MANAGING RISK IN PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING: APPLYING ANALYTIC HIERARCHY PROCESS MODEL

Transcription

1 MANAGING RISK IN PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING: APPLYING ANALYTIC HIERARCHY PROCESS MODEL Enyinda, I. Chris Alabama A & M University Chris.enyinda@aamu.edu Charles Briggs North Dakota State University Charles.briggs@ndsu.edu Khalid Bachkar North Dakota State University Khalid.bachkar@ndsu.edu ABSTRACT Because of the intense pressure to contain R&D costs, pharmaceuticals firms are increasingly outsourcing their supply chain operations. Global supply chain outsourcing can be viewed as a strategic competitive weapon rather than cost savings initiative because it can offer flexibility in production, satisfy ultimate consumers growing demands, reduce fixed costs, and enhance positional advantage. Thus, for the pharmaceutical firms, global supply chain outsourcing has become a competitive requirement for ameliorating performance and profit margin. It allows allow firms to leverage their core skills and resources well beyond levels available with other strategies. Well executed global supply chain outsourcing strategies can enhance returns on capital, reduce risk, improve flexibility, and make firms more responsive to their customers and shareholders requirements. Although the attractive benefits associated with global outsourcing have been acknowledged widely, much of the inherent risks tend to be overlooked. Acknowledged pharmaceutical supply chain outsourcing risks include regulatory risk, operational risks, technical risk, and corporate social responsibility risk. Supply chain risk management strategies that can be employed to tame a firm s exposure to supply chain outsourcing risk are risk avoidance, reduction (mitigation), transfer, and acceptance (retention). INTRODUCTION To flourish and survive in today's competitive global marketplace, firms are increasingly focusing on their core competencies and turning towards outsource functions in which they possess no expertise to maintain effective cost structures and to improve their top and bottom lines. In today s hypercompetitive global marketplace no one firm can go it alone and become successful in search of market opportunities in near real-time and cost-effective fashion because of lack of key talents and knowledge experience bases (Conklin, 1994). Due to few blockbuster drugs in the pipeline chain and competition from generics firms, the pharmaceutical firms are increasingly scrutinizing their operations to improve shareholders value and profit margins (Snee, 2006). In

2 particular, the practice of pharmaceutical outsourcing has become more than ever a viable strategic business option to gain competitive advantage. The most commonly cited reasons for the increase in pharmaceutical outsourcing include cost savings associated with cheaper labor and infrastructure, reduced burden on the firm to research and discover drugs, the shift from a fixed cost to a variable cost model and the ability to acquire new technology and knowledge via the utilization of specialized external providers. Indeed, maintaining internal pharmaceutical researchers in-house is no longer required and relevant nowadays. The costs of producing drugs can impose daunting pressures on a firm s resources. The pharmaceutical industry has seen its R&D productivity decline significantly (Dimasi et al., 2003, Grabowski and Vernon, 2000) and the traditional generation of new chemically based small molecules dwindling (Backman and Segrestin). Driven by the need to ameliorate R&D productivity and efficiency and to have access to untapped markets, global pharmaceutical firms have increasingly outsourced operations to contract research organizations (CROs) in India and China. The nature of outsourcing areas include information technology (IT) and IT support, human resource, R&D, procurement and logistics. Arguably, pharmaceutical firms are turning to supply chain outsourcing as a way to improve product pipeline and gain strategic competitive advantage. Pharmaceutical global outsourcing has become a viable and a lucrative business strategy that is enabling firms to transfer non-core activities to external partners in order to restructure their distribution networks, leverage resources, spread risks, focus on issues imperative to survival, competitive advantage, and future growth (Sink and Langley, 1997, Wang and Regan, 2003). Thus, R&D costs, regulatory pressure, patent expiry, declining blockbuster pipeline chain, among others have caused pharmaceutical manufacturers to focus on their core competencies by outsourcing supply chain non-core activities to contract manufacturing organizations (CMOs) and/or CROs. Firms increasing focus on core competencies and the need to reduce cost are motivating them to turn to global outsourcing. This trend towards global outsourcing relationships has been strong in various types of firms and in different parts of the supply chain (Fill and Visser, 2000). It has been recognized as one of the eight most prominent factors playing a key role in the offing for superior supply chain performance (Carter and Narasimhan, 1996). And superior supply chain is one that enables a firm to optimize the value of internal activities and in turn creating collaborative partnerships that can lead to high value external activities (Lakhal et al., 2001). Christopher (1999) noted that it is only those firms that can leverage the collective strengths and competencies of network partners will be able to achieve a faster responsiveness to changing global marketplace requirements. Although outsourcing started by transferring non-core activities traditionally executed in-house to CMOs, there seem to be a growing interest towards outsourcing of fixed assets and/or the whole manufacturing process (Markeset and Kumar, 2004). For example, Calaf (1995) contends that increasing number of firms are opting to outsource many of their manufacturing activities to other firms have manufacturing knowledge base. Although outsourcing to contract organizations can have both positive and negative impacts on key aspects of pharmaceutical manufacturing supply chain, one positive effect is that the manufacturer s supply chain agility is increased (Mason, et al, 2002). Lindholm and Suomala (2004) assert that the goal of outsourcing is to attain optimal performance within a firm and a supply chain. This paper discusses the pharmaceutical global supply chain outsourcing trends, drivers, and functions (areas). It also examines emerging risks in pharmaceutical global supply chain outsourcing. Specifically, it proposes measures to manage pharmaceutical global supply chain outsourcing using Analytic Hierarchy Process model. Outsourcing can allow firms to leverage their core skills and resources well beyond levels available with other strategies. Core competencies and well executed outsourcing strategies can enhance returns on capital, reduce

