In today's challenging environment, aggressive cost control has become a common theme
in the pharmaceutical industry. It became fashionable later than in most industries but
today it is with us, and it is here to stay:
ï‚·ï€ For the traditional pharmacos, the generics are putting a lid on the revenues from
older products. For the generic manufacturers, low cost is a way of life.
ï‚·ï€ Many social security systems, generating a large part of the revenues of the
industry, are facing challenges because there are insufficiently funded and their
ageing members have increasing needs.
ï‚·ï€ Emerging nations represent a growth opportunity but cannot afford expensive
ï‚·ï€ Last but not least, Research, from discovery to clinical trials, is increasingly
expensive, while the payback period decreases.
Often, before cost pressures forced the implementation of a new Procurement organization,
the function was mainly structured to administer Purchase Orders and perform basic
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quotation requests. Then, we implemented the tools and the culture previously found in
other industries such as consumer products or assembly. By consolidating volume across
plants and harmonizing specifications, Procurement forced suppliers to improve terms.
Often, consultants sped up the process and built organizational skills, with double digit
initial cost reduction, followed by smaller annual improvements. Negotiation skills were
creating value by lowering the cost of the Bill of Material. Although this is far from
today's best practices, it marks the realization by upper management that the Procurement
function had more to contribute than offering transactional administrative support.
Profit margin improved for a few years, fuelling investment in better systems, and
attracting a new breed of good managers. They introduced a more strategic vision of the
entire supply chain, gained insights on the Total Cost of Ownership (TCO) and
redistributed responsibilities to reduce the TCO with cross-functional initiatives. EProcurement
solutions provided an additional transaction cost reduction. The most
powerful companies sometimes convinced their suppliers to open their books, discuss their
cost structure and offer new ideas to optimize interfaces, setup and management costs.
Reaching this level required that firms rethink their organization, their staffing approach.
Those changes could only be justified with a long term vision of the Procurement function
and its relation with the other functions in the firm. Nimbleness, flexibility, a culture open
to change, those were the common traits of the new winners. The changes were therefore
of strategic nature, to capture advantages through excellence in execution.
Another change occurred. Procurement extended its responsibilities to support
maintenance then capital investments. The support functions were also taking the
opportunity to leverage Procurement to control better their budget. Today, most
pharmaceutical companies have a professional procurement team dedicated to reducing the
cost of services, from office supplies to marketing spend such as events and research.
But is this new culture of Procurement sufficient? Where will it lead us? Other industries
like automotive or electronics have gone this path before us, but relentless cost cutting did
not save GM from the brink of bankruptcy, did not prevent Compaq from being acquired by
HP, and was not sufficient to satisfy HP's shareholders after the merger. So what is
missing? Can Procurement deliver more? How should CEOs view their Procurement, and
what should be their objectives?
From Tactical Cost Cutting to Strategic Supplier
"The key to investing is not assessing how much an industry is going to affect society, or
how much it will grow, but rather determining the competitive advantage of any given
company and, above all, the durability of that advantage"i . The Pharmaceutical industry
today is especially under pressure to increase shareholder value. This must become an
objective for all the functions of the firm, including Procurement, which in turn must
reassess its role and its culture. But how many Procurement Professionals in our industry
have asked themselves "What am I doing better than my competitors?"
To contribute to the success of the firm on par with the other functions, the Procurement
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team must focus on identifying and capturing strategic advantages, impacting revenues in
addition to profit. When Procurement is capable to have that much impact on the future of
the Firm, it deserves to be on the CEO and the Shareholder's agenda.
