The advantages of outsourcing

Optimising your resources to achieve long-term success. With Grindeks’ Lipmans Zeligmans, Anders Ulfhielm of Rechon Life Science AB and Jim Kernan of PharmaFlow Ltd

“Price pressure and a lack of a strong pipeline are forcing many manufacturers to reconsider the organisation of their production systems”
-Jim Kernan, PharmaFlow Ltd

NGP. What advantages can companies in the pharmaceutical sector gain from outsourcing their manufacturing requirements?
Lipmans Zeligmans. The main advantages are optimisation of resources and concentration on the company’s long-term, strategic processes. Why is this important? The deepening of the global economic crisis has significantly reduced end consumer purchasing power and is leading to increased competition between producers and the price of goods or services and effectively reducing their costs is more important than ever. This is driving all market players to find ways to optimise internal company costs and improve efficiency. One option or solution for improving business is to concentrate financial and human resources on the company’s long-term, strategic processes, and to outsource less important, non-core processes to companies specialised in effectively providing a specific service.

In the pharmaceuticals industry, companies usually prefer to use contractors to perform standard processes, for which there is no risk of knowledge transfer. These are usually standard production processes, but the choice of sourcing model depends on each company’s specific strategy.

Jim Kernan. Price pressure and a lack of a strong pipeline are forcing many manufacturers to reconsider the organisation of their production systems. Some companies are focusing their efforts on improving manufacturing efficiency by introducing techniques such as lean manufacturing. Others are examining their product portfolio and looking to see if they can drop or sell off some of the small volume products. Still others are adopting a combination of both approaches.
 
At the same time, the growth in demand for personalised medicines, added to the need for multiple line extensions in order to maintain sales and the opening of new geographical markets are leading to greater fragmentation in the number of finished pack presentations demanded by customers. 

In the face of these competing challenges production of solid or liquid dosage forms in bulk for smaller volume products may still be economic. The real problem starts when companies want to fill or pack in short runs and in multiple presentations.

By outsourcing the short runs to partners that have the flexibility to respond quickly to customer demand and the ability to keep costs at a reasonable level, mainstream manufacturers can free up their large volume lines to deliver much improved efficiency with far better customer service, whilst maintaining a full portfolio of product presentations. Inventory and working capital can also be kept to a minimum.

Anders Ulfhlelm. Pharmaceutical companies doing outsourcing activities can get substantial cost savings and offset the high capital investment required for building in-house manufacturing capabilities, while still keeping the compliance and quality level.
The companies can also focus on core competencies. CMOs can today provide technology transfer and manufacturing capacity quickly as the organisations are small and flexible, and pharmaceutical companies can get access to additional expertise and expensive state-of-the-art technologies.

The disadvantages are that companies have reduced the opportunity to develop internal manufacturing know-how and expertise. The loss of control of manufacturing is a commonly cited concern of pharma companies. It can also be a concern regarding the confidentiality of developed proprietary information.

NGP. Why should companies applying the principles of Lean Manufacturing consider outsourcing their short production runs?
JK. The highly integrated manufacturing models used by the pharmaceutical industry are well suited to the application of lean manufacturing techniques but there are a number of precursors that must be put in place in advance. One key principle is that lean manufacturing is best applied to a stable manufacturing environment where the number of changes to production schedules and finished product presentations has already been minimised.   

It is no surprise that the old 80/20 rule which applies in so many industries also applies to the pharmaceutical sector. Typically 80 percent of the profit made on pharmaceuticals is made from just 20 percent of the finished pack presentations, or stock keeping units (SKUs). The remaining 80 percent of the SKUs are normally small runners and contribute only 20 percent of the profit. These small runners also account for an inordinate amount of changeover time. A disproportionate amount of inventory are frequently the cause of unplanned interruptions to the production schedule and are often found at the back of the queue, resulting in poor customer service.

To apply lean manufacturing successfully it is essential to clear the decks of the small runners so that full focus can be brought to bear on those SKUs, which offer the greatest potential for efficiency gains. In the meantime, the small volume products should be diverted to suitable units within the company’s own infrastructure or outsourced to manufacturing partners who specialise in short run production.

AU. When outsourcing, Lean manufacturing principles should always been taking into consideration when evaluating all types of manufacturing steps. This is especially important when you are doing outsourcing activities with short production runs, to avoid inefficient steps.

LZ. The lengthy process of developing a product, constantly rising manufacturing, equipment and marketing costs, and increasing quality and regulatory requirements can all delay a product’s entry into the market, which is critical for efficiency in pharmaceutical companies.

By evaluating its processes and outsourcing those requiring big investments or specific knowledge, a company can concentrate its financial and human resources on long-term development and strengthening competitiveness in strategically important areas such as R&D and marketing.