3 risk, improve flexibility, and make firms more responsive to their customers and shareholders requirements. PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING TRENDS After many years of recorded growth and profitability, the pharmaceutical industry is challenging time. As a result, to remain viable they are looking toward new business model to improve their pharmaceutical supply chains and contain costs. And the new business model to accomplish that is global supply chain outsourcing. For example, estimate has it that the U.S. market for outsourced pharmaceutical manufacturing is expanding at the rate of 10 to 12% annually. The Pharmaceutical firms will continue to drive much of this growth as they outsource large number of products and services Opportunities-) to emerging economies in Asia. For example, the pharmaceutical industry is increasingly outsourcing its R&D to Asia in desperation to tame the rising cost. Indeed, global supply chain outsourcing represents one of the acknowledged organizational and industry structure shifts of the 21 st century for the pharmaceutical industry. The pharmaceutical and biotechnology industry is outsourcing at almost every phase of the supply chain value stream. Developing strategic global supply chain outsourcing relationships with contract manufacturing partners can afford the pharmaceutical industry the opportunity to focus on core competencies, have access to specialized expertise, and enhance cost-saving benefits that can contribute to customer and shareholder values. Because of the cost of drug development, regulatory, pricing, and changing competitive environment, the pharmaceutical firms are turning to global outsourcing strategy to secure and improve profit margin. PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING DRIVERS Pharmaceutical outsourcing trends and drivers include time to market, cost advantage, risk management, and strategic focus (PricewaterhouseCoopers LLP, 2006). The premier factors driving growth of pharmaceutical global outsourcing trend include competitive global marketplace, enhancing greater productivity flexibility, attaining a global manufacturing presence, expanding capacity, enhancing product quality achieved through costs reduction and better focus on core competencies, curtailing investments in capital assets, and improved asset utilization. Global supply chains outsourcing enables pharmaceutical firms to take advantage of global relative advantages, as well as increase product variety. The increasingly global nature of the pharmaceutical/biotech industry endorses outsourcing, as most companies tend to exploit the market by gaining competitive advantage. Pharmaceutical firms have recognized that possessing the entire skill range required within an industry is not feasible. As flexibility has become critically vital within the industry, firms are realizing that concentrating on core competencies is an efficient and effective way to create optimum value. Indeed the expansion in the pharmaceutical contract service industry in recent years has contributed to a significant boost in the number of services and functions available for outsourcing to contract manufacturing and R&D firms. In the recent years, the pharmaceutical firms have aggressively been reassessing their financial position and worst engaged in mergers and acquisition because of the mounting cost pressures and the need to survive. The critical factors driving the pharmaceutical industry to seek global outsourcing are the search for efficiencies in the drug development cycle, extending a company s capacity, consolidation of the pharmaceutical industry, access to specific therapeutic expertise and globalization of the market within USA, Europe and Asia (Srivastava, 2002), and exploit new individualized drugs.

