Supply chain optimisation

Patent protection and strict manufacturing regulations result in a rarely changing supply chain set-up. How can it be optimised? NGP asked Karsten Benzing, Head of Supply Chain Processes for Boehringer Ingelheim.

Organisations today are changing like never before. To evolve with the growth of a company, and the changing needs of its customers, the supply chain needs to be optimised. The right strategy, believes Karsten Benzing, Boehringer-Ingelheim’s (BI) Head of Supply Chain Processes, will help to improve throughput times, reduce non-operative stock and material loss and gain more transparency for lifecycle capacity investment decisions within the boundaries of a rather static setting.

But where does optimisation take place? With its Economic Order Quantity (EOQ) approach, BI focuses on the total cost of the supply chain. “In order to define our optimal order sizes for packaging and shipment, we simulate the total cost of different feasible lot sizes. We aim to come up with a more or less holistic understanding of the cost elements, which are influenced by the lot size,” says Benzing, adding: “There are quite a few. There’s the set up and cleaning cost, which you have every time you start making a new lot. This drives you into larger lot sizes. Then there is the inventory carrying cost – the more you make, the more inventory you have. And transportation plays a big role, too.”

Where Benzing has the flexibility of defining a lot size, he tries to build a complete economic model and choose the most cost optimised solution. For the process throughput times, he has opted for a differentiated approach. “We go more for reliability first, because the big money is in being able to execute the process reliably whenever you need it, driven by demand, and not so much necessarily in reducing the throughput times.”

For some products, Benzing points out, BI chooses longer transportation times over shorter ones by opting for sea rather than air transport. “We find it better in terms of keeping the temperature within a certain range, and it is also more reliable in terms of timing. And finally, we aim at modelling the inventories in the right way. Safety stocks need to be balanced with supply times, and here you need to have a model that helps you in finding the right level of safety stock.”

An old school approach
Optimisation, Benzing admits, is complex. IT solutions promise to support the optimisation process. “We have looked at a lot of these solutions. Many of them require a lot of upfront investments to get them running. On the background that we do not have an integrated IT system, we have come up with simpler tools based on common business analysis and office tools, which we use to analyse the data.”

Benzing is convinced that this ‘old school’ approach to supply chain management is still the best solution, because there is almost no investment to it. “We planned to go for a fully integrated ERP solution at one point. These plans were stopped when the cost of this project came to several hundred million euros. At that time, we had a €6-7 billion euro turnover, so we thought that the investment was disproportionate to the benefits that it might bring. And actually, for the companies that have done it, the business case was not visible, so we live with variety in our IT systems. You don’t need to wait for an integrated IT system if you want to start with supply chain optimisation.”

The benefits of BI’s approach are showing. Where BI reduced inventory coverage by implementing, for example, a safety stock concept and an EOQ concept on the finished goods level, it allowed the company to reduce the inventory coverage of finished goods by almost 25 percent, from 67 days down to 51, on a global scale.

In addition, moving to larger lot sizes has allowed BI to reduce its manufacturing cost by two to five million euros annually. “By looking at all the cost elements in the pharmaceutical industry, with all the quality efforts, international transportation, the customs clearance processes and the regulatory processes when you bring drugs into a country, the administrative effort is so significant that it is not economic to go to very small shipments.”

BI checks on order sizes once a year, and on safety stocks every three to six months. The effort that is put into the company’s optimization strategy on an ongoing basis is pretty limited, emphasises Benzing. “Once you have determined the optimum, you might have some incremental improvements, but they will come from process improvements. So if we are able to do a changeover or a cleaning faster, if we are able to do a quality process with less effort because we automate it, and if we collaborate better with customs agencies, all these improvements will help us to reduce the cost of the processes, increase reliability, and that will allow us to reduce the inventories.”

Critical areas
BI’s supply chain, quality and manufacturing functions form the focus of the company’s business process excellence programme, which is globally coordinated. Each function contributes to the optimisation efforts. “As a supply chain function, we help in identifying the most critical areas and gear the company towards improving those.”

