Operations for the Executive Suite

Opening new horizons for current and future pharma leaders

Operations for the Executive Suite
Opening new horizons for current and future pharma leaders

EDITORS David Keeling Ulf Schrader

PHARMACEUTICAL AND MEDICAL PRODUCTS OPERATIONS PRACTICE LEADERSHIP Global, Europe, Middle East and Africa Martin Lösch (Martin_Loesch@mckinsey.com) North America David Keeling (David_Keeling@mckinsey.com) Asia Vikas Bhadoria (Vikas_Bhadoria@mckinsey.com) Senior Knowledge Expert/Practice Manager Vanya Telpis (Vanya_Telpis@mckinsey.com) for more information please contact Vanya_Telpis@mckinsey.com

Intel: What manufacturing model is right for pharma? David Keeling. Ulf Schrader New aspirations and operations models 09 Plantopia? A mandate for innovation in pharma manufacturing Andrew Gonce. Vanya Telpis . Vanya Telpis 35 Biopharmaceuticals success: Why manufacturing and technology strategies matter more than ever Alberto Santagostino.ii Contents Introduction 01 Operations for the executive suite David Keeling. Frank Scholz. Venu Nagali. Marco Ziegler Developing talent 49 Changing of the guard: What’s needed from pharma’s next Operations leaders Wolf-Christian Gerstner. Jeff Holland Moving from cost to growth 73 From defense to offense: Leverage operations to increase revenue Noel Greenberger. Ulf Schrader 23 Apple vs. David Keeling 59 Missing ingredient: Lean leadership on the factory floor Andrew Gonce.

Navjot Singh 145 Why quality should be on the medical device CEO agenda: The business case Ted Fuhr. Cedric Losdat. Venu Nagali. Martin Lösch 135 Evolving beyond global regulators: An operational lens Ted Fuhr. David Knott 95 Tapping operations to win emerging markets: Questions every pharma executive should consider Ulf Schrader. Katy George. Paul Rutten 167 Playing in the Champions League: Supply chain lessons from consumer goods companies Peter De Boeck. Deepak Mishra Appendix 181 Trends shaping up the pharma industry Vanya Telpis 185 Authors .iii 85 Beyond the pill: Creating medical value through technology enablement Jamie Cattell. Kerstin Kubik. Sastry Chilukuri. Nasser Khan. Janice Pai Breaking down the silos 159 Design-to-value: Re-engineering the portfolio for profitability and growth Jasmin Frick. Louis Rassey 125 Light-footed operations: The virtues of agility in volatile times Thomas Ebel. Sabine Schulz Managing risk 111 Expect the unexpected: Reduce corporate exposure and create value through supply chain risk management Katy George.

Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

McKinsey analysis—based on the revenues of more than 210 pharma companies. For example. declines in innovation. . For the first time in half a century.Introduction 1 Operations for the executive suite David Keeling. Pharma revenues for 2010 were essentially flat— just 0. And the decline in big pharma innovation is diverting value to the generic players. frankly.2 Operations have been a pivotal success factor in sectors that have experienced similar phases of maturation. 1 2 S&P Capital IQ Unit. with their lower margins. and the success of Procter & Gamble in breaking down silos within Operations and other functions in order to capture value. Ulf Schrader Traditionally.4 percent growth over 20091. how Apple and Unilever have developed new talent. Operations topics have not always been prioritized or well understood by pharma CEOs and their senior leadership teams because. But the past should not be a blueprint for the future. and commoditization. For more details. are projected to grow at 10 to 20 percent annually over the next decade. consider the exceptional supply chain efficiencies of Walmart and Dell. It’s common knowledge that the pharma industry is in the midst of significant changes. see “Trends shaping up the pharma industry” on page 181. Emerging markets. other topics were more important to growth and profits. growth has reached a plateau.

at best-in-class costs right from the start? Could we deliver small-scale personalized drugs immediately—and on demand? Could we track patient behavior in real time to improve efficacy and patient compliance? Could we make innovation a strategic priority and develop our own version of “Plantopia”? „ Could a fundamental challenge to the manufacturing ownership-andcontrol model gain us billions of dollars in market capitalization and newly freed working capital? Apple and Intel provide examples of the spectrum of this discussion. We believe that it is time for pharma CEOs to proactively examine how their organizations can capture even more value from operations—indeed. But all too often. Apple operates at two days of finished-goods inventory. such continuous change has meant the difference between average and superior performance. and shift cost and risk paradigms. By leveraging lessons from other industries that have been down similar paths. we provide context to shed light on the black box of operations and its potential for this value creation. Here are the key themes in this book: New aspirations and operations models Leaders in other maturing industries have found new sources of growth by setting aggressive aspirations for their operations. Walmart’s focus on operational cost-efficiency has driven 17 percent annual sales growth and 20 percent EBIT annual growth over the last decade. We also emphasize the role of the executive suite and offer questions that CEOs can use as starting points for discussion on each topic. The pharma executive suite must challenge Operations to more aggressively question the company’s operations model and develop a transformational strategy—delivering breakaway performance rather than incremental improvements. We have identified a number of specific Operations topics. „ Could we launch products in half the current time. their attention has been in reaction to serious regulatory issues. Nucor can build a mill at 10 percent of the cost of a traditional integrated mill. All these opportunities require sustained executive suite involvement and repeated challenges to the organization. Other industries have proved that it is possible to leverage operations to spur innovation. how they might be able to harness operations to create competitive advantage. . grouped into five themes.2 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Many pharma CEOs and executive teams have already started to spend a lot more time on operations. that could create billions of dollars in value upside for pharmacos. Looking to other industries. help open new market opportunities.

What’s the right technology to invest in? Should we manufacture internally or externally? How could we push back against the low-cost players? Placing the right bets in biopharma will make the difference between failure and success in the swiftly changing biopharma landscape. Do our operations leaders have those characteristics? If not. what can we do about it? „ How could we develop our front-line transformation leaders and ensure strong and sustained support for driving change? With the right levels of ambition and support. Developing talent The former head of Operations at Apple is the company’s new CEO—and that is an organization where few of us think that operations is the core. Volkswagen’s platforming and modularization strategy has allowed the company to serve niche markets at 25 to 40 percent lower cost and with significantly faster time-to-market. ambition. That applies both to Operations’ global leadership team and to shop floor personnel. and Deere. GE. have leveraged low-cost designs for emerging markets to win new customers back in their developed markets. creativity. the pharma executive teams have to coach and challenge the companies’ Operations groups and shape their roles toward delivering growth. flexibility. Nestlé and Unilever have reached large and underserved emerging markets populations through novel distribution models. among others. Pharmaco executive suites can help Operations organizations to develop their talent and shift their mindsets in step with their evolving responsibilities. For this they would need new skills and competencies—boldness in vision. and commitment. and the ability to lead fundamental transformation at scale. But to achieve this type of success. „ Could we leverage our operations capabilities to boost revenues? Other industries did that a long time ago—using products and platforms from . transformational change initiatives can capture 20 to 30 percent in productivity gains within a year. Coca-Cola.Introduction 3 „ Structural industry changes are pushing manufacturing questions to the center of biopharma companies’ agendas. „ Operations leaders of the future should be able to turn operations into a competitive advantage for their companies. a mindset and skills that extend beyond operations. as well as improve quality. and employee morale. Moving from cost to growth Operations has the potential to open up new opportunities just as a new treatment or a blockbuster drug would do.

4 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders emerging markets for global strategic advantage. By taking advantage of upside opportunities. Supply chain risk events are the second-largest contributors of large monthly declines in share price. „ The industry’s current dynamics and volatility require lean initiatives to be supplemented with agility as a central focus for operations. proactively. this approach could potentially deliver millions of dollars in reduced supply chain costs and higher supply assurance. and becoming more collaborative and increasingly sophisticated in their use of standards. best practices. resulting in drops of 10 percent or more when compared to the S&P 500 over the same time period. emerging middle-class population. „ Could we substantially reduce or eliminate our supply chain risk exposure? A systematic and structured risk-management approach will costeffectively mitigate risk and proactively reduce the likelihood and negative consequences of disruptive events. and healthcare is ripe for a similar change. or reacting nimbly to shifts in demand. What will it take to unlock these opportunities? Do we have the operations capabilities to reach and serve a lower-income population in economically viable ways? Managing risk Risk exposure and value at stake are higher than ever before in the healthcare industry. How could we set up a system of structural agility that goes beyond issue resolution and firefighting. Taking a lesson from other industries. Pharmaco leadership teams must have a deeper understanding of this and work to embed agile mindsets in their organizations. and cost-effectively. and . Could hundreds of billions in healthcare costs and sales losses be avoided through improvements in patient compliance and with more effective management of chronic diseases? Could our company develop the technological skills to succeed against the new competitors in this field? „ The biggest unexplored opportunities in developing markets lie in the fast-growing. „ Technology has already transformed many industries. while helping them to manage risk systematically. Hewlett-Packard’s supply chain risk-management program delivered incremental value in excess of $500 million during its first six years. making niche products profitable. and drives profitable growth thanks to faster product launches and fewer stock-outs? „ Is our organization prepared for the evolving regulatory environment? Regulators worldwide are transforming themselves—developing smarter and leaner ways of working. improves operating margins significantly without major investments.

Getting it right could mean 15 to 25 percent higher margins and increased sales. „ What happens when the product and customer value that are driven by pure science innovation start to slow down? Could we combine customer insight. and reduce risk. capture $5 to $6 billion in incremental EBITA. Could we follow the same path within the pharma industry to transform our supply chains? While this book does not have all the answers or off-the-shelf solutions. we would encourage an in-depth discussion of these and other similar questions at the next meeting of the executive team. „ Do we still rely on “compliance by inspection” in an increasingly complex and competitive medical devices sector? Could we achieve a 10 to 15 percent increase in earnings by adopting modern quality approaches and tools? Through cross-industry best practices in quality assurance. R&D. and long-term competitiveness. and Commercial leaders behind common goals and strategy. Pharma executives must be vigilant about regulators’ new mindset and new strategies in order to sustain financial performance. better service levels. Breaking down the silos Operations needs sufficient cross-functional support to step into its new role and deliver to its full potential. the medical products sector could improve patient outcomes. brand image. „ Consumer goods supply chain champions achieve 4 percent or higher operating margins. it can help to raise awareness of new possibilities. .Introduction 5 proven methods. and greater capital effectiveness than their peers. plus improvements in speed-to-market. The CEO and the executive team are the only ones who can break down the organizational silos and align Operations. and manufacturing best practices to create products with distinctive value for customers? Design-to-value is finally finding its way into healthcare to drive growth and profits. Indeed. engineering innovation.


7 New aspirations and operations models .

8 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

They would immediately notice the robots tirelessly spot-welding car bodies where men in welding masks once worked. they would be astonished by the many changes. They would observe the fast-changeover paint booths that help each production facility to meet the vagaries of market demand. Ulf Schrader Change is badly needed in pharma manufacturing. Now that the “blockbuster” model of excess capacity has run its course. it’s time to move toward operations excellence—a model marked by smaller batches. They must challenge their operations leaders to say what they plan to do differently going forward. In short. shorter runs.New aspirations and operations models 9 Plantopia? A mandate for innovation in pharma manufacturing Andrew Gonce. If engineers who had worked on a Ford or Fiat manufacturing system in the 1950s were to visit a state-of-the-art automotive plant today. and further innovation in production itself. greater quality expectations. And they would most certainly be surprised by how much total value of each car is outsourced to suppliers. . pharma leaders now need to look beyond simply running manufacturing efficiently. They would be intrigued by how the just-in-time parts delivery systems function so well.

2004. “Flexible Pharma: Puzzling Out the Plant of the Future. but have not yet applied the same thinking to the design and engineering of their assets.” PharmaManufacturing.”1 Little has changed since that report was published. for example. Fundamental changes in how products are made. and in how quality is built in rather than tested in. However. gains in pharma production have been modest. Yet. Manufacturers have squeezed some gains out of the shop floor. Yes. Can Drug Manufacturing Become a Rock Star?. But the great majority of efforts have focused on the near-term cost-reduction levers of labor and procurement.com.” MIT Engineering Web site.10 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Their counterparts in the steel industry would experience a similar study in contrasts. Quality by design (QbD) practices are still nowhere near mainstream. And while others have innovated in collaboration with their networks of suppliers. and knowledge management systems is low. 2007. and need 60 percent less energy to run as compared to traditional mills. “Novartis-MIT Center for Continuous Manufacturing. are rarely seen. US Food and Drug Administration.” PharmaQBD. the US Food and Drug Administration put it this way: “Pharmaceutical manufacturing operations are inefficient and costly. new measurement and control technologies. They can turn operations on and off to match production runs to market demand. common for more than 20 years in the automotive sector. 2009. Agnes Shanley and Paul Thomas. Compared to other industrial sectors. Opportunities for improving efficiency and quality assurance…are not generally well recognized.2 Other companies are piloting continuous process tablet lines. “MIT and Novartis in New Partnership Aimed at Transforming Pharmaceutical Manufacturing. there are exceptions: Novartis.” MIT press release. November 2010. but pharma has not. beyond the usual rationalization of production sites prompted by overcapacity. remain few and far between. marked by the recent use of lean production techniques to cut variable costs and boost labor productivity. Continuous batch manufacturing and biologics production in disposable reactors remain niche activities. Pharma’s manufacturing economics have not changed much in the last few decades. On-line process analytical technology (PAT) and the use of control limits. that has not been the case with pharma. September 28. Today’s mini-mills are economical at a tenth of the scale of large integrated mills. In a 2004 report.3 Even the presence of a U-shaped packaging line or work cell to optimize 1 2 Innovation and Continuous Improvement in Pharmaceutical Manufacturing. 3 . little attention has been paid to overall asset productivity. the rate of introduction of modern engineering process design principles. “With Continuous Operations. there are few such stories in the pharmaceutical industry. The short story is that other industries have pushed manufacturing innovation far and fast. is making the right kind of efforts by working with the Massachusetts Institute of Technology to co-develop its future manufacturing capabilities.

To begin with. It’s time to elevate manufacturing innovation as a strategic priority. Martin Losch. Gone are the days when pharmaceutical operations could rely on the US. “Driving a Transformation in Efficiency. A strong case for step change in manufacturing Innovation hasn’t happened in pharma production before because it hasn’t been necessary. shorter periods of 4 5 6 Philipp Cremer. 2004. and European markets. Nor is it part of the typical products offered by pharma equipment manufacturers. less productive R&D pipelines. higher complexity. The opportunity cost alone makes an urgent case for innovation. Innovation and Continuous Improvement in Pharmaceutical Manufacturing. But times have changed. common in consumer goods. is not standard in most fill and finish plants. US Food and Drug Administration. as one company executive did. Global Insight’s World Overview. . and choosing safe and conservative technologies —are not right for today. more price transparency. 2010. Before dreaming of the future plant. Japanese. Today. Some estimates put the potential worldwide cost savings from efficiency improvement as high as $50 billion4 —equivalent to the cost of developing 80 to 90 new drugs every year. however. and Ulf Schrader. we must understand the forces driving this change. Leaders cannot look at their next manufacturing asset and declare. McKinsey analysis.” Outpacing Change in Pharma Operations. global forces are challenging the old paradigm. pharma operations leaders must rethink their approach to manufacturing and demand more innovation that matches the already changed pharmaceutical landscape. Emerging markets will represent about 45 percent of the world’s GDP by 2018 and are expected to grow twice as fast as developed markets between 2008 and 2018.New aspirations and operations models 11 labor use.5 Our longtime studies across a wide range of industries point to five broad sources that propel innovation. The earlier paradigm of pharma operations—typified by the blockbuster model—is being replaced by shorter periods of exclusivity. reserving enormous excess capacity. and greater purchaser power. smaller batches.6 And yesterday’s stable regulatory environment is being reshaped by other nations’ regulatory bodies with different standards and expectations.” In short. they must conceive of and plan for what we might call “Plantopia”— that is. McKinsey. Yesterday’s choices—prioritizing product launch timeliness over process stability. competition based on product efficacy. the future production scenarios that represent possible and practical responses to the challenges ahead. that “we are building a museum on our next site.

in: Henry G. and huge counterfeiting risks are pervasive. Manufacturing technologies are evolving in response to some of these pressures. Any of these forces would drive transformation in manufacturing.7 Another driver involves changing customer needs in terms of both price and drug efficacy. and rising quality expectations. new global suppliers. Grabowski and Margaret Kyle. Now pharmas not only must be alert to credible competition from emerging markets—particularly from powerful. “Novavax and Xcellerex Announce Collaboration to Develop Large-scale Manufacturing Process for 2009 H1N1 Influenza VLP Vaccine. Value-chain inefficiencies also spur change.” BioProcess International. Recently. Technology developments are a third driver of innovation. Those challenges add up to increased transaction costs. One analysis shows that exclusivity for blockbuster drugs has dropped from 13. “Generic Competition and Market Exclusivity Periods in Pharmaceuticals. June–August. and process automation that includes electronic batch records. October 21. The biggest roadblock 7 8 9 10 Averages for the periods 1995–2001 and 2002–2005.2 years.8 Europe’s tender models and US healthcare reform put continual downward pressure on drug prices across therapeutic areas.12 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exclusivity. and distributors. “10 Years of Vaccine Progress in 10 Days. Prices must be far lower if pharmas are to successfully serve the “next billion” consumers. 2007. Lorna D. a “plug-and-play” manufacturing platform based on the application of single-use technologies.” Managerial and Decision Economics. fast-growing. Today. Novavax and Xcellerex. Considered together. supply chain leaders struggle in a world vastly more complex than that of a decade ago. And more of the pie is up for grabs. partners. 2009. May 2009. nuanced partnerships. McLeod. full turret replacements on high-speed tablet presses.9 An example of this trend is Xcellerex’s FlexFactory. a global health partnership launched in 2000 to increase access to immunizations in poor countries) revealed the prices paid for vaccines. June 2011.8 years to 11. . the GAVI Alliance (formerly the Global Alliance for Vaccines and Immunizations. they demand a different type of response.10 More technology suppliers are investing in “quick changeover” designs to aid in small batch production—for instance. Markets with new requirements.” joint press release. reusable. controlled environmental modules. “Advances in Bioprocessing. Orin Levine. respectively. forcing manufacturers to re-evaluate how they manage inventory and risk across their networks. Single-use technologies have come on strongly as an alternative to permanent. stainless-steel fermentors and their attendant subsystems. prompting both GlaxoSmithKline and Merck to significantly reduce the costs of their rotavirus vaccines.” The Huffington Post. well-funded conglomerates in India and China—but also must be on guard to possible competitors within the pharma value chain—such as healthcare payers.

product launches were perfect—and costs started out as exhibit 1 #3 Plantopia – Exhibit 1 Factors The Intel model Global forces Execute massive standardization in response to global fragmentation Drive unit costs as low as possible. The Intel model What if the pharmaceutical plant of the future made a standard tablet core produced at very high speeds with state-of-the-art control systems. highservice model that customers want to choose Competition Create the brand that competitors cannot replicate Expand your ownership of the value chain to include post manufacturing services Value-chain efficiencies Manage partners to your standards. building quality into the process Use operating excellence to be faster and less expensive The Nucor model Move closer to the customer.speed. standard operations. model your business on their needs The Disney model Find ways to add value in a highly competitive. But there are other questions that will help pharma business leaders start to place more of the right kinds of bets on future production arrangements. fundamentally changing the cost structure Create a low-cost. We envision three potential archetypes for the future of manufacturing—options that take advantage of industry forces to create new opportunities (Exhibit 1). bring innovations to market faster than the competition Become excellent at high.New aspirations and operations models 13 for leaders in pharma operations is less about whether to innovate and more about how to do so. with precise and flexible coating processes capable of speeding an array of products to market? What if there were no gap between development and manufacturing. commoditized market Create features and experiences for which customers are willing to pay a premium Leverage technology to create new features and services Latent or unmet customer needs Technology Reduce the total cost while increasing service levels Use the latest technology to reinvent the process. eliminate inefficient interfaces Create a flexible factory to match highly variable customer demands SOURCE: McKinsey . Each is modeled on successful manufacturing transformations in other industries. How do we begin to envision the pharma plant of the future? Three glimpses of Plantopia What does Plantopia look like? There is no one true answer to that question.

14 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

This flexibility also will shorten the time it takes for Intel to ramp up new products. “Intel makes approximately 10 billion transistors per second.” said Brian Krzanich. than the cost of building new fabrication facilities—each typically costing $6 billion today. Since manufacturability . It provides a means for integrating specific manufacturing concerns into a product design in order to develop a product that is easier to manufacture with excellent overall quality. In response to the October 2010 announcement that Intel would be investing up to $8 billion in future generations of manufacturing technology in the United States. such as its 22-nanometer chip designs. Two examples of Intel’s manufacturing strategy are worthy of closer attention. in total. the chip maker considers its manufacturing network to be a strategic asset—easily as valuable as its advanced product designs. the company has steadily trimmed the time needed for each step in the chip-making process. Krzanich went on to note that Intel’s agility helped it to fix a problem and replace a flawed chip design so quickly that the disruption did not hurt revenues. senior vice president and general manager of Intel’s Manufacturing and Supply Chain.New aspirations and operations models 15 best in class? This type of pharma plant might approach levels of operations excellence that are comparable to those of the semiconductor manufacturer Intel. which is most important today as the competition shifts to tablets and smartphones.” Intel’s continual investments in manufacturing expertise enable the company to produce a new crop of chips about every 18 months that are less expensive and use less power. Its design for manufacturability (DFM) discipline—not unique to Intel—is a way to proactively address product issues early in the design cycle. A key rationale for DFM is that not all process and layout interactions can be covered or anticipated by design rules. Additionally. and these investments will create capacity for innovation we haven’t yet imagined. Intel’s argument is that functional integration—between product design and production—leads to higher average selling prices. plus $1 billion to $2 billion for a pilot line and $500 million to $1 billion for an R&D process team. Intel also can handle product changeovers more quickly to cope with fluctuations in demand. Intel’s emphasis on manufacturing efficiencies gives it speed and agility. The company reports that new process technology saves money in the long run. and is less expensive. Krzanich stated: “Our factories produce the most advanced computer technology in the world. Because Intel competes on manufacturing efficiency.

Highly skilled technicians would propel continuous improvement in process controls and product design. products could conceivably come to market in half the time it takes today. This version of pharma Plantopia would require full integration. which operate as a virtual factory that performs consistently and independent of the manufacturing source site. Moreover.16 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders improvements are dynamic. and error-proofing. Product quality would be built in. partly also reflecting that securing a manufacturing innovator held some promise for a pharma manufacturer. and manufacturing processes would be capable of full-scale production within days. after launch. Copy Exactly! enables the delivery of products from multiple production sites. The systems and unique end-to-end process knowledge was one of the reasons why it was acquired in 2010 by MerckSerono for more than US$7 billion. sort. Equipment would be highly precise and ultra fast. think what it would be like if the only operations required were replenishing the pre-qualified active pharmaceutical ingredients (API). new learning is included as the technology evolves. The life sciences company was able to develop unique. as well as standard platforms in design and operations. which could be ordered automatically and with quality operations embedded in every step. Process controls would be well known and continuously refined. integrated quality checks. That kind of . Then envision the plant being so small that it could be built and connected to the pharmacy—and almost be mistaken for a one-hour photo booth. low-cost disposable systems—using bags instead of tanks—that are designed for fast set-up. The Nucor model Imagine if the pharma plant of the future were located right next to the hospital. and assembly test facilities. Products would launch on time and at quality. independent of the product’s time on the market. The sale represented a 50 percent market premium. with Six Sigma performance levels on all key quality parameters. beyond QbD. delivering just the vials needed at exactly the right time. And products would remain cost-effective long after patent expiry. Millipore offers a glimpse of what is possible. Intel also follows its Copy Exactly! philosophy in its fab. not months. Next. All designs that did not align with the common platforms would be sourced to contract manufacturers or partners. product cost would be best in class. The plant would be highly automated. Additional benefits include greater consistency to quality performance and faster production ramp-ups that improve product availability. In this ideal world. and truly scientific process knowledge would exist in both the development and manufacturing groups.

Beginning in the late 1960s. expensive. Filling operations would be radically compressed to just the core value-adding steps. . Pairing this small-scale. has the potential to allow an entire mill to be built in one-sixth of the space needed for a minimill and at 10 percent of the cost of a traditional integrated mill. Collaborating with two other steel companies. Its highly flexible production capability allows the company to almost instantaneously adjust output to match demand. Nucor is known as a highly successful operator of steel mini-mills. Packaging would be highly standardized and inexpensive. Nucor is exploring lower-cost sources of iron in Australia and Brazil. Today’s mini-mills are economical at a tenth of the scale of large integrated mills. The Nucor version of pharma Plantopia would require tight integration with API suppliers and a rethinking of the entire form/fill/finish (or granulation.New aspirations and operations models 17 pharma plant might come close to the small-batch. Nucor was among the first steel companies in the United States to use electric arc furnaces to melt recycled steel—a far simpler and cheaper way to make steel than the large-scale methods then used by the big integrated steelmakers of the day. coating for solids) process. obviating the need for heavy.” Castrip. the simplest and lowest-margin of all steel products. Quality would be entirely automated and would take advantage of the latest high-speed chromatography technology that is embedded in the manufacturing process. The company grew over time to develop further capabilities and broader ambitions. known as Castrip 11. It mastered electric arc furnace technology and led the way in using recycled stock as a way to re-invent rolled steel production. compression. Nucor has continued to innovate. They can turn operations on and off to match production runs to market demand. the company operates a factory that continuously casts sheet steel directly from molten steel. At the same time. Nucor was able to disrupt the then-dominant steel-making business models and fundamentally change the game in the industry. Nucor made only concrete reinforcing bars (rebars).com. 11 “The Castrip Story: Formation of Castrip LLC. A master of small-batch production. low-cost model with high service levels. which the company locates close to its customers. premium customer service demonstrated by steelmaker Nucor. The process. and require 60 percent less energy to run compared to traditional mills. Clean-in-place systems would be fast and highly effective. Labeling requirements would be homogenized. and its small scale and easy access to incoming materials— with the bulk of raw material coming from scrapped vehicles—make proximity to customers easy to accomplish. 2011. energy-consuming rollers. Initially.

is only in limited use. primarily by contract manufacturers and for non-core products. where an aseptic environment is created around the product. This technology delivers products as low as half the cost per unit and about 30 percent of the total floor space of a conventional aseptic filling line. There are further savings in cost and space because the need for dedicated HVAC equipment is minimized. Where once Disney could have been described as a media company—largely built around film—today it is an entertainment conglomerate with interests that range from theme parks to hotels to gaming to product franchises. Technology like this already exists in pharma in the form of blow-fill-seal.18 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders with precision printing integral to the operations. helping with rapid root cause problem solving and enabling remote repairs. If Intel and Nucor shine the spotlight on fresh perspectives for pharma manufacturing. Just one recent example: Toy-maker Mattel has seen sales soar on the strength of merchandise sales tied to the Cars 2 . this technology. and the lines can occupy 50 percent less space. skilled mechanics working in tandem with a sophisticated central manufacturing management system that tracks and trends operating data. which was developed eight decades ago. Disney successfully leverages its brand not only for its own benefit but also for the benefit of a raft of value-chain partners whose success continues to amplify Disney’s core brand. “Operators” would be independent. The Disney model What if the pharma plant of the future not only consistently delivered highquality products at low cost but also tracked and trended patient behavior. Disney draws attention to complementary operations areas that are ripe for innovation. Yet. Work-in-process inventory would not exist for more than a few minutes. using real data to improve efficacy and patient compliance—potentially saving health-care systems billions of dollars in waste? What if there were a smartphone app for your pill that let you know all of the drug’s interactions? What if that pill came with complete manufacturing traceability and roundthe-clock service support? What if patients could pull up their own full pharmaceutical history in the doctor’s office by scanning their pillboxes? That model for pharmaceutical operations might approach the Disney model in terms of value-added services and experiences beyond the core product delivery.

12 Since Disney is eager to offset the soaring production costs of big movies and the steep drop in DVD sales.” Wall Street Journal. September–October 2011. as well as games.13 The Disney Plantopia model would require pharma business leaders to view their organizations in different terms—to manage data and systems in the same way that they do pills and vials. “The Case for Infrastructure Investment: Lessons from Medco and Staples. a small company that can verify if the product is real or fake and inform the consumer via a return text message.” discovery. “Disney’s ‘Cars 2’ a Hit Already—in Stores. The regulatory approval process would rely on incredibly robust data. And the operating group would include a call center staff as well as an information management and programming group. A consumer can scratch off the label on a pharmaceutical product and text Sproxil.New aspirations and operations models 19 animated movie. continually refreshed with new and insightful patient data. the company is keen to spread its risks by focusing on films that can more easily generate sequels and spin-offs. the pharmacy benefits provider spun off by Merck in 2003. It would call for a rethinking of the usual boundaries of operations so that pharma business leaders could readily draw data and insights from customers’ use of their products. 2010. Some technology for this type of approach already exists to address counterfeit drug traffic in Africa. Such interventions 12 13 14 15 Maxwell Murphy. This innovation has led to a multibillion-dollar incremental business. The vial or pill would have an embedded microchip to relay information about patient behavior.” Wall Street Journal. The clinical trial data would be evergreen. and the drug’s effects. Clark Boyd. Target customers are people who suffer from chronic and complex conditions such as diabetes and cardiovascular problems. The database enables the pharmacist to tell if a patient is taking the medication as prescribed. intake time. Ethan Smith. 2011. Medco is innovating by using the health-related information it has been gathering for years from its fast-growing subscriber base—a by-product of its investments in highly automated pharmacy operations. a product of Disney’s Pixar studios. June 20.15 The company has expanded by opening nine therapeutic resource centers in the United States that are staffed by more than 1. “Cell Phones Help Fight Fake Drugs in Nigeria. or if a particular test is needed.100 pharmacists trained in one of a dozen or more chronic diseases. they account for 90 percent of all drug spending and 75 percent of all healthcare costs. “ ‘Cars 2’ Drives Up Mattel’s Profit. July 15. 2011. These specialists use the information available through Medco’s vast database to help patients manage their health problems. and a host of toys and other themed merchandise. April 15. The packaging would have scannable information for consumers to access on their smartphones.” SCRM editorial.com. Supply Chain Management Review.14 There are other parallels in the experiences of Medco Health Solutions. . theme-park attractions.

and invest in a portfolio of ideas. And in 2010. From here to Plantopia Rather than limit pharma leaders to three choices. they must determine which innovations matter most for these market segments. and Disney models are intended to foster fresh thinking about how each individual pharma company can leverage manufacturing operations to quickly and reliably boost value for its shareholders. In 2009. cross-functional team take on the challenge? What type of leader is needed to drive the organization toward innovation? Once the company’s leaders have defined the innovation owner and selected which customer groups to target. health plans. The CEO needs to raise the bar on what is expected from the manufacturing group and challenge the operations group to detail a clear picture of what the future state can look like. the company launched an iPhone app to help diabetics count calories. Leaders must bring in new ideas. they launched the iBGStar hybrid medical device—a standalone glucose monitor that has the added functionality of connecting to an iPhone or iPod touch to allow users to manage their own data. What are the challenges that will best inform the innovators? How have others solved similar challenges? What can be achieved through licensing or partnerships? What are business leaders outside of pharma doing? Pharma CEOs have a duty to hold their top teams to task in light of the need for innovations in production. and government agencies that hire Medco to keep their members healthy while controlling prescription and medical costs. Is manufacturing able to reinvent itself. CEOs must look at manufacturing as more than a cost center and demand that operations go beyond incremental improvements alone. .20 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders not only can improve patient outcomes but also can mean cost savings for Medco’s clients—the employers. the Intel. The most important question is how and where to get started. Would rural China have the same profile as urban Western Europe? Would small-molecule generics and novel biologics share the same model? Each company’s leadership team must determine who “owns” the discipline of innovation in operations. Nucor. There may be different business models for different markets. or should a collaborative. challenge conventional thinking. Sanofi-Aventis has taken a similar lead in the diabetic therapeutic area.

There is a clear. There is still a huge opportunity to use manufacturing operations as a strategic growth tool. that by itself is not a reason for pharma leaders to follow suit. but the seismic shifts in the industry’s economics certainly are reason enough. Of course. competitive rationale to act now. Innovation within pharma manufacturing is still an open field with no clear leader. There are a host of potential partners and an abundance of opportunities for far-sighted manufacturing leaders to emerge and be recognized as industry change makers.New aspirations and operations models 21 *** Other industries have pushed manufacturing innovation far and fast. Who will be the first to realize the Plantopian ideals? .

22 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

Venu Nagali. and flexibility while keeping almost all manufacturing in-house. speed to market. yet the company still manages to ensure both IP protection and reliable supply at good quality. Intel has demonstrated cost leadership. At the heart of these seemingly opposite approaches is a common strategy: keep in-house anything that is critically important for success and outsource everything else. Apple employs a production model in which plants are owned by so-called joint design manufacturers (JDMs).New aspirations and operations models 23 Apple vs. But they continue to own and operate plants for new chemical entities— ostensibly to control IP and to ensure the quality and volume of supply. No industry leader has fundamentally challenged the manufacturing ownership-and-control model. But in high tech. Intel: What manufacturing model is right for pharma? David Keeling. What would be the value-creation potential of such a strategy applied to pharma? . Vanya Telpis Pharmaceutical companies are increasingly outsourcing manufacturing—to reduce costs and gain flexibility. At the other end of the high-tech spectrum.