4 ADVANTAGES/DISADVANTAGES PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING Advantages and disadvantages associated with pharmaceutical global supply chain outsourcing to CROs (Piachaud, 2002) are reported in Table 2. Further, Datamonitor (2006) suggested that the advantages linked to pharmaceutical global supply chain outsourcing are 1) opportunity to drive productivity and efficiencies across a variety of business functions, 2) boosting long-term R&D productivity, 3) financial benefits, 4) shortening drug discovery stage, 5) access to additional drug discovery expertise and technologies, 6) flexibility, and 7) focusing free-up resources for core competencies, while the disadvantages include 1) level of returns on compounds generated through outsourcing agreements tend to be lower than in-house, 2) reduced opportunity to develop internal expertise, 3) loss of control and issue of confidentiality of proprietary information. Table 2: Advantages and Disadvantages of Pharmaceutical Outsourcing to CROs Perceived Outsourcing Advantages Perceived Outsourcing Disadvantages Obtain greater flexibility Dependence on the supplier Buy in specialized knowledge and skills Lack of shared vision and objectives Facilitate the rapid exploitation of technology Loss of control over suppliers Gain a window on a new technologies Loss of critical skills Freedom to concentrate on core functions Problems of evaluating supplier performance Spread risks Need for a new management mind set Reduce costs Problems of monitoring supplier performance Increase time to market Class of culture Source: Piachaud, B. S. (2002). Outsourcing in the Pharmaceutical Manufacturing Process: an Examination of the CRO Experience. Technovation, 22(2), pp Persson and Virum (2001) suggest that the potential economic benefits associated with outsourcing include reducing operating costs; exchanging fixed costs with variable costs; elimination of infrastructure investments; access to world-class processes, products, services or technology; better cash-flow; improved ability to sense and respond real-time to changes business environments; sharing risk; and access to resources not available in-house. The pharmaceutical industry is passing through a very challenging time. Successful pharmaceutical firms have realized the imperative of leveraging their resources. As a result, they are increasingly relying upon the wealth of expertise offered by specialist external sources, including Clinical CROs. This transition to a more integrated approach to conducting pharmaceutical R&D has however led to a change in practice within the traditional working environment of the pharmaceutical sector. Although pharmaceutical manufacturers have identified a number of advantages and disadvantages as a result of working with these external agents, the potential for enhancing the partnership process still exists. The factors driving the use of CROs include converting fixed costs into variable costs, reduction in employees, accelerate speed to market, eliminates unprofitable projects, lack of capacity, global drug development, access to knowledge and skills, and access to technology. PHARMACEUTICAL GLOBAL SUPPLY CHAIN OUTSOURCING RISKS An increasing numbers of pharmaceutical firms are realizing the potential economic advantages of outsourcing their supply chain non-core activities to external partners. Besides the advantages of outsourcing at the strategic, financial, organizational, and operational levels, there are a number of outsourcing risks which can greatly affect the quality of the relationships (Salma et al. 2007). Wang and Regan (2003) and Eyefortransport (2005) reported that outsourcing risks

5 include potential inefficient management; latent information asymmetry; loss of logistics innovative capacity; hidden costs; dependence on the third party logistics (3PL) providers; loss of control over the 3PL providers; problems of evaluating and monitoring 3PL provider performance; and incompatibility of participating firms cultures. Also, pharmaceutical outsourcing problems and risks include transaction costs; increased monitoring costs; loss of direct control over product launch; loss of internal competency and capacity; possible loss of key intellectual property; potential after-market competition; increased legal compliance and reputation costs. As pharmaceuticals outsourcing continue to grow, risks associated with it are growing as well. Some of these risks include error that can lead to FDA disapproval, long lead time, satisfying regulatory compliance, meeting the demands of Sarbanes-Oxley Act, maintaining proprietary confidentiality.as the pharmaceutical industry supply-chain strategies evolve, managing the associated risks in global outsourcing has assumed greater dimension. Because discovery and development of new pharmaceuticals involve more risks and expensive, leading pharmaceutical MNEs are entering into risk-sharing outsourcing partnerships in order to minimize operation risks by sharing management and financial responsibilities. Through appropriate risk management, outsourcing can help firms to expand their R&D pipelines and provide a greater opportunity for a drug to ultimately reach launch phase (PricewaterhouseCoopers LLP, 2006). There are a variety of factors, both internal and external, which in combination make it important for organizations to perform a structured and disciplined approach to managing and mitigating risk. Indeed, the constant changing and evolution of markets, including rivals, emerging technologies, more than ever changing customer requirements, compression of response times, and the strategic use of global outsourcing add to risks faced by organizations. Although risk management is an issue of great importance in global outsourcing due to the demands of supply chain strategies, it has received limited attention from pharmaceutical firms engaged in outsourcing relationships. Arguably, given the array of risks associated with supply chain logistics outsourcing, it is imperative that the pharmaceutical industry embrace risk management. Global supply chain outsourcing has increasingly become a strategic option for organizations seeking to increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities, increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and intangible (Graig, 2003). As the pharmaceutical industry supply-chain strategies evolve, managing the associated risks in global outsourcing has assumed greater dimension. Developing new drugs carries more risks and is costlier than ever. Many leading pharmaceutical companies are entering into risk-sharing outsourcing partnerships to lower their operation risks by sharing management and financial responsibilities. Through proper risk management, outsourcing enables companies to expand their R&D pipelines and provide a greater chance for a product to ultimately reach launch, thereby lowering overall business risks (PricewaterhouseCoopers LLP, 2006). The global outsourcing risks include proprietary confidentiality and intellectual property, technical knowledge, resource availability, capacity, production risks, firm volatility, and management challenges. To achieve successful outsourcing relationships, pharmaceutical firms must have risk mitigation measures in place. For the present study the pharmaceutical outsourcing risks considered include regulatory risk, business risk, technical risk, and intellectual property risk.

