Operational Excellence and Demand-Driven Manufacturing
The pharmaceutical industry is facing enormous pricing pressure around the world and it is especially intense in the United States as drug costs are a significant part of the debate on healthcare reform. The leading pharmaceutical companies understand the long term consequences to their industry. Even more troubling, a recent McKinsey & Co. analysis of the pharmaceutical industry, estimates that “the internal rate of return (IRR) on small-molecule R&D is now around 7.5%, which is less than the industry's cost of capital”1 Consequently, operational excellence has become a key component of their business strategies to ensure their long term vitality.
Operational excellence, stated simply, is minimizing waste while maximizing customer value. Value is defined from the perspective of both the external and internal customer in a measurable manner. The Lean movement has developed important key performance indicators for measuring an operation’s performance and bench marking its performance against the achievements of best-in-class organizations.
Operational excellence, stated simply, is minimizing waste while maximizing customer value. Value is defined from the perspective of both the external and internal customer in a measurable manner. The Lean movement has developed important key performance indicators for measuring an operation’s performance and bench marking its performance against the achievements of best-in-class organizations.
According to Womack and Jones, there are seven types of process waste – rework, overproduction, excess inventories, non-value added process steps, excess people movement, excess material transportation, waiting, and non-value added goods of services. In the pharmaceutical industry, waiting and excess inventory are significant sources of process waste and often mask underlying work process deficiencies.
A common pharmaceutical practice is to plan global distribution requirements 90 days in advance and carry significant inventory levels to protect service. Since the value and importance of its products is very high, protecting high service levels at the point of consumption is a necessity. Nevertheless, the median inventory turn, industry wide, is just 3.4 turns2. The time that it takes to move from end-to-end consumes a substantial portion of the product’s shelf life. Furthermore, as competitive product substitution is an inherent aspect of the generic market, more responsive suppliers gain competitive advantage.
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End-to-end Throughput Time
Reducing the overall throughput time from end-to-end, from the first chemical reaction all the way through distribution, improves market responsiveness, reduces risk through less exposure time and improves profitability. Just as importantly, from an operational excellence perspective, it exposes inefficient or even incapable processes that are masked by high inventories and long lead times.
Novartis’ continuous manufacturing paradigm, a component of their Lean program, has led to the reduction of their overall throughput time from 550 days to 200 days for some of their major products and they see the opportunity to get it to just 1 month3.
In the pharmaceutical industry there are three main challenges to operational excellence: demand visibility, collaboration and determining the right operational response. On the surface, these items would appear to be straightforward to address but are in fact very difficult due to the complexity of the total order-to-fulfillment process.
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