A financial analyst or supply chain professional who is new to life sciences might be tempted to cry when looking at working capital requirements of some life sciences organizations. But such high inventory numbers can be justified when you consider the incredible innovation – not just in terms of new products or therapies, but across all facets of their ecosystem.
Suppliers require custom synthesis to manufacture raw materials, usually referred to as active pharmaceutical ingredients (API). Packaging suppliers innovate when they provide products that dispense metered doses of a specific medication during the manufacturing process or even for the end consumer.
Competitive pressures such as generic products can erode margins for innovative organizations. Many supply chain organizations view inventory and raw materials as a cost of doing business. Supply chain innovators in life sciences (SCILS) can provide tremendous value to their organization by rejecting the status quo and instead digging deeper into efficiency initiatives.
Collaborating during design, negotiations, and operations
Before approaching a supply base with a specific set of requirements, be sure to include your supply chain in the design process. Suppliers can offer advice and collaborate on how these requirements can meet overall operational objectives – cost control, assurance of supply, risk, and other opportunities for value.
A simple example
|Contract manufacturer to you:||You require 600 units over 6 months at 100 per month. We can efficiently make 120 units per month. Can you accept this volume over a 5-month period at a much lower cost per unit?|
|Your question:||Can you accept 20% more each month? Does the lower unit cost from your supplier justify the cost of this extra inventory and additional transportation charges?|
We have now discovered manufacturing efficiencies of a contract manufacturer and can determine whether aligning your supply chain to leverage their efficiencies benefits your organization.
The value to the supplier:
- Efficient manufacturing: Measured by Return on Assets, Overall Equipment Effectiveness, and other metrics
- Capacity: Rather than consuming 6 months, this 600 units can be made in 5 months, offering the supplier 1 month of extra capacity
- Time-to-revenue: The supplier receives the revenue in 5 months vs. 6 months
Though there are numerous other benefits to the ecosystem, the key takeaway is to approach the supply base in a way that encourages open communication, trust, and alignment of objectives. During the remainder of the relationship with your supply base, collaborating on value opportunities should be the goal. Here, we touched on the initial design phase of a product lifecycle.
In future blogs, we will discuss joint value opportunities, including optimization of working capital and which work-in-process inventory (WIP) is included. Then we can discuss how to “WIP it good!”
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