6 RESEARCH METHODOLOGY A decision-making environment can entail multiple and in some cases conflicting objectives or criteria called multi-criteria decision making (MCDM) (Hwang and Yoon, 1981). Evaluation and management of pharmaceutical supply chain outsourcing risk represents a typical MCDM problem that entails multiple criteria that can be both qualitative and quantitative. An example of MCDM selected to model risk management in pharmaceutical supply chain outsourcing is AHP developed by Saaty (1980). It is selected because it allows decision-makers to model a complex problem in a hierarchical structure portraying the relationships of the overall goal, criteria (objectives), sub-criteria (sub-objectives), and alternatives. Although the positive attributes associated with AHP has been widely reported in the literature, there has been a small number of descending voices as to its theoretical basis. For example, Belton and Gear (1986) and Dyer and Wendel (1985) argue that AHP lacks theoretical basis. Watson and Freeling (1982) contend that AHP in order to elicit the weights of the criteria by way of a ratio scale, it asks decision-makers useless or meaningless questions such as which of these two criteria is more important for the goal and how much more. However, in defense of Saaty s AHP, based on the theoretical research of Harker and Vargas (1987) and Perez (1995), respectively, proved that the criticisms against AHP method was not valid. They argued that AHP is indeed based on a firm theoretical ground. As a result, its application has been popularized in many fields. Research that have used AHP include supplier selection (Lee et al., 2001); project selection and management (Liberatore, 1987; Al-Harbi, 2001), international business management (Atthirawong and MacCarthy, 2005), operations and logistics/supply chain management (Enyinda, 2008; Min, 1992), marketing (Dyer and Forman, 1992), pharmaceutical marketing and management (Ross and Nydick, 1994), and accounting (Apostolou and Hassell, 1993). Following Saaty and Al-Harbi (2001), hierarchy structure modeling of risk management in pharmaceutical supply chain outsourcing shown in Figure 1 can be achieved as follows. 1. Define an unstructured problem and determine the overall goal. The overall goal is to manage risk in pharmaceutical supply chain outsourcing. 2. Build the hierarchy from the top through the intermediate levels to the lowest level which usually contains the list of alternatives. The major decision criteria occupy the second level of the hierarchy, while the sub-criteria occupy the third level of the hierarchy. The decision maker defines the criteria that will be used to judge the alternative policy options. The defined decision criteria are regulatory risk; business risk; technical risk; and intellectual property risk. The alternative policy options proposed to manage the pharmaceutical supply chain outsourcing risk are risk reduction, risk acceptance, risk avoidance, and risk transfer. The factor with the maximum local priority is selected from each category to represent the category and the relative priorities of the scaling factors computed. The derived priorities are used for final rating of the alternative policy options and selecting the most important and satisfactory policy option.