But putting aside the relatively new and small virtual-specialty players. and GlaxoSmithKline. The economic value in finding outside manufacturers to produce as much as possible won the day early on in businesses as disparate as textiles and auto parts. A similar disparity exists for companies producing chemical APIs: 46 percent outsource more than half of their needs. notably AstraZeneca. Contract Pharma Annual Outsourcing Survey. Endo Pharma. based on availability. 1 The general trend to outsource is driven mostly by cost pressures. like Shire. which was doing so before being acquired by Pfizer). and the increasing capabilities of contract manufacturing organizations (CMOs).) Proprietary technologies are usually kept in-house to protect intellectual property and ensure supply. 2011. though. no one has fundamentally questioned the traditional manufacturing approach. the need for flexibility. (By in-house manufacturing. Most outsourcing decisions are still made opportunistically. . A recent survey of operations executives at 19 top pharmacos indicated that opportunistic decisions are especially prevalent with bulk drug formulations (Exhibit 1). the debate is still finding its voice. Tax considerations influence pharmacos to maintain high-margin products in-house. For pharma. for example. But for a variety of reasons. the general trend in pharma manufacturing is to outsource. However. pharmacos are marked by widely varying outsourcing levels.24 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders For many industries. which is moving toward outsourcing all of its off-patent products. the debate about outsourcing ended a long time ago. with 25 percent outsourcing less than 10 percent. 40-plus percent of pharmacos outsource less than 10 percent of their manufacturing. but 30-plus percent outsource more than half. 2011. Some companies are partly challenging the in-house model. in-house manufacturing is still prevalent. In finished dosage formulations. To be sure. In a different survey. and Bluefish Pharma. and product characteristics. a self-assessment showed that tactical reasons were at the heart of outsourcing decisions about as often as strategic reasons. And some companies are even bringing previously outsourced production back home to increase the utilization of their own facilities or to address quality concerns. capacity. Many of these CMOs are now attractive not only for their expertise in niche technologies but also for their operational excellence and ability to deliver consistent quality. which has announced its intention to outsource all chemical API production (following in the footsteps of Wyeth.2 1 2 Contract Pharma Annual Outsourcing Survey. we mean that a company invests the capital to build and maintain its production infrastructure and owns the plants and other assets in that infrastructure.

Intel has dominated its market for years— boasting an 81 percent share in 2010. Bulk/drug product solids 3. two giants in high tech. appear to have gone in opposite directions in settling on their manufacturing models. By contrast. perhaps most. taking assets off the books. the company tripled its share to 9 percent in 2008. Apple and Intel. Intel – Exhibit 1 Where do you plan to increase your outsourcing ratio? N = 35 Insource Insource Outsource Outsource strategically opportunistically opportunistically aggressively 1. Bulk/drug product steriles 36% 28% 20% 16% 12% 38% 50% 0% 29% 42% 29% 0% 46% 4. Apple and Intel’s models in high tech—why are both successful? At first glance. Packaging steriles 22% 22% 4% SOURCE: POBOS Roundtable survey of operations executives from 19 Pharmacos The bottom line: Many. where. Packaging solids 52% 8% 33% 13% 5. three points higher than the already highly enviable 78 percent it held in 2002. a new direction may be found in the experience of two leading companies in another industry. behind only . Apple and Intel.New aspirations and operations models 25 exhibit 1 #4 Apple vs. API/drug substance 2. in the fast-moving consumer electronics market. both companies are highly successful. decisions are made with short-term benefits in mind—and without a long-term perspective on competitive advantage. including mobile music players and smartphones. Intel’s model is to keep manufacturing in-house—it outsources less than 10 percent of its microprocessors. Yet. If a shift is in order. Apple is the market leader in several product areas. as with pharma. while still ensuring reliable supply and good quality through exercising rigorous oversight and control. despite their very different positions on ownership of production. IP and surety of supply are everything. Apple outsources practically everything. In the latter category.


Operations for the Executive Suite: Opening new horizons for current and future pharma leaders

Nokia and RIM, and it just surpassed long-time leader Nokia in the second quarter of this year to take the top spot by capturing a 20.3 percent share. The profitability of both companies is good, with Intel’s EBITA margin at 36 percent and Apple’s at 28.4 percent last year. However, they operate at very different ROIC levels: Intel’s is at 67.8 percent, having grown slowly but steadily over the last 15 years. As for Apple, because the company outsources so much of its production, it has little in the way of fixed assets, resulting in negative working capital and an ROIC that is essentially infinite in size. In digging a little deeper, though, it turns out that Apple and Intel actually have the same simple yet disciplined strategy: keep in-house anything that is critical to your product’s success in the marketplace, and core to your company, and outsource everything else.

Apple’s focus: Ideas, design, and marketing
In Apple’s dynamic and innovative environment, cost competitiveness is not a primary concern, especially in the first generation of a pioneering product, and ownership of manufacturing assets doesn’t confer any differentiation so long as the product performs as designed without too many glitches. The path to large-scale outsourcing has been beckoning to Apple and other electronics companies for the past two decades, thanks to the adoption of standard industry processes and tools for the design3 and manufacture4 of printed circuit boards (PCBs). This standardization enables the cost-efficient manufacturing of several products on the same factory line with minimal changes or customization. To achieve its competitive advantage in this industry, Apple has made idea generation, distinctive design, and innovative sales and marketing its core competencies. Over time, the company has moved almost completely away from direct manufacturing ownership, leaving it in the hands of a reliable network of strategic outsourcing partners, under rigorous oversight. The shift started to occur in the mid 1990s. Until then, Apple was manufacturing and assembling almost everything in-house. Between 1997 and 1999, Apple’s ROIC increased three-fold, jumping from -51.8 percent to


Electronic design automation (EDA) enables designers to communicate with manufacturers in standardized formats, allowing different functions and even different companies to work together efficiently to design, test, validate, and produce printed circuit boards. Surface mount technology (SMT) enables the automated placement of components on a printed circuit board. The high-speed production process comes with high fixed costs, however, requiring very high production volumes to justify the investment. Since the early 1990s, most original equipment manufacturers (OEMs) in electronics have chosen not to invest in SMT manufacturing. Instead, they have outsourced to partners who have built giant assembly plants, mostly in East Asia, and have kept them humming by aggregating the necessary volumes through several OEMs.


New aspirations and operations models


109.9 percent, as the company began to outsource almost half of its output.5 In the same period, Apple’s inventory in purchased parts and work in progress shrank to one-fifth of its former size. Meanwhile, its inventory of finished goods at the end of the 1998 fiscal year reflected a seven-fold improvement over a year earlier. Days of inventory plummeted from 30 to 2. Now, more than 90 percent of Apple’s products, including the iMac, iPod series, iPhone, and iPad, are made through joint design and manufacturing (JDMs) projects. If ownership of manufacturing assets is not critical to Apple’s success, its control over the manufacturing process for essential items certainly is. Apple has its own processes and its own people in JDMs to provide oversight (see sidebar, “The Enablers of an Apple-like Model”). For example, Apple now also considers its microprocessors to be critical to its success. This determination caused the company to buy a startup6 so that it could control the design of its A-series processors. Yet, even there, because the ownership of the manufacturing assets for the processors is not deemed to be critically important, Apple has outsourced that role to contract semiconductor fabrication companies like TSMC while retaining the appropriate level of oversight.7

Intel’s focus: Operations
Intel has focused on operations excellence as a core competency, an approach that has given the chip maker significant cost effectiveness as well as superior speed to market, flexibility, and agility. In its business-to-business (B2B) space, outstanding product performance at low cost is critical for success—therefore, manufacturing confers important product differentiation and competitive advantage. Most of Intel’s product differentiation comes from its leading-edge semiconductor manufacturing process. The company employs a Tick Tock model8 of successive and alternated innovations in semiconductor process technology and microprocessor design. In this model, microprocessor performance is closely coupled to the specific semiconductor process

5 6 7

By the early 2000s, Foxconn was making the eMac; Elitegroup and Compal were turning out the iBook; and Quanta was producing Powerbooks and iMacs. On April 23, 2008, Apple announced that it had acquired P.A. Semi. Industry standard CMOS (Complementary Metal Oxide Semiconductor) process technology enables the contract manufacturing of logic semiconductors. This standard technology (which allows some small process variations to accommodate specific customer requirements) permitted companies like Apple, Broadcom, and Qualcomm to specialize in the design of chips and to forgo ownership of semiconductor fabrication plants, known as fabs. At the same time, the technology spawned companies like TSMC, UMC, and Global Foundries, which focus purely on manufacturing chips for Apple and other “fabless” players. One of the key reasons for such specialization was the extremely high capital, $6 billion or more, needed to build a new fab, with the major manufacturers setting up a new plant every two to three years to stay competitive. Most fabless companies do not have the volumes of their own to justify building fabs at that rate. “Intel’s Tick Tock Model,” web page, Intel.com.



Operations for the Executive Suite: Opening new horizons for current and future pharma leaders

technology, resulting in both design and manufacturing processes playing a major role in marketplace differentiation. From the early to mid 2000s, Intel’s designs were inferior to those from AMD.9 One of the main reasons Intel remained competitive was that its better manufacturing processes, vis-à-vis AMD, resulted in processors that were cheaper to produce and ran at higher speeds. Even now, for certain applications that require lower-power processors, another competitor, ARM, has processors that are superior in purely design terms, but they are produced in outsourced manufacturing plants that can’t match Intel’s capabilities. To keep that advantage, Intel treats its manufacturing network as a strategic asset and invests heavily in state-of-the-art equipment and in improving its processes. Its Copy Exactly! approach takes manufacturing standardization to a new level, turning multiple production sites into a single virtual factory by matching the manufacturing sites to the development site. It is Intel’s way to enforce quality control.10 In 2009, the company announced that it was investing $7 billion in an ongoing bet on nanotechnology, “to build faster, smaller chips that consume less energy.”11 One result is its breakthrough “tri-gate” 3D transistor, announced in early 2011. The new technology allows Intel to continue to reduce the cost per transistor, following Moore’s Law. At a conference in May, Intel said that the transistor would extend the company’s process leadership by improving performance even as it cut power consumption. Intel also said that it has reduced its cycle time in manufacturing, trimming a third of the time spent between deciding to make a new chip and producing it.12 The cost of staying on this path is staggering, however. Semiconductor fabrication plants, called “fabs,” can cost $6 billion or more to build, plus $1.5 billion to $3 billion for a pilot line and R&D process team.13 To remain competitive, companies have to add a plant every two to three years as new process technology is introduced. As a result, ROIC for a company like Intel is much lower than Apple’s.


To much acclaim in 2003, AMD introduced its 64-bit Opteron and Athlon processors, which revolutionized the x86 based PC and server markets that, until then, were dominated by Intel’s 32-bit processors. In 2005, AMD further reinforced its technical lead over Intel when it launched dual-core Opteron and Athlon processors, which sported lower power consumption and less significant heat issues when compared with Intel’s processors. AMD’s share climbed to 20 percent of PC and server markets in the mid 2000s because of these technical innovations. See, for example: Jordan Hall, “AMD vs. Intel: Which Chip Offers More Bang for Your Buck in Gaming PCs?,” selfseo.com, May 25. 2006. “Copy Exactly!,” web page, www.intel.com. “Intel to Invest $7 Billion to Build U.S. Plants: Plants will use nanotechnology,” Industry Week, February 10, 2009. Michael J. Miller, “Intel’s Manufacturing Plans: 22nm, New Fabs,” PCMag.com, May 18, 2011. Ibid.

10 11 12 13

com.14 And then there is HP.” ZDNet.com. the experience of the high-tech industry also offers lessons in how companies in the middle of the spectrum apply those models to their situations (Exhibit 2).” TheInquirer. which pioneered outsourcing but is now insourcing some capacity—building and owning plants in BRIC countries and particularly in China—to serve local markets. 2010. The company will outsource a portion of its business to Samsung. For a biotech company betting on complex molecules. which leads its industry in the production of largesize LCD panels. For example. keeps its high-profitability panels with screen sizes of more than 40 inches in-house and outsources lower-profitability panels that are less than 40 inches. while keeping the rest in-house. December 27. Larry Dignan. thus improving its competitiveness. At times. making for better products that get to market faster. developing a hemophilia drug with a longer half-life. 2010. “HP plans new factory in southwest China. requires a sophisticated manufacturing solution for the re-engineering of a protein and 14 15 Adam Hartley. “HP to Manage PC Manufacturing Plant in China.15 Are the lessons from the Apple and Intel models useful for pharma? How would the Apple and Intel models operate in the pharma context? The first and foremost strategy-shaping question a pharmaco should ask is about the basis of the competition—what kind of company do we choose to be? Will we compete on product benefits or on cost? Will keeping manufacturing in-house and linking it to design enable us to differentiate our products and achieve competitive advantage? Examples of the Intel strategy in pharma could be today’s originator biotech companies—molecule design and manufacturing are interwoven. a critical patient need. This insourcing enabled HP to capture tax incentives offered by local governments.com. “Toshiba outsources chip production to Samsung. June 10. Toshiba recently decided to adopt a similar strategy for some semiconductor products. June 10. For example. Sumner Lemon. October 10. 2010.” techradar.New aspirations and operations models 29 Going for a hybrid mix The Intel and Apple models are at opposite ends of the asset ownership spectrum. . “HP’s PC supply chain by the numbers. However. the switch also helped the company to meet local-country manufacturing requirements. Samsung.” PCWorld. 2008. making it critically important to keep manufacturing in-house and to invest heavily in state-ofthe-art facilities and new process technologies. and Egan Orion. understanding the intricacies and challenges of the manufacturing process helps to engineer the product.com.

Whether it’s a unique formulation for a specific target population (e.16 At the other end of the spectrum in pharma. Intel – Exhibit 2 IN-SOURCE Leverage lower cost structure HP: In-sourcing in BRIC countries Competitive & World-class IN-SOURCE Leverage capability to succeed in the marketplace Intel: Semiconductor manufacturing Cost structure (manufacturing capabilities) Apple: Software & microprocessor design OUT-SOURCE asset ownership Uncompetitive Apple: Product manufacturing MOSTLY IN-SOURCE (and strive to become cost competitive) OTHERWISE OUT-SOURCE Less differentiating More differentiating SOURCE: McKinsey Manufacturing as product differentiator and basis of competition the performance of complex downstream processing. the success of these products would be tied less to manufacturing and could be outsourced to low-cost CMOs known for their high reliability. GE’s portable ultrasound machine developed for the China market)17 . a large leading-edge biotech plant can cost about $500 million. as well as its bid for cost leadership. See also “Tapping operations to win emerging markets: Questions every Pharma executive should consider” by Ulf Schrader and Sabine Schulz on page 95. Furthermore. a company betting on emerging markets would consider cost important but might choose to focus more on delivering superior customer benefits..g. Keeping a strong connection between manufacturing and R&D during the development of this type of drug could significantly affect a product’s feasibility and chances for success. unlike semiconductor fabs. biotech plants can stay on the leading edge for a decade or more. must become a core competency in such a setting.30 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exhibit 2 #4 Apple vs. These economics may permit pharma companies to set up and own biotech plants. Managing the external supply network of partners. Abbott’s heat-stable version of Kaletra for African markets). 17 . 16 As a comparison. which retain their leading-edge process for just two to three years after which they need further investment for upgrades. or a redesigned packaging or delivery system to achieve a lower price point (e. which is an order of magnitude cheaper than a semiconductor fab. however..g.

has a nearly infinite ROIC (it was last measurable in 2007. like Apple. and a growth rate of 3 percent to 5 percent depending on the segment. To that end. A different model. and for distribution it relies on UPSSupply Chain Solutions.” TheManufacturer. an increase of ROIC to similar levels (for example. It’s a justified strategy— another top-five generics company recently experienced a six-month delay in API supply from a large supplier.19 The company’s infrastructure for accessing external technology is its biggest investment and. adding cost and delays to a critical product launch.” Pharmaceutical Outsourcing. and the agility to shift to new manufacturing platforms and process technologies as they become available much more critical to success.5 billion in working capital for a pharmaco with $5 billion in COGS.18 For manufacturing. November/December 2007. one top generics company has integrated in-house 60 percent to 70 percent of its API supply.New aspirations and operations models 31 For many top generics players. it joins up with CMOs (primarily Novartis Consumer Health and Teikoku Seiyaku). . Endo. 1. when it registered at 632 percent)—generating multiple times the investment returns of other pharmacos. For example. Even under the low long-term growth expected for pharma. has managed to increase sales 20-fold to almost $2 billion and market value 15-fold to about $4 billion in the last 15 years while maintaining an almost fully outsourced model. “Endo Pharmaceuticals. While most top pharmacos have ROICs in the 80 percent to 100 percent range. and the connection between R&D and manufacturing is fundamentally important for Phase IV. The in-licensing strategy makes the connection between design and manufacturing less relevant. A specialty pharmaco can choose to compete on its ability to identify and access new products and technologies developed externally. For example. assuming 9 percent WACC (weighted average cost of capital). is second to none—an asset critical for its alliance-heavy operating model. Endo Pharmaceuticals. a specialty pharmaco. it’s absolutely critical to have a reliable API supply on day one of the launch of a generic drug with the ultimate goal of achieving firstto-market advantage. according to Endo. Yet another pharmaco had to suspend its API supply because of poor compliance with technical and quality standards by its supplier.com McKinsey estimate. 18 19 20 “Growth and Outsourcing: Advantages of the Virtual Integrated Model.000 percent) would mean a jump of $2 billion to $3 billion in market value for a typical mid-to-large-size pharmaco. as is the reliability of supply. speed to market and cost competitiveness are the key factors for success.20 There are benefits in freeing up inventory as well—going from the average five to six months of inventory typical for pharma to the three months that Endo has would release $1.

Despite the improving landscape. However. These companies aim to have strong technical and other capabilities. some CMOs aim to provide customers with superior service. and nanocrystals. including information sharing on operational metrics. . “The Enablers of an Apple-like Model. a proactive approach to joint problem solving.32 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders So. If all that weren’t enough. pharma companies will have to make a real investment of time and effort to build CMO partnerships and develop their capabilities to leverage the full range of their services. such as injectables. They also have increasing operational excellence that allows them to achieve cost leadership. sustained-release pills. getting the strategy right could be worth billions of dollars in market capitalization and freed working capital. CMOs armed with distinctive compliance and regulatory records can serve as partners. The fact is. for pharmacos that do take the Apple path. *** Should mainstream pharma adopt the Apple model? No single answer exists yet. at least for certain products or sectors? (See sidebar. the question is: Are the right enablers in place or emerging for mainstream pharma companies to consider the Apple model. which are applicable to manufacturing more complex products. and first-rate technical expertise to design pilot-plant-scale and large-scale production and to develop novel processes to use for and with customers. pharma companies continue to face stumbling points with some CMOs—everything from poor quality and insufficient supplier commitment to delays with deliveries.”) For one thing. just as Apple gradually developed and improved its joint design manufacturing arrangements. lyophilized formulations. the sophistication of contract manufacturing organizations is growing. They can apply strong process-integration skills to bridge gaps between systems.

Apple noted that “a significant concentration of this outsourced manufacturing is currently performed by only a few of the company’s outsourcing partners.New aspirations and operations models 33 The Enablers of an Apple-like Model The following are the enablers that allowed Apple to outsource virtually all of its manufacturing operations. − Demand and delivery management. final assembly of substantially all of the company’s portable Mac computers. Used to forecast demand for products and associated components. Dedicated Apple-product assembly workers with restrictive access to Apple assembly lines. Pharmacos adopting this model would have similar requirements. often in single locations. Negotiate prices of components with parts suppliers and provide the list to JDM. permanent trouble-shooting support team. Selection of JDM based on the ability to fulfill Apple’s demand in peak seasons. once the core R&D idea development is finished. Longterm contract with FedEx for its Priority DirectDistribution Program that offers product tracking and delivery monitoring. „ High levels of standardization of components and of design and manufacturing processes and tools. „ Ability to have just-in-time delivery. and select partner for EMS/ODM (electronic manufacturing services/ original design manufacturer) on a product basis. iPods. iPhones. In its 2008 annual report. Cross-functional quality SWAT team. Buy & Sell for key components. including the ramp-up of volume with new products. − Robust Sales and Operations Planning (S&OP). and stationing employees at sites. quarterly quality inspections and reporting. This characteristic of the electronics industry enables Apple and other vendors to outsource their manufacturing in bulk. regular on-site inspection of JDM factories by Apple. − Quality management. „ Strategic partnerships with a few key companies.” „ Supplier management—rigorous oversight and development of outsourcing partner performance in several areas: − IP risk. but not limited to. . Certain of these outsourcing partners are the sole-sourced supplier of components and manufacturing outsourcing for many of the company’s key products including. With good supplier management capabilities. the vendors obtain surety of supply during all phases of a product’s lifecycle. and prevention of IP leakage through contracts. „ Ability to find the right outsourcing partner with the right expertise (Foxconn’s aluminum casing capability for the i-Pod is a key example) and early involvement of the partners in development from the planning stage. customized to take into account the differences in their industry. − Supply and cost management. and most of the company’s iMacs.

34 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

New aspirations and operations models 35 Biopharmaceuticals success: Why manufacturing and technology strategies matter more than ever Alberto Santagostino.1 1 Worldwide prescription and over-the-counter sales. Marco Ziegler To date. outmoded systems. But structural changes in the market are now pushing manufacturing issues to the heart of the agenda for biopharma CEOs. Biopharmaceuticals have been one of the great recent successes of the broader pharmaceutical industry. With the manufacturing landscape changing quickly. In just 20 years. and how to counter new low-cost players. . the value share of biopharma products worldwide has grown from virtually zero to 22 percent ($140 billion in 2011) of the overall pharmaceutical market. EvaluatePharma. manufacturing has been just one step in the rich biopharmaceutical value chain. The stakes are rising around choices involving which technologies to invest in. whether to manufacture internally or through contract manufacturing organizations (CMOs). executives need to place their bets soon or risk being stuck with costly.

Three trends are disrupting the market High production costs are just one reason that biopharma CEOs should think carefully about manufacturing strategies. The resulting boost in productivity will likely be many times higher than that achieved using the “lean” approaches widely adopted by players in small molecules.5%). Three imminent shifts in the market will raise the ante for biopharma companies5. disproportionately affecting more small molecules. these costs will rise if prices decline because of greater competition over time and a first wave of patent expiry over the next five years. But this is an expensive market to compete in. First. The third trend concerns the anticipated significant increase of the already existing overcapacity in mammalian cell-line fermentation. As the follow-on products are rolled out. as well as publicly disclosed information by biomanufacturing companies. revenues will come under intense pressure as patents on key products expire and many companies launch biosimilars. For instance. greatly improving the lives of patients. Novo Nordisk (20%). The second shift involves dramatic new production technologies likely to come on stream over the next five years. biologics reference corporations are Biogen Idec (9%). 2 3 4 5 Forecast based on historic growth adjusted for the expected impact of loss of exclusivity. the cost for biopharmaceutical production is even larger—the yearly average cost per patient treated with biologics can reach thousands of dollars. and Genzyme (29. it is predicted to reach more than 30 percent2 . in line with or above the average of the equivalent cost for small molecules. Biopharma technologies are creating effective treatments in previously intractable areas. production cost and quality will become far more important to success in the market. and small molecules are in the range of $250 to $800. This increase will be mainly driven by the entry of new players with aspirations to gain market share in the biopharma production market. We expect to see a competitive dynamic comparable to the one observed for small molecules: It will become increasingly difficult for any incremental innovation to command a differentiation-based price premium over biosimilars. in particular.000.36 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders And by 2020. Amgen (15%). such as rheumatology and oncology. rheumatoid arthritis one-year treatment COGS are in the range of $1. The cost of goods sold (COGS) ranges from 10 percent to 30 percent for biological products today 3.500 to $4. Bloomberg 2010 reported COGS. Expert interviews. . Moreover. are determined to make biotechnology part of their core capabilities. Asian companies and governments. In absolute terms. along with the creation of cross-product manufacturing platforms. compared to the cost through small molecules. which rarely exceeds hundreds of dollars4. Industry and academia expert interviews.

New aspirations and operations models


In the face of these converging trends, success over the long run will hinge on a handful of choices that senior executives must make today around technology and manufacturing. For the next 15 to 20 years, we believe that manufacturing will be as strong a source of competitive advantage as R&D. Biopharma CEOs will have to make a strategic decision on whether to keep biomanufacturing in house or to outsource production and depend on other dimensions of competition. To understand what will be the best next moves, CEOs need to consider if their respective biopharma production organization is set up to effectively manage costs, quality, and speed at the same time. Here are the critical questions they should ask themselves:

Can we radically cut production and investment costs?
Biopharma is a highly regulated market, so the level of costs will also depend on how regulation plays out in different countries. For instance, regulators may require the production of biosimilars to mimic current production technologies and go through Phase III again. In many developed countries, biosimilars prices may be regulated and first movers may win a disproportionate market share. In these scenarios, the cheapest production setup will not always be the main factor of success. For most cases, however, time-to-market and cost of production will be critical for success. Consequently, the entire industry is seeking to develop new technologies and improve operations. New production technologies are likely to lead to radical changes in development lead times and manufacturing performance. In monoclonal antibody (mAb) production, for instance, fermentation titers for commercial scale mammalian production will likely rise beyond 10 grams per liter from the current 4 grams, with yields after purification as high as 80 percent from the current 50 percent to 60 percent, and failure rates will likely fall to near zero6. Besides such new technologies, several players are experimenting with innovative production setups that permit investment in capital equipment that is ten times lower than comparable investments by incumbents. While these new approaches still have to prove their potential and dependability, it is possible that they could make the existing installed capacity outdated, dramatically disrupting biopharma-manufacturing markets. The implication will be a drastically lower total cost of production (see sidebar “Process Technology in Action: The Tipping Point of Disposable Technology”).


Company announcements.


Operations for the Executive Suite: Opening new horizons for current and future pharma leaders

Process Technology in Action: The Tipping Point of Disposable Technology
New technologies have emerged that allow companies to produce an active pharmaceutical ingredient (API) sufficient for clinical trial in a single 250-liter wave-bag, rather than the bioreactor of 3,000 liters that is typically required. Disposables, in short, may be on the verge of becoming a viable commercial-scale solution. The disposable wave-bag may simultaneously reduce risks and increase flexibility. It can be validated during clinical development and, to reach commercial scale, multiple bags can be run in parallel. Scale-up can be delayed until after clinical development, avoiding the risk of a large capital investment in a manufacturing facility. Moreover, this technology at commercial scale could be much cheaper than fed-batch technology. The investment using disposables would be $50 million to $60 million, compared to the current investment of $500 million in developed markets and $200 million in emerging markets. And total cost savings could reach 40 percent.

Should we take advantage of contract manufacturers?
The development and production of biopharmaceuticals carry high risks, such as expensive capital equipment turning into a loss in the case of clinical development failure. That’s why companies are starting to share this risk with a partner or to outsource manufacturing responsibility altogether. Several big pharma players are reducing production capacity, often by divesting underutilized assets to contract manufacturing organizations (CMOs) that commit to manufacturing the captive products. Others are experimenting with broader partnership solutions, such as the deals between NovartisLonza, Teva-Lonza, and Boehringer Ingelheim-Elan. Furthermore, companies in Europe and the United States have started partnerships with Asian

New aspirations and operations models


producers—Hospira with Celltrion in Korea, Mylan with Biocon in India, Merck with Hanwha in South Korea, and Abraxis with Green Cross in South Korea.7 Outsourcing has several benefits. A company that outsources older products can then deploy its in-house capacity to launch new ones, avoiding capital investment. External capacity can also serve as a buffer to transfer the risk of demand variability. And for small, R&D-focused players with limited in-house production, a CMO can become a valuable source of chemistry, manufacturing and controls (CMC) and manufacturing expertise. Another benefit is lowering costs. Given the technological challenges associated with biopharma production, more large incumbents may decide that it’s cost-effective for them to partner with a CMO or to license an existing platform technology. They could leverage the technological edge and the high-caliber scale-up and manufacturing capabilities that certain CMOs offer. One large pharmaco, for example, reduced annual costs by more than $300 million in its biopharma production by streamlining its manufacturing footprint, outsourcing to CMOs, and gaining internal efficiencies.

Do the new, sophisticated CMOs represent a threat as well as a partnership opportunity?
Indeed, they do. While biomanufacturing has historically been done by originators in developed countries, and these players still have the majority of worldwide fermentation capacity, new players in South Korea and other emerging markets have started to produce biosimilars and vaccines. We expect a big push to develop biopharmaceuticals in China. The 12th FiveYear Plan published in 2011 identifies biotechnology as one of seven strategic industries, and China plans to invest several hundred billion renminbi in the next five years to build a competitive biotech industry8. Some explicit goals include creating ten big biotech enterprises with ¥10 billion sales per year (or roughly $1.5 billion), and creating a comprehensive biotech base in the BeijingTianjin zone, Changjiang zone, and Zhujiang zone with ¥50 billion (or roughly $7.5 billion) in production value. Most of the established CMOs also are investing aggressively in capacity, both organically and through acquisition of manufacturing sites dismissed by big pharma players (Exhibit 1). Organic examples include Celltrion’s 90,000 liters of new capacity in validation on top of its existing 50,000, and Lonza’s expansion by 80,000 liters in Singapore. Some examples of recent

7 8

Company press releases. Communist Party of China (CPC) Central Committee’s Proposal for Formulating the 12th Five-Year Program for China’s Economic and Social Development (2011–15), adopted at the Fifth Plenum of the 17th CPC Central Committee.

Hanwha. exhibit 1 #5 Biopharma – Exhibit 1 Estimated expected growth of mammalian fermentation volume June 2011 CMOs Online capacity 23% Online + expected new capacity 32% 77% 68% Global capacity 2. where price is a more important customer priority and the cost to develop a market is low. and the acquisition of Johnson & Johnson’s Centocor manufacturing facility by Gallus BioPharmaceuticals9. LG Life Sciences. Several CMOs have also developed innovative platforms and technologies that will benefit their customers. .40 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders deals are the acquisition of Merck Biomanufacturing Network by Fujifilm.1 million liters SOURCE: McKinsey world wide fermentation capacity assessment Global capacity 3 million liters SOURCE: McKinsey world wide fermentation capacity assessment Biosimilars players. Samsung. However. ranging from high-yield cell-line and expression systems to fermentation process technology and proprietary purification systems. 9 10 Company press releases and journal publications. Announcements by Celltrion. These biosimilars companies may find easier access in emerging markets. for instance. by contrast. these companies also may begin to gain share in developed markets that prove to be dependable and safe. will exploit low production costs to undercut existing originators as patents expire. the acquisition of the Fremont site from Amgen by Boehringer Ingelheim. Companies thus will need to carefully assess the benefits and risks of outsourcing biopharma production within their long-term strategy. and HanAll BioPharma. GreenCross. at least five biosimilars players are currently conducting clinical trials with mAbs produced in their own manufacturing facilities10. In South Korea alone.

driving a substantial increase in worldwide capacity. Now the biomanufacturing footprint has become fragmented globally. the combination of a lower-thananticipated yield and a systemic virus infection caused a capacity shortage that delayed a targeted launch by 12 months and that cost hundreds of millions of dollars in lost revenues.New aspirations and operations models 41 What should we do with the surplus manufacturing capacity? Until quite recently. for example. the additional capacities installed may lead to a further increase of cost pressure in the industry. making the region a new biopharma hub. Hence. Forecast based on historic growth adjusted for the expected impact of loss of exclusivity. Mammalian fermentation volume is expected to grow from the current 2. disproportionately affecting more small molecules. driven by the belief—and supported by government subsidies—that they will achieve a lower cost structure than Western companies and gain market share.1 million liters to 3 million by 2015 (perhaps as early as 2013)—a 40 percent increase. At one company. of which 0. . not only for fast-growing local markets but also for the rest of the world. The rise in fermentation production productivity—better titers and higher purification yields—will almost suffice to meet the soaring demand for biopharmaceuticals. This trend will only accelerate. 11 12 McKinsey worldwide fermentation capacity assessment. This newly installed capacity will be only partly absorbed by the growth in demand for biopharmaceuticals. reducing its potential market share and growth trajectory. biomanufacturing was a distinctive capability of biopharmaceuticals innovators located in Western nations. with operations in more than 25 countries by more than 100 companies at more than 200 sites11. which we expect to be around 40 percent to 50 percent over the next five years12. Is our manufacturing operation robust enough to avoid a major disruption in product supply? Production problems at biopharma facilities tend to have a rapid and severe impact. The lead compound will reach the market later than direct competitors. We expect around half of all the expected new mammalian capacity to be built in China and other Asian nations. New players in emerging markets are investing heavily in capacity.6 million liters is already in construction or validation (Exhibit 2).

rather than trying to close gaps after the fact. production problems can be difficult and time-consuming to fix.000 employees over the past five years. had to add 2. Recruiting and training that number of people to meet the highest quality standards in a fast-changing and demanding environment is a formidable challenge in some countries. it is critical to define and implement a robust process from the start. a mismanaged initial scale-up of the manufacturing process without the definition of a robust process in CMC caused variability in the performance outcome that required up to three years to stabilize and validate.000 liters Europe 700 180 exhibit 2 ESTIMATES Installed capacity Growth: in validation & construction Share of global capacity North America 1.150  Growth: 640 SOURCE: McKinsey world wide fermentation capacity assessment Moreover. effectively doubling its workforce. The decision about a new manufacturing location .300 33% Installed 20% Growth 310 Asia 420 60% Installed 34% Growth 150 7% Installed 46% Growth Total online volume  Installed: 2. Do we have the right organizational capabilities to support high growth? Strong projected growth comes with another challenge that many companies underestimate: Biopharma production processes tend to be very laborintensive. for instance.42 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders #5 Biopharma – Exhibit 2 World wide mammalian capacity in 1. with many process steps run in batches that require a great deal of manual work and sophisticated testing. Half of the new employees have advanced degrees and highly specialized skills. for example. To avoid such issues. At another company. One biopharma company building out a major site.

companies should make a thorough assessment of whether the organization is capable of running a biopharma operation. The required investments may be large. making sure that product handovers are managed effectively. Are we securing access to technologies for next-generation therapies? Cell therapy and gene therapy each have the potential to establish new archetypes of treatment over the next decade. but commercial success is yet to be proven. What is our plan for maintaining leadership? The most successful biopharma players will likely be those that can maximize their return on investment by moving beyond the product-by-product approach common today to adopt a platform strategy that applies the same process steps and production parameters to a broad range of products with dependable results. . For instance. and that development is carried out with manufacturing capabilities in mind. but instead demands a scale-out. are already demonstrating the potential of such an approach. Several of these therapies have reached the market. as the starting material comes from a single patient. one of the currently explored applications—autologous cell therapy— does not permit the usual scale-up of operations. processing the material may need to occur in a network of small laboratories close to the patient. To participate in these new markets.New aspirations and operations models 43 may have to be made entirely or largely on the basis of where biopharma companies can find enough skilled people. In cell therapy. Along with the shortage of talent that affects certain locations. CMC and process development. Early successes. such as the proprietary mAbs expression systems developed by leading CMOs. But others have minimal capabilities or experience in this regard. expression system. for instance. and might do better to outsource their manufacturing. pharma companies will need new skills. perhaps even merging them. some companies reinforce the links between their CMC and manufacturing units. and vector production all have significant technological problems today. but choosing not to participate in the initial phase of such development may lock out a company from further innovation and submission of critical patents. These platform technologies are now being licensed to new entrants that are willing to pay to secure the advantage of state-of-the-art technologies. Scale-up.

while simultaneously evaluating innovative approaches. strong and effective relationships with regulators. Technology investments entail not only placing bets but also hedging bets. improved yields. and better quality. too. should frame the discussion. . and better quality. Failure to act will leave companies with manufacturing systems that cost too much to run. These choices will be strategically critical. and machine controls—will help to deliver greater manufacturing flexibility. Alternatively. Every biopharma company should take a clear position on how to build a biomanufacturing advantage based on faster development. such as new organisms and expression systems. CEOs and their senior teams need to make decisions about their manufacturing strategies now. 13 Chinese hamster ovary . where possible. and the technological and commercial landscape will change dramatically over the next few years. and whether and how to use CMO partners. * * * Biopharma is a young industry. Given the rapid pace of change and the competitive challenge posed by new entrants. as the decisions made today could lock companies into an approach for the long term. Technological solutions will be important. What’s clear is that the bets must be placed soon. For example. The questions about whether and how to invest in proprietary technologies. or that are too inflexible to respond to shifting market requirements. It won’t be clear at the onset which technologies ultimately will prove most effective. lower cost. That’s why companies will have to work with current technologies. and a change in the way companies approach product and process development.44 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Building strong manufacturing platforms will require time—18 months to two years or more. competitive advantage may come from opting out and securing adequate manufacturing performance and capacity from CMOs. Standardization. advanced real-time process automation technology—combining computer software. hardware. should be the focus.mammalian expression system widely adopted by the biopharma industry. such as fed-batch fermentation processes or CHO13 cell lines.

