For much of its history, the pharmaceutical industry lived a charmed life as it enjoyed a string of brilliant successes. Companies developed powerful new drugs, marketed them heavily, and created reliable streams of revenue. The generic pharmaceutical industry, meanwhile, after many years of weakening patent protection for branded pharmaceuticals, found that it could come to market earlier and earlier with its high-demand products. Without the considerable cost of research and development that burdened the branded pharmaceutical industry, the generic companies quickly gained a reputation as successful, high-margin businesses.
Today, however, the entire industry is facing immense and unanticipated problems, creating perhaps the most intense financial challenges in its history. Price erosion is rampant. Global competition is intense and growing.
There are few blockbuster” drugs in the pipeline, which will ultimately reduce industry sales growth. Even with significant cash reserves, it is becoming increasingly difficult for companies to fill a pipeline by identifying promising biotech companies as acquisition candidates. While there is considerable industry consolidation, a few fundamental problems remain - long lead times in production, quality defects, low productivity, and frequent reports of poor customer service.
This is a new and puzzling environment for the industry, marked by stiff legal and regulatory compliance and intense price pressure. The urgency to lower costs and reduce prices has become paramount. Yet even after numerous efforts to squeeze costs out of their systems, many pharmaceutical companies are still left wondering how they can maintain their margins and productivity. This challenging situation demands a focus on the basics: reducing costs through productivity improvements.
For companies seeking quick results, this type of change requires a huge shift in operating paradigm. Most pharmaceutical manufacturers operate in a highly regimented manner, strictly divided into clear functional silos. At one time, this organization model gave these companies clear of labor and clear lines of responsibility for managers. It also made the search for cost reduction very limited. When a manufacturer needed to lower costs, managers would simply seek lower-priced suppliers for their Active Pharmaceutical Ingredients (APIs) and excipient (inactive) materials. That approach, however, came with costs: The demand for cheaper materials put a real burden on suppliers, sometimes straining long-established relationships. At best, it was a short-term fix to reduce costs, but not a real solution.
If lower costs were to be achieved, the company’s entire manufacturing process need examination. Simply looking at the work undertaken by each functional silo would be insufficient,” says Silvers a Leading Six Sigma consultant. To help pharmaceutical companies & identifying where they had opportunities to improve, a new approach Strategic Process Management, or SPM is to be implemented.
Strategic Process Management is the next-stage model for process improvement, says Silvers. It enables companies to align process improvement work with company strategy, identifies performance opportunities, and then works to engage employees to rapidly improve the business.” By looking at a business through its value streams rather than at individual processes or components and applying the rigors of Lean Six Sigma to underperforming areas any company can achieve their targets.
Case Study: Setting New Priorities for Process
A couple of years ago, the leaders at a global pharmaceutical manufacturer recognized that they needed to make dramatic improvements if the company’s long-term prospects were to remain hopeful. The company had reached a critical point in its growth, but steady price erosion in the industry demanded a cut in its costs of at least $40 million over the coming year. It thought costs could be reduced simply by analyzing projects within each functional silo. However, research found that, the need to reach beyond traditional cost-cutting methods is to take a fresh look at how the company’s processes affected the way its products flowed through the manufacturing facilities. To address this need, three new approaches devised to the manufacturer to help them better understand their own business:
1. Mapping core value streams
2. Sizing batches to match customer needs
3. Emphasizing flow over function
1. Mapping Core Value Streams
In this highly siloed manufacturing organization, managers were accustomed to focusing on each individual step in a process, and the equipment, time, and people used during that step. As a result, there was very limited visibility into how each step interacted with other steps across the entire manufacturing process. Managers had a very poor picture of how their products flowed through the plant and then, ultimately, to the customer. Each manager had become consumed with the details of his or her own functional responsibility.
The leaders of the company began to realign their manufacturing process without redesigning the physical layout of the plant. They reorganized the manufacturing process into four core value streams. A value stream” was defined as anything where 80% of the products flowed through similar processing steps. The company then assigned four managers to track and oversee each value stream, regardless of what functions the value stream passed through. In what amounted to a critical change, the company allowed the managers to schedule production cycles based on the constraining process step(s) within that value stream something that had proved impossible under the functional manufacturing system that had previously prevailed. Additionally, all the company’s supporting functions were aligned with the value streams through dotted line” responsibilities to the managers, keeping the entire organization on the same page. The company also began using the Lean Six Sigma approach to quality and cost long a staple in the auto industry, for instance in order to modernize their manufacturing process. The result was that 98% of the company’s orders were now fulfilled within 48 hours, compared with 69%.
2. Sizing Batches to Match Customer needs
For a long time, the pharmaceutical industry believed that the best way to improve customer service levels while reducing cost was simply to increase equipment utilization. A traditional process technique in pharmaceutical manufacturing was to increase the batch size to expand the length of time production equipment would be run. With a larger batch size, the hope was that the production process would require fewer changeovers to subsequent orders. The focus was on the manufacturing cycle rather than on what it meant for customers.
Rather than trying to optimize equipment utilization, focus on reducing changeover and downtime to create a nimble, more flexible process. This allows decrease in campaign size and reduces processing cycle time. This new approach also allowed the company to meet what had been a long-elusive goal: deliver products to the customer when they want them, in the right quantity, and with a high margin.
3. Emphasizing Flow over Function
Pharmaceutical companies also broke with its traditional manufacturing methods when it prepared to launch a new drug. Anticipating much higher demand than the existing quality control lab could handle, they ordered construction of a new quality control lab to deal with the coming volume of work. The initial plans for the lab followed the traditional organization and layout. It contained none of the fundamental principles of Lean Six Sigma design. However, when they saw that a lab could be designed around value stream flows that could dramatically save time and resources, they changed course. To create a new quality control lab, the company took several steps including:
• Analyzing demand for the coming year
• Determining the number of quality tests needed for this about-to-be-launched drug
• Measuring the time it took a product to move through the lab and aligning that with expected demand
• Laying out the lab to co-locate testing equipment, glassware, and other materials to minimize travel time
• Determining the resources and staff needed to support increased volume
• Cross-training resources to conduct all lab tests to support increased volumes in a single testing area
• Establishing guidelines, measures, and controls to monitor the lab’s performance and ensure that it was on target to meet forecast volumes.
The new testing lab design took advantage of understanding the flow of product through the manufacturing process. The benefits were immediate. It required only seven lab technicians (compared with ten in the original design), and significantly improved productivity. The new design generated a total annual savings of $1.3 million.
By approaching cost cutting in this new, holistic way, the pharmaceutical manufacturer achieved nearly two-thirds reduction in manufacturing cycle times, from 86 to 25 days, enabling it to eliminate 45 supply chain positions. Work-In-Progress inventory fell 66% and gross inventory 41%. Other process improvements led to plant product availability rising from 84 to 99%. The pharma company now fulfilled 98% of customer orders within 48 hours, instead of 69%. Managers established a weekly review of visual metrics to keep their focus and hold departments accountable for performance gaps.
Anticipating the Future
As the pharmaceutical industry continues to feel the strain of the economy, more and more companies will need to uncover untapped sources of cost reduction. In this effort, leaders must recognize that squeezing water from a stone will require new tools and approaches; only through a radical focus on process reforms and a break from traditional ways, can pharmaceutical companies achieve and maintain global leadership in quality and innovation.
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