7 Figure 1. Hierarchy Structure of Pharmaceutical Supply Chain Outsourcing Risks Managing Pharmaceutical Supply Chain Outsourcing Risk Criterion 1: Criterion 2: Criterion 3: Criterion 4: Regulatory Risk Business Risk Technical Risk Intellectual Property Risk Policy Option 1: Policy Option 2: Policy Option 3: Policy Option Reduce risk Accept risk Avoid risk 4 Transfer risk 3. Construction of pairwise comparison matrix. Build a set of pairwise comparison matrices for each level of the hierarchy and then conduct all the pairwise comparisons. The pairwise comparison matrix A, where element a ij of the matrix is the relative importance of i th factor with respect to j th factor, can be determined as follows: A = [a ij ] (1) Where the entry in row i and column j of A (a ij ) indicates how much more important objective (criteria) i is than objective j. Each entry in matrix A is positive (a ij > 0) and reciprocal ((a ij = 1/a ji ) for all i, j = 1, 2, 3, n). Importance is measured on an integer-valued 1-9 scale reported in Table 3. It is the relative scale measurement developed by Saaty (200) for pairwise comparisons. It allows the transformation of qualitative judgments and/or intangible attributes into preference weights (level of importance) or numerical values. The pairwise comparisons are accomplished in terms of which element dominates or influences the order. AHP can aggregate many aspects of the decision situation into a single objective function. Its goal is to choose the best alternative that can optimize the objective function. However, with AHP model, a supply chain risk C-level

8 executive or chief risk officer can make pairwise comparisons of the criteria using Saaty s ninepoint scale. The nine-point scale seeks to know the dependence criteria, which one will influence the common criteria more and if so how much more. According to Saaty, a value of 1 between two criteria indicates that both equally influence the affected node, while a value of 9 indicates that the influence of one criterion is extremely more important than the other. Table 2. The AHP Pair-wise Comparison Values or Scale of Preference between two Elements Preference Definition of Verbal Scale Explanation weights or level of importance (value of a ij ) a ij = 1 If the two objectives are equally (equal) preferred (importance) Two activities or elements contribute equally to the a ij = 3 a ij = 5 a ij = 7 a ij = 9 If objective i is moderately preferred or moderately more important than objective j If objective i is strongly preferred or strongly more important than objective j If objective i is very strongly preferred or very strongly more important than objective j If objective i is extremely preferred or absolutely more important than objective j objective Experience and judgment slightly favor activity or element over another Experience and judgment strongly or essentially favor one activity over another An activity is strongly favored over another and its dominance demonstrated in practice The evidence favoring one activity over another is of the highest degree possible of affirmation 2,4,6,8 Intermediate values Used to represent compromise between the preferences listed above or used to compromise between two judgments a ji = 1/3 If objective j is weakly more important than objective i. 4. n(n 1)/ judgments are needed to develop a set of matrices in step #3. Reciprocals are assigned in each pairwise comparison automatically. 5. Utilizing the hierarchical synthesis to weight the eigenvectors according to the weights of the criteria. The total is for all weighted eigenvectors corresponding to those in the next lower level of the hierarchy. 6. After completing all the pair-wise comparisons, the consistency can be evaluated using the eigenvalue (λ max ), to derive the consistent index (CI). Specifically, Saaty (1990) recommended that the maximum eigenvalue, λ max, can be determined as

9 λ max = n a ij j= 1 Wj/W i, (2) Where λ max is the principal or maximum eigenvalue of positive real values in judgment matrix, W j is the weight of j th factor, and W i is the weight of i th factor. 7. Consistency Test. Each pairwise comparison which has several decision elements for CI measures the entire consistency judgment for each comparison matrix and the hierarchy structure. Thus, CI and consistency ratio (CR) are used to determine the consistency of the comparison matrix. A matrix is assumed to be consistent if and only if a ij * a jk = a jk i jk (for all i, j, and k). The eigenvalue method is used to check for inconsistencies in the inputted valuation. When a positive reciprocal matrix of order n is consistent, the principal eigenvalue possesses the value n. Conversely, when it is inconsistent, the principal eigenvalue is greater than n and its difference will serve as a measure of CI. Therefore, to ascertain that the priority of elements is consistent, the maximum eigenvector or relative weights/λ max can be determined. Specifically, CI for each matrix order n is determined by using (3). CI = (λ max n)/n 1 (3) Where n is the matrix size or the number of items that are being compared in the matrix. Table 3 shows the Saaty s AHP average random consistency or random index (RI). Table 3. Saaty s AHP Average Random Consistency or RI Size of matrix Random consistency (n) Based on (2) and Table 3, the consistency ratio (CR) in (4) can be determined as below: CR = CI/RI = [(λ max n)/n 1]/RI (4) CR is acceptable, if its value is less than or equal to However, if it is greater than 0.10, the judgment matrix will be considered inconsistent. To rectify the judgment matrix that is inconsistent, decision-makers judgments should be reviewed and improved. DATA COLLECTION A survey questionnaire approach was used for gathering relational data to assess the order of importance of the pharmaceutical supply chain outsourcing risks. Thus, from the hierarchy tree, a questionnaire was developed to enable pairwise comparisons between all the factors at each level in the hierarchy. The pairwise comparison process elicits qualitative judgments or opinions that indicate the strength of the experts preference in a specific comparison according to Saaty s 1-9 scale. The experts were requested to respond to several pairwise comparisons where two categories at a time are compared with respect to the goal. The result of the survey questionnaire technique was then used as input for the AHP. The pairwise comparison matrix is shown in Table 4.