Benchmarks show between 100 and 200 full-time equivalents (FTE) per production site—distributed as 30 percent to 40 percent direct workforce. and consumables/disposables at 15 percent to 35 percent. followed by capital equipment depreciation at 10 percent to 30 percent. at 40 percent to 50 percent of total plant costs. and 5 percent to 20 percent overhead. Small molecule API. „ Process steps: Companies are trying to reduce the number of process steps. „ Labor intensity: Biologics API biomanufacturing is labor-intensive. . Performance parameters have increased steadily in recent years. for the production of monoclonal antibodies. in particular. „ Costs: Labor contributes most to costs. despite changeovers. with more than 60 percent of the workforce holding a university degree. Conversely. fermentation productivity. to save cost. and compress cycle time. by contrast. where utilizations plunge as low as 20 percent. „ Capital productivity: Existing overcapacity leads to significant idle time in several manufacturing plants. requires only 60 to 80 FTE per production site. 35 percent to 45 percent indirect workforce. particularly among originators in their single-product dedicated facilities. depending on the plant utilization rate.High Variance in Biomanufacturing Operations Suggests Ample Potential for Improvement McKinsey’s POBOS Biologics industry benchmark of biomanufacturing operations and technologies shows a wide variation in several dimensions. „ Process performance parameters: Companies also are focusing on improvements in yield upstream and downstream. and the success rate. reduce complexity. especially in downstream purification. effective multipurpose facilities reach utilization rates above 60 percent. And biomanufacturing requires a higher level of education.


47 Developing talent .

48 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

a generational change in pharmaceutical operations has occurred as many senior executives retired from top positions. . and further evolution in pharma operations’ top ranks is possible in the next few years. What skills and competencies will be needed to drive those changes? That question should be on the minds of pharma CEOs. and up-and-coming middle managers who see opportunities to overhaul the effectiveness of pharma operations and position their companies for new streams of profitable growth. Leaders such as Charlie Portwood at Wyeth. their Operations leaders will have to make much bolder and more extensive changes than have been asked of them to date.Developing talent 49 Changing of the guard: What’s needed from pharma’s next Operations leaders Wolf-Christian Gerstner. Donnie Young at Johnson & Johnson. current Operations leaders. and Nat Ricciardi at Pfizer are among the prominent executives who stepped down. Over the past few years. David Keeling As pharmaceutical companies face greater pressure on margins and growth prospects. This changing of the guard also affects management one and two levels down.

Organizations will want to establish end-to-end supply chain cost. improvement in costs. quality. And pharma has ample room for improvement relative to other industries (Exhibit 1). and that they must now start to acquire a new set of skills and experiences in order to sharpen their organizations’ competitive edge. but they won’t be sufficient to contend with an environment characterized by higher margin pressure—from thinning pipelines.1 The contours of a new Operations organization Historically. they need to ask a more challenging and ambitious question: What skills and competencies will leaders need to deliver breakaway improvements in operations to fuel their companies in the future? The follow-on questions may be just as challenging to answer: How strong is our internal pipeline of operations leadership talent. the necessity—to push their organizations beyond today’s model. To attain these performance levels. Operations leaders will have the opportunity— indeed.com. patent expirations. Sales and Operations Planning (S&OP) processes. Many of these up-and-comers understand that incremental gains will not produce the results needed in the future. June 25. and how robust is our succession planning? Should we hire from outside the industry. and service levels that allow them to win both in emerging markets and in the competitive segments of developed markets. or both? If CEOs need to think ahead about the nature of future leadership in Operations. but slow.” PharmExec. grow talent internally. pharmacos have looked to Operations to support their business model—which is centered on blockbuster product innovation and highperformance sales and marketing—with uninterrupted supplies of high-margin products and steady. Rather. First. and tough pricing—and by strong emerging markets growth and increasing consumerism.50 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Given the complex forces facing pharma companies now. the current crop of high-potential operations managers should consider accelerating and reshaping their career development as well. . companies will have to adopt best-practice supply-chain approaches to segmentation. moves on several fronts will be required. in order to significantly decrease lead times and inventory across 1 “Emerging Pharma Leaders 2010. 2010. and other operations. We see this future model taking shape in three important ways: End-to-end supply chains that create competitive advantage in themselves. CEOs cannot afford to ask their leaders to just keep improving operations on today’s trajectory. Those expectations will remain.

as well as performance management initiatives to their external network. platforming and complexity reduction. supply/ demand prioritization and optimization. The tradeoffs cover everything from operations cost and service performance versus market needs and opportunities. companies will want to extend cost. And finally. in order to accelerate the shift to lower-factorcost countries and align with the needs of high-growth markets. and capabilities associated with product development will enable the Operations and R&D functions to jointly spur the organization to get products to market faster. Stronger connections with the Commercial and R&D functions. in order to understand product and market opportunities. cost. and quality requirements. Greater information sharing. to decrease product cost and increase quality and market impact. and speed tradeoffs will allow Operations to be an even stronger partner in helping patients and achieving market success. to strengthen patent protection. . which involves attaining top-quartile performance across cost and quality. and also greater flexibility and service of internal assets.Developing talent 51 exhibit 1 #6 Changing of the guard – Exhibit 1 Measure Overall equipment effectiveness Percent Annual productivity improvement Percent First-pass yield – zero defects Percent Lead time Days Inventory of finished goods Days SOURCE: McKinsey. POBOS Pharma Automotive Aerospace Computer CPG Cost 20-70 70-85 50-70 80-90 70-90 1-7 5-15 5-10 1-3 5-15 Quality 60-80 90-99 70-90 90-99 90-99 Agility 120-180 1-7 7-120 5-10 3-7 60-90 3-30 3-30 5-50 10-40 the value chain. Strengthening the cross-functional interfaces. processes. SKU proliferation. and alignment with Commercial over major supply. discussion. and to extend product life. and asset investment. They will also have to reconfigure the internal and external supply and distribution network. A third step will involve increasing the “sweat” on internal assets. service.

turned manufacturing into an integrated component of its product supply network. role modeling. See also “Apple vs. ambition. The best pharma Operations organizations tomorrow will collectively reflect a higher level of talent than today in terms of industry and market experiences and perspectives.2 Apple shifted from owning all its manufacturing facilities in 1997 to owning fewer than half in 1999 to virtually none today. to do so. and Vanya Telpis on page 23. of course. and a greater flexibility and capacity for change.52 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Operations organizations—from the senior team to the shop floor— with a higher level of skills and ambition to innovate. and Walmart—could not have succeeded without step changes in the effectiveness of their operations. Many other industries have traveled this path after facing their own sets of operations challenges and opportunities. persistent curiosity and ambition to improve how work is done. as well as outstanding general management skills. . and coaching) with the science of performance management (through internal transparency.Gartner Industry Research. restructured the manufacturing network. Venu Nagali. Anatomy of the future Operations leader Given the convergence of these trends. emerging markets while maintaining growth in developed markets. external benchmarking. Drawing on lessons from competitors. it created a robust global supply chain organization.3 These companies—and others such as Procter & Gamble. and analogies from other industries. communications. March 2011. and adjusted cost models and distribution strategies. Southwest Airlines. for example. creativity. But what competencies and characteristics will be in greater demand as a result of the fundamental changes discussed here? Several characteristics stand out: Boldness in vision. suppliers. Tomorrow’s Operations exemplar will define a vision based not on incremental improvements over last year. has successfully penetrated fast-growing. and more rigorous metrics and reviews). improve. but rather on how the organization can become the very best at what’s needed to succeed. and commitment. Intel: What manufacturing model is right for pharma?” by David Keeling. the leader will use this knowledge to creatively explore approaches well beyond current industry 2 3 “Insights from the Supply Chain Top 25: Unilever’s Product Supply Strategy Focuses on Manufacturing Excellence. Successful organizations will balance the art of people engagement (through compelling visions. Unilever. and take operations beyond current best-in-class levels. what is the ideal profile of the executive who will lead tomorrow’s Operations groups? He or she will still need solid grounding in technical and functional skills of operations.”.

They will have the people and technical skills not only to select the right team and ask tough questions of the team. suppliers. But if pharmacos genuinely want to reach breakaway performance in their operations. A mindset and skillset that extend beyond pharma operations to include peer functions. And he or she will bring empathy and creative ideas to discussions with other functional leaders. The ideal Operations leader will demonstrate a strong ability to collaborate with peers in other functions.Developing talent 53 norms and aspirations. Although they may not be change management experts. or other industries. Future Operations leaders will have to excel at communicating to. based on experiences or rotations outside of operations and developed markets. they will certainly be familiar with the factors that enable change. he or she will understand how to adjust operations to local priorities and gain access to emerging and high-growth markets. as will the ability to execute at a high level day in and day out. For example. and to translate them into opportunities for Operations to add value and build competitive advantage. to understand market dynamics. and other industries. The ability to lead fundamental transformation at scale. external partners. And they will serve as natural role models for the skills and behaviors they expect from their reports. but also to problem-solve the answers with them and constantly coach and develop their organizations. from other key leaders. . The future leader will also have operations experience or training with competitors. including those from other industries (see sidebar profiles on Tim Cook and Pier Luigi Sigismondi). to inform what might be possible with internal operations and external partners. connecting with. in order to mobilize support for achieving their declared goals. they must study and adopt the competencies and characteristics that are prominent in Operations leaders in other breakout companies. not to complicate. Their inclination will always be to simplify. and from their entire organization. and inspiring people at all levels of their organizations. Building a robust pipeline of supply-chain leaders Our research into best practices across industries can help to pinpoint several ways in which pharmacos’ emerging Operations leaders can cultivate the characteristics described above. He or she must also be willing to act boldly without necessarily knowing all the details of how to achieve the vision. These are in no way the only hallmarks of the ideal future Operations leader. customers. Technical skills will remain essential.

So pharmacos should develop deeper pipelines of leaders and actively track and manage those pipelines. Keith Harrison. Vol. was VP of Supply Chain and R&D for Nestlé Mexico for four years. Operations chiefs should have worked in adjacent roles. gained deep experience in brand management for two years. can also be helpful. Keith Harrison. Emerging markets experience is not yet common in 4 5 “Explaining New CEO Origin: Firm versus Industry Antecedents.” The Academy of Management Journal. Assignments should not be short stays. and special project assignments. and relationships with local experts. Academic studies point to opportunities for “outside-industry” succession to accelerate organizational learning about novel strategies. an executive with quality and manufacturing in his or her background is considered to have cross-functional experience. . and purchasing for Electrolux Major Appliances—led the Electrolux business in North America and Latin America for several years. No. manufacturing.54 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders To start. “New Breed of Leaders Helped Guide Fuel Standards. On the whole. active role rotation. and no shortage of examples of top-performing executives in every discipline who have come up through the ranks. P&G’s global product supply officer. Unilever’s chief supply chain officer. perhaps as S&OP leaders or Commercial managers. especially in the emerging markets that will fuel more of tomorrow’s growth. and which many believe will help buoy a globally competitive U.4 New Chrysler Chairman Sergio Marchionne credits the hiring of non-automotive executives with enabling the auto industry to accommodate tough new fuel-consumption standards—a breakthrough that many observers feel might not have happened for years under the entrenched old guard. Pier Luigi Sigismondi. as it takes at least several years to gain real market insights. pharmacos lag: There are too few operations people who have nonpharma experience. 46. ideally with very different business models and with other industries. Experiences outside the company. technologies. Procter & Gamble’s global product supply officer.S. 327–338. 2011. 2003). pharma Operations management is quite cloistered. and markets outside industry boundaries. August 3. Of course. Such assignments should include work in other regions of the world. they can rotate through roles beyond operations and supply chain. ensuring that the development agenda includes leadership coaching and training. At the least. albeit with greater performance risks. 3 (June.” New York Times. deep understanding of the market-access specifics for each country. For instance. pp. Electrolux President and CEO Keith McLoughlin—recently the head of R&D. auto industry for years to come.5 Here too. Other industries take a broader view. led that function for the consumer-products giant for four years in the Middle East and Africa. Chrysler Says. there are abundant reasons to hire from within.

then. More operations managers are doing stints overseas.Developing talent 55 pharma Operations leaders. who can champion an ambitious business agenda and lead transformational change. * * * The changing of the guard that we’ve described opens the door for conversations about what Operations can and should contribute in the future. This is not a time for replication of old patterns and cautious steps. They must ensure that they do not simply match their senior Operations vacancies with candidates who fit traditional job descriptions. and in the future more operations rotations will likely include emerging markets locations. but there are signs of change. but rather for big strides and organizational renewal. . instead. The onus. It sharpens the realization that yesterday’s skill sets will not be adequate to deal with the pressures and opportunities that the pharma sector has begun to face. they should seek people with new leadership style and capabilities. is on the CEOs and senior executives to elevate their expectations of Operations leaders’ strategic contributions.

25 billion to corner. January 25. such as moving the entire computer line to Intel microprocessors. and his strong communications skills. in introducing Apple sales staff. The problems led to a $1 billion loss in that fiscal year. and Intelligent Electronics. Ireland. Here’s what Cook and his team did: First. Cook joined the company in March 1998. For example. he is credited with turning operations around and making huge contributions to market success. his connection to the market. but he has shown what proactive Operations chiefs can do to augment shareholder value. Then he recast Operations as a lean and flexible supply chain.2 The COO also supported Apple’s rapid revenue growth over the past seven years—since the launch of the first iPod—conceding very few product shortage events during that time.56 Apple’s Tim Cook Shows How Operations Can Increase Shareholder Value Tim Cook is hardly the public figure that the late Apple founder and CEO Steve Jobs was. That move dropped inventory levels from 90 to 2 days and enabled rapid changes to Apple’s products. In 1997. for several years. and was struggling with inefficient manufacturing and 90 days’ worth of total inventories.” International Herald Tribune.1 Cook helped Apple to more accurately predict demand for unreleased products. Cook boldly closed most of Apple’s manufacturing operations. IBM. As chief operating officer. Cook is a highly skilled operations practitioner. 2008. such as opening Appleowned stores and buying a startup that would become the source of Apple’s own designs of microprocessors. and was the logical successor to step into Jobs’ shoes upon his retirement in August 2011. pushing Apple suppliers to physically locate next to assembly plants for Apple products and to hold the inventory on their books. November 10. the market on a particular type of flash memory that would prove crucial in the forthcoming iPod Nano. Those skills fueled his promotion to overseeing worldwide sales as well as operations and also led him to be successful there—for instance. 1 2 “Reverse image of charismatic chief fills in at top for Apple. he prepaid $1. including costly write-downs on unsold computers and parts. . cutting costs and pushing the technical boundaries of the company’s products with key partners. and Singapore.” CNN Money. Cook led Apple on three occasions when Steve Jobs was on leave. “The genius behind Steve. But what drove his success was his ambition and vision. Apple was running its own factories in California. following senior operations positions at Compaq. 2011. boards. And he supported and implemented counterintuitive strategies. his overall leadership and management abilities. and chipsets.

growth and customer satisfaction are inseparable—which is why he is closely attuned to the demand side of Unilever’s business.” Chief Executive Officer Magazine. have dropped by over 50 percent.” Sigismondi also makes full use of his suppliers’ attributes—not just the parts and materials they ship to Unilever. long-term business partnering. you need to look outside the box. “If you want to operate the best supply chain in the industry. on-shelf availability has risen by more than 480 basis points. Unilever set the challenge of doubling in size while simultaneously reducing its environmental footprint. It won’t take you to the very top. To get there. “Not taking advantage of that would be a real opportunity missed. contributing to overall savings of some €1. necessitating a radical shift from costcutting to value creation. We still need to be ruthless in the way we operate as a procurement organization. getting them to invest in these programs as well and come back to the company with ideas about how to get more value out of its products. The supply chain chief also remains vigilant about what’s happening outside of the company. “It’s great to see how the electronics and automotive sectors achieve best practice in innovation. “Seeing our suppliers as an integral part of our strategic agenda requires a shift in mindset. But the chance is there for both parties to commit to each other in the longer term and see investments made in new assets and technology.57 How Unilever’s Pier Luigi Sigismondi Looks Outside the Consumer-Goods Box Former consultant and international supply chain expert Pier Luigi Sigismondi arrived at Unilever in 2009 with a mission to help transform the consumer-goods conglomerate’s supply chain into a “customer-focused operation. pursuing cost improvements every day.” Extensive investment and a renewed focus on the customer and product quality have already produced marked results: Through 2010 and the first half of 2011. . His operations have cemented sustainable relationships with their huge roster of suppliers. you need to look at an array of business models. they have shifted from last-minute. In fact. ” 1 “Shifting Strategy. he identifies customer service and improved quality of products as two of a supply chain’s “areas of excellence. This is about genuine.” he says. consumer complaints have declined by about 10 percent. 2011. so we can’t just dump a supplier after a year of service. Cost-cutting remained important. the function had been transformed into a globally led supply chain organization with executive buying authority. of course. May 5. There’s a clue to how top Operations officers think in Sigismondi’s statement that he is “energized by a growth agenda. Supply chain operations are viewed as pivotal to realizing that dual goal.”1 To Sigismondi. such as recalls. Within 12 months of Sigismondi’s appointment.4 billion in 2010.” His track record since then illustrates what it will take to be an Operations chief in the future. Benchmarking against your competitors and reverse engineering is business as usual. “best deal” opportunism to long-term relationships that engage suppliers in Unilever’s growth and sustainability plans. and improved supply chain processes saw €800 million shaved from procurement costs. and product incidents. In general.” he says.

58 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

That is particularly relevant in a time of rising cost pressures. Why is improving lean efforts in pharmaceuticals so important? Pharma companies are feeling global pricing pressures as more drugs go off patent.Developing talent 59 Missing ingredient: Lean leadership on the factory floor Andrew Gonce. and the pipeline of new patented drugs remains thin. Low-cost manufacturers have emerged that not only have lower labor costs.” They must lead the cause through their own behavior and ensure that their front-line leaders have the right support to undertake a successful lean transformation. yet too often they are told to make the transition without adequate preparation. Because investors understand these dynamics. competition intensifies in generic drugs. they will reward companies that become . Jeff Holland Lean methodologies have proven to be quite effective at raising productivity and quality in pharmaceutical operations. To engage these overlooked players. but also have newer plants and state-of-the-art equipment. CEOs and senior executives cannot simply hire a new “lean VP. Plant managers and supervisors are central to success in leaning out operations.

Becoming more productive would help. thereby threatening the growth aspirations of many pharmacos. and packaging can be as great as 20 percent to 50 percent within 12 months of implementation.1 Lean methodologies. At a McKinsey roundtable in late 2010 with 25 pharmacos executives. can address these issues. initial quality improved by 20 percent. lean efforts will flounder.D. Pharmaceutical manufacturing in the United States raised output per hour just 0. filling. flexibility. Still others allow poor practices to continue by believing that excess capacity. according to the US Bureau of Labor Statistics. quality departments are imposing even more checks onto an already cumbersome system. shorter cycle times. for example. and J. But lean is not a toolkit to be simply plucked off the shelf and handed out. lean practices can reduce department costs by as much as 30 percent. cars. Over the same period of time that motor vehicle manufacturers averaged 3. and fewer investigations. employee engagement. . and speed of decision making. Some industries have managed to achieve startling improvements. lean can build in higher quality and more reliable practices from the start. compared to gains of between 2 percent and 13 percent in industries as varied as chemicals. By revealing and fixing the root causes of defects. and production are required in order to maintain service levels. but here the track record is bleak. while pharmacos generally have lagged. Recent McKinsey engagements in lean manufacturing across multiple pharmaco sites. including more proactive decision making 1 US Bureau of Labor Statistics. show that improvements have led to higher morale. One reason for the slow pace of change is executives’ concern that disrupting current processes will increase their exposure to quality and compliance risks. training.60 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders more efficient and punish those that lag behind. particularly those with a poor quality record. Without strong leadership. Power. if approached and implemented in the right way. overtime. and computers. and preparation. rather than relying on a subsequent check-and-fix process. At other pharmacos. These productivity gains did not come at the expense of quality.7 percent annually from 1987 through 2008. At the same time. In terms of quality. lean improves manufacturing. cost. The Harbour Report.4 percent annual productivity gains and reduced total time per vehicle by about 30 percent. Productivity gains in formulation. such as mortgage approvals going from 60 days to one. Overcoming these organizational problems will require new behaviors and mindsets among front-line leaders. only about one-third said their lean transformation program was resulting in stepchange productivity or cost improvements.

Developing talent 61 on their part. and encourage workers to suggest improvements.. performance among individual plants varies widely—and the different levels of leadership skills of plant management largely account for this difference. front-line leaders need the time and ability to address the unique circumstances of their plants. articulate how lean will improve competitiveness. For plant managers and supervisors. and mindsets and capabilities simultaneously Driven by line leaders     Unit leaders accountable for delivering change Goals tied into local budgets Line leaders develop so that they can lead the change successfully Change agents to provide expertise.e. It is the senior team that must convey the sense of urgency.Exhibit 1 High aspirations grounded in context     Driven by top priorities for the business (i. foresee trouble and stem it before it begins. At . sustained support of senior executives. Absent direct CEO involvement. common language High-performing senior team    Aligned goals and shared understanding of the journey ahead Ability to engage and motivate organization through difficult periods Personal readiness to change Balanced approach to driving change   Engaging the organization at all levels to create a new way of working Holistic approach that addresses operating systems. Only the CEO can direct the heads of Human Resources and Operations to set aside their differences and work together on lean training and leadership development. the magnitude of the change is so large that they will need the strong. management infrastructure. exhibit 1 #7 Lean leadership . And that includes the CEO. and empower front-line leaders to execute the transformation. and coaching Designed for scalability Early and tangible “wins” to build confidence and momentum Repeatable “building blocks” – tactical changes at the unit level combined with “cross-cutting” changes to the entire organization  Right pace and sequence for the challenge and culture  Clear roadmap of initiatives. resources and leadership requirements   SOURCE: McKinsey To be more productive. capacity. Relying on front-line leaders Even within any one pharmaco. the next ten years of lean efforts will look largely like the last ten years—a huge missed opportunity. “what matters most”) Recognition of starting point – what has and has not worked in past Sufficient stretch to cause people to think and act differently Shared vision. The ability of plant leaders to coordinate problem solving by front-line employees lies at the heart of an individual plant’s success (Exhibit 1).

but rather aims to understand the reasons behind the issues. These include: „ Process. front-line leaders serve as change agents allocating 60 percent to 70 percent of their time to the floor. Instead of spending a huge amount of time micro-managing the front-line leaders. „ People. „ Purpose. Clarifying the skills and behaviors that lean leaders need to exhibit is a good place to start. and support for staff to accomplish tasks themselves. and plan for potential new demands. „ Partnering. Such companies also empower front-line leaders to think ahead. but they must be accompanied by changes in mindset and behavior in order to achieve and sustain real performance improvements. plant managers provide the required information. but leadership behavior consistent with lean methodologies can be taught to and encouraged in any competent manager. Advocate the new approach by repeating why the plant needs to change in an emotionally engaging way. Make sure the leadership team and peer departments are aligned around the new way of working. Lean leadership can be taught Some people have greater innate leadership qualities than others. much of it in high-quality individual coaching. Engage in constructive but demanding performance dialogue to show commitment to reaching improvement targets. to help address them. uncover and solve long-term problems. coach rather than tell. The behavior of plant managers also changes. resources. Effective leadership in this area does not simply punish for non-compliance. Pharmaco plants have many people with untapped leadership potential who will develop into lean leaders given adequate training and support. Technical and management system changes are often needed. Actively demonstrate how to make the front line successful— reward rather than punish. . Spend a few hours every week on the work floor with front-line staff to help them solve problems. „ Performance. „ Problem solving.62 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders best-practice companies. Serve as a role model for application of standards such as new key performance indicators (KPIs) and disciplined deadlines. and to encourage the entire plant to learn from them.

workplace organization Tools and techniques to identify opportunities and design built-in quality Error proofing SOURCE: McKinsey . The supervisor also must have the support and commitment of senior leaders. Why am I going to class? Supervisors need to understand the context of why they should engage in lean leadership training sessions (Exhibit 2).Exhibit 2 Capability building module Communication Change story and influence model  Coaching and feedback    Senior Operators Supervisors leaders Description Conduct training Telling a compelling story that touches the hearts and minds to motivate action  Key elements and practical methods to plan and deliver feedback    Performance dialogues Difficult conversations How to foster effective dialogues around performance improvements Root cause of conflict and facilitation of conversation Recognize and identify value-added activities and practical. applicable methods to prioritize daily work Understand how to measure and track toward a goal in a way that drives ownership at all levels Prioritization/objectives  Time prioritization    Performance management Full utilization of collective intellect      Trust and accountability Empowerment and delegation         Problem solving Quick changeover Loss elimination  T-shirt game  Standard work and 5s  Critical steps for building trust and accountability. meets with severe chastisement. and realigning teams. without a very good reason. That’s a sea change for the supervisor. quality Understand role of standard work.Developing talent 63 Plant managers who are accustomed to a world where firefighting is the norm must have a compelling reason to change their approach. with 30 percent fewer people in half the time—through problem solving. and this should be fully laid out exhibit 2 #7 Lean leadership . asking why not Awareness and identification of waste in a system Use simulation to teach goal setting. It must be made clear how the change will benefit them personally as well as the broader organization. and must be able to see how the broader organization is committed to change. coaching. Now the supervisor is expected to do the same or better. Consider a supervisor running a line that makes an essential and expensive cancer-fighting drug. Previously. the expectation was that the line hit 100 percent fulfillment with 100 percent compliance. Failure to hit the target. standard work. relation to change Discuss and role play how to implement empowerment and delegation day to day Tools and exercises around identifying/solving problems Simulation teaches target setting. He or she must be able to understand the context in which the change is occurring and the business case for change.

they result in slowed progress because of inefficient decision making. Senior management must be willing to invest in and formalize the program. and giving feedback to novices. What level of each skill set do you need? „ Breadth of need. the requirements span the organization. with department managers accountable for the employee’s development. Getting the right capabilities on-board will mitigate those risks. When will you need these capabilities? Will it be now or later. or initial benefits that can’t be sustained because the effort tails off. At Toyota. delays due to lack of available resources led to 20 percent in excess costs and four months’ delay at the outset. For example. There’s a wrong way and a right way to make the investment. failure to get the expected returns. by contrast. What expertise is required in terms of technical skills and change agent skills? The technical strengths may be more obvious than the need for change agent skills. each employee has a personal development plan designed to meet the objectives of the individual and the plant. Developing your own staff works when you don’t need a deep skill set. consider that the odds of success will hinge partly on whether your organization has the appropriate capabilities— both technical skills and leadership skills. for example. don’t spend time figuring out what is best for each individual. and you perceive a longterm need. such as presenting. initiating difficult conversations. One consumer packaged goods company offers plenty of training through HR. companies should start by identifying the capabilities required and the gap they currently face along three dimensions: „ Depth of need. the penalties for a lack of capabilities tend to be hidden. one with a dedicated champion and dedicated change agents. They consist of delayed starts because the right resources are not available. but the courses do not address personal developmental needs. we have seen delays and missed opportunities—which stemmed from the failure to build capabilities—lead to reductions in 10 percent to 20 percent of the transformation’s potential value. one company we know launched a lean transformation program in two sites. another without. short-term or ongoing? While the costs of these programs tend to be visible. „ Time frame of need. There are several ways to acquire these capabilities: „ Build from within. In other cases. Where are the capabilities most needed? Is it better to have centrally coordinated change agents or capabilities embedded throughout the organization? We estimate that 1 percent to 2 percent of a site’s team should be dedicated change agents. There is a core set of . At a pragmatic level.Transformation Ahead: Do You Have the Right Capabilities? Before you embark down the path to transformational change. and the training isn’t tied to personal growth objectives or coordinated with other departments. For the latter. Department managers.

This approach is appropriate when you need deeper expertise in a narrower set of units within the organization. develop a clear plan with partners that explicitly discusses how to transfer capabilities to the organization. and Role of the Leader. To rent effectively. and performance evaluation process to sustain these gains. and find talent in the marketplace. succession planning. Companies also will need a solid retention strategy. capability building alone won’t be sufficient to guarantee lean program success. limits the duration. In addition. such as Practical Problem solving. or if you have an immediate need to boost team capacity. evaluates options to select the best fit between capabilities and organizational needs. . The essential first step is to understand what you need and quickly plan to get those capabilities on-board. However. shake up the existing culture. classroom training is supplemented by formal and informal coaching as well as progress reviews. with the expectation that the skills will be transferred to in-house leaders over time. This works to acquire a deep set of skills for a short period of time. „ Rent short-term to build long-term. and integrates seamlessly with ongoing operations.training and skill requirements that everyone in the plant will go through. Kaizen. The company must be willing and able to attract a new type of talent. „ Buy external expertise.

but were stifled because their bosses were not aligned with the changes. individual development plans. needed comparable leadership training. Just as troubling. To keep costs down. and no mentoring to develop their skills. as they knew what processes should be changing and what they should be doing differently. up to the most senior level. This plant is now the highest-performing . Supervisors were told to attend because they needed more skills.66 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders before they begin. the company sent as many supervisors as could fit in two sessions. Is it any wonder that supervisors revert to their old behaviors? One pharmaco we know decided to send all its supervisors on a one-week training course at a local college. First. Each individual knew his or her strengths and improvement areas. Many reported that they enjoyed the training. In short. the company failed to recognize that the rest of the management team. there’s no follow-on training or support given. The energized supervisors grew frustrated. The company had not put in place a program or structure to support the supervisors to help them embed their skills—there was no coaching. and “buddy” assignments so that leaders could coach one another. As a result. We commonly see supervisors who are ordered to attend training with no explanation for the purpose of the sessions. Successive layers then went through the same sequence. or development programs so that individuals would know how to focus their improvement efforts. People who had been supervisors for years were hearing for the first time that they lacked the skills to supervise. the company announced performance improvement goals. while others said it made them feel inadequate. a capabilitybuilding program was developed through collective and individual training. Or they begin practicing their new skills. skill gap analysis. only to realize that life is different outside the classroom—even though the company claims that they now have all the skills and tools to do the new job. Contrast that experience with the more comprehensive approach taken by another company to build the lean capabilities of all its plant leadership. Then it redefined the roles and responsibilities of leadership positions and determined all the technical. managerial. further training. based on these gaps. The training process started with the highest level of plant leadership to demonstrate to everyone involved that the entire community needed to change behavior. They leave not only with a certificate—but also with the unpleasant memory of the program pointing out the many ways in which they have been ineffective leaders. many good supervisors left the company. but they were not told why. Most were skeptical that life at the plant would change— which turned out to hit the mark. and leadership skills required. so that each level could support the next.

is not sufficient without complementary infrastructure and performance management systems to build lean problem-solving capabilities. she asked rather than told. . the staff tended to wait for permission to act rather than taking action without her input. Her staff. exhibit 3 #7 Lean leadership – Exhibit 3 From . considered her to be a micro-manager. Your investment of time … to Your investment of time Initial coaching Rigorous review and feedback Own time investment Rigorous review and feedback Monitoring Initial coaching Time SOURCE: McKinsey Take task over Time A plant manager often went right to the shop floor when there were issues. This manager felt that she was exhibiting lean leadership and helping the team to arrive at the answer faster. of course. As this manager began working with the team. . and the pharmaco plans to apply the same principles to its other plants. and discussed an alternative approach to the shop floor walks: coaching supervisors on how to lead problem solving. Her coach pointed out this behavior and its effect. As a result. she helped build skills in her team and allowed them to make the decisions they were supposed to be making. however. she became their coach.Developing talent 67 plant in the worldwide network. in order to jump in and help the staff solve problems. Coaching the coaches Training. Two vignettes illustrate this point. thus. diving in at the first sign of trouble and giving everyone orders. . Rather than being a super-supervisor in every area. Part of that infrastructure should include regular coaching by lean experts and mentors from other parts of the organization in order to facilitate an extended conversation about how to handle problems and pursue opportunities (Exhibit 3).