When Procurement became an agent of change in a cross-functional approach to optimizing
the Total Cost of Ownership, its impact was transactional effectiveness (defined as "level
2" above). It improved the relation between suppliers and the value chain of the firm,
working together to solve problems more efficiently: design, logistics, value engineering,
etc. were discussed. But this approach is not intrinsically differentiating because it has
been discussed at length and implemented by many enterprises. Nothing in this approach is
proprietary, unique, or differentiating. Firms that have not adopted a "level 2" in
procurement are lagging, but reaching "level 2" is not a guarantee of being ahead for a
The complexity of relationships in our industry has increased significantly. Innovative
molecules and solutions are not systematically developed in house, and then manufactured
in integrated plants starting with basic raw materials. We leverage a network of biotech
firms, and academic research institutes for some part of our innovation. We outsource to
low cost Far-East facilities the production of bulk chemicals, and to nimble secondary
manufacturing specialists the packaging of our products. We rely increasingly on CRO's to
support clinical research and farm out data management to India or South Africa. Health
Economists and Key other experts provide advice and support to our commercial
So in our innovation driven environment, external resources have become increasingly
important to value creation. But an innovation that is accessible equally to all players in an
industry builds only value to the final users. Therefore, it is important to manage the
sources of innovation to build an extended enterprise rather than a loose relationship that
will change direction or be broken with the winds of commercial relationships.
Today, the Procurement leadership must develop key suppliers to exploit quickly their
skills to their advantage rather than for the benefit of the industry. It must contribute to
shaping supplier's strategies to speed entry into new markets. To do so, it must dedicate
resources to facilitate seamless and exclusive transfer of value from the suppliers'
development labs to the final consumers and back. That is the reason why Procurement
must understand the lifecycle value creation potential of an item, not only as a driver of the
Total Cost of Ownership but, more importantly, as a driver of product pricing through the
premiums provided by exclusivity, and/or market growth for the company. Those types of
initiatives can only succeed if both partners have common goals, and the trust that both will
work together rather than exploit a weakness of their associate at the first opportunity. It
does not mean that cost cutting strategies are obsolete. They have become necessary rather
than sufficient. They will be useful to manage a large portion of the addressable spend, not
the entire spend.
This strategic sourcing approach, called "Collaborative Sourcing", is differentiated from
transactional effectiveness. It can deliver superior returns because it aims specifically at
creating a gap between the firm and its direct competitors to create sustainable competitive
advantages. Another impact is the securization of long-term strategic materials and
resources. Transactional effectiveness only aims at improving the operational aspects of
the relation, not to build value for the extended enterprise in a competitive environment.
Transactional effectiveness is often driven by a buyer at "level 2" who imposes its working
approach on all its suppliers forced to go along or be replaced by more compliant
alternatives. It can also be the result of an industry wide effort, often pushed by solution
Collaborative Sourcing requires a radical change in the culture and the vision of the relation
between the buyer and the supplier. Collaborative Sourcing can involve more than two
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companies, such as a supplier of raw materials, a packaging manufacturer and a final user.
Therefore it is clear that Collaborative Sourcing goes beyond the performance of similar
activities better than one's rivals. It is a deliberate attempt to reposition the company by
using different and distinctive approaches to managing suppliers. Few companies have
competed successfully on the basis of their better effectiveness over an extended period.
Collaborative Sourcing is the strategic repositioning of the supplier relationship
management. Collaborative Sourcing experts define, search, capture, isolate, manage and
improve resources internal and external to the firm to deliver strategic advantages by
optimizing internal and external working relations. Collaborative Sourcing relies on trust
between involved parties.
Comprehensive External Resource Management
Moreover, leveraging innovation requires the input of many functions in the firm.
Therefore a sourcing strategy aimed at value capture relies heavily on collaborations within
the firm. Building and managing this collaboration is a complex task that can only be
effective if it is properly orchestrated: this is the role of the Sourcing Manager in the
So Collaborative Sourcing is not only a change in the relation between the Enterprise and
its suppliers. It is also a change in the relation of the Sourcing Managers and the other
functions. In the past, Procurement was only involved when the products hit the supply
chain, usually at the industrialization phase or later. Unfortunately, this approach presented
a few weaknesses:
ï‚·ï€ The scientists are often focusing on obtaining products or services to solve a
development problem, rather than a supply chain issue. Therefore, they may not
take in account all the parameters involved in long term value creation
ï‚·ï€ Although some scientists combine brilliant research capabilities with business
savvy, many others have less inclination for negotiation, long term cost benefit
analysis, or similar skills that a modern Procurement professional must master.