10 Table 4 Pair-wise Comparison Matrix for the Four Criteria Regulatory Business Risk Risk Regulatory Risk Business Risk Technical Risk Intellectual Property Risk Technical Risk Intellectual Property Risk / / /3 1/2 1 EMPIRICAL RESULTS The pairwise comparison of the major criteria shown in Table 4 as well as in Figure 1 indicate that regulatory risk is the most important risk to manage with a priority of followed by intellectual property risk (0.342), technical risk (0.168), and business risk (0.107).. Table 4 Pair-wise Comparison Matrix for Risk objectives w. r. t the Goal Priority Rank Goal Regulatory Risk Business Risk Technical Risk Intellectual Property Risk Inconsistency = 0.02 Priorities with respect to: Goal: Manage Pharma SC Outsourcing Risk Regulatory Risk.383 Intellectual Property Risk.342 Technical Risk.168 Business Risk.107 Inconsistency = 0.02 with 0 missing judgments. Figure 1. Major Decision Objectives Priorities

11 RISK MANAGEMENT STRATEGIES Tables 5-8 report on the risk management strategies for the four major decision criteria, including regulatory risk, business risk, technical risk, and intellectual property risk. For both regulatory risk and business risk, the best strategy is risk transfer such as insurance. However, for both technical risk and intellectual property risk, the preference is to reduce risk. Table 5. Pair-wise Comparison Matrix for Policy Option w. r. t Regulatory Risk Regulatory Reduce Accept Avoid Risk Transfer Risk Priority Rank Risk Risk Risk Reduce Risk Accept Risk 1/ Avoid Risk 1/2 ½ Transfer Risk 1/2 1/ Inconsistency = 0.03 Table 6. Pair-wise Comparison Matrix for Policy Option w. r. t Business Risk (BR) Business Risk Reduce Accept Avoid Transfer Risk Priority Rank Risk Risk Risk Reduce Risk Accept Risk 1/ Avoid Risk 1 1/ Transfer Risk 1/3 1/5 1/ Inconsistency = 0.04 Table 7. Pair-wise Comparison Matrix for Policy Option w. r. t Technical Risk (TR) Technical Reduce Accept Avoid Transfer Risk Priority Rank Risk Risk Risk Risk Reduce Risk Accept Risk 1/ Avoid Risk 1/3 1/ Transfer Risk 1/5 1 1/ Inconsistency = 0.02 Table 8. Pair-wise Comparison Matrix for Policy Option w. r. t Intellect Property Intellectual Reduce Accept Avoid Transfer Risk Priority Rank Property Risk Risk Risk Reduce Risk Accept Risk 1/ Avoid Risk 1/3 1/ Transfer Risk 1/3 1 ½ Inconsistency = 0.03 The performance sensitivity analysis in Figure 2 shows how the risk management strategies are prioritized relative to others with respect to each major criterion as well as the overall. To determine the best risk management strategy, a decision maker can read the overall priority from the inspection of right y-axis and the overall priority for each alternative risk management strategy. For example, risk reduction is about 0.39, risk transfer is 0.30, risk avoidance is about 0.19, and risk acceptance is about For each major criterion s priority that is based on the decision maker s paired comparison, the left y-axis is used. Therefore, based on the performance sensitivity analysis is about 0.39, business risk is about 0.11, technical risk is about 0.17, and technical risk is about 0.34.