Only after leadership became rigorous about the process. despite the fact that the regulation was clearly stated and approved by the union. the site lean champion and his coach were walking through the site prior to a senior executive team visit planned for the next day.68 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders At one plant in another pharmaco. An environment that tolerates mistakes and turns them into lessons will be more conducive to learning than one that punishes mistakes. in other words. should work hand in hand on lean leadership development. But HR can’t go it alone. he was instituting effective role modeling for workers on the shop floor. the coach pulled him aside and challenged him about the phone call. Had the lean champion really empowered the team running the area. Note. The process is much like learning to use a standard stick shift in a car—the driver progresses over time from consciously unskilled to consciously skilled to unconsciously skilled. We worked with a pharmaco client at one plant where operators did not always wear the correct protective glasses. during which people have to learn from their mistakes. Yet. however. and for most pharmacos. walking past the operators and shift supervisor to call the maintenance staff to fix the problem. because they have detailed knowledge of the work processes that will undergo lean transformation. suspension. The lean champion went right to the phone. the logical owner is the Human Resources (HR) function. His new behavior—coaching the team to solve a problem themselves—empowered the team to get the right answer without needing a manager on the floor. and role definition—and is a consistent presence no matter how product lines or business units change. from verbal warning to written warning. . that tolerance does not mean being lax about safety standards or process rigor. or had he taken charge himself? The champion quickly understood that the action had taken away the group’s right and responsibility to manage their own work. They saw a water leak at a vial washer station. The broad point is that learning lean leadership behavior takes time. Who should take ownership? An initiative as important as lean leadership demands clear responsibility. every time his team members passed someone who was not wearing protective glasses. The two functions. Operations staff must also be involved. HR usually has the expertise in leadership development. and dismissal—for repeat offenders—did the rest of the plant comply. skills training. with water dripping out of the washer into a small pool by the floor drain. The top manager thought that by always having his team of supervisors and department heads wear protective glasses. Afterward. they sent an implicit signal that it’s fine to not wear them.

that may be a big cultural change for two functions that typically have been isolated from each other. As a consequence. to make sure that training is covering what is truly required. Questions CEOs should ask „ Have we defined the attributes of strong lean leaders. in order to better understand both perspectives and thereby improve training. we have sometimes seen the two functions loaning staff to each other for a year or so. they are not exhibiting lean leadership. the CEO has the responsibility to ensure that C-level executives exhibit lean leadership themselves. . and do we have a process for selecting and developing them? „ Are we promoting the right people? „ Have accountabilities. roles. it is critical that they see their bosses do the same. ensuring that the lean approach is properly designed. The C-suite should be the catalyst by setting and effectively communicating the right ambitions. It takes a measure of courage to change one’s behaviors and facilitate change in others. and responsibilities been clearly defined for lean leaders? „ Is HR up to the task of partnering with Operations to develop lean leaders? Is Operations collaborating enthusiastically? „ Are our senior executives modeling lean behavior? „ Do we have a system in place to develop line leaders? Lean leadership starts at the top Ultimately.Developing talent 69 However. Each function also should review the skills of lean leaders at least annually. If front-line leaders are to muster their courage for the good of the plant. the CEO must step in to ensure that the head of each function is committed to collaborating with the other and demonstrating that commitment through concrete actions. and that the systems and funds are put in place for the program to be successful. If the C-suite is perceived by the shop floor as hiring new vice presidents in order to launch new initiatives. For example. Their actions as coaches and as lean leaders set the tenor for the entire organization.


Operations for the Executive Suite: Opening new horizons for current and future pharma leaders


Moving from cost to growth


Operations for the Executive Suite: Opening new horizons for current and future pharma leaders

we have identified a number of promising themes for revenue growth that are already common practice in other sectors: ideas around leveraging products and platforms from emerging markets for global strategic advantage. and reacting more nimbly to shifts in demand. enabling the profitable production of niche products. Recently. We believe that with sufficient attention and oversight from the executive suite.Moving from cost to growth 73 From defense to offense: Leverage operations to increase revenue Noel Greenberger. with profit margins under significant pressure and . these ideas can generate significant additional revenue and better position companies for success in the dynamically changing pharma industry. Pharma and medical device companies are already testing some of these ideas. many of these companies have asked us how to leverage operations to increase revenues. however. In a challenging market for pharmaceutical and medical device manufacturers. Vanya Telpis Traditionally. From our experience and from observing other industries. Frank Scholz. pharmaceutical and medical products companies have focused their operations strategies on reducing cost and ensuring supply.

Some companies are already doing this in other corporate functions. Companies can test innovative ideas and adapt them to drive growth globally. But the most forwardlooking companies are using them to gain a strategic advantage globally. with an increasing number of companies asking. it is time for both CEOs and COOs to challenge operations to adopt some of these ideas in order to help drive revenue. Pharmacos are already adopting some of these ideas in various forms. Others are completely new to pharma. Earlier this year. and product designs. there is revenue on the table. enabling the profitable production of niche products. “How can operations drive the top line in pharma?” Our experience in other industries provides a range of ideas that fall into three broad themes: leveraging products and platforms from emerging markets for global strategic advantage. but these ideas have already proven their worth in other sectors. primarily by cutting costs to sustain margins. Either way. This has recently become a consistent theme in our work. top management must ensure that the correct prerequisites and resources are in place—in both headcount and budget—and that the company has the right organizational structure to support the new operations priorities. such as R&D. How can we leverage products and platforms from emerging markets for a global strategic advantage? Almost every pharma and medical device company has emerging markets at or near the top of its agenda. Yet. McKinsey published the results of its third annual . The C-suite must take a central role in implementing these strategies. and reacting more nimbly to shifts in demand. These markets offer high-potential growth in revenue and profit. And CEOs must provide sustained attention to the venture to keep it a priority on the company agenda. as well as a means to reduce R&D and operations costs (for example. For pharma companies that can reorient their strategic approach and shift their operations capability from a defensive to an offensive asset. supplier relationships. 1. but perhaps not as comprehensively and aggressively as leaders in other industries. Management also needs to align the commercial and operations functions. Leveraging operations to drive revenue is an ambitious undertaking. The goal is to use emerging markets as a proving ground for new ways of doing business—new cost structures. by tapping into low-cost labor). successful companies in other sectors are taking a different tack: leveraging operations to drive revenue growth. Specifically.74 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders few blockbusters in the development pipeline. to unify the organization behind a common goal of increasing revenue. many companies have looked to make changes in their operations.

focusing on strategies in emerging markets. India. This latter strategy could and should extend to operations as well. Madhavan with additional reporting by Josey Puliyenthuruthel. global positioning systems. where consumers typically buy tractors with more powerful engines. “Made in India. these companies design products with the right combination of features and pricing for an emerging markets customer—or de-engineer existing products by removing features to lower the price point—and then find that the new versions resonate with buyers in other geographies and markets. N. including developed countries. developed a relatively basic.”3 Some companies have had success not through low-cost products but in leveraging global designs that just happened to come out of emerging 1 2 3 “Christie Barrett. . the number one seller of tractors in the world (under the John Deere brand). For example. and other developed-market add-ons. no-frills model for India. “Innovation: Replicators no more. about half the tractors Deere makes in India are exported. 2009.2 Siemens has experienced similar successes. customers who did not need those advanced features. January 5. Deere & Company. But in 2001. The design came out of Deere’s R&D facility in Pune. “Siemens seeks low-cost shelter from downturn.” McKinsey Quarterly. More than one-third of the 1.” Financial Times. Daniel Schäfer.Moving from cost to growth 75 global survey on R&D. CEO Peter Löscher said. in which products with the right combination of reduced features and a lower price point attract buyers in more developed markets.” Business Today.S. and the company initially did not consider selling it in the United States. Peet van Biljon. Today. Stefan Wagstyl.1 The disparity among these different corporate approaches is startling. India. 2010. April 2011. air-conditioned cabins. It helps increase a company’s competitiveness not only in emerging markets but also in industrialized countries. Deere recognized an untapped market niche. And 30 percent said they use emerging markets R&D for global product platforms—these companies are deriving the maximum possible benefit from their emerging markets R&D. for the World.173 respondents said their companies do no R&D work in these markets—these companies are missing a prime opportunity to take advantage of substantial local skill sets and resources. It quickly modified its India tractor by adding more power and launched it in the United States as the 5003 series. Often. Another 25 percent of all respondents use emerging markets R&D strictly for local innovation—they are tapping into resources but are limited by their application to local markets alone. for instance. There are multiple examples of companies taking full strategic and global advantage of their emerging markets operations. “R&D strategies in emerging economies: McKinsey Global Survey results.” Financial Times. 2011. May 30. can be plugged into a global system of sales and manufacturing. and Chris Musso. January 29. when Indian competitor Mahindra & Mahindra began targeting hobbyist farmers and other U. “A good idea or product from.

“The Indian solution was on a par in quality but cost one-fifth what the French and Japanese engineers came up with. Madhavan with additional reporting by Josey Puliyenthuruthel. This can lead to new manufacturing. with growing share in many markets. N.4 Finally. for the World.” Business Today. Pulpy became an instant hit. which is transferring water consumption knowledge gained from India to other global locations. It is Coca-Cola’s fourteenth brand to reach $1 billion in global retail sales and its first one developed in an emerging market. Japan. “Coke taps into taste for fresh alternative. was subsequently rolled out across Asia and Latin America. May 30. “Made in India. May 30. and often apply a more entrepreneurial mindset that is highly focused on continuous improvement and optimizing cost.” 6 4 5 6 Stefan Wagstyl.76 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders markets R&D. however. Companies should take advantage of this mindset and export these ideas globally. quality. in 2004 in China—a market with high demand for fruit juice.” a fruit-based drink. they are not as established as more developed markets. and is poised for further global expansion in 2011. and distribution solutions that are more efficient than existing approaches in more advanced countries. engineering. is learning “frugal engineering” solutions from emerging markets and applying them to the company’s overall business model to achieve more with fewer resources. January 6. It reduced the amount of water required to produce a liter of beverage from 7.” Financial Times.” Ghosn said. In our experience. “Made in India. 2010. . “Renault-Nissan had parallel teams in France.” Business Today. including back to developed countries. Emerging markets managers are often trying to prove themselves. One example of such a strategy is PepsiCo.4 liters in 2009. and India working on identical specifications.5 Another example. largely through process efficiencies learned in India. Coca-Cola created “Pulpy. Madhavan with additional reporting by Josey Puliyenthuruthel. for the World. The drink was “engineered” to deliver a 100 percent real fruit juice feel to a 10 percent juice drink through the addition of orange pulp to the mix. but where undiluted juices were too expensive for most customers and were difficult to distribute without reliable refrigerated delivery chains. Coca Cola website.3 liters in 2001 to just 2. few pharmacos do this well today. companies can also go beyond product design to export innovative emerging markets business models and value chain strategies on a global basis. chairman and CEO of the RenaultNissan Alliance. N. 2010. 2011. related by Carlos Ghosn.

Yet. To date. making the company more responsive to changes in demand. such as a laser level.Moving from cost to growth 77 2. which reinforces brand loyalty (Exhibit 1). manufacturing. Companies in other industries have succeeded by developing product groups built around standard modules and platforms from which multiple products can be built. battery. Yet. An added benefit of this modular approach is that it establishes a familiar user interface for consumers. As with the DeWalt example. These vehicles—more than 40 models in all—share the same modular platform concept. including the charger. has several products with widely varying functions. liquefied petroleum gas. and increase dependability. and a grinder. most companies devote a relatively small portion of overall capacity to such products. an impact driver. modularity. simplifying engineering. operational complexity will correspondingly increase. diesel. and trigger. Such a standardization approach allows the operations function to consolidate volume around components. Similarly. biofuel. they can be fitted with gasoline. and platforming. as the sector shifts to greater niche production. Pharmacos that wish to thrive in this new market environment have little choice but to adapt their operations function and find a way to manufacture these products profitably. Products can be customized for specific niche markets later in the production process. hybrid. These components form a basis for modular assembly and simplify engineering. As a result. Volkswagen targets a number of niche markets with different crossover-utility and SUV vehicles. manufacturing. motor. The keys to this operational capability are product design. and move away from a product-by-product approach. the pharma sector is moving away from a reliance on mass-market drugs and toward a strategy based on niche products targeted at smaller patient populations. keeping any manufacturing complexity to a minimum. and quality control efforts. and speed time to market. thus driving revenue by reducing the company’s reliance on mass-market products. However. and quality control efforts and establishing familiar user interfaces for customers. Companies must be able to produce broader drug portfolios in smaller runs. or electric power trains (Exhibit 2). the maker of power tools. all of these products share common parts and modules. compressed natural gas. companies can reduce production complexity and product costs by as much as 20 percent. They also lower development and product costs. DeWalt. How can we produce niche products profitably? With pipeline productivity decreasing and fewer blockbusters in development. platforming and modularity allow Volkswagen to target these niche markets .

And third. Second. top management should ensure close cooperation between technical development and manufacturing to come up with respective niche-product designs. Operations management must reconsider platforming concepts to keep complexity cost under control while targeting additional niche markets. Nissan has done the same with its FM Chassis. For the pharmaceutical and medical product companies. appealing product variety Charger Battery Drill Grinder Impact driver Motor Trigger Drywall router World-class platformers typically enjoy  Better price stability (from higher product appeal)  Lower development cost  Lower product cost  Faster time to market  Improved customer loyalty  Better penetration in high-value niches Nailgun Laser level SOURCE: Press search. and increases quality and reliability. COOs should revisit the production footprint to allow for broader product portfolios in smaller quantities. the ability to respond to changes in demand will play a greater role in maximizing revenue and sustaining margins. How can we react more nimbly to shifts in demand? In an increasingly dynamic business environment with shorter product lifecycles. from product launch through 7 Press articles on Volkswagen’s new MQB and MLB platforms. utilizing a single design to produce a number of vehicles. this shift in production strategy will encompass several requirements. . this approach is intended to help the company reach its goal of 10 million vehicles by 20187. McKinsey analysis in a way that cuts development time by up to a year. Overall. 3. reduces costs by 25 percent to 40 percent. First.78 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exhibit 1 #8 Defense to offense – Exhibit 1 Innovative platforms … … lead to broad.

Suppliers. Jochen Großpietsch. modular. as well as standardized equipment that can be reprogrammed quickly in response to demand shifts. should also be responsive to demand variability.8 8 Thomas Ebel. while still allowing most production processes to take place at central. Event-based forecasting and continuous. press search. McKinsey. A crucial lever to improve responsiveness is to develop standardized. “The Value of Flexibility: Pharma Supply Chain 2020. standardized facilities. Companies that can prepare for and respond quickly to these shifts will have a clear revenue advantage over competitors. Body Platform Module Module Model class Model class Synergies Synergies Model class Synergies Brands Brands Brands 20% Body 50% Modules 60% 20% Platform 50% SOURCE: Company interviews. We have also seen organizations utilize regional packaging centers that are close to suppliers and customers. and Marco Ziegler. 2010. products. and geographies. and scaleable production—such as manufacturing steps and processes— across facilities.in addition to maintaining platform concept.” Outpacing Change in Pharma Operations. . iterative demand planning will enable the organization to best utilize these new standardized and lean processes. in turn. These regional centers allow for late-stage customization. Ulf Schrader. McKinsey analysis loss of exclusivity (LOE) to product sunset. which can be accomplished by working to integrate flexible contracts more effectively into their planning and forecasting systems.Moving from cost to growth 79 exhibit 2 #8 Defense to offense – Exhibit 2 Past Synergies via using same platform for multiple brands Present Synergies via using same platform across multiple brands and first introduction of modules (component clusters) Future Same modules across multiple brands and model classes for majority of car content . which helps companies respond to changes in demand. This will allow for more flexible capacity that operations can rapidly scale up or down in response to shifts in demand and to the lifecycle stage of specific products.

com. May 8.” JustAuto. a distribution center or retail location can add snap-on covers and other features. to focus on the products that show the greatest variability. See also company annual reports and website. August 29. com. with products that become differentiated at subsequent steps.” Winnipeg Free Press. followed by late-stage customization. “Analysis: Flexible Future for Ford. Nokia built regional production centers that include co-located suppliers. . 2008. Ford’s manufacturing capability is based on flexible operations. for example. The company also designed production systems with substantial platforming. namely large product portfolios and short lifecycles in which most of a product’s profits are won in its first quarter of sales. But if the sector is to maximize the opportunities inherent in leveraging operations to 9 10 Press search. To overcome this variability. a single production line can support 250 individual SKUs. using reprogrammable tooling in body shops. Nokia. Finally. and plug-in hybrid—all on the same production line. Companies will need more flexible production facilities that can. to accelerate the supply process. Nokia’s production system allows for rapid ramp-up in production for products that take off in the market. hybrid. standardized equipment in paint shops. a faster response to shifts in demand will require clear segmentation of the supply chain. has made a series of strategic decisions to react with more agility and speed to demand variability. for example. Through this approach. to ensure a comprehensive approach across the enterprise. Finally. 2009. The mobile phone market has several characteristics that make demand forecasting a challenge. and a common-build sequence in final assembly.9 The auto industry has also made great strides in developing a flexible manufacturing capability. “Ford to Spend $500M on New Focus Plant. 2006.” JustAuto. “Ford Focuses on Flexible. How can we take advantage of these opportunities? A few pharmacos and medical products makers have already begun to implement measures along the three themes discussed above. Ford utilizes modular construction and configures machinery to be used across models as demand changes. 2011. management will need to ensure a much closer collaboration across functions. enabling production of multiple models in one plant. Jim Kerr. handle multiple lot sizes in addition to multiple products.80 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Many companies already exemplify these practices. especially between Commercial and Supply Chain. For instance. February 11.10 For pharmaceutical companies. Nokia capital markets presentation. After a $550 million transformation. electric. Hoovers. in addition to software at the factory. the company’s Michigan Assembly Plant will be the first facility in the world capable of building a full array of vehicles—gas-powered.

Moving from cost to growth 81 .

Accordingly. or even private-sector companies outside pharma. Regardless of which strategy a company pursues. R&D. the CEO and senior executive team will need to play an active role in advancing these ideas from initial assessment through selection to successful implementation. and quality capabilities for these opportunities will need to come from external partners. For example. product complexity. Operations must make decisions regarding the network. . and other functions. CEOs will need to allocate resources intelligently. remain flexible to demand swings.82 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders drive revenue. and those that align most directly with the company’s current strengths. and overall supply strategy in concert with the Commercial strategy. and operate globally need not be inordinately expensive. In addition. and organizational design in support of the new direction. the two teams must collaborate and cooperate. distribution. To seize new opportunities. and a single person within the C-suite must have direct management responsibility—and accountability—for the venture. capacity. Operations is often the last to receive resources after Commercial. Because of their broad scope and interdisciplinary nature. „ Build partnerships: Some of the required manufacturing. Seek out these partnerships. Enabling the Operations function to scale quickly. right price point. they must consider the right product for each market—target product profile. but it does require significant consideration during the strategic planning and budgeting cycle.and second-generation products. other local or multinational pharmacos. Building these relationships will start with the executive team—often with the CEO—and work downward. the Commercial team must make product and market decisions with operational capabilities in mind. „ Include Operations during strategic and resource planning: Similarly. The executive suite will need to foster this collaboration. capabilities. all three opportunities require significant strategic planning and oversight. Conversely. these three revenue opportunities share several common elements that require oversight at the CEO and executive team level: „ Develop close ties between Commercial and Operations: Traditionally. pharma Operations and Commercial teams have operated in silos with different priorities—Commercial wants to drive growth. CEOs will need to prioritize based on the most promising revenue opportunities. and capacity for each market—along with factors such as a launch timetable and a transition between first. such as contract manufacturing organizations (CMOs). supply chain. To generate new revenue from operations. while Operations seeks to reduce costs. target cost. it will need to undergo substantial organizational changes to align assets.

The CEO must ensure that this discomfort does not jeopardize the long-term strategy by negatively impacting operational capabilities. . and new ways of doing business. Operations is one major source. new products. well outside of its prior areas of expertise and focus. The organization will need to operate using unconventional strategies. More broadly. they can also help to strengthen the organizational capabilities and overall competitiveness of pharmacos.Moving from cost to growth 83 „ Shift the mental paradigm: Pursuing new revenue opportunities through operations will require a pronounced shift in mentality. Based on their current application in other industries. Frequent communication will help all internal and external stakeholders understand the degree of commitment and operational excellence needed for success. pharmacos can better develop new markets. the strategies laid out in this article can each offer strong potential to generate additional revenue. pharmaceutical companies must look to all available means to spur revenue growth. *** At a time of dynamic changes in the industry. By adopting innovative ways to leverage operations in order to drive revenue. which may stress the company and key departments.

84 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

Sastry Chilukuri. technology has transformed many industries. David Knott Economic and demographic pressures on health systems around the world are forcing providers to improve their performance. they are looking to improve quality. In the United States. reduce cost. the system is slowly shifting from . pharma and medical device companies are better positioned for success. for example. New technology not only can help companies to address several major care challenges—such as compliance and chronic disease management—but also can help them to create hundreds of billions of dollars in value. where healthcare costs as a percent of GDP are the highest. and increase safety and access (Exhibit 1). will require the involvement of top management as well as major changes to organizations and capabilities. As health systems face increasing pressure. and healthcare is ripe for change. England’s National Health Service.Moving from cost to growth 85 Beyond the pill: Creating medical value through technology enablement Jamie Cattell. however. has expanded its oversight on quality and has restructured hospital providers. Already. Although high-tech and telecom firms have made significant investments in this space. Capturing this opportunity.

and rheumatology. such as chronic diseases.86 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exhibit 1 #9 Beyond the pill – Exhibit 1 Healthcare spending has risen at unsustainable rates for 40 years – a change is inevitable 70 60 50 40 30 20 10 0 Healthcare spending as % of GDP OECD countries Due to … 1 Technological innovation and specialization leading to higher costs 2 High customer expectations leading to increased demand & willingness to pay 3 Aging population fueling health care cost explosion GDP +2% (historic rate) GDP +2% GDP +1% (half of historic rate) 90 2010 30 50 70 90 2100 1970 SOURCE: OECD. McKinsey Extrapolation fee-for-service payments to outcome-based reimbursement. payors are taking strong actions to stay alive. and avoidable hospitalizations. Healthcare reform is accelerating this shift. such as the fragmentation of providers and the suboptimal use of healthcare data. „ Underuse of preventive and population-based services due to misaligned incentives and systemic waste. oncology. including high-spend pharmaceuticals and medical devices (see sidebar “Payors Speak Up about Opportunities”). „ High-cost venues of care. Their major targets are: „ High-cost therapeutic areas. „ Health system issues. . Under tremendous cost pressure. They are scrutinizing all aspects of utilization. such as inappropriate drug spending. „ Inefficiencies in care modalities. A small number of patients account for the majority of costs. when lower-cost settings such as specialized homes could be developed and used effectively. unnecessary surgeries.

20 to 90 percent. much of the diagnostic testing and imaging.” Radio France International. are unnecessary. do not respond to the prescription.” England’s National 1 2 Academic literature. Poor provider or patient adherence to protocols leads not only to inadequate treatment. “We consume too many drugs in France2. and payors are increasingly focusing on them. for example. “French pop too many pills. we’ll be out of business and the pain will ripple through the entire value chain.” – CEO of a major health plan “We’re always interested in unique business models provided they create value…but can you get a return given the state of the science?” – SVP for clinical advancement “Personalized medicine is what keeps me up at night…. The numbers on medical effectiveness are alarming. depending on the treatment.000 deaths and $100 billion in healthcare and productivity costs every year—not to mention the $80 billion in lost pharmaceutical sales1. Of those patients who do comply. 2011. the health minister. . Together. We lack the analytic and technological capabilities on this. National Pharma Council.Moving from cost to growth 87 Payors Speak Up about Opportunities “If the current trends continue. We have already seen some examples of this new pressure in pharmaceuticals. The average is roughly half for medicine as a whole. The French national health insurance program recently created an independent overseer for quality. McKinsey analysis. by disease condition. McKinsey 2005 survey of hypertensive patients on persistency/compliance. says health minister. Xavier Bertrand. as well as potentially some surgical procedures. are noncompliant with drug regimens.” – SVP for health affairs Source: Interviews with payors and key opinion leaders. 40 to 70 percent of patients. Similarly. June 23. Pharmaceutical executive.” – VP for health affairs “It would be ideal to have the tools [for personalized medicine and clinical diagnostics] in the provider environment. In the United States. recently said. they have been blamed for 125. but also to 20 to 35 percent of all adverse drug events. and it is employing new metrics to boost the results of its spending.

It also regularly reports on bottle use for patients. Once in the digestive tract. Only after the company agreed to refunds for non-responders did the government reverse its decision. we believe that these technologies are already ripe for adoption in more closed or self-contained settings such as specialty care. “Chip-on-a-pill” technologies go even further to record the actual consumption of medicine. Pharma companies have struggled for years to overcome the challenge of poor adherence to treatment regimens.” such as those offered by Boston-based startup Vitality. Taken together.000 per treatment cycle. provide escalating reminder levels. Pharma companies could partner directly with specialty pharmacies to deploy these solutions. Electronic pillboxes offer similar benefits. however. A new “smart cap” for insulin injection pens tells users how long it has been since their last injection.88 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Institute for Health and Clinical Excellence declined Johnson & Johnson’s Velcade biologic for multiple myeloma. Improved adherence also could significantly increase medical . pharmacy. the chip transmits vital signs and confirms the dose taken. and customer relationship management (CRM) software have all proved limited. call centers. the necessary tools have been missing. Cost-savings could run into the hundreds of billions of dollars—while still boosting total revenues for pharma and medical device companies. then it makes a noise. and data transparency. First the device glows. physicians. closed-loop monitoring. caregivers. drug-test combinations. letters. and patients—and the limited visibility into patient homes have proven to be insurmountable by conventional means. and finally it calls your phone. While experts have long seen a solution in enabling patients to have a robust dialogue with providers. while websites. For example. the involvement of multiple stakeholders—payors. Emerging opportunities Over the next several years. Five opportunities are highly attractive: patient adherence. While aligning the various stakeholders in the healthcare landscape will be challenging. pharmacies. New technologies offer significant potential. They collect a wealth of personalized patient adherence data to facilitate a stronger dialogue. the episodic and infrequent nature of interactions with providers. which costs more than $24. chronic disease management. and physicians. “Smart bottles. Proteus Biomedical and other companies implant ingestible chips that can send a signal to an external device. the challenges posed by the complexity of drug treatments. Patient adherence. health systems and payors will actively seek ideas from all stakeholders to increase medical value.

The World Heath Organization (WHO) estimates that in 2008 chronic noncommunicable diseases accounted for 63 percent of all deaths worldwide3. 2011. Several companies are currently pursuing this opportunity. .. and provide intelligence to administer optimal doses of insulin at the right time. and chronic obstructive pulmonary disease (COPD)—are mature with key stakeholders aligned and ready for broader adoption. congestive heart failure (CHF). And it will only continue to grow as more conditions. and health behavior. and chronic obstructive pulmonary disease used a remote-monitoring device to answer daily questions about their symptoms.Moving from cost to growth 89 value.” World Health Organization. and back pain. This accounts for 75 percent of U. apps on smartphones. vital signs. Continuous glucose monitoring. such as rheumatoid arthritis. congestive heart failure. monitoring devices are equipped with intelligence to act in real time on readings and to deliver treatment. Closed-loop monitoring. Baker et al. Chronic disease management.000 patients today. This represents the next wave of drug-device decision-support integration in chronic care. The technology 3 4 “Global status report on non-communicable diseases. Several interesting applications are available on the Apple app store that allow patients with chronic conditions to better manage their disease state. go from an acute to a chronic condition. and location-based services. 30:1689–1697. Treating these conditions effectively requires new tools and technologies that can change the standard of care from episodic to continuous. Patients with diabetes. healthcare spend— amounting to more than $1 trillion and to $3 trillion worldwide. In India. for example. Laurence C. “Integrated Telehealth and Care Management Program for Medicare Beneficiaries with Chronic Disease Linked to Savings. implanted defibrillators are equipped with advanced intelligence to deliver the right pulse to maintain heart performance.” Health Affairs. Other disease areas. Similarly. Here. We believe that solutions for these three disease areas—diabetes. will soon see advances in care as well. mobile phone services provide tele-counseling and algorithmbased diagnosis for chronic disease conditions for more than 20. As patients step up their treatments and see better outcomes. A recent study of the Veterans Affairs hospital system in the United States demonstrated a 7 to 13 percent reduction in monthly costs per person through a carefully designed and implemented care management and telehealth program. oncology.S. Care managers reviewed their answers and responded with timely escalations or interventions4. including remote-monitoring capabilities. they will consume more medicines while requiring less intervention from providers. for example. aims to integrate a monitor and an insulin pump. including heart disease and certain cancers. 2010.

ending in 1998. the ability to measure individual variations and tailor therapy has grown exponentially from physical characteristics (age. Now that information can be linked to the MC1R gene on chromosome 16 and pheomelanin to potentially guide dosage levels5. and the regulatory hurdles will be difficult. Still. Pharma companies are starting to take the next step and are including distinct biomarkers and companion diagnostics in the FDA labeling of pharmaceuticals. Today. Data transparency has the potential to reduce medical errors. These include improving the molecular understanding of disease. many are partnering with or acquiring diagnostics companies. Growing volumes of medical data. Gleevec. also Genentech websites. advanced computing capabilities. Over the last century.” Anesthesiology 2:279–83. Herceptin was the first major example of this. and increasing levels of access have resulted in pockets of unprecedented transparency and insights. as the availability of the HER2 FISH (fluorescence in situ hybridization) test is thought to have resulted in Herceptin coming to market eight years earlier than estimated. Most of the value will accrue to players demonstrating the usefulness of biomarkers. gender. Rather than develop an in-house expertise. “personalized medicine” will continue to focus on companion diagnostics. and metabolite levels in the late 20th century. and news and analyst reports. Data transparency. Drug-test combinations. Liem et al. 2004. rather than a 10-year full population trial6. reduce healthcare 5 6 E. antibody/antigen. aligning incentives among various stakeholders. “Anesthetic requirement is increased in redheads. It required only a 20-month clinical trial. Erbitux. raise the standard of care. .B. and race) and family history in the mid 20th century to diagnostic tests for characterizing protein. major challenges must still be met. For example. this opportunity promises to deliver significant medical value for all key stakeholders. and Tarceva are prime examples. and developing the necessary informatics. company reports.. anesthesiologists have long suspected that red-haired females need more anesthetics. however.90 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders challenges are still significant. We thus expect the number of diagnostics–pharma deals to grow. To realize the full potential of these developments. sugar. thousands of genomic and combinatorial measurements are transforming the ability of physicians to adjust medication to individual patient profiles. Until that time. Physicians have long been aware of significant variations in patient response to various drugs. 2009. especially the pharma companies. Per public comment of CEO Art Levinson and President Susan Hellmann of Genentech.

Moving from cost to growth 91 .

AT&T and Orange are establishing mobile health platforms to deliver remote care. Intel. Intel. for example. Established drug and device companies have a deep understanding of disease states.92 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders consumption. WellPoint has started using IBM’s Watson to evaluate patient claims data and identify treatment options. in turn. and imaging data. has the potential to completely change pharma and medical device offerings and reimbursement patterns. a few exciting examples already exist. these companies face major barriers in fully commercializing their innovations. relies on a joint venture with General Electric for its “Care Innovations” effort. has developed a “Healthcare Management Suite” for providers to use with patients employing the company’s electronic monitoring equipment. for example. pharmacy. This not only places them in an enviable position of strength but also makes them a partner of choice for technology companies. we believe that increasingly workable solutions are being created. While significant obstacles remain in linking inpatient. This. and even Ford Motor Company has jumped on the bandwagon to offer heart-monitoring car seats. credibility with payors and providers. An increasingly complex competitive landscape Several large (and small) technology. creating and capturing value in this space has proved to be elusive. and improve outcomes. Key stakeholders in the healthcare value chain. And Novo Nordisk has conducted a virtual retrospective clinical trial across millions of health records in Denmark to demonstrate there was no increased risk of cancer with a particular type of insulin. On the consumer end are such companies as Castlight Health. a repository that converts . and other players have made significant investments in this space. While creating “perfect data” is fraught with challenges. Despite their first-mover advantages.” It offers pricing transparency so that patients can choose the most costeffective providers. a San Francisco-based startup aiming to become the “Travelocity of healthcare. and extensive regulatory experience. They also have advanced marketing capabilities with global brand recognition and mature channels to distribute products and services worldwide. telecom. for example. are building advanced capabilities and establishing a competitive advantage. outpatient. claims. lab. We believe that success in most areas will depend on four key components across the value chain: a recorder that collects data from the treatment sites. Even for pharma and medical device companies.

