Operational excellence in the pharmaceutical industry

Operational excellence in the pharmaceutical industry

Continuously increasing industry hurdles justify the need for implementation or continuation of operational excellence in big pharma Management summary Industry hurdles Increasing cost pressure through health care reforms and generic drug competition Continuously stricter country-specific approval procedures Imminent losses in sales as a result of patent expirations, especially from 215 onwards Increasingly more complex and more expensive development of medication Tendency towards individualized therapy and thus higher complexity Operational excellence must contribute towards shaping the future business model and significantly lowering costs. Source: Porsche Consulting, Survey 213 2 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

45% of the TOP 2 companies in the pharmaceutical industry took part in the survey Management summary Introduction and target of survey 45% of the TOP 2 pharmaceutical companies worldwide took part in the survey.* The respondents came from Europe and the USA. Most respondents were C-level. All of the respondents had leading functions in operations. The target of the survey was to determine the status of operational excellence implementation in big pharma, as well as how core competencies, end-to-end supply chain management, and supplier integration are handled as contributors to lower costs in operations. * 1% of the participants are research-oriented pharmaceutical companies. Source: Porsche Consulting, Survey 213 3 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

The survey has generated a variety of recommendations for facing future challenges Recommendations 1 1% Operational excellence Set your vice presidents clear targets for operational excellence contribution. Measure and link them to the balanced score card. Annual productivity targets shall be around 3 6%. Use the same structured approach across all sites to be able to benchmark. 3 Optimizing the end-to-end supply chain Transparency across the whole supply chain is the key to end-to-end supply chain improvements and avoidance of the bullwhip effect. Inventory reductions of 3 5% are possible by using a rolling forecast and a weekly data exchange to manage and match demand and capacity. Most drugs have a very stable patient demand. Therefore automatic replenishment shall be used as widely as possible. 2 Outsourcing Clearly define the core and non-core competencies within operations and set up a strategic roadmap. Core competencies must be kept in-house and must be further developed in order to distinguish from competitors. Non-core activities shall be strategically outsourced in the medium to long term. 4 Supplier management/integration Due to strict regulations in the pharmaceutical industry, changes of key suppliers are not easy to manage, and strategic partnerships are critical. Introduce structured supplier programs to increase supplier productivity. Integrate targets for annual productivity improvements of 3 6% in the objectives agreement. Introduce open book calculations to drive down costs. Source: Porsche Consulting, Survey 213 4 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

1 1.1 Every big pharma company has implemented operational excellence in its operations division What is the status regarding implementation of operational excellence in the operations division in your company (in %)? Has not been implemented Implemented in pilot areas Comprehensively implemented in some plants 56 Every big pharma company has implemented operational excellence in its operations division % have started implementation of operational excellence in pilot areas, but a comprehensive rollout has not yet taken place. 56% have not yet fully rolled out operational excellence, but have implemented it at some plants. % comprehensively apply operational excellence to all plants. Comprehensively implemented in all plants Source: Porsche Consulting, Survey 213 5 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

1 1.2 All of the big pharma companies started their structured operational excellence programs after 2 In which year did you begin to implement a structured operational excellence program at your company (in %)? 44 All of the big pharma companies started their structured operational excellence programs after 2 66% implemented a structured operational excellence program after 25. Only % started their program less than 3 years ago spoiled by success, the industry is feeling more and more pressure from several sides. None of the companies began implementation before 2. < 1995 1995 2 21 25 26 21 > 21 Source: Porsche Consulting, Survey 213 6 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

1 1.3 The majority of companies (75%) target a 5 1% productivity increase within a two-year time frame What potential have you achieved/are you planning to achieve through operational excellence (in %)? In the last 2 years Planned for the next 2 years The majority of companies (75%) have targeted a 5 1% productivity increase within a two-year time frame 67 5 5 5 25 25 Increase in productivity Reduction in stock Reduction in quality costs 25 5 5 75 Despite the fact that availability of equipment and machines is still a problem in the pharmaceutical industry (e.g., low OEE), increasing productivity was not that successful only 25% of companies have achieved more than a % productivity increase over the past two years. None of the companies reduced their stock by more than 1%. In this context, one has to consider that supplier management/integration needs to be enforced. 5% continue to target more than 2% reduction of quality costs in order to tackle the increasing cost pressure. < 5% 5 1% 2% Source: Porsche Consulting, Survey 213 > 2% 7 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