The most critical areas depend on which part of the supply chain you look at. Chemicals and biopharmaceuticals, says Benzing, are capacity constrained with little room for change. In pharmaceuticals production, he continues to say, BI has a big network that spans across 20 plants. “They all have a different heritage and used to be run regionally. They are all on different levels. Here, we have good success with best practice sharing and internal benchmarking.”

In every site, BI has set up a throughput time measurement and management system to provide transparency. “This enables us to point to the most critical areas, which will be different in the different places.”

To protect its products, BI has added a structured supply chain risk management approach for its top products, which enables the company to take even more conscious decisions. “We observed that our risk management attempts were isolated in that somebody in pharmaceuticals would have done it, somebody in chemicals would have done it and somebody in supply chain would have done it, but these people would not necessarily have talked to each other. Also, the risk mitigation actions which they might have taken may not have been aligned.”

Consequently, BI put in place Failure Mode Effect Analysis (FMEA) to identify singular risks, combine all the various risk identification and mitigation actions and provide a global view. “This is mainly focused on the top 10 products which we supply to the markets. It allows us to streamline the risk mitigation actions to the most necessary ones, and has helped us to reduce excess capacity.”

Risk avoidance, Benzing admits, is tricky. “Quite often, we find that the risk avoidance measures are so difficult and challenging that it is easier to just go into some sort of insurance approach, like dual sourcing, where you have another supplier. We would like to move the organisation more towards risk avoidance, but we find that this is a challenging task.”

Performance
The most important indicator in terms of supply chain performance is customer service level, says Benzing. “We go for a very high service level, between 98 and 99 percent. And we have this concept of service level for all the supply chain players, so we would have a production service level, a transportation service level, and we would have particular targets to all these service levels, because that’s ultimately what the supply chain has to ensure.

“In measuring and improving the efficiency at which we run the supply chain – apart from the cost on the more operative level in supply chain management – we look at the inventories, which are a very good indicator of how well a process is run.”

However, he adds, the targets need to be very specific. “In terms of information flow, we look at the forecast accuracy, which our marketing units achieve, and we look at the accuracy of the secondary requirements, which production passes on to the upstream suppliers.”

Outlook
How does BI’s old school approach to optimization apply in an industry that relies on being innovative? “The majority of our sales stem from innovative products coming from our own research and development functions. For these innovative, patent-protected products, time to market is paramount.

“This has some consequences from a supply chain perspective. In the early years of a product’s lifecycle, the manufacturing processes still evolve. Sometimes they are not yet fully matured at launch. Thus the supply chain has to cope with variances and delays. On the other hand, we rarely change our basic supply chain setup. We will typically manufacture a product in the same place for its patent lifecycle. This allows us to apply our supply chain optimization approach and to adjust supply chain parameters to process improvements.”

At BI’s US Generic Prescription Medicine (GPM) subsidiaries Bedford Laboratories and Roxane Laboratories, and at BI’s Consumer Health Care Products Division, the turnover is much quicker. “To keep up with the market development, we need to constantly refresh our portfolio in these business areas. Here, the critical element is to have a good launch and change management process so that you’re able to launch products quickly. Order size optimization does not play such a major role here.”

Looking ahead, says Benzing, BI will continue to focus on the total cost of its supply chains. “We expect the most significant savings to come from process improvements. This is why BI is rolling out business process excellence approaches across all functions.

“In Supply Chain Management, we have launched a broad excellence initiative to identify and implement best practices. We pull together mixed teams of talented people from multiple sites and functions and ask them to come up with suggestions. This already covers production planning, supplier integration, forecasting, and international forwarding processes. We will roll out this approach to further processes in Supply Chain Management. Overall, we will be trying to improve cost management while maintaining or even improving our high customer service levels,” he concludes.

Karsten Benzing, a biologist by training, has been responsible for Boehringer-Ingelheim’s supply chain processes since 2005. With his team he is also defining inventory targets, as well as setting up and running performance management systems, with the aim to optimise the end-to-end supply chain.