ROI. smart executives will start preparing now. such as: „ Is our CIO the right person to help us navigate the technology landscape. an analytics and intelligence engine to guide clinical decisions. barriers to entry. Pharmaceutical and medical device companies that are able to integrate them into their product development and delivery processes will stand to gain revenue and market power. for example. or do we need a CTO? How can our IT organization—which to date has focused on efficiently delivering large capital projects—supply these solutions? How can we successfully incubate these technology ideas and ventures within our company? „ Do we have the operational capabilities to integrate technologies with our products? Are we in a position to drive economies of scale to make some of these components cost-viable? Do we have the cold-chain logistical capabilities. While most of these advances are still emerging. companies will need time to develop the capabilities necessary for speedy integration. and business development. to supply a batch of one to a patient? „ Is our business development group equipped to scout for appropriate targets? Are our traditional criteria for success around defensibility.Moving from cost to growth 93 data to information. . and IRR applicable for these spaces? „ More broadly speaking. could we become the Apple that transforms healthcare through developing attractive products and services? *** These new technologies not only will add enormous medical value but also will shift the healthcare landscape. This will require answering some tough and candid questions. pharma and medical device CEOs need to build intensive capabilities in operations. technology. Few models have succeeded in both establishing these components and determining how to capture the most value. and behavioral mechanisms that guide or enforce appropriate clinical intervention. does our organization have the intellectual curiosity to explore new realms of possibility and deliver distinctive patient value? In the coming decade. Rather than wait to see the technologies mature. Getting started Beyond creating a profitable strategy and business model.

94 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

The importance of emerging markets is indisputable for pharmaceutical companies. new opportunities are quickly opening up and are set to drive 70 to 90 percent of the growth in pharma sales over the next five years. From Nigeria to Indonesia and from Russia to Brazil. Many of these companies can also point to the dedicated executives who are in charge of implementing those strategies.Moving from cost to growth 95 Tapping operations to win emerging markets: Questions every pharma executive should consider Ulf Schrader. But are some pharmacos still missing valuable opportunities in these markets? Some observers would say so. But pharmacos will not be able to win in those markets if they use the same approaches that have driven their success to date. Most global pharmacos now have broad strategies for tackling emerging markets—and they can articulate them well. Here are the key questions that pharma executives should ask to better understand the potential of operations in driving emerging markets growth. Operations. could unlock many of these opportunities and trigger fresh ideas. Sabine Schulz Fast-growing customer segments in emerging nations represent the next growth opportunity for pharmaceutical companies. however. especially now that rivals in emerging markets are becoming stronger. .

Indonesia. Europe. the MNCs’ overall penetration is modest. The bigger opportunity. but very competitive landscapes that are increasingly crowded with both multinational companies (MNCs) and strong domestic players. and China—huge markets with significant potential. the focus tends to be on only a few key markets. companies’ websites. with rising wealth and stable social and political environments. The pharmacos that are the quickest to gauge and build new operations approaches to capture those new classes of customers will succeed in breaking away from the pack and growing revenues as the spending power and expectations of those customers grow. Moreover. there are huge differences between serving more affluent consumers in. Russia. or the CIVETS: Colombia. local companies have cornered much of the available markets. in turn. There. the differences almost always involve customized product design. Just as important.and high-income segments in developing markets. Egypt. India. 2 . Many markets in China. for example. There is still relatively little MNC business in the next wave of emerging markets1—a set of countries offering sizeable populations. Bangladesh. and more—requiring a significantly different operations approach. Nigeria. lies in the populations coming up behind the middle. Nigeria or Bangladesh and serving lower-income populations in those nations. Egypt. It is not simply a question of the affordability of pharmaceutical products. the biggest multinational pharmas generate on average only 15 percent of their sales value outside the United States. are inaccessible to MNCs because product price points are low—and there is little support from government to make MNCs’ high-quality medicines available to the poorer segments of Chinese society. Turkey. Global pharmas are certainly paying attention to the BRIC nations—Brazil. most MNCs are still targeting higher-income consumers in emerging markets—and there is little that requires them to operate differently to reach these segments. the efforts of pharmacos will also become the proving grounds for a range of innovative approaches in manufacturing and distributing drugs. Espicom. Yet. will help those companies serve a host of new mass markets in emerging countries.96 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders To begin with. alternative distribution models. say. and the Philippines (introduced by Goldman Sachs in 2005). by far. and potentially even create benefits for their businesses globally. Still. 1 For example. In India. dedicated low-cost production sites. Vietnam. the opportunities are similar in scale but equally difficult to reach. the Next Eleven (N11): Mexico. These emerging middle-class segments are evolving rapidly as many of their citizens move toward middle-class status and many more pull themselves above the poverty line. South Korea. and Japan2. Despite being present in many countries worldwide. This. and South Africa (introduced by the Economist Intelligence Unit in 2009). Vietnam. Turkey. Pakistan. Iran. Indonesia.

selecting limited sets of brands from its global portfolio of salty snacks but developing brands with uniquely Indian flavors such as “Magic Masala. We have distilled several principles for how multinationals and local companies can successfully shape their operations to serve the bottom of the pyramid and emerging middle-class markets.” Product innovation can also happen by experimenting in local markets— applying a “test and learn” approach—and by conducting local R&D to develop new product concepts. When the appropriate operations strategy. it is essential to take a full valuechain view when thinking about the business proposition. That can happen by “deengineering” or adapting global products to develop versions that can meet local customers’ requirements.Moving from cost to growth 97 Key questions to prepare pharma operations to drive emerging markets growth If a company is to be successful in pursuing opportunities with emerging middle-class groups worldwide. low-cost footprint. Danone is an excellent case in point. the food company is improving the health . profitability has to be the “end state” goal in order to ensure the appropriate allocation of resources and the right degree of commitment. its leadership team must be confident that it can serve those groups in economically viable ways. distribution channels. Last. and competencies are not in place. it will be necessary to envision and develop innovative new models that can do the job. First. The key is to nurture product innovation that brings new products to local markets by properly balancing global and local needs. for example. operations must take a view from the customer back through the value chain to ensure that products are appropriate for the intended markets and that cost levels are similarly aligned. followed that route in India. often at lower production costs. Applying a self-sustaining business model to produce nutrient-rich dairy products at a small flexible factory in Bangladesh. So how can big pharma executives rethink their strategic agendas and operations efforts so that they can reach the markets that will reward their organizations over the long term? They should consider the following questions: Do we have the right product design and packaging? The value-chain model will not be scalable in emerging markets unless it addresses the fundamental of tailoring products to local needs. It is also vital to leverage a broad ecosystem of partners for supply and distribution. Frito-Lay. Second.

and prices in rural areas and adjusting the packaging from a conventional plastic cup to pouch packaging. the tablet version has been filed for registration in more than 150 countries and nearly 75. May 2010. By testing different product formulas. Bayer’s approved doses for Ciproflaxin vary by region—600 mg in Japan. Do we have the right manufacturing footprint? In many countries. For example. Astra Zeneca launched a 2. and up to 1200 mg in the United States4. The new formulation did not require refrigeration.5 mg form of Crestor—half the normal dose—for patients of Asian ethnicity whose metabolisms may not easily accept doses typical in the United States or Europe. refrigerated storage and transportation—a lesson that is absolutely transferable to other product categories that could appeal to the emerging middle class3.” McKinsey 2009. sizes. could be taken without food. . August 23. Danone has come up with a product that is proving very popular in Bangladesh. Pharmacos can pursue this strategy. local regulations require local manufacturing (sometimes just of specific products or at specific production stages) in order to receive a marketing authorization. So far.000 patients were treated in 2008. Body mass also affects dosing levels.98 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders of rural communities. Michael Edwards. Some leaders already are actively developing and using alternate formulations. But that isn’t Danone’s only objective. The company is learning valuable on-the-ground lessons about how to produce and distribute products in low-income markets. Due to the scarcity of refrigeration equipment. 2010.. they might develop a pack of three tablets to stay below a certain price point. Dosing levels may need to be adjusted in emerging markets to reflect variations in the efficacy and toxicity of a drug at a given dose between different geographical or ethnic populations. a Social Business in Bangladesh. Abbott launched Aluvia. In 2004. up to 800 mg in the United Kingdom. The company has also learned how to distribute fresh dairy products without a conventional cool chain— typically. In 2007. forcing companies to either start local operations 3 4 “Danone’s Cheap Trick. the soft gel capsules and oral solution that were previously available were not appropriate. Grameen Danone Foods Ltd. dosages. for example. and populations in emerging markets tend to have lower average body mass than those in the United States or Europe. “R&D in emerging markets: A new approach for a new era. a heat-stable tablet formulation of the protease inhibitors lopinavir and ritonavir for African markets. and dosing was reduced from six to four times a day.” Time. or a pack that includes purified water for areas where this is needed. or packaging tailored to market needs or to logistical challenges.

the key is to be able to establish low-cost manufacturing that allows competitiveness—at the cost-of-goods-sold level—with local players. registering and launching new versions of molecules generally requires local manufacturing and a long timeline5. Other countries don’t make this a requirement. and small—the average capacity is nine tons compared to four and five times that load for long-haul truck transportation in the West. China has seen more than 20 such announcements in the same period 6. Interestingly. 2010 and 2011. but local manufacturing still offers significant benefits—faster approval path. then it must concede a license to a third party to manufacture the patented product in Brazil. This can happen through joint ventures. Trucks are outdated. Indonesia has particularly strict laws mandating local production. When Colgate acquired Sanxiao. the pharmaceutical sector is currently experiencing a new wave of industrial investments in rapidly growing markets. Brazil’s patent law requires that if a patentee does not arrange local manufacture of the product within three years of the issue date of the patent. Some consumer goods companies have even started to explore the design and implementation of small. for instance. a low-cost toothpaste brand in China. or outsourcing. Supply chains in emerging markets are a world away from what managers in developed countries are used to. for example. low-cost manufacturing set-ups with robust and rather simple equipment that they can deploy and easily replicate in local settings in emerging markets. FiercePharma. And in Egypt. 5 6 Press releases. Next to navigating through existing regulations. and so on. more than 17 major manufacturing facilities’ investment projects have recently been announced. Extensive press search. Do we have the right distribution approach? An efficient distribution model is also vital to the success of the overall strategy. preference at tenders. Getting products to emerging middle-class consumers poses big challenges. In Russia. overloaded. Ministries of Health interviews. average road speeds are half those in the United States. It was able to reduce its costs by 60 percent. local acquisitions. . the MNC discovered Sanxiao’s cost advantage in toothpaste production. The value-chain model won’t make much headway without an efficient manufacturing strategy. In India.Moving from cost to growth 99 or to partner with another company to begin manufacturing. which allowed the company to lower the price of its goods by an equal percentage and thus expand into an economy market segment by localizing manufacturing at a Sanxiao facility.

“They want the same products as everybody else.100 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders In many emerging middle-class markets. Nestlé may expand its operations in Brazil or in other countries such as the Philippines. 2010. The boat visits 18 small cities and 800. to the region they live in. including chocolate. Nestlé has launched—literally—a floating supermarket service.000 potential consumers on the Para and Xingu rivers—tributaries of the Amazon—carrying 300 different goods.” Bloomberg website. Nestlé Takes a Novel Approach to Distribution in Emerging Markets To reach underserved consumers along the far reaches of the Amazon. Nestlé isn’t the only company to use boats to reach low-income communities along the Amazon’s waterways. with up to a billion people worldwide exiting poverty and being able to afford its products in the coming decade. and sophistication that best practices suggest. high-capacity telecommunications services— often falls far short of global standards.” 1 Nestlé website. Nestlé views emerging middle-class markets as key to its long-term strategic success. If successful. according to Nestlé Brazil President Ivan Zurita.” Nestlé has invested more than $500. “These clients don’t want to be labeled as poor. Bradesco won 700 new clients after six months. Even the most basic infrastructure—well-maintained. ice cream. Rivers act as streets and avenues in that region. “Nestlé to Sail Amazon Rivers to Reach Emerging-Market Consumers. scale. We are servicing them where they are.000 in products and partnerships with local suppliers for the project. yogurt.” says a Banco Bradesco director. Banco Bradesco SA. June 17. “People’s daily lives here are linked to fishing. The food maker has adapted its products in low-income regions by offering smaller. The lack of reliable cold storage in many channels dictates the need for frequent resupply. press release. also in the Amazon. widely available electricity. started to offer banking services last year via the Solimoes River. according to Zurita. 2010. Iuri Dantas and Tom Mulier. and reliable. warehousing facilities lack the size. . cheaper versions of products such as Alpino ice cream and Ninho milk powder through direct distribution to make them more accessible to low-income shoppers1. properly surfaced roads. Brazil’s second-biggest bank by market value. and juices.

stockists. to gain consumer insights and expand its distribution network to remote areas. and Novartis website. allowing the company to reach 30 million villagers by 2010. In fact. the better the solution may work.”) And Hindustan Lever has developed innovative approaches to supply chain challenges in rural India. For example. paying them a 7 percent commission7. “Arogya Parivar. and availability of their products. the company launched a new range of quality medicines at affordable prices. “Prayas. Most pharmacos still use a multi-layer distribution model that results in 16 weeks of inventory in their supply chains and around 25 to 32 percent of the product value retained in the distribution chain—with clearing and forwarding agents. By doing so. India’s largest microfinance institution. Uttar Pradesh.000 women working on consignment. GSK partnered with SKS Microfinance.”) Pharmacos are still learning how to navigate the particularly complex distribution landscape in emerging markets. the Indian consumer products giant had some 100. In 2009 Sanofi Aventis launched a rural marketing initiative. and pharmacies to effectively create awareness. . and retailers8. and West Bengal.Moving from cost to growth 101 Nestlé is among those that have started using river transport to supply remote populations. One example of innovative distribution strategies is the launch of rural initiatives by some pharmaceutical companies. news articles. They partner with doctors. Case Studies. Another recent 7 8 9 Global Private Sector Leaders Forum.” in Bihar. affordability. (See sidebar “Novartis’s Low-Tech Approach to Beating Malaria. Successfully supplying emerging middle-class markets may call for solutions that require little in the way of new technology.” in Uttar Pradesh and Maharashtra. McKinsey analysis. Press releases. Unilever. GSK is currently using this alliance for ASHA (a nutritionally superior but easy-on-the-pocket health drink). non-governmental organizations (NGOs). acceptability. In yet another case. Its “shakti” model trains rural women who live in small villages to become local salespeople for its household products. Analyst reports. they eliminate the stockists and retailers from their distribution channels. As part of the program. the more basic the technology. in 2006 Novartis launched a rural marketing initiative. Novartis’s SMS for Life project is exemplary in its embrace of “low tech”—working collaboratively with global technology and communications companies in Tanzania to keep track of point-of-sales inventories and thereby reduce stock-outs of anti-malaria drugs from 26 to 1 percent. and contracted subsidized rates for rural populations and four local manufacturing firms to produce the medicines for the company 9. (See sidebar “Nestlé Takes a Novel Approach to Distribution in Emerging Markets. as of last year.

102 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders example is Pfizer and Ranbaxy formalizing a tie-up with ITC (one of the biggest FMCG companies in India) in July 2011 to tap the rural markets for their over-the-counter products. President of the Organisation of Pharmaceutical Producers of India (OPPI) and head of Novartis in India. The overall stock-out rate has been reduced from 26 percent to less than one percent2. As observed by Ranjit Shahani. Short Messaging Service (SMS) technologies. 1 “Rural health facilities in Tanzania use mobile and electronic mapping technology to save lives”.” Novartis website. “SMS for Life” pilot increases availability of malaria treatments threefold at participating health facilities. The initiative is helping Tanzania to battle malaria by reducing stock-outs of anti-malarial drugs. The 21-week pilot. Through its SMS for Life initiative. The project has proved that a state-of-the-art data-gathering infrastructure can be made available to people in remote locations using basic everyday tools like SMS and mobile phones. . It uses a combination of basic mobile phones. the pharma works in collaboration with the Roll Back Malaria Partnership— initiated by the World Health Organization. the United Nations Development Programme. stock levels are transparent. It also demonstrates the effectiveness of public-private partnership models. As a result. Novartis’s Low-Tech Approach to Beating Malaria Novartis is not going it alone in its fight against malaria in Tanzania—and it is not using sophisticated technology.” 2 “SMS for Life. and the medicines are promptly replenished. the drug company FMCG tie-up is a “creative and sensible” decision. The in-field project managers have an incentive to text their current stock levels every Friday afternoon: They receive free mobile phone credits. the World Bank. has already made a big difference. and the United Nations Children’s Fund—together with Tanzania’s Ministry of Health and with IBM and Vodafone1. which included 226 villages and 129 public health facilities in three rural districts in Tanzania. “Roll Back Malaria Partnership. and easy-to-use websites to track and manage the supply of artemisinin-based combination therapy (ACT) drugs and quinine injectables.

where the milk is inspected and forwarded to the next production step. See also: Noel Greenberger. Collaborative solutions—such as the third-party joint supplier audits conducted by the pharma industry consortium Rx-36012 on behalf of its members—ensure the consistency.” The Hindu Business Line. “And that’s why we wanted full control of the supply chain11. formed in 2009 to support an industry-wide commitment to ensuring patient safety by enhancing quality and authenticity throughout the supply chain. Nestlé established long-term relations with 25. Nestlé’s new chief executive for China. The Joint Audit Program.” page 73. which is one of the consortium’s initial objectives. which can be placed into the product containers to monitor the experienced temperature over more than 48 hours— are options for supervising the cold chain and the quality of products along the supply chain. was designed to increase the effectiveness of each audit by collecting and analyzing more information while reducing the audit burden on suppliers and pharmaceutical companies. Can we leverage more broadly what we develop for emerging markets? The companies that excel at tapping into emerging middle-class markets keep an eye on what they can take back to their customers and operations in other markets13. 2011. To do so. effectiveness. Frank Scholz. Innovative solutions like “temp tails”—small temperature recorders. Some pharmacos are exercising oversight by sending quality-assurance personnel to their suppliers’ plants in order to manage the release of their products. 2011. Ensuring product quality is critical for any pharmaco—especially if local manufacturing and suppliers are involved. and Vanya Telpis.Moving from cost to growth 103 The distribution reach of an FMCG company into rural areas in India is much wider than that of a pharmaceutical company10. 13 . July 11. The resources and money that suppliers save by submitting to joint audits free up resources for improvements. Rx-360 is a pharma industry consortium.000 Chinese milk farmers who deliver their milk to one of the 164 stations within the eastern provinces of China. “Milk multinationals wrestle with Chinese supply chain. December 5. and fairness of audits throughout the supplier base. 10 11 12 “Pfizer. How do we ensure product quality? Consumer product companies that have been at the forefront of local sourcing increase their active engagement in development and support of local suppliers in order to take more direct control of supply chains.” FTD Mobile. The objective is to ensure quality and supply as well as to reduce the volatility of pricing. “From defense to offense: Leverage operations to increase revenues. “We realized there would be these risks.” says Roland Decorvet. Ranbaxy tie up with ITC to sell over-the-counter products in rural areas.

And they are more effective when they are led by local managers. 2. It is more important to learn quickly by efficiently testing assumptions than to hit the numbers. They cannot focus on problems of customers in emerging markets. norms for working relationships. 4. Innovation endeavors are by nature uncertain. Without autonomy. organizations. infrastructure. sales. and manufacturing to marketing. Shift power to where the growth is (and the people are). LGTs need the power to develop their own strategies.” Harvard Business Review. its senior managers understood that a very different business model was needed. targets. Customize objectives. LGTs become pawns in a global game. The LGTs had to rewrite that “software. Have the LGT report to someone senior in the organization. Build new offerings from the ground up. so it was set up as an independent “local growth team“ (LGT) based on five principles: 1. reverse innovation requires a clean sheet of paper. . reporting structures. 3. sourcing. job descriptions. Given the tremendous gulfs between rich countries and poor ones in income. The new business would have little in common with GE’s premium-market products. and power balances between functions—all evolved to suit local globalization. The executive appointed to do so has three key roles: mediating conflicts between the LGT team and the global business. These wide differences cannot be spanned by adapting global products.” establishing a standalone business unit with its own value chain—from product development. and service. Build LGTs from the ground up. titles. 5. connecting the team to resources such as global R&D centers. and sustainability needs. GE’s organizational “software”—its hiring practices.104 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders How GE Helps Develop Local Business Models Through Local Organizational Structures When GE developed its new portable electrocardiograph device in China. like companies. and metrics. and helping take the innovations that the team develops into developed markets1. 1 “How GE Is Disrupting Itself. and products. LGTs cannot thrive without strong support from the top. 2009.

the little ultrasounds comprise a $278 million annual global business for GE. its reach has grown to Russia. smallscale manufacturing.S. Its development in China of a portable ultrasound machine has given it a product that has become a big hit in the West. For pharmacos. and tuberculosis.Moving from cost to growth 105 General Electric (GE) offers a good example of this “emerging middle-classplus” thinking. growing at least 50 percent a year14.” GE website. This improves the planning horizon for pharmacos and other suppliers. CHAI enables and incentivizes governments of developing countries to better forecast their annual demand for medicines and medical devices and to extend the duration of their tender contracts from one year up to three years. The results are impressive: 14 15 “How GE Is Disrupting Itself. Founded by former U. As noted earlier. learning to apply this “reverse innovation” would be particularly critical in times when they need other weapons with which to fight back generics in their developed markets. Just as important: The machine is also enjoying fast growth in developed nations. Since 2008. Six years after launch. Brazil. Performance against Commitments. 2009. Focused on HIV/AIDS. Designed in China and meant for simple tasks such as spotting stomach irregularities. and other emerging markets in the Middle East and Africa15. The company has also gained valuable insights into local market needs. Similarly. . That is the case with the Clinton Health Access Initiative (CHAI). where it is used at accident sites and in hospital emergency rooms.000—less than 15 percent of the cost of its high-end equipment. “GE Citizenship. CHAI shows how co-operation can improve market dynamics and create wins for all parties. malaria. the machine has been a hit with rural clinics all over China. and other suppliers of healthcare services to decrease the risks of demand volatility.” Harvard Business Review. enabling them to reduce their production costs. pharmacos. The lessons that can be extracted from activities in lower-income segments can apply to processes as much as to products. GE’s portable MAC 400 electrocardiograph was designed in India and targeted to physicians and practitioners in rural areas. Danone has learned much about economies of scale from its Bangladesh yogurt activities. President Bill Clinton. a business-based approach to global health in lower-income markets. Are we taking on too much risk in producing for emerging markets? Successful operations approaches will also involve more thoughtful and effective cooperation among governments. and rural distribution that it can leverage elsewhere— notably in Africa. The machine costs about $15.

The reason? Pharma’s conventional operating model—R&D that drives innovation. nor have we gone near the labyrinth of regulatory issues that add complexity to any effort to reach emerging middle-class markets.106 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders For example. The innovation paradigm is shifting to “customer backward” from “science forward. (See sidebar: “How GE Helps Develop Local Business Models Through Local Organizational Structures. But the questions we have posed are representative of the main themes that support the design and implementation of new operations strategies for emerging markets. These are by no means the only questions that deserve to be on management’s agenda.” Clinton Foundation website. and managing innovation portfolios. and to focus not only on products for developed countries but also on mass markets worldwide. hard look at whether the Operations function and the whole corporate culture are suited to the successful penetration of emerging middle-class markets. Is our Operations organization ready for this? The management team has to take a long. We haven’t touched the thorny topic of pharmaceutical counterfeiting. The first issue to address here is the mindset change that is required. It calls for Operations to move from a largely reactive stance toward becoming an active innovator in a wide range of areas such as design-to-value and distribution models.” with all the organizational changes that this entails. In total. CHAI’s successive agreements have cut the price of first-line treatments by 50 percent and of pediatric medicines by 90 percent—mainly by taking out volatility and their resulting costs for pharmacos. representing nearly half of all people living with HIV and on treatment in developing countries16. embellished with marketing insight—must give way to a model in which innovation is powered largely by Marketing together with Supply Chain and Production. two million people are benefiting from medicines purchased under CHAI agreements. as well as the talent and competencies to make innovation part of the mindset. arranging seed funding.”) 16 “What We’ve Accomplished. We have not fully addressed the issues of the skills required not only within operations but also among partners’ employees. A final question touches upon the readiness and flexibility of the Operations function. . Innovation itself should be nurtured: Operations must have the governance and processes for scouting new ideas.

requires a culture that not only tolerates but also encourages entrepreneurial behavior. to craft incentives to reward the right kinds of innovation. if any. The built-in bias that domestic markets are “safe” and overseas markets—particularly volatile emerging markets—are “unsafe” is being turned on its head in many cases17. . That. The next step is to ask the right questions and provide focus and support for operations to become a growth driver. penalties for early oneoff failures. Action needed now Today’s global pharmacos are only part of the way there in emerging markets.Moving from cost to growth 107 Reaching lower-income consumers in rural Pakistan or Nigeria demands a willingness to launch many small-scale “test and learn” projects—which. let alone institutionalized. calls for senior management to signal clearly and consistently that such constant innovation is smiled upon—indeed.” Time. in turn. Even fewer have thought through how to “reverse innovate” and turn their emerging markets lessons into a global competitive advantage. 17 “Risk Inverse: The Third World Is Now a Better Bet. in turn. It’s not too late to start. And it may be important to structure those efforts as standalone units that operate beyond the scrutiny of conventional budget mechanisms— at least for a while. Emerging middle-class activities also demand a different view of risk—and perhaps different risk management metrics as well. May 24. The immediate starting point is to put operations on the executive team’s agenda when shaping the company’s emerging markets strategy. the potential of operations to deliver emerging markets growth. There should be few. 2010. Few of the global players have truly understood.


109 Managing risk .

110 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

most companies in the sector still do not have a systematic approach for assessing and managing such threats. Increased offshoring and outsourcing. leading to a greater potential for disruptive . Louis Rassey Supply chain problems have significantly impacted pharmaceutical and medical products manufacturers recently. with more stable production capacity and better financial performance. However. As a result. Supply chain risks to companies in the pharmaceutical and medical products sector have risen steadily in recent years.Managing risk 111 Expect the unexpected: Reduce corporate exposure and create value through supply chain risk management Katy George. driven by a range of factors. these companies can gain an edge over competitors. have made supply chains in the sector far more complex. pharmaceutical and medical products manufacturers can substantially reduce or eliminate supply chain problems due to unforeseen events. regulatory settlements. along with more sophisticated production technology. recalls. We have developed a five-part framework to identify and mitigate supply chain risks in a proactive way. leading to billions of dollars in lost market cap. Venu Nagali. and other costs. By following the elements in this strategic approach.

product recalls alone cost shareholders more than $25 billion a year in market cap. In the United States. Quality and compliance issues are an additional source of risk. 2011. and David Voreacos. com. competitive and pricing pressures have reduced the margin of error for production problems. Food and Drug Administration website. The FDA lists a range of supply chain risk issues that are currently causing drug shortages. which can limit production and create a significant impact on public health. GlaxoSmithKline PLC agreed to pay $750 million for quality issues4. “Boston Scientific’s ICD recall may result in asset sale. Justin Blum. More substantial.112 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders events. they are less prepared today to mitigate supply chain risks. Boston Scientific was forced to recall implantable defibrillators. 2011 . And Johnson & Johnson recently experienced a series of product recalls caused by several manufacturing and supply chain events that resulted in a loss of more than $900 million in annual revenue. Such risks manifest themselves in several ways.” Bloomberg.com. January 25. as has convergence between pharma companies and makers of medical products. destabilizing business plans and overall financial performance. “Current Drug Shortages. Andrew Harris. “Glaxo Agrees to Pay $750 Million to Settle Defective Drug Suit. forcing doctors to delay or ration treatment1. among others. 2011. These incidents can put substantial shareholder value at risk. resulting in drops of 10 percent or more when compared to the S&P 500 over the same time period (Exhibit 1). however. Recent reports indicate a current shortage of some cancer drugs. The company expects to lose $5 million every day that the devices are off the market3. cancer drugs shortage has doctors scrambling.100 recalls a year. June 7.” Reuters. As a result. and supply issues2. At the same time.” Reuters. assuming $2 million in costs per recall. 2010. are outright shortfalls in components or production materials. causing its shares to fall 13 percent overnight.com. they can also result in large share-price declines for companies in the sector. leading to lower inventories and a reduction in dual sourcing.com. While these events have obvious public-health ramifications. The past year has seen several such incidents. October 27. especially for certain lowmargin generic versions.S. This is not the first such experience for 1 2 3 4 5 Debra Sherman and Julie Steenhuysen. “U. and a stock multiple of 12 times earnings.” U. Debra Sherman. NYTimes. October 20. not counting losses of goodwill and market share5. potentially triggering recalls or adverse regulatory actions. Pharmaceutical and medical products manufacturers face greater capital intensity and cost pressures. ”Johnson & Johnson’s Profit Falls 12%. including greater-than-expected demand.S. Regulatory compliance changes have also played a role. manufacturing delays. Hurt by Series of Recalls” Associated Press. commodity shortages. about 1. A recent McKinsey study of medical products companies determined that supply chain risk events are the secondlargest contributors of large monthly declines in share price. April 1. At a minimum. component and product costs can spike during supply-demand imbalances. 2010.

which—coupled with supply shortages due to manufacturing and quality issues as well as lower inventories—resulted in lost sales and loss of market share 6. and they often fail to include proactive steps to mitigate the risks from such events. in order to manage increasing risks in a cost-effective way. Johnson & Johnson experienced higherthan-expected demand for a new drug-eluting stent. there is a clear need for healthcare companies to implement comprehensive and rigorous supply chain risk-management programs. including natural disasters (e. While such practices are still relatively uncommon in the sector.. For example. 2004. companies can adopt best 6 Ross Kerberand and Jeffrey Krasner. most BCM plans typically specify similar time-to-recover goals for manufacturing sites without explicitly considering the relative importance of the products being produced or the likelihood of bad events. In 2003 and 2004.. etc. Although most companies in the sector have risk management programs in place. there is little if any coordination among these efforts.)  Legal & Regulatory 1 2   Commercial 4  1 Actual number of events SOURCE: Factiva. ICD. In this context. “Johnson & Johnson Missing Out on Stent Sales. or compliance and audit management initiatives in the quality organization.. Yet. McKinsey analysis the company. measures within the procurement organization to mitigate sourcing risks from suppliers. .g. ICD. they are typically siloed and functionally based. August 19. joint replacement)  Disappointing clinical trials  Market share erosion from new competitors    32 Supply Chain 1 9 Product failures/recalls Major supply chain disruptions. Furthermore.g. stents.g. Katrina) Investigations of alleged improper physician relationships/payments related to use of device Fraudulent Medicare claims/off label promotion Expensive legal settlements over patent disputes with other manufacturers Concerns over decreased reimbursement by Medicare/Medicaid for certain device classes (e.Managing risk 113 exhibit 1 #11 Risk – Exhibit 1 Frequency of negative risk categories1 causing >10% drop in monthly share price (2000-10) Strategic MEDICAL PRODUCTS Examples of most common negative risk events Demand for a key product declines because of decreased procedure volume (e. companies may have business continuity management (BCM) programs for individual manufacturing sites that focus on recovering from disruptive events. drug-eluting stents.com.” Boston.

the business impact from that risk. Accordingly. and—if those risks develop into full-fledged recalls and regulatory actions—the impact of those events on the company’s operations. which are largely ad hoc and lack a comprehensive approach to implementation. „ In addition to the focus on negative risk. and consumer product goods (CPG) verticals. end-to-end supply chain risk-management process and tool kit tailored to healthcare companies. we believe that: „ Companies in the healthcare sector can systematically identify risk at all steps in the end-to-end supply chain. Our framework for supply chain risk leadership We have developed a proprietary. „ Risk management must go beyond the traditional scope of business continuity management—that is. and new product introductions that ramp faster than forecasts. preparing for recovery after bad events— to more proactively reduce the likelihood and negative consequences of such events. This approach can reduce both the risk of conventional quality and compliance issues. This represents a substantial upgrade to the current risk-management practices at most companies in the sector. „ While healthcare companies must still implement quality and compliance management systems. in order to identify and proactively mitigate potential risks and deliver incremental value. and the preparedness to mitigate it. a risk-informed approach can enhance the effectiveness of those systems. Our framework consists of five components (Exhibit 2). companies must consider and plan for the upside opportunities of supply chain uncertainties. apparel. „ Companies should explicitly account for risk when making strategic decisions. such as those in the high-tech. automotive. . opportunities stemming from supply disruptions that impact a competitor. such as greater-than-expected demand for vaccines. and rigorously quantify their exposure by considering: the likelihood of a particular source of risk.114 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders practices from other industries that have implemented a more comprehensive and forward-looking approach. „ Risk mitigation and preparedness strategies should be differentiated based on the relative importance of different products and sites.

