, Q3 2009, pg 144-6.