12 Figure 2. Performance Sensitivity Analysis Performance Sensitivity for nodes below: Goal: Manage Pharma SC Outsourcing Risk Obj% Alt% Reduce Risk Transfer Risk Avoid Risk Accept Risk.00 Regulatory R Business Ris Technical Ri Intellectual OVERALL.00 For the alternative risk management strategy with respect to each major criterion and reading from the right y-axis, with respect to regulatory risk, risk transfer is about 0.75; risk reduction is about 0.44; risk acceptance is about 0.26; and risk avoidance is about With respect to business risk, risk transfer is 0.85; risk reduction is approximately 0.39; risk avoidance is approximately 0.32; and risk acceptance is approximately With respect to technical risk, risk reduction roughly 0.94; risk avoidance is 0.41; risk transfer is roughly 0.15; and risk acceptance is roughly With respect to intellectual property, risk reduction about 0.88; risk avoidance is 0.38; risk transfer is about 0.19; and risk acceptance is about Finally, for the overall, risk reduction is the best strategy followed by risk transfer, risk avoidance, and risk acceptance. CONCLUSIONS AND IMPLICATIONS In an atmosphere of declining R&D productivity, increase pricing pressure and changing regulatory requirements, global pharmaceutical firms are under increasing challenges to improve profit margins. To deal with these challenges, pharmaceutical firms are pursuing consolidations in the form of M&A and global outsourcing. By establishing strategic outsourcing relationships with partners, pharmaceutical firms can afford to focus on core competencies, have access to specialized expertise, and enhance cost-saving benefits that can contribute to shareholder value. In recent years, global outsourcing of R&D and manufacturing processes has become

13 increasingly relevant in today s competitive environment, and hence a growing trend in the pharmaceutical industry. Indeed, the pharmaceutical firms have moved up the value chain for outsourcing from non-core functions to secondary core functions. The key drivers of pharmaceutical outsourcing R&D are increased complexity of clinical trials and regulatory requirements, increasing data requirements, cost savings, minimizing time to market, rapid access to additional R&D capacity, access to therapeutic expertise, and access to novel enabling technology. Global pharmaceutical supply chain outsourcing leverages series of factors, including low cost, more efficient utilization of labor, capital, technology and resources. Because of the intense pressure to contain R&D costs in an ever changing global marketplace, pharmaceuticals firms are increasingly outsourcing their supply chain operations. Forward looking pharmaceutical firms view outsourcing of global supply chain operations as a strategy rather than just cost savings initiatives. Global pharmaceutical outsourcing can offer flexibility in production, satisfy ultimate end-users growing demands, reduce fixed costs, and enhance positional advantage. For the pharmaceutical industry, global supply chain outsourcing has become a competitive requirement for improving performance and profit margins. Global outsourcing of supply chain operations can allow firms to leverage their core skills and resources well beyond levels available with other strategies. Core competencies and well executed outsourcing strategies can enhance returns on capital, reduce risk, improve flexibility, and make firms more responsive to customers and shareholders value requirements. REFERENCES Al-Harbi, K.M.A.-S. (2001). Application of the AHP in Project Management. International Journal of Project Management, Vol. 19, pp Apostolou, B. and Hassell, J.M. (1993). An Overview of the Analytic Hierarchy Process and its use in Accounting Research. Journal of Accounting Literature, Vol. 12, pp Atthirawong, W. and MacCarthy, B. (2005). An Application of the Analytic Hierarchy Process to International Location Decision-Making. Proceedings of the 7 th Cambridge Research Symposium on International Manufacturing, Backman, M. and Segrestin, B. Drug Design Strategies: The New Challenge of Discovery Departments in Pharmaceutical Companies. gnstrategies.pdf. Belton, V. and Gear, T. (1983). On a Shortcoming of Saaty s Method of Analytic Hierarchy. Omega, Vol. 11 No. 3, pp Calaf, J. E (1995). Value-added Network in Contract. Annual International Conference Proceedings, American Production and Inventory Control Society, Falls Church, VA, pp Carter, J. R. and Narasimhan, R (1996). Purchasing and Supply Management: Future Directions and Trends. International Journal of Purchasing and Materials Management, Vol. 32 No. 4, pp Christopher, M (1999). Creating the Agile Supply Chain. Conklin, J. M (1994). Extending Capabilities through Contract Manufacturing. In the Proceedings of Electro International Conference, pp Desouza, K. C., Awazu, Y. and Mehling, J (2004). The Risks of Outsourcing.