In March 2000. Nokia switched orders to other Philips plants and to its Japanese and American suppliers. Create Change. The difference in outcomes for the customers of the New Mexico plant was dramatic—Nokia came out of the disruption stronger and gained market share. 2008. . while some of its leading competitors were significantly weakened and lost market share7. This difference was primarily due to Nokia’s comprehensive supply chain risk-management program. and Really Get Ahead. Identify and evaluate risks across the end-to-end supply chain The ability to identify and evaluate exposure from sources of risk from their supply chains made a big difference to the fortunes of Nokia and its competitors. 7 Amit Mukherjee.Managing risk 115 exhibit 2 #11 Risk – Exhibit 2 1. Financial Times Press. and then react accordingly. a fire broke out at a Philips plant in New Mexico—a supplier of semiconductor chips to cell-phone manufacturers including Nokia—forcing the plant to remain shut down for several months. The Spider’s Strategy: Creating Networks to Avert Crisis. and redesigned chips to reduce its reliance on Philips products. which helped the company immediately—and accurately—estimate the impact of the shutdown on its business.

“Cisco Addresses Supply Chain Risk Management. And it updates the resiliency of critical suppliers every six months through worst-case-scenario evaluations. Each source of risk must be evaluated based on its impact on the company’s ability to meet its objectives—the “objectives-at-risk” approach. (2) Financials (3) Brandnam e Risk appetite overview (3/3): Brandnam e th resholds Ri sk app etite overvi ew (2/ 3): Fi nanci al l oss thresholds Ri sk ap petite overvi ew (1/ 3): P ubli c heal th thresholds High ris k P roduct 4 5 Medi um risk Ri sk Low ris k Acti on ?… Key Risks ?… ?… ?… ?… ?… ?… ?… ?… Key Risks ?… ?… ?… ?… ?… ?… ?… ?… ?… 2 Focus on commoditi es exc eeding ri sk threshol ds co mmod ities th at have high expo sure (% of revenue tho se commodi ti es represent) # of co mmod ities % of secto r revenue 3 3 4 5 6 7 ? Pharm 1 ? Fac tory Indicato rs Indicato rs ?… ?: ?: ?: ?… ?: Impact: I f theevents occur. component suppliers. achieving cost targets. Sourcing Pro dn. Cisco Systems also has an effective system to identify and evaluate sources of risk throughout its end-to-end supply chain8. and complying with regulations.116 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Like Nokia. what wo th level of impact b on ou t an cost? uld e e tpu d = 20 2 0 s hut down ? Increase inventory by 0. In addition. Plan ning IT Qual ity & Comp iance l EHS Security Labor F acilities T ech Ops Finan s cial High High NPI s Function/Site risk assessments Site risk das hboard: X YZ Pr oduct pr ofile and importan ce Site Profi le T er: 1 i Likeli h ood: Key sources of potenti al r sk and key indicators i Prodn .” . and between suppliers. Cisco uses a subscription-based service to obtain near real-time alerts about events that could affect the flow of goods from. and site (Exhibit 3). Specifically. obtaining supply. The company maps all manufacturing partners. 5M unit s 3 Di splay the abs olut e num ber of commoditi es in breach of threshol ds over t ime Exposure profil e (# of commodi ti es) ?… ?… ?… ?… ?… ?… 45 Preparedn ess to g row Peop e l Produ ct Process Net expo e to o sur bjectives Executi ve summary Preparedn ess to g row Peop e l Produ ct Process Net expo e to o sur bjectives Executi ve summar y 53 50 50 ?… 60 60 60 ?… ?… ?… ?… ?… ?… ?… ?… ?… ?… ?… ?… 60 ?… Q1 Q2 Q3 Q4 Det ails regarding s ources of risk and act ions are provi ded f or com modi ties carrying ex ces s risk 21 4 SOURCE: McKinsey 8 Gartner case study #G00206060. Sourcing Pro dn. function. To begin. Plan ning IT Qual ity & Comp iance l EHS Security Labor F acilities T ech Ops 1 Finan s cial High Impor tant commodi ti es (% of pro th site) d ru High NPI s Enterprise/Sector risk priorities Procurement dashboard: Summary overview of commodities by risk level over time 1 Generat ed for (1) Public Health. exhibit 3 #11 Risk – Exhibit 3 NPI Plan Procurement Make (external) Make (internal) Deliver Product risk assessments & mitigation Function/Site risk assessments & mitigation Product risk assessments Product ris k da shboard: XYZ Pr oduct pr ofile and importan ce Pro duct Profil e 1 T er: 1 i Likeli h ood: Key sources of p otenti al ri sk and key indicators Prodn . It can then identify and evaluate sources of risk from each node. the company should identify individual risks for each product. Nokia and Cisco offer object lessons for pharmaceutical and medical device companies that should adopt a multidimensional approach to understand the risks at all stages of the supply chain. to. what wo th level of impact b on ou t an cost? uld e e tpu d + 20 2 0 ?… ?: ?: ?: ?… ?: Impact: I f theevents occur. which it displays on a central crisis-management dashboard. those objectives include serving customer demand. and logistics providers as nodes.

and better assess its overall business continuity preparedness. A standard evaluation approach will enable management to make an apples-to-apples comparison of risks across products. 2. a problem that is compounded by a comparatively wide range of supply chain risks. capacity at several stages of production. a major healthcare company recently defined its risk appetite by categorizing the entire product portfolio into three types. procurement. and brand name. To evaluate the exposure from each source of risk. For example. and distribution. environmental health and safety. given the complexity of many companies’ portfolios. and even from one product to another within a company’s offerings. for each of its top products. That said. The site segmentation enabled the company to prioritize investments. with specific exposure thresholds for each. some unique to the sector. manufacturing.Managing risk 117 In addition. management should specify risk appetite not by individual products but rather by product groupings. . In the healthcare sector. The company also categorized its production facilities into segments based on the type of products they manufactured. management must use a standard evaluation approach that considers: the likelihood of occurrence for that risk. a company may have a substantially lower risk appetite for products that can adversely impact public health. such as financials. the impact it would generate on one or more supply chain objectives if it were to materialize. and the cost and supply of raw materials. more accurately determine the frequency and duration of quality audits. and sites. properly allocate management attention among multiple facilities. in order to identify the most immediate potential disruptions facing the company. this kind of quantitative approach is notably rare. functions. patient safety. the company should systematically identify and then assess sources of risks for all functions along the end-to-end supply chain—from new product introduction (NPI) and commercialization to planning. These include quality and compliance risks. Define clear risk appetite across the enterprise and by product type The appetite for risk will vary dramatically from one company to another. For example. public health. Using quantitative leading indicators and trends of key performance indicators (KPIs) helps to determine the likelihood of individual sources of risk. and the current level of preparedness in place to reduce the impact. reputation. These groupings can be based on individual importance of products to one or more enterprise objectives.

and demand variability risks. currency. material and logistical cost risks. Use a risk-informed approach to making strategic decisions Every strategic supply chain decision involves an element of managing uncertainty and risk. currency.g. exhibit 4 #11 Risk – Exhibit 4 Define enterprise objectives Determine product importance to enterprise objectives to define 3 product categories Set risk appetite thresholds for each main operations metric within each product category Quality & compliance (e.g. A CPG company. recently confronted these issues. respectively) Financials Type 3 L M H Cost (e. along with cost and supply risks at its foreign manufacturing sites due to uncertainties in labor. The company was seeking to better manage significant demand risks in its main U. including labor. cost savings targets. or quality and compliance levels by product type (Exhibit 4). acceptable cost increases due to risk events of $5M and $1M for Type 1 and 3 product categories. Defining risk exposure will enable managers throughout the organization to make quantitative and consistent decisions when faced with tradeoffs between risk levels and investment. These exposure thresholds can be pegged to supply chain metrics such as meeting demand (fill rate or service level). Companies that strive to optimize their production network must assess a range of factors. respectively) Public Health/Brand Name SOURCE: McKinsey 3. market. demand fill-rate of 99% and 80% for Type 1 and 3 product categories. and natural disasters.01 ppm for Type 2 risk category) Public Health/ Brand name Product categories Type 2 Type 1 H Financials M L Service level (e.S. materials. complaint rates or 0.118 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders The next step for each company should be to define risk appetite by setting exposure thresholds for each product type. disaster-related disruptions and supply shortages. To that .g. for instance.

Finally. as shown in the examples above. the company recognized an additional $2. which not only mitigated downside risks from events such as natural disasters but also offered additional capacity to address upside opportunities in the United States. . supplier contracts. This raises the degree of difficulty of such decisions. To address these challenges. Only by adopting a risk-informed approach will management be able to make more robust decisions that can withstand the inherent uncertainties of the future. certain supply chain decisions— such as the level of inventory and dual sourcing. The company conducted a comprehensive analysis to quantify all major risks and determine the scope of potential upside revenue opportunities.5 billion in sales over five years. a large pharmaceutical company faced risks in a high-margin segment of its business. In this way. By strategically optimizing its flexible capacity. In some cases. Similarly. processes. This is particularly true in the healthcare sector. where rigorous supply chain riskmanagement programs are still relatively rare. while companies most commonly seek to reduce their exposure to risk by determining the optimal set of mitigating actions. overtime).. Vaccine manufacturers face related capacity-planning challenges. and facilities. this is not universally true. The company tested the idea with highly volatile products that required minimum investment (e. a rigorous riskbased approach not only can mitigate threats but also can unlock incremental value by freeing up resources of time and attention that had been devoted to keeping certain risks unnecessarily low. however those sites served only local and regional markets. due to supply threats such as shortages and disasters. the company reduced its exposure to external events while also generating a 16 percent improvement in riskadjusted cost. manufacturing footprint. We recommend using a risk-informed approach to make strategic supply chain decisions. The company optimized its manufacturing network to address these risks by investing in new capacity at one of the LCC facilities. Yet. the company had two manufacturing sites in a low-cost country (LCC). an increase of 17 percent. we find that when explicitly accounting for risk. and inventory policies.Managing risk 119 point. including network optimization. in that it adds an additional entering argument. and more significantly due to variable demand. it needed to establish a flexible production capacity. given significant uncertainty in demand and the long lead times associated with production. By adopting a long-term view to investing in capacity in this manner. among others—can be vastly different from those determined by traditional practices.g. This provided a dual production source. a company may find itself able to tolerate greater exposure for certain products. and the size of back-up manufacturing facilities.

Establishing this culture requires a high degree of communication. and/or sites can be displayed on a sector-level dashboard for risk officers and other senior leaders. At some companies. This process must explicitly define the roles and responsibilities of the different supply chain functions. a mitigation action that has worked well in procurement. an employee in manufacturing should be aware of. ground-level suggestions that are intended to improve results. or fail to accommodate innovative. . Individuals should be able to discuss bad news with the same candor as when discussing good news. In addition. while information for multiple products. Create a risk culture in the organization Our surveys of employees at several healthcare companies indicate that risk culture is an area with substantial room for improvement. Developing the right culture is the key element of managing risk in any organization. Given the scope and complexity of most companies in the sector.120 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders 4. For example. by its very nature. 5. is a cross-functional activity. in which management establishes the right set of incentives for individuals to respect rules and procedures and to work for the greater good of the organization. A set of customized risk reports and dashboards can help. the company must periodically reassess risks to ensure that its mitigation strategies remain appropriate to the changing dynamics of the market. functions. Other companies tend to punish dissent in the ranks. Because of that interconnectedness. with clear lines of demarcation. And workers within the different supply chain functions should share actions and best practices across the boundaries of the supply chain. managing the sheer volume of information from this process becomes a challenge. and be able to leverage. Management should foster an open environment in which individuals feel empowered to discuss risks and potential disruptions. establishing a cross-functional risk-management process is critical to success. the company compiles all of the top risks for a particular product and displays them on a single dashboard for that product’s manager. Establish robust governance by embedding risk management into core processes Risk management. managers seem to reward firefighting more than the proactive steps taken to reduce risks. and even challenge line managers on specific decisions where appropriate. One major healthcare company is currently implementing a series of dashboards that can be customized to specific levels within the management structure. For example. as different functions within the supply chain can only identify and manage the sources of risks within their own realm.

management must understand that risk management is not a one-time activity. risk organizations can progressively become more sophisticated in the implementation of supply chain risk management. enabling companies to: understand the likelihood of certain risks. To deliver on this wide range of benefits. or an analysis of strategic investments that includes both conventional metrics such as expected net present value (NPV) and return on invested capital (ROIC). With this as a foundation. implementing a holistic and comprehensive supply chain risk-management program can deliver a wide range of benefits. This information will help catalyze a set of initial activities that ideally comprise the first steps of this framework. we recommend a detailed assessment of a company’s risk culture to identify gaps and address cultural issues head-on. leading to an assessment of supply chain risks for the top products to determine the greatest sources of risk and the specific mitigation actions for each type. This information should come through specific deliverables such as a heat map to describe the concentration of top risk sources across various supply chain functions. In conclusion. Companies should categorize all products into a few types and then define the risk appetite for each one. However. . proactively and cost-efficiently mitigate those risks. along with risk-adjusted measures such as standard deviation or worst-case NPV and ROIC.Managing risk 121 Given that backdrop. Getting started Senior executives of healthcare companies can get started by asking the supply chain organization to identify the greatest sources of risk to the enterprise. and obtain incremental value by making risk-informed strategic supply chain decisions. risk management must become an integral part of how the company operates.

and high scenarios of demand for HP products at any point in time. This defines the range of demand uncertainty that HP is willing to accept. including component/product demand. HP transfers that risk to the supplier using a flexible quantity contract. and 90th percentiles of the discrete demand 1 Venu Nagali et al. base. 2 . which considers the risks to key supply chain objectives that the company considers most important: supply assurance. if the business objective is cost savings. If the business objective is cost predictability. for example. Like most high-tech companies. That is. the 10th percentile (the “low” scenario) by definition implies that there is only a 10 percent likelihood of the actual demand being less than forecast.Case study: Hewlett-Packard Hewlett-Packard Company has been implementing a comprehensive supply chain riskmanagement program since 2001. HP faces a host of challenges. In evaluating demand. Short product life cycles in the sector create significant demand risks. Nagali is current at McKinsey and is one of the co-authors of this paper.” European Leaders in Procurement Magazine. and cost predictability. For the range of demand near the 50th percentile. it can then leverage pricing terms pegged to specific business objectives. 38. component cost. and supply uncertainties. Supply chain uncertainties and risks linked to key objectives HP has implemented the “objectives-at-risk” approach. And periodic mismatches in supply and demand for the industry—along with supply chain disruptions and quality issues—trigger component supply risks. Defining risk appetite and ownership using the probabilistic scenario approach The probabilistic scenario approach lends itself nicely to the subsequent challenge of defining risk appetite. cost. primarily because the results have been so notable. Risk-informed strategies and decisions Once HP has quantified the uncertainties impacting its supply chain objectives. where the uncertainty is higher. which HP quantifies using probabilistic scenarios. HP repeats this process for all of its products. These three objectives are impacted by a range of variables. HP uses a discounted pricing term. Volatile component prices bring cost risks. cost savings. “Procurement Risk Management at HP. To address these supply chain risks. Patrick Scholler and Venu Nagali. The supplier takes on this uncertainty because it may be cheaper for the supplier to manage across all of its customers. January 2008.2. October 2007. it uses either a fixedprice or price-cap pricing term. 50th. which has been written about extensively in industry and academic journals1. the company uses the 10th. HP developed and implemented a comprehensive supply chain risk-management program. Vol. distribution to represent the low.” INFORMS Interfaces Journal. “Calculated Risk. Number 1. HP commits to buying that range of demand using a fixed quantity contract with suppliers. and supply uncertainty. which aligns well with portions of the five-part framework described above. Taking demand analysis a step further. For example. and effectively winds up with a portfolio of structured contracts that are specifically tailored to maximize business objectives and manage risk due to demand..

and marketing. these results are not reproducible in all companies and across all sectors. saving HP an additional $50 million. HP’s supply chain risk-management program delivered incremental value in excess of $500 million during its first six years. Of course. across four key categories: (1) material cost savings of over $425 million. as the riskinformed contracts enabled suppliers to lower their costs and risks of doing business with HP. this example shows what is possible through a comprehensive and integrated approach to supply chain risk management. (3) improved cost predictability of components that have volatile costs. implementing a rigorous business process that linked and defined the responsibilities of all elements of the supply chain— from procurement and planning to supply chain operations. Among other elements. particularly during market shortages. delivering an estimated $50 million in additional margin. HP took the governance element of risk management extremely seriously. . However. (2) increased supply assurance for key components. finance.In the aggregate. and (4) lowered inventory costs by several percentage points as HP optimized inventory levels internally and at suppliers.

124 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

Managing risk


Light-footed operations: The virtues of agility in volatile times
Thomas Ebel, Kerstin Kubik, Martin Lösch

Pharmaceutical operations are exposed, as never before, to disruptive events and volatile demand shifts. Agility thus is becoming a prerequisite for success, yet many pharmacos remain in firefighting mode. The leaders, by contrast, are developing a structural approach to agility, which helps them to improve their cost-competitiveness and to drive profitable growth through faster ramp-up of launches and fewer stockouts. Here’s how to realize a step-change in supply chain agility.
In a world that’s getting “hot, flat, and crowded,” to use Thomas Friedman’s succinct phrase,1 pharmaceutical supply chains are increasingly at risk. Because supply chains have become more global and interconnected, natural disasters such as the recent Japanese earthquake and tsunami, or political upheavals in the Middle East, can wreak havoc on the business.


Thomas Friedman, The World Is Flat: A Brief History of the Twenty-First Century, Farrar, Straus and Giroux, 2005.


Operations for the Executive Suite: Opening new horizons for current and future pharma leaders

When the 2010 volcanic eruption in Iceland stopped European air traffic, many pharmacos struggled to find alternative transport, leaving some lifesaving drugs out of supply for two weeks. The Japanese tsunami damaged numerous pharmaceutical plants, some of which may never reopen. Other changes in the environment have combined to raise the pace and complexity of competition, which puts a premium on the ability to rapidly and efficiently adapt operations. Among the most important factors are these: „ Demand volatility. The traditional model of stable demand is being supplanted by more erratic patterns driven by tenders, rebate contracts, and unexpected pandemics and epidemics. „ Generic challenge. Between 2010 and 2015, drugs representing roughly 40 percent of pharma revenue are coming off patent, leading to higher levels of volatility and uncertainty. „ Demand fragmentation. As pharmacos focus on lifecycle extensions, new drug delivery systems, dosage forms, and packaging/marketing innovations are all increasing the number of SKUs, lowering the average SKU size and making product portfolios more complex. „ Regulatory scrutiny. Regulators are turning up the pressure on pharmacos to improve quality compliance and performance, as observed by the increased number of warning letters, fines, and import bans. „ Higher working capital targets. To free up more liquidity, companies need to tap the next level of inventory reductions. This will require a business model that features shorter lead times through a more agile supply system.

Toward a system of agility
Some pharmacos have made reactive adjustments to improve their agility. For example, they might charter special airfreight capacity to respond to a natural disaster, or rush production orders after a batch failure to avoid a stockout on a critical product. Such fast issue resolution extinguishes the crisis fire, but it doesn’t anticipate or prevent the next fire. Pharmacos must be able to set up a system of structural agility that goes clearly beyond issue resolution and firefighting. Our research shows that building structural capability generally involves five operating dimensions (Exhibit 1): „ External supply. Creating and maintaining an agile supply base to quickly scale up or down the supply of materials and services. „ Site flexibility. Quickly adapting local capacities with minimal cost.

Managing risk


exhibit 1
#12 Agility - Exhibit 1 Five dimensions of agile operations
End-to-end supply chain planning Pharmaco Distribution

4 Suppliers

Raw suppliers API plant API/intermediate Contract suppliers manufacturers 2 1 External supply 3 Site flexibility Network flexibility Manufacturing plant Country DC Wholesaler DC Pharmacy

SOURCE: McKinsey  

Segmentation Complexity management

 

KPIs Risk management

„ Network flexibility. Supporting structural flexibility, and being able to rebalance it quickly and easily. „ End-to-end supply chain planning. Creating information transparency and use planning to keep supply synchronized with demand at any point in time. „ Sustaining agility. Ensuring and maintaining the right conditions for agility, in areas such as segmentation and performance measurement.

External supply: Sources of agility
Many pharmacos are not capturing the full potential of an agile supply base. One reason is that they don’t manage suppliers’ flexibility with the same rigor and professionalism as they do pricing and compliance. Consider the automotive industry by comparison. For a seat manufacturer delivering to a major automotive OEM, the annual frame contract defines an average output (say, 7,000 units per week) as a non-binding plan, calculated based on available supplier capacities at 90 percent utilization (five days, three shifts, running at 100 percent). Call-off orders against that contract follow clear contractual rules for upside/downside flexibility:

During the recent financial crisis. running a supplier sales and operations planning (S&OP) process to proactively address capacity issues. the supplier has access to critical planning information. This requires multi-skilled employees and flexible production equipment. companies such as Volkswagen. T-Mobile. such as new engines. exchanging demand and production plan information with key suppliers. Mix flexibility. „ With three months’ pre-advice. „ With four weeks’ pre-advice. Volume flexibility. volume flexibility—being able to increase or decrease production based on demand—is only part of the answer. fast increases in capacity. unit cost. average output per week can be exceeded by 30 percent. Pre-qualification of equipment could be a solution. companies need to develop the ability to make small. smoothing fluctuations up front through capacity sharing. which needs agreement by both parties. especially full visibility of the OEM production schedule and volume plan. this involves labor. with sequencing of orders possible until one day before delivery to align with the OEM production schedule. Mix flexibility also figures in. and with more than six months’ pre-advice by 40 percent. and collaborating on projects to eliminate bottlenecks. as .128 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders „ Orders placed become binding three days before delivery date. The limiting issues here involve internal quality and external regulatory validation of new equipment. can produce multiple models on the same production line in its Leipzig plant and can even easily integrate new technologies. for instance. Besides labor flexibility. breathing plant When it comes to individual sites. because changes in product mix can pose a major challenge. although it comes at a cost. „ Higher volumes require additional capacity and investment. In exchange. BMW. average output per week can be exceeded by 15 percent. can be even more effective. and adherence to sequence. Besides defect rate. and Bosch used methods like adjustments to standard work time in order to deal with the drop in demand. Automotive players lead in this regard. Site flexibility: The living. A third lever. upside/downside flexibility is a key dimension in the supplier scorecard. even if volumes are stable. First of all. Pharmacos can substantially upgrade their own capabilities in supplier management by covering points such as: leveraging annual agreements to include call-off order and flexibility rules.

2 But how can these capabilities be transferred to pharma? The key is to incorporate production considerations in the product design phase. Looking outside the production context. Capacity sharing. 2009. “Using Stochastic Supply Inventory Models to Strategically Mitigate Supply Chain Disruption Risk. and overseas facilities. Crocs balances in-house with outsourced manufacturing and production close to markets as well as in low-cost regions through its U. for instance. Chiquita. so as to achieve maximum pack harmonization—the same blister pack or bottle formats that can be handled with less changeover time on one machine. pack types. . Schmitte. while Kimberly Clark and Unilever operate a joint warehouse to level out demand fluctuations.Managing risk 129 needed. Auto makers have been doing this for many years with a “round robin” scheme in which Product group A can be produced in plants 1 and 2. a pharmaco should be able to quickly shift volumes in the network.3 supplying labor both to Bayer and other companies and thus smoothing Bayer’s own fluctuations in labor demand.” report of the Economist Intelligence Unit. Bayer organized its human resource pool as an external company. ideally done in a structured manner. regulatory requirements once again pose a challenge. Product group B in plants 2 and 3. including minimal contractual obligations with primary third-party manufacturers in China. for example. Managing demand peaks and troughs can be addressed through active collaboration with other players. Jobactive website. and Product group C in plants 3 and 1. Pre-certification thus is essential. 2008. Network flexibility: Greater than the sum of its parts When confronted with sudden demand shifts or disruptive events.S. Crocs also has evaluated and qualified more than 15 alternative manufacturers in the event that current 2 3 4 BMW Plant Leipzig website.4 For pharmacos.” Logistics Spectrum.J. specifically the need for local authorities to approve each production site separately for each drug. and “Managing supply-chain risk for reward. which resulted in a 4 percent revenue increase during this crisis. Rivals Mars and Nestlé. A. shifted production to other regions when a hurricane struck its plantations in Honduras. such as having two sites certified per product in order to ensure backup availability for strategic or high-risk products. Our experience shows that a radical harmonization of dosage forms. many consumer companies have pursued such collaborations. and pack dimensions can lead to substantial improvements in overall equipment effectiveness and unit cost. It has flexible relationships with suppliers. Shoe manufacturer Crocs exemplifies a truly agile network. joined forces to manage the logistics related to the Christmas peak in confectionary sales.

One pharmaco decided to focus on end-to-end planning in order to reduce excess inventories and write-offs. shifting to meet demand surges in new regions. Why. . And others are pre-qualifying subcontractors to preempt a possible shutdown of current manufacturing partners.130 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders suppliers reduce or cease production. are many pharmacos whipsawed by poor planning practices. Attaining such a short lead time will be hard for pharmacos that take four to six months for multi-step drug substance production. then. for example. As a result. Hoover’s. and were 5 Crocs’ company financial statements. as well as to stabilize the production system and better capture upside sales opportunities. Crocs’ mixed strategy reduces its own assets while simultaneously reducing complete reliance on just a few suppliers. had full visibility of drug substance stocks worldwide. Indeed. there is still a lesson to be learned. The company made several changes: „ It defined three clear planning “loops” to ensure that each part of the value chain synchronized with patient demand—materials supply. and finished product replenishment. pharmacos should compensate by planning farther ahead. or for different models or colors. managing supply according to a vendor-managed inventory/pull logic. Knowing that they cannot accelerate the process to manufacture to customer order. choosing which production steps to outsource—and gaining flexibility for those steps. „ It defined one owner for each planning loop. some pharmacos are actively shaping their outsourcing strategy. Chemical production planners. End-to-end supply chain planning: Running in sync with demand The computer industry lives by the creed that “the best forecast is a customer order. despite the fact that forecasting and planning are so important in the context of long lead times. especially when it comes to linking upstream steps like materials and active pharmaceutical ingredients with patient demand? We see pharmacos clearly lagging behind consumer goods companies. drug substance production.” Laptop manufacturers supply large European retailers in an assembleto-order process out of Asian factories with just five to seven days’ order lead time. the company can rapidly adjust production as needed.5 While plastic shoes are significantly less complicated to produce and have lower quality requirements than pharmaceutical products.

and anticipates management decisions on key potential issues and bottlenecks. implementing end-to-end planning led to a 5 percent revenue increase through scenario planning and forward-looking issue resolution. End-to-end planning is the most effective way to reduce response times to external events and to compensate for long process times. plus a 30 percent reduction of supply variability through enforcement of frozen time windows and elimination of root causes of variability. Here are the most important methods: „ Product segmentation. SKUs. For this pharmaco. mainly by using a platform approach. „ Key performance indicators (KPIs). and technologies. „ It uses an S&OP governance that picks up the need for decisions or escalation across the three loops. „ Complexity management. To focus agility where it matters most. To reduce the number of costly and timeconsuming process variants. To steer efforts to those areas where agility can mitigate risks for strategic products. and set aspirations (Exhibit 2). .Managing risk 131 responsible for adjusting chemical production to meet demand scenarios and stock targets. and through scenario planning for strategic products. by flagging key changes or inconsistencies. „ It set the right planning frequency (such as a monthly review of the chemical production program) and alerts that trigger action through the whole supply chain (immediate handover of a high-probability tender forecast). „ Risk management. Sustaining agility: Setting the right conditions for agile operations Agile companies use a set of methods that help them create and sustain a system of structural agility. „ It systematically challenged demand figures. such as products in launch phase and critical hospital supplies. suppliers. drive awareness and focus. To understand performance.

That’s why C-suite involvement is critical. or with a forward-looking approach of assessing diversification. supply fluctuation (number of supply bottlenecks per year). and predictability of these fluctuations (forecast accuracy). senior leaders will need to understand the size of their exposure to volatility and risk. (Do all our suppliers come from one region or are they spread globally?) . so that they can focus their investments. „ How vulnerable are we to disruptions? This could be measured by a backward look at the number and severity of disruptions in the past few years. stretch targets. Leaders should ask several questions: „ How affected are we by day-to-day volatility in our different product lines and geographies? Look at week-by-week demand fluctuation by product group and geography.Exhibit 2 Measuring agility of operations Suppliers  Pharmaco Distribution 1 External supply     Supplier upscale potential % of multiple sources Share of sourced volume with volume commitment Share of stock in supplier consignment stock Call-off order lead time  2 Site flexibility    Std up-/downscale potential within one month (%) Average utilization Share temps of total blue collar staff Ratio fixed to variable costs  3 Network flexibility  % of multiple production sites Safety stock covers   Contract flexibility (avg. and max contract length of suppliers and sub-contractors) % of production outsourced Measurements to be performed by product group and geography 4 End-to-end Supply chain planning  Volume frequency index (VFI)1  End-to-end throughput time (total and per value chain step)  Order to delivery time 1 Share of SKUs produced minimum every 2 weeks SOURCE: McKinsey Questions for senior leaders Achieving a step-change in agility requires some bold changes in how people work.132 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exhibit 2 #12 Agility . as well as the current level of agility of different product lines and geographies. and cross-functional collaboration among Production. external suppliers. To start. and Supply Chain.

Managing risk 133 „ Given our risk of day-to-day volatility and disruptions. An agile company can increase revenues with better market penetration. *** Greater agility clearly offers substantial benefits for pharmaceutical companies. inventory and thus working capital can be reduced through faster replenishment processes. how agile are we in response? Key dimensions to examine are the ratio of variable to fixed costs. faster delivery into new markets. average line utilization. pharmaceutical firms will be better equipped for a volatile world. faster ramp-up of launches. a clear segmentation strategy. as well as reduced idle time. . standard upscale/downscale potential in one month. Significant cost reductions can be achieved through optimized product and plant allocation. Further benefits come in the area of growth. In addition. and fewer stockouts. the volume-frequency index (share of SKUs produced at minimum every two weeks). and reduced throughput times in manufacturing and packaging. and end-to-end throughput time. By developing agile operations in the right places.

134 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

Elsevier Business Intelligence. Over the past few years. By understanding the nature and scope of this transformation.1 In the same time period. Faced with these growing challenges. and the public at large. regulators worldwide are adopting smarter and leaner ways of working—from utilizing new technology-based surveillance tools to expanding global collaborations. Nasser Khan. 2011. . April 1. Between 2005 and 2010.Managing risk 135 Evolving beyond global regulators: An operational lens Ted Fuhr. Navjot Singh Globalization has reshaped pharmaceutical manufacturing and distribution at a time when new drug technologies are being commercialized. the number of drug recalls rose over threefold from 254 to 849. Elsevier Business Intelligence. The Gold Sheet. regulators. 2011. pharmaceutical executives will be better equipped to lead their own proactive efforts to improve product quality and safety.2 The speed in which these 1 2 The Gold Sheet. May 25. the number of annual Good Manufacturing Practices (GMP) warning letters more than doubled from 18 to 49. product and manufacturing quality concerns have moved to the forefront of attention for industry.

quality and safety concerns have moved to the forefront of attention for all pharmaceutical manufacturers. patients are manufactured abroad.6 The entities subject to inspection have always outnumbered the available inspectors. Education.S. globalization in pharmaceutical production is the result of a convergence of forces—demographic. their numbers have increased dramatically. Director of Medical Programs. industrial. 2011.” The Wall Street Journal. economic. Pew Health Group. An ongoing trend toward consolidation in the pharmaceutical industry will lead to fewer alternatives for supplying product during shortages. A changing world requires intensified scrutiny What’s driving this heightened activity? An increasingly global and fragmented supply chain has augmented the formidable challenges that regulators— traditionally under-resourced—face in ensuring quality and safety. Pew Charitable Trusts. more than 80 percent of the 820 hospitals surveyed by the American Hospital Association revealed that patient treatment with lifesaving and other critical-care drugs had to be delayed due to drug shortages. and act more swiftly to contain 3 4 5 6 7 The Gold Sheet. 2011. Overseeing the safety. Labor and Pensions by Allan Coukell. and technological. threat: the impact of recalls and the ensuing shortages on the lives of the people who depend on lifesaving medicines. Populations in developed nations are aging. As regulators dedicate more resources to inspections and other oversight activities. April 1. are projected to represent the majority of growth in pharmaceutical sales in the next five years. Elsevier Business Intelligence. Manufacturers and regulators deal with products that are life-and-death matters—products for which quality assurance is critical not only to individuals but also to society as a whole. drugs come from foreign countries. and could further exacerbate this problem in the future. July 13. . Drug shortages hit a record high (178) in 2010. and growing rapidly. “FDA Continues Aggressive Enforcement as Drug GMP Warning Letters Mount. September 14.4 Burgeoning demand has contributed to the growth in contract manufacturing—a market currently estimated at $20 to $24 billion. Beyond the direct harm caused by contaminated drugs is a less sensational.136 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders actions were taken has increased as well.S. Global industry analysis. Testimony before the Senate Committee on Health. and 80 percent of the active ingredients and bulk chemicals used in U. but no less dangerous. poised to account for about 45 percent of the world’s GDP by 2018. and the middle class is expanding worldwide.5 Up to 40 percent of finished drugs used by U. in a matter of years. and availability of the world’s drug supply requires unrelenting vigilance.3 Amid this heightened activity. Emerging markets. As with many other industries. “Most Hospitals Face Drug Shortages. 2011.” Global Insight’s World Overview. integrity.7 In the first quarter of 2011.