1 1.4 89% are at least in line with the results of their operational excellence programs How satisfied are you with the results achieved (in %)? Expectations not fulfilled In line with expectations 89 89% are at least in line with the results of their operational excellence programs All companies record and measure the results of operational excellence. The big pharma companies claim to have implemented operational excellence in their operations division. However, 89% of companies are in line with expectations. % of the programs exceeded the expectations. Expectations exceeded Results not recorded/evaluated Source: Porsche Consulting, Survey 213 8 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

1 1.5 Tackling end-to-end supply chain optimization is the next big thing in performance improvement What areas do you intend to focus on over the next 2 years in order to meet increasing cost pressures (in %)? (Multiple answers possible) Outsourcing Tackling end-to-end supply chain optimization is the next big thing in performance improvement 89% are focusing on end-to-end supply chain optimization in order to meet demand and achieve low stock at the same time. Optimizing the end-to-end supply chain 89 Contrary to expectations, outsourcing is not one of the hottest topics. However, the pharmaceutical industry can learn from other industries companies don t have to do everything on their own. Supplier management/ integration Other* 67 67% will enforce supplier management/ integration. % intend to focus on other areas (e.g., standardization, improving quality at the shop floor level). * Other: Standardization, improving quality at the shop floor level, distribution Source: Porsche Consulting, Survey 213 9 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

2 2.1 Although all companies are research companies, 67% consider operations as a core competence What added value stages do you consider as a core competence of your company (in %)? (Multiple answers possible) Research 89 Although all companies are research companies, 67% consider operations as a core competence Pre-clinical phase Phase 56 56 It takes around twelve years to develop a new drug. Only a small percentage will ultimately go onto the market as new products. That is why companies focus their efforts on research and development. Phase I - III Licensing 67 Patent expiration is an essential concern in the industry reducing time-to-market could be a key success factor. Accordingly, 67% claim the clinical phases (I III) as their core business. Operations Sales and marketing Other* 67 89 In global competition, sales and marketing is one of the core competencies as well. Contrary to prior assumptions, 67% also see operations as their core competence. * Other: Pricing and access Source: Porsche Consulting, Survey 213 1 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

2 2.2 Surprisingly 67% even consider packaging as a core competence within operations What added value stages do you consider as a core competence within operations (in %)? (Multiple answers possible) API*/drug substance 78 Surprisingly 67% even consider packaging as a core competence within operations Bulk/solid drug products Bulk/sterile drug products 78 89 More complex processes such as API and bulk are considered key areas of expertise of big pharma companies one reason for this may be the highly stringent requirements for production. But even packaging of solids as well as steriles are considered as a core competence of the companies, although this is a field of action that could easily be outsourced to CMOs**. Packaging solids 67 Packaging steriles 67 * Active pharmaceutical Ingredient ** Contract manufacturing organization Source: Porsche Consulting, Survey 213 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

2 2.3 Most of the companies plan on opportunistic in- or outsourcing therefore, pharma operations value proposition will not change dramatically In which areas are you planning to increase the proportion of in-/outsourcing (in %)? API/drug substance Bulk/solid drug products 2 4 6 4 4 Most of the companies intend to do opportunistic in- or outsourcing therefore, pharma operations value proposition will not change dramatically Despite the flexibility pressure, none of the interviewed companies will drive an aggressive insourcing strategy. Bulk/sterile drug products Packaging solids 2 2 6 2 8 Big pharma is planning to outsource processes particularly with regard to packaging solids (8%) or use a selective strategy. They decide on a one-by-one basis and outsource as well as insource opportunistically. The reason is the full utilization of existing capacities. Packaging steriles 4 4 2 Insource strategically In-/outsource opportunistically Outsource strategically Source: Porsche Consulting, Survey 213 12 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

3 3.1 Stock coverage levels vary extremely between companies and clearly reveal room for improvement What is the average stock coverage level in your company (in %)? API Bulk 13 13 13 38 13 5 25 25 13 Stock coverage levels vary extremely between companies and clearly reveal room for improvement Only 13% of the companies have a stock coverage level less than 5 days for API and bulk among other reasons, due to unsteady internal demand (e.g., triggered by individual affiliates). Due to batch production as well as for contingency reasons, API has the highest stock level, with >15 days in 75% of the companies. Packaged finished products 38 < 5 days 38 5 1 days 15 days 25 151 2 days > 2 days 38% of big pharma have a stock coverage level of bulk of more than 15 days. While packaged finished products are countryspecific, the days on hand is comparably low. 76% of companies have less than 1 days on hand within their reach. Source: Porsche Consulting, Survey 213 13 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