Last but not least, good scientists are in short supply, so why ask them to stretch
themselves to cover tasks that others can do faster and more naturally.
To support Research activities, Procurement must be involved in securing sufficient supply
of a hard to find molecule. While the current needs may be for a few hundred grams of
laboratory grade product, the long term growth of the company may require a thousand fold
increase or more, with radically more complex specifications and service requirements,
capable of entering into a GMP production environment, satisfying strict regulatory
Another area for Procurement involvement is the Clinical Research. Here we are not
speaking of the mere improvement of contracts with CRO's or academia. Today's
Procurement best practices will support a much more strategic and fruitful collaboration
through the application of all the tools of the trade: the transparency tools like cost
modelling, the specification tools like benchmarking and process reengineering, in addition
to the traditional negotiation tools.
Procurement must be a natural partner to all the functions in the Enterprise. Nobody but
the finance team identifies and secures funding for a new research or a marketing initiative.
Human resource professionals manage compensation, and recruitment. The IT department
develops and maintain the architecture of systems supporting all other functions. Likewise,
if it is an external resource, it must be managed by the specialists in the Procurement
Department (Figure 2).
To be effective contributors to the strategic issues of the Enterprise, the Procurement
leadership must work closely with the other senior executives in charge of key functions.
This can be done through an ad-hoc steering committee, usually with the Finance,
Production, R&D and HR leaders. Increasingly, the executive in charge of Procurement
reports directly to the CEO and sits on the executive leadership council. In this case, this
executive is usually a Chief Procurement Officer, a CPO.
The role of the CPO is to optimize all the relations with external suppliers, a much broader
role than the traditional cost cutting approach. It complements the transactional activities in
the supplier relationship with Sourcing defined as "The process of identifying
opportunities, evaluating potential sources, negotiating contracts and continuously
managing supplier relationships to achieve corporate goals"ii.
In a world class Procurement organization, the potential for creation of shareholder value,
not merely the preservation of it, is an intrinsic part of the role of Procurement. The
R&D Production Commercial
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Value Creation Framework
function must be a contributor to strategic differentiation: not only being excellent in
executing transactions but also identifying where it can contribute to develop sustainable
competitive advantages. Obviously, there will always be a sizeable part of the portfolio
that is spent on suppliers that bring no opportunity to differentiate (Figure 3). Those will be
managed traditionally to reduce total cost of ownership. Industry-wide solutions, processes
to improve transactional efficiency, will be used to stay at the front of the race. And for
select relations, collaborative relationships will be developed to build value and support
Michel Philippart is in charge of Sourcing and Procurement for GSK Biologicals, the
vaccine division of GSK. Prior to joining GSK, he worked for consumer goods companies
such as PepsiCo and Consulting firms such as McKinsey. He is working on a book on
"Collaborative Sourcing" with Christian Verstraete and Serge Wynen (available in
September at i6doc.com)
i Warren Buffett, Fortune, November 1999
ii Pierre Mitchell, AMR Research
iii Collaborative Sourcing, Philippart, Verstraete, Wynen, September 05, Presses
Universitaires de Louvain
Figure 3: Mature Portfolio of Supplier Relationshipsiii
â€¢ Adversarial relationships
â€¢ Clear objective to reduce cost of supply
â€¢ Operationally oriented
â€¢ Reduction of cost of doing business
â€¢ Electronic transactions (eg. PO)
â€¢ Establishment of collaborative
approaches to do business (eg. VMIÂ°
â€¢ Sharing of planning information
â€¢ E2E Integration of sourcing processes
Value Chain Integration
â€¢ Collaborative relationship from product
â€¢ Joint investments
â€¢ Joint go-to-market
â€¢ Development of tight relationships to
ensure long term partnerships across
all business aspects
â€¢ Exclusive capture of resources
â€¢ Strategic alliances and acquisitions