Food and Drug Administration (FDA) Center for Drug Evaluation and Research (CDER) utilizes a risk-based model to assess factors relating to the intrinsic product—such as sterility and prescription versus over-the-counter. But this stepped-up scrutiny goes beyond intensified enforcement.gov. Regulators are working smarter and leaner Throughout the world. the number of enforcement actions will likely only increase. as well as a deepening interest in proactive approaches to quality. For example. for example. its manufacturing processes—whether there is elevated risk for cross-contamination. practices.” www. and network-wide quality and compliance. control. As the pharmaceutical market undergoes wholesale transformation. U. scarce resources are a fact of life for regulators. the U. COMSTAT. FDA.Managing risk 137 regulatory breaches. “Pharmaceutical cGMPS for the 21st Century—A Risk-Based Approach: Second Progress Report and Implementation Plan. They are developing smarter and leaner ways of working and are becoming more collaborative with their counterparts around the world. and to the facility—such as past history of documented quality defects.fda.9 Next-generation surveillance technologies Regulators are also beefing up their investments in IT to improve their intelligence activities. and amid rising demands and shrinking resources. As government budgets are scrutinized. and monitoring of raw material suppliers and contract manufacturers—evidence of the heightened interest in ensuring authenticity. provides inspection activity information to other regulators in the hope that they may learn from 8 9 “Risk-Based Method for Prioritizing cGMP Inspections of Pharmaceutical Manufacturing Sites—A Pilot Risk Ranking Model. while those in emerging markets are becoming increasingly sophisticated in their standards. regulators are undertaking their own transformation. We are witnessing the advent of a new era in which regulators are expanding their vigilance from after-the-fact deficiencies to a broader scrutiny of company. increasingly requiring detailed active pharmaceutical ingredient (API) supply chain pedigrees or extensive qualification.” Department of Health and Human Services. We are seeing new efforts to advance regulatory science to stay abreast of revolutionary drugs and drug technologies. the FDA’s web portal. or the depth and frequency with which a surveillance inspection should occur.8 Risk assessments can help inspectors determine whether a preapproval inspection is warranted. and methods. plant. Some regulators are. .S. global regulators are increasingly focused on allocating resources against the greatest risks to public health.S. for instance. September 2004.

www.fda.138 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders FDA databases and work together more effectively and collaboratively. these systems are intended to improve operations by more thoroughly capturing adverse events and expanding the agency’s capacity for data mining and pattern discovery. European Directorate for the Quality of Medicines & HealthCare.. is a growing problem worldwide. Department of Health and Human Services. Together.10 Other tools include MedWatch Plus. 498–499. pp. evaluating. Food & Drug Administration.S. the FDA’s regulatory science strategy plan.gov.14 Among these emerging products are biosimilars. 364. it was estimated at $75 billion—and is growing at a rate upward of 13 percent a year.” U. February 10. Center for Medicine in the Public Interest. the Sentinel System allows the FDA to actively query various automated healthcare data repositories—such as electronic health record systems. In addition. Vol. “Developing the Sentinel System–A National Resource for Evidence Development. As biologics begin to lose patent protection in the next few years.cmpi. 10 11 12 13 14 “The Importance of PIC/S in Our Globalized World.S. To address these challenges.” New England Journal of Medicine. counterfeit medicines in some cases may represent a disproportionate share of market value in developing nations. In 2010. putting the populations in those areas at far greater risk. Rachel Behrman et al.edqm. .11 Technology-based surveillance tools are also helping regulators safeguard the security and integrity of the industry’s ever-expanding supply chain.org. www.org. identified the agency’s goal of developing better tools for reviewing innovative technologies. and registries—and thereby evaluate possible medical product safety issues continuously and in real time. administrative and insurance claims databases. Indeed. “Advancing Regulatory Science at FDA: A Strategic Plan. and analyzing adverse event reports and other safety information for all FDA-regulated products.12 What’s more.13 New approaches for emerging technologies A growing number of complex pharmaceutical products—some without precedent or clear legislative definition—have prompted regulators to expand their surveillance capabilities and processes. the Council of Europe’s European Directorate for the Quality of Medicines & HealthCare (EDQM) is engaged in a track-and-trace project that by 2015 is expected to link all national tracing systems into one European-wide platform to help prevent the entry of counterfeit medicines into the supply chain. Hamburg. and the FDA Adverse Event Reporting System (FAERS)—the agency’s new repository and advanced analytical methods that enable more efficient and effective analysis of safety reports and potential threats. and governments face increasing pressure to cut healthcare costs. for example. processing. released in August 2011. the global biosimilars market is expected to grow rapidly. 2011. www.” Remarks of Margaret A. August 2011. an electronic system for receiving. MD. The counterfeit drug market. U.

” U. FDA issued an Import Alert without conducting its own inspection firsthand. based on information provided by the European Directorate for the Quality of Medicines & HealthCare. along with the arrival of novel products and product classes such as therapeutic vaccines and innovative technologies such as needle-free delivery. In 2006. 2011.17 In addition. For example. These trends. June 2010. “Pathway to Global Product Safety and Quality.S. Evaluate. 2009. a regulatory pathway is already being forged in many parts of the world.”18 Accordingly.16 Demand for more clinical evidence has grown. will induce regulators to develop new ways of monitoring industry practices. In the future. Hamburg. we may well see a different paradigm.Managing risk 139 approaching the $30 billion mark by 2020. FDA partnered with Health Canada to authorize manufacturer inspections by accredited third parties. Switzerland. at 40th anniversary gathering of PIC/S. U. Since 2002.15 With at least 14 products on the European market. As a part of its recently announced global strategy. and other specialty-dosage forms—another objective of the FDA’s recently released strategic plan. inhalation. U. To a growing extent. countries are grappling with shrinking national budgets even as the demand for government services continues to grow. Regulators must become more creative and efficient with constrained resources through quality and compliance. MD. Geneva. FDA Special Report. 15 16 17 18 VisionGain. and regulators are also honing their focus on product design and manufacturing processes—especially for controlled release. Many are already using internal resources more efficiently. July 7. Food & Drug Administration. Commissioner of Food and Drugs. the FDA has piloted the use of accredited third parties to perform inspections of Class II and III medical devices. they are relying on the data and judgment of other regulators. This trend appears likely to continue—and even to become a cornerstone of the agency’s future operating model. the FDA has announced its intention to establish the necessary infrastructure for review and audit of information from third parties. . regulators are considering the use of independent third parties to boost their ability to conduct inspections—in the same way that pharma has increasingly turned to outsourcing for manufacturing. Leveraging internal and external resources for greater efficiencies Throughout the world. 2011. Industry will also play an increasingly important role through its internal safeguards and safety-monitoring programs.S.S. the agency announced that it will develop “compliance and inspection programs that contemplate enlisting public and private third parties to conduct audits and other oversight activities on behalf of FDA.” remarks of Margaret A. recently U.S. May 31. “The Importance of PIC/S in Our Globalized World.

China. all leaders and experts can “work together to assure that regulators around the globe have common knowledge. while weaknesses persist in regulatory systems—from a fragmented legal framework and limited powers to manpower and resource shortages— changes are gradually under way.20 A recent eight-year assessment survey of 26 African countries by the WHO showed a wide-scale commitment in many countries to improving their regulatory capacity. The country has intensified its inspections. and its new GMP regulations. As Commissioner Margaret A. developing networks to help them adopt formal guidelines and global best practices. As emerging markets become major sources of pharmaceutical products. which were put into effect in March 2011. tools.” She also noted that the FDA’s entry heralds enhanced cooperation and collaboration with other agencies and 19 20 “What Multinational Companies Need to Know about China’s New GMP Regulations. July 2011. Collaboration as a critical enabler The fragmentation and globalization of the supply chain has compounded the challenge of drug inspections. .19 In Africa. National Drug Authority. Hamburg noted. the largest supplier of pharma ingredients to the world. significantly raise quality standards. Uganda. The January 2011 admission of the FDA into the PIC/S represented a significant milestone in global cooperation. including pre-market inspections. September 2008. regulators around the world have become increasingly aware of the importance of their broader cooperation. has made significant strides since the 2007 heparin contamination. study assessment. and practices so that they can best work together. their regulatory bodies have worked hard to adapt to the rapid pace of growth in their markets—and to combat such threats as the rise in counterfeiting— through structural reforms and heightened enforcement activity. and other regulatory activities. Harmonization initiatives seek to improve the efficiency of regulatory systems. As a result. regulators in developing nations are receiving increased funding and support from their own governments.” presentation by Apollo Muhairwe. “Harmonization of Drug Regulation in the East African Community.” PharmaAsia News. Many are already adopting new structures based on the organization’s recommendations.140 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Slowly but steadily: Rising professionalism in new markets Supply chain globalization and swelling demand in emerging markets have prompted regulators in emerging markets to increasingly standardize and professionalize their operations. while other efforts are focused on improved training in GMP inspections. In addition to the training and knowledge sharing from regulators in developed economies.

at 40th anniversary gathering of PIC/S. Hamburg. including China. 2010.Managing risk 141 inspectorates beyond PIC/S. in addition to assessing gaps in the regulatory systems and training programs of developing countries. identifies best practices and training efforts helpful to global counterparts. the FDA announced its new long-term. Commissioner of Food and Drugs. enable mutual recognition of inspection results. ANVISA. Africa to check fake drug menace.22 Meanwhile. The FDA’s International Programs Office provides the sharing of information and evidence. fourpronged global approach to ensuring safety and quality in drugs and medical devices. the Brazilian regulatory agency. among others. Switzerland. To meet the newer security challenges and boost capacity. “India. MD. noting their nations’ common challenges as large emerging markets.” remarks of Margaret A. Elsewhere. May 31.” Deccan Herald. Food & Drug Administration.” Clinica Medtech Intelligence. and Latin America. including visits to Africa by delegations of Indian regulators. examples of international cooperation are growing. government health officials. June 11. and industry professionals. as well as regularly and proactively sharing data and resources throughout world markets. Food and Drug Administration website . Their cooperation in the investigation spurred joint activities to raise awareness of quality and regulatory issues (and boost confidence in Indian pharmaceuticals). 2011. and develop international standards and regulations.S. Nigeria’s National Agency for Food and Drug Administration and Control has worked with regulators in New Delhi to address counterfeit drugs entering several African countries. and China’s SFDA have recently agreed to further their collaboration in areas such as manufacturing inspections and information sharing related to regulatory processes and standards. The U. Geneva. Europe. the agency has 13 overseas posts in a number of geographies worldwide. regulators in both developed and developing markets are also expanding their informationsharing activities. which includes building coalitions with regulators to develop data systems and networks. Today. the FDA will increasingly work with foreign governments to provide technical and scientific assistance.24 With the passage of the Food Safety and Modernization Act (FSMA). This new strategy will build upon existing FDA efforts.S. In June 2011. 2011. and promotes regional and global networking. “China’s SFDA and Brazil’s ANVISA meet in Brasilia to strengthen collaboration.23 The FDA is helping to accelerate the development curve in emerging markets—and fortify its own efforts to cope with a burgeoning volume of imports—by expanding its overseas presence. 21 22 23 24 “The Importance of PIC/S in Our Globalized World. U.21 More and more collaborative efforts are already under way.

The agency has announced that it will be looking for abbreviated new drug applications (ANDA) to include relevant studies as described in guidelines from the International Conference on Harmonization. as more drugs come off patent and generics occupy a larger proportion of the overall prescription drug market. rather than after the fact as a control issue. they would also reduce the dependence.” The Gold Sheet. While Questions on Use of Prior Knowledge Persist. audits. It’s clear that using downstream inspection and control as the primary means of ensuring safety throughout the supply chain can no longer be the only approach. industry and regulators alike have promoted the idea of Quality by Design (QbD). While ensuring compliance through inspections. They must be as vigilant about the new mindset and new strategies of regulators as regulators are about the changing global marketplace they oversee. QbD refers to a set of principles that seek to remedy quality problems by addressing the approach to quality up front as a design issue. quality-oriented mindset is a critical change pharma leaders must make to ensure their continued success.142 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Shifting the focus to quality With the increase in systemic risk that globalization has brought to the pharmaceutical landscape. rigidity. In essence. industry and regulators have increasingly recognized the need to expand their focus beyond compliance and into the assurance of manufacturing process robustness and understanding. and other field operations has long been a core regulatory tool. and costs of regulatory oversight to safeguard the system. May 1. New imperative for pharma: Thinking proactively about operational implications The unprecedented changes we are witnessing in the global regulatory landscape are a clear signal to pharma executives. By ensuring quality up front in the sourcing and manufacturing process and demonstrating control all along the value chain—from acquisition of raw materials to distribution to the end-user—manufacturers could dramatically improve safety. Within the last few years. regulators will increase their focus on quality. the FDA has pressed generics manufacturers to speed adoption of QbD in order to improve the quality of submissions. . Recently. Shifting from a reactive to a proactive. In doing so.25 In the future. this issue will increasingly migrate to the forefront of regulatory focus and attention. 2011. Beginning to understand how 25 “FDA Presses Generics Firms to Speed Adoption of QbD.

Managing risk 143 regulators operate and are approaching public safety in new ways is only part of the imperative. pharma leaders should be looking critically within their organizations to assess their preparedness. theft. and long-term competitiveness. it’s a matter of being good global citizens: ensuring public health and safety worldwide. and the type of data we will need to have readily available? . by leveraging third parties to conduct mock inspections? What specifically do we know about inspection changes? Do we understand the kinds of questions inspectors will ask. for example. counterfeiting. and intentional contamination and taking all the necessary precautions to prevent those? „ Are we fully aware of the compliance and quality concerns within our organization? How. how do we think about quality today? Are we using the right metrics to approach quality proactively in our design and manufacturing processes? Do our company’s incentives emphasize profits over quality? (For example. brand image and reputation. How Prepared Is Your Operations Organization? A Reality Check for Pharma Leaders As regulators push to keep pace with—if not get ahead of—market and industry developments. in turn. work with regulators to co-develop approaches to quality and safety. They should ask themselves these key questions: „ How closely are we working with regulators to help shape global quality standards for the future? „ As an organization. have we adapted our production practices and associated compliance activities as the supply chain (both inputs and outputs) has grown more globalized? „ How ironclad is our supplier qualification process? What methods do we use to assess risk among our suppliers? „ Where are the gaps in our internal monitoring processes? What tools and technologies can we adapt to improve our surveillance? „ Can we improve our preparations for regulatory surveillance activities. Beyond sustaining financial performance. for example. is it worse to miss profit goals than quality goals?) Does our culture encourage quality? „ Are quality reviews and standards in our emerging markets plants keeping abreast with emerging trends? Are we proactively assessing the risks to our products from adulteration. Pharmaceutical executives must themselves drive change in industry and.

144 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

Sales of medical devices have grown at an annual rate of 9 percent for the past decade.1 The number and complexity of the devices on the market have risen significantly. This rapid evolution has delivered 1 HRI MD&D Reports. capture $5 to $6 billion in incremental EBITA. too.Managing risk 145 Why quality should be on the medical device CEO agenda: The business case Ted Fuhr. Katy George. By adopting cross-industry best practices in quality assurance. Extracting the potential from quality enhancement requires cross-functional collaboration across the business driven by the CEO. . Laggards in the race for quality may pay a high price. Indeed. and reduce risk. and its products so complex. Modern practices in quality assurance could lead to a 10 to 15 percent increase in the earnings of medical device companies and even more in the years ahead. the industry could improve patient outcomes. some already have. that “compliance by inspection” is becoming obsolete. Janice Pai The medical device business has grown so competitive.

Sample headlines Terumo Cardiovascular to pony up $35 million. Media attention has increased. and patients. including cost competitiveness. McKinsey analysis 2009 2 FDA data and McKinsey analysis. .624 5. such as infections.S. Indeed. and investors have severely punished some firms with quality issues (Exhibit 1). from manufacturers and regulators to payors. exhibit 1 #14 Med device quality . the risk that a major quality event will cause serious.146 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders life-enhancing innovations. There have also been reports of injuries. another group is paying close attention: personal-injury lawyers. 6 December 2009 … multiple reports of malfunctions of the SS1 that had the potential to cause or contribute to serious injuries to patients. a company today may deal with hundreds or even thousands of suppliers and sub-suppliers. an average of one company per year has seen a 10 percent drop in share price after a single. and supply chain tiering. automation. Meanwhile. globalization.2 Quality issues rightly concern every stakeholder in the medical device value chain.984 1.. each of whom can impact product quality and performance. 22 March 2011 The FDA says Terumo Cardiovascular Systems will pay $35 million and curtail sales of some products to remedy problems at a plant in Ann Arbor.728 2000 SOURCE: Factiva. Stent Concerns Are Galvanizing Plaintiffs' Bar The Wall Street Journal. Food and Drug Administration (FDA)—those resulting in hospitalization.472 6. disability.927 6. long-term value destruction is high and rising. curtail sales Associated Press.622 1. mostly burns from exposure to the sterilant solution. doctors. the industry has experienced increasing pressures.577 5. The industry’s transformational growth and innovation have placed new burdens on quality systems. or death—which is about twice as fast as the increase in the overall medical device market. to healthcare facility staff operating the device 124 25 38 105 96 100 65 7 2000 8 16 2009 Factiva hits for “medical device” and “FDA” Number of articles containing keyword +15% p.513 2. major quality event (e.g.a.. Michigan …. FDA Warns of Problems with Sterilizer Reuters. including combination products. 2.532 6. 8 December 2006 While a panel of experts from the Food and Drug Administration weighs the safety of a popular heart device at a meeting concluding today. a major product recall). Evidence of this includes an increase in serious patient adverse events reported to the U.Exhibit 1 Factiva hits for “medical device quality” Number of articles containing keyword +34% p. and wireless technology. In the past decade.a.437 4.

we recently carried out research3 to identify and measure the impact of the emerging best practices that medical device companies are now using to raise quality.Managing risk 147 The medical device industry is approaching a tipping point where the increasing likelihood of a quality event. or 12 to 18 percent of industry revenue (Exhibit 2). and the public nature of quality performance will force companies to focus on quality and reliability— throughout product design. quality issues or the lack of them can enhance or impair market reputation. better products. from the market. . Working with a major regulator. regulators. The research indicated that the term “quality” means a lot of things to different people. quality failures or failure prevention efforts affect costs. The good news is that companies in a wide range of industries have developed approaches that help them build quality into processes at every step of the value chain—from design and manufacturing to sales and service— which will lower costs over the long term. and marketing. and the impact of quality on customer satisfaction can alter revenues. 3 Including detailed analysis of financial and FDA data. We defined the optimum level of quality as the one that reliably meets or exceeds the expectations of customers and regulators while maximizing competitive advantage and shareholder value. quality issues can force the removal of a device. These approaches are now making their way into the medical device sector. Using company financials. A company’s quality performance can affect its business performance in multiple ways. company case examples. manufacturing. proprietary benchmarks. and a series of interviews with medical device company executives. the rising costs of such events. and healthier patients. We believe that other players in the industry would have similar results if they adopted these best practices. For example. The quality potential Quality best practices offer many benefits. The benchmarking effort revealed that top performers use a clear set of best practices that significantly reduce quality issues and the costs of maintaining quality. market research across several major medical device categories. or a company. we estimated the total cost of quality for the medical device industry—including day-to-day quality costs as well as cost and revenue loss from non-routine events—at $17 to $26 billion per year. lower risk. and compete in today’s more challenging business and media environment. including lower costs and risks. and expert insights. and customers. In extreme cases.

This would translate to a roughly 14 percent growth in EBITA for an average company. manage supplier quality.$1 B  For company going from average to good. and McKinsey analysis. This includes $1. adopt holistic 4 5 FDA website.4% of revenue ($1B . Assume 50% is capturable for non-routine costs and loss revenue.g.5 B Improvement levers  1 Day to day costs Improve feedback throughout the organization (e. along with associated warranties and lawsuits— cost the industry between $2.2% of revenue ($1. from the field to product development) Product development focused on Critical to Quality attributes Cascade quality metrics throughout the organization: from the shop floor to the CEO Develop quality mindsets and culture throughout the entire organization Structurally improve supplier quality (e. or $14 to $21 billion.5 billion.$3. moving the entire industry to top-quartile performance would represent an opportunity worth about $3.$2B) $.. Senior management must guide product development along well-defined critical-to-quality parameters.148 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders exhibit 2 #14 Med device quality .$21B) Capturable for industry1 ~$3.5 B   3 Revenue loss due to nonroutine quality events Total 0.g. build feedback loops across the quality management system.7 . warning letters.5 We estimate that adopting best practices would cut these costs in half. Since the industry spends 10 to 14 percent of its revenue on maintaining day-to-day quality. FDA website and McKinsey analysis.5 . .5 to $3 billion per year on non-routine costs.5 percent.4 Non-routine quality events—such as major observations.Exhibit 2 Current industry cost 10 . or from 25 to 28. we estimate that moving to top-quartile performance would increase profits by 3 to 4 percent of revenue. plus $1 to $2 billion in lost sales of new and existing products. POBOS benchmarking. recalls.5 B .1.75 .14% of revenue ($14 . the opportunity is 3-4% of revenue 12-18% of revenue ($17 . develop scorecards)  Total quality costs for industry 2 Costs due to non-routine quality events 1 . and consent decrees. Note: Industry revenue estimated at $148 B SOURCE: McKinsey analysis. Improvements of that order generally require that a company transform its approach to quality.$26B) 1 Assume day to day costs are capturable from average to top quartile performance.0B) $.. POBOS benchmarks For an average quality performing company.5 and $5 billion per year on average.$1.

In another example. and slowing growth. supplier quality oversight. a key manufacturing process change. and disciplined root-cause problem solving. Key to the success of the company’s transformation were the introduction of a proactive quality mindset throughout the company. and in-market product performance monitoring. allowing revenues to increase by around €30 million annually. warranty costs and claims) while increasing capacity. and manufacturing while bolstering their ability to use customer and field sales-force feedback as a core listening device to monitor and improve product performance. conducting performance dialogues around key performance indicators.5 percent of revenue. annual capacity increased significantly.. the focus on the return flow allowed for a €15 million annual benefit from a higher success rate in warranty claims toward suppliers. At the culmination of a three-year change effort. As a result of the supplier and manufacturing improvements.g. and low-quality performance of suppliers. They undertook a major program to overhaul and tightly integrate product development. customer complaints. The transformation effort both reduced costs and increased revenues. a small capital device manufacturer faced significant issues with rising product failures in the field.Managing risk 149 metrics that drive the right behaviors. not only were customer complaints down by 94 percent but the sales and profitability of the business were booming with a halving of the cost of poor quality. and instill a quality mindset across the organization. a focus on problem resolution after customer delivery rather than problem prevention in development and production. including quality costs above competitor levels. . sourcing. For example. Through reliability engineering. The combined effect of these changes was a reduction in the cost of quality by 35 percent. Finally. The company also conducted benchmarking of quality systems and processes with other industries. the company reduced warranty costs by €21 million annually. which resulted in profitability improvement of approximately 2. The implementation included a reorganization of the quality function as well as the design and launch of four major process improvements: design for reliability. increased profit per employee. a European supplier of high-tech equipment faced several major quality challenges. and doubledigit sales growth. a system for tracking. Senior leadership concluded that revamping the approach to quality from end-to-end across the value chain was necessary to turn the business around. and introduced a continuous improvement initiative together with the design and detailed planning of further quality initiatives. The management went forward with a transformation aimed to reduce qualityrelated costs (e.

Beyond these characteristics. the patients and physicians in our survey did not suggest that such risks had a large influence on their purchasing decisions. for example. durability. For example. however. and ease of use—three components of device quality—are the main drivers of purchasing decisions among physicians and patients for both implantable cardiac devices and glucose monitors. . And even where physicians and patients have 6 December 2010 McKinsey survey of 410 physicians and 420 patients on the use of implantable cardiac devices and glucose monitors. Only a third of the physicians in our research actually use the FDA CDRH as a source. and Underwriters Laboratories on automobile. most consumers and other decision-makers lack the information they need to compare the quality of medical devices. Since consumers have no independent. Even relatively high-profile public examples of quality issues appear to have only a small impact on purchasing decisions today. Medical device consumers invariably claim that quality is a key consideration in purchasing decisions.150 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Taking down the barriers Historically. Unsurprisingly. for example. and building materials marketplaces are strong examples. however. More objective data sources are available. in part because consumers and other stakeholders are not always able to recognize or reward superior quality. Although recall risk is generally considered a key component of quality. manufacturers are not consistently rewarded for high quality. Executives also say that the pressure to launch products quickly at low cost tends to reward innovation over quality. Regulatory approval sets a baseline and is often the only objective measure of product quality. such as their own clinical experience and the opinions of clinician colleagues. Some argue that the increasing complexity of end-user environments and the innovative new features of products are challenging the typical medical device quality approach. find it accurate and trustworthy. reliable source of comparative information aside from regulatory approval. Consumer Reports. most clinicians we surveyed rely on rather subjective sources. while. and the majority of physicians who use the FDA Center for Devices and Radiological Health (CDRH) data to inform their device section decisions. the influence of JD Powers. patients rely heavily on clinician advice. Market research6 has confirmed that efficacy. adoption of quality best practices has faced strong barriers Many executives have told us that the economics of quality are uncertain. Analysis in other industries has shown that accurate and readily available comparative quality information has a strong influence on buying choices. consumer appliance.

6 percent will never recommend it again.” and “R&D is pushed to focus more on timelines than quality. Executives tell us. In our research. personal experience of problems and recalls. too. such events appear to have little effect on their willingness to use the same product again. 1-6 mo. Total Never Time to reuse1 for diabetes devices Percent 18 26 21 21 +86 8 94 6 Immediately < 1 mo. senior leaders may be reluctant to delay product launches to ensure high quality. Many industry executives see time-to-market entry as a crucial competitive advantage—and they consider quality best practices as barriers to maximizing that advantage. Similarly for glucose monitors. 6-12 mo. for example. Coupled with the perception that innovation and speed.Managing risk 151 direct.” . 91 percent of cardiologists will use a cardiac device again within one year of a recall. competing pressures often will overwhelm the internal push for improvement. December 2010 If the external pull from patients and physicians is not yet strong enough to drive a fundamental change in medical device companies’ approach to quality. Total Never 1 Reflects average time-lapse between quality incident and when a physician will begin implanting / recommending the brand of device again SOURCE: Survey of 205 cardiologists and 206 diabetes clinician-specialists. rather than quality and reliability. yield the biggest rewards in the market. 86 percent of diabetes clinicianspecialists recommend a glucose monitor again within one year. exhibit 3 #14 Med device quality . 6-12 mo. 1-6 mo. > 12 mo. and only 3 percent will stay away from the brand forever. and half of those patients who encounter issues with their glucose monitor would definitely consider purchasing the same brand again (Exhibit 3). > 12 mo.Exhibit 3 Time to reuse1 for cardiac devices Percent 22 29 19 22 97 6 3 +91 Immediately < 1 mo. “There’s no appetite to slow the process to embed quality.

Moreover. when quality problems do occur. exhibit 4 #14 Med device quality . increasing regulatory. Factiva. the rising complexity of devices and user environments is increasing the likelihood of significant quality issues.Exhibit 4 Drop in share price by event Percent Product quality issue FDA warning letter/citation Industry wide quality concern Average drop due to quality issues Percent 0 -5 -10 -15 -20 -25 2000 -16. suppliers’ moves to cheaper raw materials for implantable devices has led to shorter product lifecycle and more frequent replacements. Second. First. as shown above.8 -7. that situation is likely to change for three reasons. The average drop in company share price that followed select quality incidents has increased significantly over the last decade (Exhibit 4). since many executives mistakenly believe that improving quality necessarily adds to cost. McKinsey analysis . Consumer and payor cost pressures increase the challenge. In fact. can hurt product quality. legal.152 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders The pressure is even greater for smaller companies. enhanced product quality increases profits.0 2002 2004 2006 2008 Year 2000-2002 2006-2009 SOURCE: Companies financial statements. or pressuring existing suppliers to lower costs. where senior managers may believe they need to release new products early to compete. rather than those that improve quality performance and reliability. searching for lower-cost suppliers. and media attention means they will likely have a bigger impact. For instance. The importance of quality is set to rise While the market may historically have favored companies’ efforts to launch new products quickly.8 -9.

or failure analysis—all used routinely in the automotive and aerospace industries for product development and process control. . Also.1 billion to expand comparative effectiveness research at the Agency for Healthcare Research and Quality and the National Institutes of Health. Many executives cite design. the medical device industry’s ability to drive quality and reliability through the value chain does not appear to have kept pace with the increasing complexity of its devices. few companies use sophisticated reliability engineering practices. Together. such as accelerated life testing analysis. and finally. but executives tend to believe that tangible benefits are years away. or the growing pressure to eliminate quality issues. Many companies have begun to upgrade their quality organizations. life data. Many do not develop or use risk-assessment tools. Smaller medical device companies. The market opportunities available to companies and devices that perform well in these comparisons will be considerable. A quality head at one large manufacturer with a history of recalls. critical-to-quality metrics. Quality systems will need to catch up with industry demands Unfortunately. experience from other industries has shown that early adopters of quality best practices hold an advantage over competitors. overseeing a $250 million investment in quality systems. companies either do not implement advanced quality processes or are only in the early stages of doing so. these three factors may constitute a tipping point that forces companies to prioritize high levels of quality and reliability at the expense of early revenues. such as design and process failure mode and effects analysis (FMEAs). lack expertise in developing risk assessment or mitigation plans during the development phase. in particular. This impairs their ability to monitor or control quality through manufacturing and post-production. a number of ongoing efforts may greatly increase the public availability of data on the comparative quality performance of medical devices.Managing risk 153 Third. and post-production monitoring as areas of quality risk. while late adopters may risk the demise of the company because the competition is already too far ahead. or do not update them frequently enough to incorporate post-production feedback from the field. Few companies use formal statistical tools like Quality Function Deployment (QFD) in a disciplined way to capture critical requirements accurately. With a few exceptions. Head-to-head comparisons of therapy options will highlight the quality and safety of specific medical devices. said that one of her biggest challenges was “managing expectations about the payoff.” While such investments can take time to result in increased revenues. The American Recovery and Reinvestment Act of 2009 directed $1.

which can require a new training infrastructure and knowledge base. and implement a world-class quality system. and developing positive and quality-oriented mindsets and capabilities across the organization. As in a lean operations transformation. frameworks. and tools are new to medical device practitioners. But a handful of medical device companies have already demonstrated that implementation does not require new regulations or guidance—just the knowhow. behaviors. Early signs are that adoption of these and other leading practices are yielding strong results in improving device quality. and capabilities.154 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Some companies are innovating with processes to drive quality. management infrastructure— including new steering mechanisms and cascading metrics—as well as highperformance mindsets. building a high-performing quality organization. Sales. a transformational approach is required to gain the full benefit of implementing these tools. Many of the concepts. dedication. however. along with methods for optimizing new product designs for commercial manufacture. This includes visible senior executive team sponsorship and tight cross-collaboration between Quality and other functions (e. Implementing quality best practices A quality best practices program begins with an integrated set of techniques for designing and manufacturing high-quality products based on the most critical customer needs and compliance requirements at low cost. A comprehensive approach would encompass a set of best practices and methodologies to diagnose. implementing quality best practices does present challenges. While all medical device companies aim to produce high-quality products. The approach would also focus on addressing technical and cultural challenges: clearly defining a quality strategy in tune with the voice of the customer. design. Manufacturing. tailored to medical devices. adopting quality best practices means applying a cohesive set of technical tools. One large medical device manufacturer. and discipline to implement it. As with any major change program. has been evaluating advanced “process signature” methods in its plants to catch process nonconformance early.. in many cases. aligning quality metrics. developing robust functional quality processes across the entire product life cycle.g. . In our experience. and R&D) in setting mutual aspirations. implementation roadmaps. joint working teams. for example. and. medical device quality best practices include time-tested methods from other industries. Another now uses “spiral modeling” techniques to develop error-free software quickly for its devices.

and the public can gain much from the broad-based adoption of quality best practices.Managing risk 155 Top team support Quality best practices require investments in change management to ensure that the new methods endure. Quality best practices are primarily about execution. “Is the project on time and on budget?” but also. Each employee should understand the high-level objectives and exactly how he or she can contribute. Next. . who must be willing to make quality best practices a priority and demonstrate the new behaviors. As a vital component of profitability.and long-term objectives—and among sometimes conflicting departmental needs—requires decisive leadership. and cultural experience of the top team. engineers. Making the right tradeoffs between short. outside experts. Quality. and regulators. senior management should build a strong and committed quality team to provide individual departments with direction and support. regulators. Regulatory. Delegating quality to the front line will not work. including Manufacturing. will be rewarded. quality requires cross-functional alignment and performance objectives. any effective quality program requires the guidance and input of scientists. The top team should be visibly involved in key initiatives to send the message that solid progress is expected. R&D. “What are the key risks of each approach?” and “What alternative designs have we considered?” Implementing quality best practices takes active executive management—and time. COOs. The top management team must cascade clear messages and direction to the management of each department to integrate changes with other organizational processes. The top team must first create a compelling business case that lays out the company’s overall objectives and each department’s role in achieving them. * * * Medical device companies. and rigorous project management. CEOs. an overarching governance structure. They include a strong commitment from the executive team. The program needs the support. Companies that have implemented quality best practices have shown that the rewards are worth the effort. Senior management must ask their staff the right questions: not just. Multiple departments need to work in concert. Manufacturing. The benefits are great and the opportunities are obvious. Together. including the CEO. and is a prerequisite to the organization’s success. governance. they should communicate the upcoming changes in ways that excite people but remain realistic. and Quality heads and regulators alike should seize this opportunity. and R&D. not investment.