14 Datamonitor. (August 2006). Pharmaceutical Outsourcing: New opportunities in a fully Integrated Global Outsourcing Strategy. Datamonitor Pharmaceutical Report. Dimasi, J. A., Hansen, R. W., and Grabowski, H. G (2003). The Price of Innovation: New Estimates of Drug Development Costs. Journal of Health Economics, 22, pp Dyer, J.S. and Wendel, R.E. (1985). A Critique of Analytic Hierarchy Process. Working Paper 84/ Department of Management, The University of Texas at Austin. Dyer, R.F. and Forman, E.H. (1991). An Analytic Approach to Marketing Decisions, Prentice Hall, Englewood Cliffs. Enyinda, C. I. (2008). Modeling Risk Management in Pharmaceutical Industry Global Supply Chain Logistics Using Analytic Hierarchy Process Model. Ph.D. Dissertation, North Dakota State University, Fargo (Forthcoming. Fill, C. and Visser, E (2000). The Outsourcing Dilemma: A Composite Approach to the Make or Buy Decision. Management Decision, Vol. 38 No. 1, pp Grabowski, H. G. and Vernon, J (2002). The Distribution of Sales Revenue from PharmacoEconomics, Supplement 1, Vol. 18 No. 3, pp Graig, T (2003). 4PL versus 3PL: A Business Process Outsourcing Option for International Supply Chain Management. Harker, P. T. and Vargas, L. G. (1987). The Theory of Ratio Scale: Saaty s Analytic Hierarchy Process. Management Science, Vol. 33 No. 3, pp Lakhal, S., Martel, A., Kettani, O. and Oral, M (2001). On the Optimization of Supply Chain Networking Decisions. European Journal of Operational Research, Vol. 129, pp Lee, E.-K., Ha, S. and Kim, S-K. (2001, August). Supplier Selection and Management System Considering Relationships in Supply Chain Management. IEEE Transactions on Engineering Management, 48(3), Liberatore, M. J. (1987). An Extension of the Analytic Hierarchy Process for Industrial R&D Project Selection and Resource Allocation. IEEE Transactions on Engineering Management, Vol. EM-34, No. 1, pp , Lindholm, A. and Suomala, P (2004). The Possibilities of Life Costing in Outsourcing Decision Making. Frontiers of E-Business Research, pp Decision_Making.pdf. Markeset, T. and Kumar, U (2004). Dimensioning of Product Support: Issues, Challenges, and Opportuities, Paper Presented at the Reliability and Maintainability Symposium (RAMS). Mclvor, R. T., Humphreys, P. K. and McAleer, W. E (1997). A Strategic Model for the Formulation of an Effective Make or Buy Decision. Management Decision, Vol. 35 No. 2, pp Mason, S. J., Cole, M. H., Ulrey, B. T., and Yan, L (2002). Improving Electronics Manufacturing Supply Agility through Outsourcing. International Journal of Physical Distribution & Logistics Management, Vol. 32 No. 2, pp Min, H. (1992). Selection of Software: The Analytic Hierarchy Process. International Journal of Physical Distribution & Logistics Management, 22(1), Persson, G. and Virum, H (2001). Growing Strategies for Logistics Service Providers: A Case Study. International Journal of Logistics Management, Vol. 12 No. 1, pp Perez, P. (1995). Some Comments on Saat s AHP. Management Science, Vo. 41, Issue 6, pp.

15 Piachaud, B. S (2002). Outsourcing in the Pharmaceutical Manufacturing Process: an Examination of the CRO Experience. Technovation, 22(2), pp PricewaterhouseCoopers LLP (2006). How can Pharmaceutical and Life Sciences Companies Strategically Engage Global Outsourcing? 2 Ross, M.E. and Nydick, R.L. (1994). Structuring the Selection Process of Licensing Candidates in the Pharmaceutical Industry Using the Analytic Hierarchy Process. Journal of Pharmaceutical Marketing and Management, 8(Issue 1), Saaty, T.L. (2000). Fundamentals of Decision Making and Priority Theory (2nd ed). Pittsburgh, PA: RWS Publications. Saaty, T.L. (1980). The Analytic Hierarchy Process. New York: McGraw-Hall. Salma, B.; Lyes, K.; Abderrahman, E.-M.; Younes, B (2007). Quality Risk in Outsourcing. Service Systems and Service Management, 2007 International Conference, Issue 9-11, June, pp Snee, R. D (2006). Lean Six Sigma and Outsourcing: Don t outsource a process you don t understand. Sink, H. L. and Langley Jr., J. C (1997). A Managerial Framework for the Acquisition of Third Party Logistics Services. Journal of Business Logistics, Vol. 18 No. 2, pp Srivastava, N. (2002, September). The Trends in the Biotech/Pharmaceutical Outsourcing Industry. CanBiotech BioMed Outsourcing, Newsletter: 1, Issue 1. Wang and Regan (2003). Reducing Risks in Logistics Outsourcing. pp Zinnov LLC (2006). Pharmaceutical Outsourcing Landscape An Overview.