This can all have a positive impact on company cash flow, by reducing product costs and time to market. And isn’t that the main goal?

NGP. How can outsourcing help companies reduce costs, reduce inventories, improve lead times and facilitate improved customer service?
AU. You need to create a company outsourcing strategy which shall be approved by the executive management, find qualified partners and go for a win-win situation.When you use outsourcing companies or CMOs, you will always have process and manufacturing steps with a high utilisation level, and thus will have an efficient value-added process with gains for both the pharmaceutical company and the CMO. It’s all about having the right critical mass and utilising the best knowledge.

LZ. Entrusting manufacturing to a company specialising in the relevant field, with experience, know-how, reputation and all of the necessary resources for providing the respective service can have a positive impact on company cash flow by optimising inventories both for raw materials and finished products, since the service provider is fully responsible for this. Also by optimising capital expenditures – the company saves both time and the resources required to maintain or adapt the necessary infrastructure and acquire technology as this is all done by the service provider to accelerating the products’s time-to-market – a company specialising in contract manufacturing usually arranges the development, manufacturing, packaging and delivery of the product in accordance with an agreed, binding schedule in line with JIT system and GDP requirements. 

JK. By outsourcing the fragmented elements of their manufacturing requirements, companies can apply the full rigour of lean manufacturing techniques to improve all aspects of their retained mainline activities including inventory management, production efficiency and customer service.

By choosing a flexible and responsive outsource partner which specialises in small volume production, they can also be assured that they will maximise their ability to service the short run presentations effectively. In both cases working capital, inventory cycle and cash flow are improved.

NGP. Pharmaceutical companies are coming under increasing pressure to reduce costs, lower inventory levels and ensure continuity of supply. How can companies like yours help them to achieve this?
JK. PharmaFlow was established in 2004 by experienced pharmaceutical professionals to provide contract manufacturing services for small batch/multiple presentation products in the pharmaceutical and natural healthcare sectors. Operating in a fully GMP licensed facility we specialise in providing innovative, flexible, low cost formulation, filling and packing solutions. 

By outsourcing short runs to PharmaFlow, our customers achieve increased production efficiencies, minimise production delays, reduce inventory, improve customer service, shorten their cash cycle time and free up their own management team’s time to focus on improving all round profitability

LZ. Grindeks has extensive experience in manufacturing a broad spectrum of pharmaceuticals. We offer full-service contract manufacturing starting from development and production of APIs and followed by development, manufacturing, packaging and distribution of various finished dosage forms (tablets, capsules, ointments, injections, syrups). This allows our customers to optimise their costs for purchasing raw materials, maintaining inventories, manufacturing and logistics. We are flexible in meeting the customer needs and offer tailor-made solutions.
 
Grindeks constantly invests in modern, high-powered technologies – our newly finished dosage forms plant opened in 2009, complies with world class pharmaceutical manufacturing standards and has a capacity of 1.5 billion tablets and 500 million capsules per year. The manufacturing processes are organised in accordance with GMP and ISO quality standards, the plant is equipped with a modern automatic control system that regulates the microclimate, manages the technical engineering systems and other manufacturing processes and significantly reduces energy consumption.

An equally important factor is the geographical location of Latvia, the home country of Grindeks. Latvia is a bridge between Europe and Russia, which means savings on logistics costs for shipping goods from one side to the other.

The historical background of Grindeks (links with Russia, the CIS and Eastern countries), its European business culture, the language skills of its staff, international quality standards and the significant research capacity of the company add up to creative and farsighted business solutions at still very reasonable prices.

This is especially attractive to medium sized Western European companies that prefer to do business on a European scale.

AU. Companies need to utilise the CMO fixed assets in an efficient way, provide an umbrella overview, be flexible, put strong efforts in improving communication levels and establish a professional project management system.

Lipmans Zeligmans is the Director of Final Dosage Forms Manufacturing of Grindeks. He has worked for Grindeks since 1992 and has developed tremendous experience in managing the manufacturing processes of company products, as well as for contract-manufacturing partners. In his guidance the new solid dosage forms manufacturing plant of Grindeks was built, equipped and opened in 2009.

Jim Kernan is one of the founders of PharmaFlow Ltd and is responsible for Business Development. Prior to PharmaFlow he held senior positions within Eli Lily, Baxter, Aventis and most recently as Vice President of International Manufacturing at Stiefel Laboratories. He has extensive experience of operations, quality and strategy management within the Life Sciences sector.

Anders Ulfhielm is CEO at Rechon Life Science AB in Malmö, Sweden. He is responsible for creating a new pharmaceutical business in Europe with the newly founded company Rechon Life Science, which has Chinese owners. He has long experience in executive positions within the pharmaceutical industry at Astra, Kabi-Pharmacia, Gist-brocades and Ferring Pharmaceutical.