Beyond the Foggy Supply Chain

More control over warehouse data (from drug company to pharmacist) is key to inventory control

Pharma faces myriad challenges in information technology. But, in fact, many of them require the same action: To control costs, a company needs to refine its processes across the board, replacing old spreadsheet-driven processes with sophisticated analytics. That means collecting and analyzing data from a daunting variety of internal and external sources.

Dennis Constantinou
To meet these challenges, companies need IT systems that support the ubiquitous flow of data across the organization. But they also need to create and implement new business processes—and in some cases, develop new relationships with suppliers, distributors, and customers who hold key data.

This business evolution is playing out in various parts of the industry, from R&D to sales management to marketing. But one of the clearest examples comes in sales and operations planning (S&OP), where companies are attempting to replace their old make-to-stock model with a demand-driven approach.

New Approaches

Arvindh Balakrishnan
The impetus for change is clear. Approximately five years ago, inventory management agreements (IMAs) emerged. IMAs were devised by manufacturers as a way to align their business objectives with those of the distributors by shifting costs to the most efficient point in the supply chain. But pharma companies aren't good at matching production to demand, so IMAs have had a perverse effect: According to a 2005 report by Pembroke Consulting, pharmaceutical manufacturers added nearly $4 billion in inventory between Q4 2001 and Q4 2004. At the same time, they spent at least $785 million in additional manufacturing operating costs, not counting related expenses such as expedited shipments and the excess capital tied up in inventory.

In this environment, manufacturers are looking for new approaches to help them unify all business areas—R&D, sales, marketing, manufacturing, distribution, and finance—and truly align supply with demand.

IT plays a crucial role here. With the right systems, companies can:

  • Make better forecasts via accurate, easy-to-access historical data and improved collaboration across formerly siloed departments
  • Maintain flexibility in production, with the ability to enter new product batches as needed
  • Better monitor inventory levels to enable more timely response to fluctuating demand
  • Automatically and accurately document all sales and operations processes to ensure regulatory compliance
  • Gain complete visibility into end-to-end operations.

Integrated S&OP

Most pharma companies have a fragmented S&OP process. Typically, each department has its own process, storing data on spreadsheets. Departmental plans are not aligned with one another or company objectives. This situation leads to a time-consuming manual process that results in "the forecast," which is typically inaccurate. The supply chain team takes the forecast and figures out how to meet demand—with no thought to the profitability of their decisions. Ultimately, the "approved" plan is filed away, leaving departments to execute based on their own department-specific objectives.

The goal should be to replace this process with one that leads to a single, organization-wide forecast—built on accurate demand signals—which is at the core of an integrated S&OP approach. And the crucial tool in developing this process is integrated IT.

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