3 3.2 Delivery reliability is a key measure 89% record an average delivery reliability of > 9% What is the average delivery reliability (in %)? (Delivery reliability is defined as the correspondence between the promised volume and the agreed delivery date +/- 1 day.) < 6% 6 7% 71 8% Delivery reliability is a key measure 89% record an average delivery reliability of > 9% Tackling delivery reliability is a common field of action in the pharmaceutical industry poor supplier performance and unsynchronized processes could lead to serious problems (e.g., inefficiency all along the internal value chain) While some companies are even achieving 99% delivery reliability, others (%) are still fighting in the 71% 8% range. 81 9% 91 99% 89 Source: Porsche Consulting, Survey 213 14 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

3 3.3 The use of standardized electronic tools in order to optimize the end-to-end supply chain is high Which tools do you use to achieve transparency/optimization of stocks/supply capability in your supply chain (in %)? Suppliers Own semi-finished goods (API/bulk) Packaging Central final products warehouse 43 14 14 14 57 86 71 86 14 The use of standardized electronic tools in order to optimize the end-to-end supply chain is high The majority of the companies exchange information via ERP systems/standardized protocols e.g., 86% for their own semifinished goods (API/bulk). Only 14% of big pharma use automatic replenishment. Affiliates warehouse 43 57 5 5 Wholesale Selected end customers 2 8 No exchange of information Exchange of information through integration using nonstandard tools* Exchange of information via ERP system/ standardized protocols** Use of automatic replenishment * Example: exchange of Excel files ** Example: EDI Source: Porsche Consulting, Survey 213 15 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

3 3.4 The focus of the end-to-end supply chain is strengthened by concentrating competencies in a single organizational unit Is end-to-end responsibility for requirement and capacity planning (end-to-end supply chain) bundled within a single organizational unit (in %)? No 12% The focus of the end-to-end supply chain is strengthened by concentrating competencies in a single organizational unit There is a clear trend towards strengthening end-to-end supply chain optimization. Therefore, 88% of big pharma have bundled the competencies of requirement and capacity planning into a single organizational unit. There are clear advantages to concentrating competencies in one organizational unit e.g., consistent key figures, efficient communication, clear responsibilities, standardized methods and procedures. Yes 88% Source: Porsche Consulting, Survey 213 16 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

4 4.1 Supplier management/integration is becoming an increasingly integral part of big pharma operations What tools do you use (U)/are you planning to use (P) in the supplier management area (in %)? (Multiple answers possible) Supplier assessment upon assignment Objectives agreement* Open book calculation Continuous evaluation of supplier performance Supplier programs for increasing the supplier's efficiency Task forces for resolving quality problems on the supplier side Strategic partnerships Other 67 56 67 56 56 56 A supplier B supplier C supplier 44 44 44 44 Supplier management/integration is becoming an increasingly integral part of big pharma operations Although regulations are strict, only 44% of the companies use supplier assessments upon assignments and continuous supplier performance evaluation for B and C suppliers. 56% of the companies have started to implement objectives agreements with their A suppliers and % with B and C suppliers. Strategic partnerships for increasing the supplier's efficiency are used by 56% of the companies for A suppliers. Only 44% of the companies use open book calculation as a purchasing tool to lower costs for A suppliers. Due to strict regulations in the pharmaceutical industry, changes of key suppliers are not easy to manage and strategic partnerships are critical. Use Plan Use Plan Use Plan * Examples: resupply time, weekly capacities, accuracy of delivery, quality Source: Porsche Consulting, Survey 213 17 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx

Contact person at Porsche Consulting Dr. Roman Hipp Principal E-mail: Cell phone: Roman.Hipp@porsche.de +49 ()17 9 491 Porsche Consulting GmbH Porschestrasse 1 74321 Bietigheim-Bissingen Germany Phone: +49 ()7 9 121 18 Survey 213_Operational_Excellence_in_the_pharmaceutical_industry.pptx