156 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

157 Breaking down the silos .

158 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

over-the-counter (OTC). engineering innovation. is finally finding its way into pharma. design.Breaking down the silos 159 Design-to-value: Re-engineering the portfolio for profitability and growth Jasmin Frick. most are still leaving money on the table. and cost have been rewarded with 15 to 25 percent higher margins and increased sales. While some healthcare companies claim that they are already using DTV. . Capturing this opportunity requires leadership from the CEO and the entire executive team. Companies that bring their full cross-functional expertise together to review and challenge the design of existing and new products and make better-informed trade-offs between functionality. as is happening in healthcare today? The answer is to combine customer insight. Paul Rutten What can companies do when the product and customer value driven by pure science slows. The “Design-to-Value” (DTV) approach. and manufacturing best practices to create innovative products with distinctive value for customers. and medical products to drive growth and profits. Cedric Losdat. used by other industries to deliver exactly what customers value. quality. as well as improvements in speed-to-market.

As a result. In practice. As a result. individual functions lack the momentum and decision-making power to make significant and lasting changes to product and portfolio complexity. Should a new delivery format be considered for the new product? Does perforation on the blister really add value for the consumer? The fall-out of these imperfect processes is unnecessary cost and complexity. prints. For many companies. based on 100 different blister pack types. . however. from the head of engineering and supply chain for OTC products at a major healthcare player. as companies attempt to differentiate using costly product features that are less critical to consumers. and embossings. for example. or select manufacturing technologies that are expensive to scale up. Pharma companies have used various approaches to reduce the resulting cost and complexity. however. it now manages more than 1.160 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders “Why does success have to come at the expense of such cost and complexity across the supply chain?” This question. driven by the regular introduction of new products. for example. and 30 different pill types with a variety of shapes. the problem has its roots in the way products are developed. That company’s largest OTC brand has enjoyed strong and steady worldwide growth over the past decade. R&D and Commercial functions often ignore the implications of formulation and design decisions on product profitability. companies rarely have the opportunity to fully consider how customer preferences and cost will play out in the various alternative designs or to conduct all the necessary trade-off discussions between functions. organizational silos mean some product managers never get a full picture of which elements drive sales or total product cost. As they rush to get new variants onto the market. While the focus of the innovation process is medical benefit and drug efficacy. perhaps EUR5-10K per SKU. complexity continues to rise. In fact. neatly sums up the essence of today’s situation for many in the industry. The impact of portfolio reduction efforts is usually limited to cutting the administrative cost of the portfolio. Some have tried eliminating the tail of low-volume SKUs from their portfolios. particularly larger players. and margins go on falling. Time pressure doesn’t help. Such functionally driven initiatives merely scratch the surface. rising complexity is dramatically eroding the margins of pharma companies.200 SKUs for the same active ingredient. In the race for competitive advantage through constant innovation.

The approach also helps to reduce time-to-market by focusing development resources on the product attributes that matter most to customers. 2009. Kraft Foods is one company that embraces the principles of DTV. Healthcare companies could learn much from other industries. For example. “While the switch to plastic means fewer trucks on the road.Breaking down the silos 161 Design-to-Value is a winning strategy in other industries de·sign | to | val·ue A fact-based. .” Packaging & Converting Intelligence.000 gallons annually1. They have responded by using Design-to-Value to reengineer their products and safeguard their margins. DTV has helped companies in other ways. These insights help to drive better product design decisions. through a combination of cost reduction and increased sales. for example. but also aggressively pursues enhancements to core brands and existing products through improvements in additional consumer benefits quality or packaging innovation. by leveraging crossfunctional expertise and analyzing competing approaches.” Design-to-Value has already demonstrated significant impact in multiple industries. and 15 to 25 percent improvements in margin. consumer insights. The Design-to-Value (DTV) approach aims to create transparency around cost. have been down the same path of shortened product lifecycles. we’ve been able to decrease fuel consumption by 87. too. By transporting the product on fewer trucks. cross-functional approach to increase product value and reduce cost by selecting the most desired product attributes and their most ef cient realization. and alternative design options. and pricing pressures from privatelabel manufacturers.” says Perfecto Perales. Consumer goods players. Kraft’s Senior Director of Packaging Research. allowing companies to balance the imperative to innovate with the need to keep margins in line with stakeholder expectations. it replaced the traditional glass packaging for Miracle Whip with a recyclable plastic jar in the United States with rewarding results: “The new consumer-preferred ‘wide-mouth’ jar lets users easily scrape nearly every last bit of Miracle Whip out of the jar. for example. The company not only is dedicated to continuous new product development. portfolio proliferation. since six more pallets of product fit on each load. typically 10 to 40 percent reductions in product cost. 1 “The Art of Reduction.

Design-to-Value is highly relevant and applicable for a wide range of products in the industry—particularly in medical devices3. the company identified a number of near. Sastry Chilukuri. DTV is also well suited to the OTC business. however. Michael Gordon. the company believed that its new competitor’s products were much more expensive to build than its own. the new consumer insights were immediately integrated into the sales process while a number of operational actions.” on page 95. such as cheaper packaging solutions. Nevertheless. Some cost-reduction opportunities identified by using the approach. Finally. can also be applied to prescription-based pharmaceuticals. When it carried out a detailed teardown of the competitor’s product. or by facilitating the creation of customized low-cost products for emerging markets customers2. Initially.” Outpacing Change in Pharma Operations. chose the Design-to-Value approach in the face of increasing competition from a new low-cost market entrant that had eroded its market share by 15 percentage points in only five years. In response. and Sanjay Ramaswamy.and long-term measures to re-establish the competitiveness of its product range. . and that it was buying market share with low prices. design. “Design to value in medical devices. and delivery format innovations play a key role in differentiating the offer. McKinsey 2010. One medical device manufacturer. enabled 2 3 4 Ulf Schrader and Sabine Schulz. where an increasing number of companies have been exploring the approach to help them translate patient insights into the best feature sets for their products. for example. “Tapping operations to win emerging markets: Questions every pharma executive should consider. in which packaging.162 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders by bundling proven and well-accepted design concepts into standardized product platforms that reduce the build-up of complexity across the supply chain. a formal analysis of customer requirements and willingness to pay revealed that the competitor was offering a feature set that matched actual customer needs much more closely than its own. the company learned that its competitor had a significant cost advantage in product features and elements that were hidden from the user. Clean-sheet costing is a tool used to estimate the cost of a purchased product component through quantifying bottom-up all process steps required to manufacture it. Is this a good solution for healthcare? The healthcare industry works in an environment of tight regulatory constraints in product development. For example. and product efficacy will always have the highest priority. such as clean-sheet sourcing4. The resulting insights on cost and its drivers can be used as a fact base in supplier negotiations or to generate and assess value and cost reduction ideas. Chris Musso. DTV also helps to promote the corporate social responsibility agenda—or sustainability—in an effective and intelligent way. In addition.

Comparison of the appearance of different products on the shelf. while retaining critical customer appeal. and cross-functional teams. they can generate additional insights. pharmacies. Design-to-Value starts and ends with the customer. and which product attributes and package sizes they found most appealing. . such as clarity of claims and shelf visibility. Importantly for the company. the company’s engineers identified a series of changes to product composition. The DTV approach enabled one OTC company to successfully introduce to the Chinese market an oral solid product that was popular elsewhere in the world. for example. In response. the new low-cost product had successfully penetrated China’s tier-one cities. and manufacturing that allowed it to reduce manufacturing costs by half. can deliver valuable insights into how customers perceive their available treatment options. threatening its established price position there. Design-to-Value is also a powerful tool for leveraging a critical growth opportunity: designing products for the needs of emerging markets. The company conducted extensive research among consumers.Breaking down the silos 163 a significant product cost reduction. by revealing packaging solutions that use fewer or lower-cost materials or alternative manufacturing processes. by doing appropriate qualitative or quantitative studies. Long-term. fact-based decision-making. the company made DTV a priority to avoid repeating its mistakes in future product generations. and other stakeholders to understand how much customers were willing to pay for its products. Moreover. for example. packaging. Stripping down and comparing their own products’ packaging and formulations with those of competitors from various regions and price points can also be a powerful tool to challenge existing design solutions. no matter how skilled their technical and commercial teams are. Critical factors to make this powerful approach successful The Design-to-Value approach is built on three principles: understanding the market needs. From that analysis. First. the changes it had made to both the product and packaging also eliminated the risk that product intended for China would be re-imported into developed markets. This research indicated that Chinese consumers would require price reductions of around 30 percent compared to other large emerging markets. companies must analyze how customers make their buying decisions and how patients handle the product end-to-end. they can then generate actionable recommendations and identify gaps in design against important customer benefits. companies can learn much from the way their competitors design products. Finally. Within two years.

in Procurement or Manufacturing. packaging. the power of the DTV approach lies in bringing together all functional perspectives during product design and optimization. “The product development process at Mars – R&D. for example. for example. but challenging this belief and testing the alternative revealed that flavor in the formulation had been improved tremendously over time. Change in the way products are developed can only happen if engineering capabilities are fully explored. and other departments as well as R&D. One commercial representative who was engaged in a DTV analysis noted.com. get the momentum they need. marketing. consumer insights are more rigorously integrated. and manufacturing share their knowledge and join forces. packaging. include formal roles for people from plant operations. insight.164 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Second. supply chain. The company’s Consumer and Customer Research function helps to prioritize and quantify the value of new R&D concepts (such as organic versus functional pet food) and systematically identifies preferred product elements (such as cans versus trays). The result was a 33 percent cost saving for the ingredient in question. Cross-functional teams also help to ensure that the innovative elements of the product can be realized efficiently. marketing. Once we got into the mindset of challenging what we ourselves had developed during the past years. showed that the currently used spray-dried version of an ingredient was much more expensive than the more widely available liquid equivalent. The company believed that the more expensive version was required to cover the bitter taste of the active ingredient. and plant operations sift through a pipeline full of product ideas with supply chain playing a pivotal role. Any change in processing or recipes suggested by R&D goes through a rigorous review process. and logistics components of a product launch5. “I felt like the trees were hiding the forest. Finally. The product development teams at consumer goods player Mars. The DTV approach not only brings people together but also gives employees from various functions a common language and shared objectives—and when marketing. and the valuable ideas that often exist outside the R&D function. and the Supply Chain function plays a key role in managing external as well as internal suppliers of the ingredients.” 5 Dave Fusaro. .” FoodProcessing. as R&D and design teams are rarely aware of the implications of their decisions on product profitability. the results are astonishing. so that the more costly ingredient was no longer required. procurement. 2008. creating this transparency on alternative options and their cost is another essential element of Design-to-Value. Analysis of the ingredients of an OTC product. equipment. without blaming each other but looking for better solutions—we saw how much untouched potential there was. for example.

because it brings back focus on what matters: exciting the consumer while delivering tangible bottom-line impact. Because the approach requires both the organization and individuals within it to challenge their own past work—and because it should be cross-functional at multiple organizational levels—DTV will not start without a clear trigger and direction from the top.Breaking down the silos 165 Time for action If they are not doing so already. and other stakeholders are translated into the right product development choices? „ Can we say the same about insights from competitor products? Do we try to analyze or tear down competitive products in order to generate improvement ideas? „ Do our R&D teams always understand the full cost implications of their decisions? How do they collaborate with other functions to ensure the tradeoffs they make are the best ones for the whole organization? „ Do we have the processes and organizational willingness to continually review. and improve existing products as well as new ones? „ If we don’t have all the above elements in place today. the first steps in Design-to-Value are probably the most difficult. physicians. challenge. what needs to change in our organization to make them happen? Who is the right person to lead that change? *** Even more than for other initiatives. „ Do our target customers perceive our products as delivering higher value than competitive offerings? Do we win in all our target segments. Design-to-Value should be high on the agenda of every pharma CEO. Only the CEO can do this effectively. or is there an opportunity to grow market share through product improvement? „ Do we have robust organizational linkages to ensure that insights from patients. CEOs in the healthcare industry should ask themselves whether their organization could benefit from the Design-to-Value approach. .

166 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

But that was then. for example. executives in the pharmaceutical industry have not viewed supply chain management as especially important. Their indifference appeared to be warranted: high gross margins justified building enormous inventories and did little to encourage management to think about holistic approaches to the supply chain. the pressures on the pharmaceutical sector mean that traditional industry mindsets about the value of modern supply chain management practices have to change—and quickly. The value at stake is significant—in consumer goods.Breaking down the silos 167 Playing in the Champions League: Supply chain lessons from consumer goods companies Peter De Boeck. Today. service levels. Deepak Mishra Pharma executives need to place more value on supply chain excellence and reconsider the way their supply chains are managed. supply chain champions achieve on average 4 percent higher EBIT than their peers. and capital effectiveness. The best way for pharmacos to get up to date on global best practices is to understand how supply chain champions in other industries simultaneously deliver superior performance in cost. . For decades now.

As concerns about drug quality become big news—rattling consumer confidence and raising regulators’ hackles—there are more and more calls for. demand is becoming more diverse. efficiency programs have yielded results on cost and inventory across key parts of the value chain. How do we want to organize our supply chain in the future. research shows that supply chain practices also directly drive differences in performance. Quality issues are also driving the need for managers to be accountable for their supply chain practices. and which of those skills do we lack? Without the 1 McKinsey analysis. supply chain champions had on average 4 percent higher EBIT than median performers—a difference that is directly attributable to superior supply chain performance. A typical question might be: What is the value of delivering in a more agile way to the regional warehouse if this just leads to one day’s worth of additional inventory in that warehouse? Furthermore. but not necessarily to the bottom line. tender markets. there has to be a clear and easily interpreted supply chain vision. better traceability of batches across the full chain. All participants—from raw materials suppliers and production teams to warehousing staff and transportation providers—need to work together across the chain in a coordinated way to derive the full impact of best practice in supply chain management. It is markedly different from working to establish operational excellence at a single supply point. there are no easy ways to do so. and why? How does this differ from today? What results do we expect from that new setup? What skills do we need to manage the end-to-end supply chain. This has two direct implications. There is a greater need to see how the supply chain operates from end to end. pharmas that intend to grow in emerging markets will have to apply different supply chain models to be successful. such as packing and shipping from one distribution center. for example. among other things. Furthermore.168 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders For a start. Why would this differ in pharma? Initial research shows this could be as high as 7 percent for the pharmaceutical industry1. Now comes the issue of how to respond to those challenges. These are just a few examples to illustrate the increased demands on pharmaceutical supply chains. First. . Managing the supply chain is a complex and constant endeavor. increasingly require enormous flexibility in capacity and supply. In consumer goods. What works to distribute products to consumers in Germany or Japan will not be anywhere as near as effective in rural China. At the same time. Although there are real opportunities for improving supply chain management in pharma.

The second implication is that there is no room to delegate a supply chain transformation to a staff function or to one of the line functions. of 32 CPG companies from different categories in food and home/personal care" Of course. Just one example: . But they can take comfort from the fact that other industries have blazed most of the necessary trails (Exhibit 1. it is easy for pharma executives to point to the many differences between their sector and consumer goods—differences that do indeed place constraints on the ability to improve performance. the chief operating officer. they may be daunted by the enormity of the task. Leading and taking a one-directional commitment is a topic for the senior management agenda. Unilever. it must be a senior manager—the chief executive officer.) This article will spotlight what supply chain leaders have been doing in the consumer goods industry.Breaking down the silos 169 alignment of all stakeholders around such a vision. Manufacturers such as Procter & Gamble (P&G). or a business-unit head—who directly oversees and steers the improvement program and holds the appropriate managers accountable. University of Münster: Supply Chain Champions survey. exhibit 1 #16 SC champions – Exhibit 1  Top performers achieve 10% both cost and service advantage  Top performing companies were found in every category Better service performance  More than 85% of these 90% leading companies also have top-third inventory performance Better cost performance SOURCE: Joint research of McKinsey and Institut für Supply Chain Management. and Nestlé are some of the exemplars—companies that can boast long-proven and highly effective practices and continual reinvestment in new thinking about supply chain efficiencies. there are perpetual risks of suboptimizing the process and causing friction and mistrust between the business functions involved. As pharma executives think about how to re-invent their supply chains. In general.

it . and the stringent quality regulations that govern the industry. In short. Let’s look at each in more detail. multi-stage manufacturing. From the customer back: An end-to-end view of the supply chain The good news is that over the last five years. For example. The counter-argument is that it is also true that many aspects of pharmas’ supply chains are simpler than those in consumer goods. the company’s management structures and incentive systems have not moved at the same pace. Only a few pharmas have succeeded in transforming their operations so that they can manage their supply chains on an end-to-end basis—evaluating and integrating every step from the customer’s receiving dock all the way back to suppliers’ own suppliers’ shipping departments. mastering complexity management. its inventories are still often managed at a single supply point—the local commercial organization. for example. the need to never be out of stock because of the implications for patients. and excelling at launch excellence. For instance. 1. However. and have tried to set out the practices that distinguish great supply chain performance from merely good practice. supply chain champions focus on many fronts simultaneously. average revenues per stock-keeping unit (SKU) can be many times higher. there is little sudden variability and predictability in demand for most pharmaceutical products after launch by contrast with consumer products such as yogurt. These last two are of increasing importance as the lifetimes of pharmaceutical products shrink. These elements are: managing a “from-the-customer-back” supply chain. or apparel. what are the specifics that pharma managers can learn from their colleagues in consumer goods? Most important. One pharmaceutical company recently testified that it has close to real-time information on its end-to-end inventory levels of global product flows. mobile phones. Despite the transparency that the pharma operations managers enjoy.170 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders Product portfolios in pharma are far more complex than is typical of families of consumer goods products. Complexity involves longer production lead times. we contend that the intrinsic differences are not enough to prevent pharma executives from adopting proven practices from the consumer business. many pharma companies have indeed improved the level of transparency in their supply chains. So. We have identified three elements that should form part of any successful pharma supply chain vision and transformation.

inventory. High levels of cooperation (with retailers. and regulatory compliance in high-growth environments. the tendency among pharma companies has been to view their supply chains as covering activities from product development to customer delivery and then to split them into an upstream function focused on manufacturing—and a downstream function focused on logistics. true customer-back supply chains go beyond the boundaries of the company itself. At organizations such as Unilever. and service in the situations where all three factors matter a great deal to customers. First. and .” This enables real end-to-end optimization in how the supply chain is organized and resourced. in a customer-back supply chain. let’s look at what global consumer goods companies are doing. where operations activities are responsible only for delivering the goods to the country warehouse—at which point the commercial function takes over. We contend that they probably need to pay more attention to it since their customer base is becoming more diverse—ranging from retailers to hospitals to government tenders—and is thus likely to require different consumer outcomes of the supply chain. Today. every relevant decision starts from a clear understanding of what drives value for customers. pharma companies are not especially proficient at this level of targeting. merchandising. and how incentives are shared. For example. and then to tailor the service offerings specifically against those customers’ prioritized needs. when the consumer picks up the Tide detergent or the Vicks cold medication at the shelf. But the silos that result prevent senior managers from optimizing end-to-end performance. suppliers. and packaging quality are influential levers. and customer service. too. It is important to understand whether customers put a higher premium on more frequent delivery than on shorter lead times. This not only puts the focus of supply chain activity squarely on on-shelf availability but also shows that product quality. By definition. how cross-cutting processes such as sales and operations planning (S&OP) work. that means that pharma is not applying a customer-back approach. good manufacturing practices (GMP). Third. planning. Consumer goods companies don’t split their supply chains. supply chain responsibility and accountability are clearly tracked from “farm to shelf. They make it much more difficult to make the appropriate trade-offs among cost.Breaking down the silos 171 is still common for there to be a split in the distribution chain between the technical operations and the commercial function. To illustrate that point. Second. P&G’s supply chain is targeted at ensuring quality at the consumer’s “moment of truth”—that is. The driver for this was a justifiable need to focus on product quality.

ensuring that there is no suboptimization at the company level. Those efforts are tightly integrated not only with financial planning and budgeting but also with management of commercial activity in order to best balance supply and demand. P&G regularly differentiates in how it configures and plans for high-volume. Most producers of fast-moving consumer goods gauge their supply chain performance not just on conventional measures such as inventory levels or cost of goods sold (COGS). Together with senior managers in those varied retail channels. most consumer goods companies also stand out for their seamless cross-functional processes—in particular. For their part. the consumer sector is heavily dependent on key metrics. low-variability products—focusing on replenishment rather than forecasts. and replenishment frequencies as well as the transportation routes that best optimize end-to-end supply chain costs. most pharma companies still tend to place long leadtime internal orders between their commercial markets and their global manufacturing hubs—a practice that can create frequent disconnects on the supply side and limit the organization’s ability to react quickly to changes in demand or margin structures. Fourth. With this segmentation.172 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders third-party logistics providers) jointly drive improvements on an end-to-end basis. inventory levels. most consumer goods companies are expert at differentiating their supply chain models according to their products and customer segments. For its promotions or new products. For example. but also on metrics that are shared with their commercial functions—such as gross margin. service. Fifth. for their activities with S&OP. new product development. For example. These processes genuinely make it easier to reach decisions that are the best mix of cost. configuring factories for scale and long batch runs. P&G managers plan joint sales targets. and organizing just-in-time supplies of raw materials. backed by market-based demand planning. and site-based scheduling. and order to cash. most fast-moving consumer goods players use an S&OP process. which is supported by a forecast. P&G and Unilever have deep collaborative supply chain relationships with major retailers such as Walmart and Tesco and also with major distributors in emerging markets such as India. where the volumes may be lower but the variability can be much higher. agility. This means that the endto-end chain for a product is planned according to its size and product characteristics—that is. and . customer-service levels. according to demand variability. regional supply planning. the company deploys more of a “push” approach or engineers more agility into the appropriate supply chain configuration. and other relevant factors. strategic planning and capital expenditure.

400 SKUs in its product portfolio together represented just . rationalization. Some organizations have been successful at rationalizing their product portfolios. Some pharmas do make use of a similar approach for certain parts. A consumer goods maker we know. creating portfolios with long tails of niche offerings.” they have to judge the progress of their supply chain transformations against each of these five characteristics. appropriately supported by joint-reward structures. the company can build scale in purchasing while becoming agile in manufacturing. To help make this cross-functional process even more effective at combating complexity. and supply chain operations. recently found that nearly one-third of the 6. 2. but our observations indicate that such approaches are rarely as institutionalized or as well integrated across functions as they are in consumer goods. The portfolio management process then encourages the adoption of elements of the approved platform standards during new product development. This ensures that the companies’ supply chain functions manage the careful balance between delivering the commercial goals and optimizing supply chain functions. The process spans its R&D. One beverages company has recently put in place a cross-functional process for managing its product portfolio. marketing. the cross-functional team meets quarterly to make joint decisions about new products. and harmonization of SKUs and packaging formats. the beverages producer has designed a number of category “platforms”—combinations of recipes and packaging formats—that are fully standardized across the company.Breaking down the silos 173 time-to-market. explore new market opportunities. Complexity can often be the result of the siloed efforts of sales and marketing organizations. which are motivated to create new products. new products and variants tend to proliferate. If pharma executives are to determine whether their supply chains are truly “customer back. yet very few have been able to scale those efforts from one-off SKU rationalization to a continuous approach to complexity management that is part of the institutional fabric of the organization. and respond to emerging customer needs. that way. Mastering complexity management: Simpler is better Many companies—certainly pharma companies—struggle with mature portfolios that generate a great deal of complexity and drive hidden costs within the system. As they do so. The group’s value engineering and technology decisions drive gross margin improvement across its operations. for example.

Such collaboration won’t eliminate the need for more carefully segmented supply chain strategies. economies of scale dictate that low-volume products cost more to make per unit than highvolume ones. Low-volume products also require a disproportionate effort in sales and administrative processes. The dialogues should start from a detailed. The company found that its production costs for low-volume products were 129 percent higher than those for its best-sellers. In the face of these numbers. Jochen Großpietsch. the impact can be eyeopening. supply chain. all of these activities should be embedded in a portfolio review process that combines a quarterly review of the profitability of each product in the portfolio with integrated decision-making about which SKUs to rationalize. complexity management is really just a one-off exercise in SKU reduction. blind axe-swinging based on sales figures alone often does more harm than good. and invest in. Some lowvolume products have benefits that outweigh their costs. value-engineer. However. And they drive up supply chain costs: It’s necessary to hold high inventory levels to meet agreed-upon service levels across a broad range of low-volume products. This should involve more than just the cutting of SKUs. but it should help to ensure that such efforts are well targeted. Excelling at product launch: Off to a good start Launch excellence is becoming an increasingly important topic for companies in every industry. This is particularly so in pharma because the window for 2 Christoph Glatzel. Second. When all of these extra costs are taken into account. Otherwise. First. This complexity comes at a cost. One company found that 25 percent of its SKUs actually lost money. it must enable managers to structure product platforms—from which portfolios of products can be produced—and must lead to an asset strategy to fully capture the benefits of the efforts. and Ildefonso Silva. fact-based understanding of the true drivers of complexity costs. R&D. companies might be tempted to take an axe to the long tails of their product portfolios. only through close collaboration across functional boundaries can companies make the right decisions. and marketing. January 2011. 3. “Is your top team undermining your supply chain?” McKinsey Quarterly.174 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders 1 percent of total revenues. “Cross-functional” typically means ensuring that the team includes representatives from procurement.2 A pharma can start to claim mastery of complexity management if it masters a few of the traits of the true supply chain champions. . with full transparency of complexity costs. a senior executive should check to determine whether proper cross-functional portfolio review processes are in place.

Breaking down the silos 175 .

R&D. Supply chain exemplars also have dedicated “agile” factories. and packaging—and to form the new product development category platform for each product category. they integrate supply chain and R&D tightly into a clear categoryfocused “backbone. as well. equipment. They will also write “innovation partnering” clauses into their contracts with suppliers. The effectiveness of those facilities is gauged by factors such as how quickly they can move new product to . they ensure that their contracts with suppliers of raw materials or packaging materials have flexibility built into the volumes and lead times for their planned new products.176 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders benefiting fully from product exclusivity is always shrinking. R&D. manufacturing. the champions are quick to use virtual computer-aided design/ computer-aided manufacturing (CAD/CAM) concurrent design technologies to collaborate on new product designs among their manufacturing. or lines within factories that are dedicated to innovation. create capacity in pilot plants to test commercialization and feasibility. To begin with. re-use components. while cost factors are putting more and more pressure on the traditional methods of building launch inventory. For example. a major food producer is simultaneously developing a supply chain hub in Europe and an R&D hub in the same location. and work jointly with material. and contract manufacturing suppliers to bring the product rapidly to market at the lowest cost. Moreover. For example. The supply chain champions also stand out because they bring an innovation mindset to their supplier relations and to their sourcing strategies in general. this cross-functional category group can rapidly develop and test prototypes. This initiative has made it easier to build cross-functional category launch teams—across procurement. the champions will often pay for pre-launch stock-building. The net result: The food company acquires a major competitive edge. engineering. develop quick costings for product and capital expenditure. They have dedicated “activity managers” from the supply chain group who project-manage launches. In such cases. As a result. Our experience indicates that supply chain champions focus on several key factors in order to execute their product launches efficiently and effectively.” Fast-moving consumer goods companies are especially adept at this. and marketing teams—and often with their suppliers. Supply chain champions are also notable for involving supply chain professionals and practices early in every new product development process. when regional marketing staff come up with new product ideas. They also tend to involve suppliers in the early stages of the innovation process.

. *** These days. There is indeed a great deal to be learned from the global consumer goods companies. Indeed. and getting new products to market quickly. where the champions excel at addressing their supply chains from the retail shelf backward. The issue of excellence in supply chain management is no longer just about inventory optimization or lowest production costs or rapid shipping—it is all of those factors and more. time-to-market will often be an explicit performance indicator for the supply chain organization. Pharma COOs must now work to reinvent their supply chain practices. combating supply chain complexity.Breaking down the silos 177 market. not by conventional measures such as overall equipment effectiveness or conversion costs. with the executive suite ensuring real collaboration across functions and embedding a new capability in the organization. That’s evident in the 4 percent EBIT margin edge that supply chain champions in the consumer sector have over their peers. geared to the needs of discrete groups of customers. there is a clear competitive advantage to be gained by improving the effectiveness of the pharma supply chain.


179 Appendix .

180 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

pharma has been amongst the best-performing industries. However.8 to 11. Drugs worth more than US$250 billion will lose patent protection between 2013 and 2017. Grabowski and Margaret Kyle. McKinsey analysis. Of even more 1 2 3 S&P Capital IQ Unit. McKinsey analysis. “Generic Competition and Market Exclusivity Periods in Pharmaceuticals.” Managerial and Decision Economics. oil. in recent years. chemicals. Its base of revenue and profit renewal has been eroding fast in the face of several major challenges: „ Portfolios and pipelines have weakened significantly.2 years on average over the last 15 years3. Henry G. Returns on R&D have fallen by more than half. semiconductors. computers. Periods of exclusivity have dropped from 13. the industry has found itself at a crossroads. Overall. and its profit pool has expanded more than threefold1.Appendix 181 Trends shaping up the pharma industry Vanya Telpis Historically. the industry’s revenue pool has more than doubled over the past 20 years. June–August. suppressed by reduced value creation and rising R&D costs. . 2007. and paper. putting 60 percent of the revenues of top 10 pharma companies at risk 2. Evaluate Pharma. defense. In the last half-century. it has generated better returns than the S&P 500 for more years than have most other sectors—certainly better than telecommunications.

lost revenues. 2011. The consequences are worrisome: Of the drugs launched between 1997 and 2007. Generics currently represent more than a quarter of all pharma sales worldwide. and crowded. „ More and more healthcare systems are challenging the status of pharma prices through radical reforms of structure. where healthcare costs as a percentage of GDP are the world’s highest.” McKinsey 2009. the government of the Netherlands recently introduced healthcare reforms and capped the amount it is willing to pay for many popular drugs. Whatever innovation there is often is focused on secondary product features. resulting in millions of dollars in fines. counterfeit drugs represent anywhere from 10 percent to 30 4 5 Matthias Evers. warning letters from the federal Food and Drug Administration have proliferated by more than 300 percent over the last five years. „ The pharma industry is being transformed by an unprecedented shift to generics. IMS Says. In the United States. Generating fewer blockbusters. In some new markets. McKinsey analyses. and increased expenses. including the emergence of a small but growing biosimilars market. For example. often without precedent or clear legislative framework. “Value-driven drug development—unlocking the value of your pipeline. Germany has introduced a tender system in which payors ask pharmacos to bid for contracts to supply specific molecules or portfolios of products. and Michael Steinmann. and are growing at twice the rate of branded drugs. funding. „ Pharmacos are facing higher complexity everywhere. In the United States. Evaluate Pharma. Part of the challenge for both companies and authorities is the increased globalization of both clinical and commercial supply chains. or organization as well as through reactive cuts linked to recent economic conditions. Adding to the challenge is the greater complexity of products to be evaluated. International Pharmaceutical Regulatory Monitor citing IMS’s “Global Use of Medicines” report. usually produced in smaller batches.” June 9. flat. . APM Health Europe. citing Pharmaprojects. „ Healthcare systems are also looking to improve quality and increase safety and access. Valentina Sartori. 60 percent failed due to lack of differentiation4. „ The world is getting hot. their success now rides more on niche products. the system is shifting from feefor-service payments to outcome-based reimbursement. Between one and three consent decrees are issued every year. “Global Spending on Generics to Skyrocket Worldwide. R&D productivity in the labs. Their supply chains are becoming far more fragmented as they work to establish a presence in new markets and develop global networks of suppliers and distributors. meaning that they are expected to account for about 40 percent of aggregate pharma revenues by 20155.182 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders concern: Pharmacos have slowed R&D spending given the challenges of maintaining. Petra Jantzer. let alone improving.

in 2008. While the largest new markets are in BRIC countries (China alone will soon represent nearly a third of the world’s pharma sales). already eclipses the 2 to 3 percent growth found in developed markets7. 63 percent of all deaths were due to chronic noncommunicable diseases (NCDs). there is great potential in the next wave of emerging markets in Africa. 6 7 8 Global Insight’s World Overview. with the greatest increase expected in low. almost all of them currently unserved or at least underserved.Appendix 183 percent of all sales. Lifestyle and chronic illnesses are also on the rise. „ Pharmacos continue to emphasize operational improvements and to redress operational inefficiencies. Collectively. Pharma sales growth at 10 to 20 percent annually in the largest emerging markets. the population aged 65 years and older will be 240 million in 2020—up from 98 million in 1980. New opportunities are emerging for pharmacos—new markets and consumers. the industry has brighter prospects. . and Latin America. McKinsey analysis. including political crises and natural disasters. „ Biotechnologies will continue to flourish and provide an innovation engine for the industry—especially important as product differentiation becomes more valuable. The large-molecule market is expected to grow at twice the rate of small molecules. According to the World Health Organization (WHO). new technologies. However. driven by major scientific advances—such as protein biology/complex molecules.and middle-income regions8. too. can trigger global supply disruptions and lost revenue. For example. “Global status report on noncommunicable diseases 2010. according to the Organisation for Economic Co-operation and Development (OECD). Espicom Business Intelligence. and genomics/personalized medicine—and by the need for more specialized and integrated approaches to treatment. Lean transformations and continuous improvement initiatives are now common in the industry—a huge shift in thinking compared to 10 years ago.” World Health Organization. And the OECD estimates that the current annual healthcare cost of a 75-year-old is 10 times that of a 35-year-old. emerging markets will represent approximately 45 percent of global GDP by 2018 and are expected to grow twice as fast as developed markets in the 2008–2018 period 6. large molecule synthesis. „ The increased healthcare needs of an aging population will be a factor in all developed markets as well as in key emerging markets such as China. and more efficient operations: „ Emerging markets are poised to bring in a billion new consumers. Asia. Bernstein Report 2009. Unexpected risks. Most big pharmacos have announced and implemented aggressive cost reduction programs. projected to increase by 15 percent globally between 2010 and 2020.

184 Operations for the Executive Suite: Opening new horizons for current and future pharma leaders .

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