The Generic Pharmaceutical industry is one of the most dynamic industries I’ve ever experienced – at least in Canada. In this industry, something significant happens every year that changes patterns of demand in the market and challenges supply chains. But sometime in 2009, things began changing in a way that’s been building up since and is now reaching a tipping point.
2009 is the year when frequent shortages of generic medication started to occur in the market. It began by the virtual collapse of the Apotex supply chain (the #1 manufacturer with close to 30% of share at the time) and just continued from there. The causes of shortages in the marketplace, of course, go far beyond the difficulties of one company. Rather, the past 5 years are a period where a number of factors converged and created a perfect storm of persistent shortages in all major therapeutic classes.
Even though a great deal of work has been done to reduce shortages of generic medication, the fact is that generic pharma supply chains are constantly challenged in their ability to provide steady, reliable service. These difficulties manifest themselves in a variety of ways, all of which I have observed myself, working with a number of these companies, or through other colleagues who also consult in the industry.
- The top-tier of manufacturers experience periods of good service followed by periods of bad service, up and down year after year without being able to sustain high service levels for multiple consecutive years.
- For any one manufacturer, a relatively high percentage of their portfolio are products where at least one competitor is on backorder.
- The Allocation process (protecting service to top customers from demand ‘floods’ caused by competitors on backorder), which was supposed to be used sporadically and on exception, is used in a high number of sku’s.
- And most importantly, this pattern: the #1 cause of service difficulties experienced by Generic manufacturers very often is not their own supply chain’s issues, it is the incidence of competitors on backorder – i.e., their biggest problem is a problem occurring in someone else’s supply chain.
These conditions challenge many of the traditional practices of Supply Chain Management 101, particularly when the cause of one’s problems are problems that one has no visibility of.
So what do supply chain practitioners have to do to face these difficult conditions? Here are my top 7 recommendations:
- Focus on Demand Management – I think it’s fair to say that most people labouring in supply chain management, particularly in this industry, are concerned with the supply side of things. Traditionally, service problems lead organizations to work on supply capabilities and demand is reduced to basic forecasting processes or inventory allocation strategies. But in the conditions shown above, it is the unpredictable variations in demand, caused by issues in someone else’s supply chains, that constitute the biggest challenge to good service.
- Redirect your attention from Forecasting to Short Term Demand Management – Forecasting is a way to predict trends. It isn’t good for anything else, really. An accurate Forecast should mean that demand is trending as you planned. But the impact of competitors on backorder occurs in a short period of time and causes inventory deficits that have to be dealt with in the short-term, way before a new trend sets in.
- Plan with your Clients – and I don’t mean simple CPFR or VMI. If you are a manufacturer, you don’t know when problems in your competitor’s supply chain are going to occur or even when they start causing shortages in the market – but your customers do. When shortages start happening in the medication supplied by one manufacturer, demand starts shifting to the same product made by another manufacturer (such is the nature of Generics). Who knows this first? – your customers do. Manufacturers shouldn’t forecast demand by themselves, they should plan with their customers – i.e., major wholesalers and distributors.
- Manage Demand by event, not in bulk – in classical forecasting, a manufacturer will revise the forecast of all the sku’s in the portfolio once a month. It’s a heavy, slow process invented a long time ago when the world was stable. Today, you should manage demand in reaction to individual events that you detect by collaborating with your customers and attack demand plans on the sku’s affected by each event, when the even occurs – not once a month.
- Focus on Detection – manufacturers in particular but wholesalers as well, need to develop business intelligence that allows them to detect as early as possible that shortages are occurring in the products supplied by any one company. This involves the creation of collaborative communities within the manufacturer’s enterprise that include the Sales Force, Product Managers, Customer Service reps, Inventory Managers at their customers’ and anybody else with their ‘ear to the ground’.
- Develop rapid response strategies – so many times I hear supply managers say “well, if you want us to change the supply plan, first change the forecast”. You need to have ways of adjusting supply that don’t rely on forecasting. Response strategies may include the following: a) work with customers to develop ramp up plans so that the shift of demand from usual sources now on backorder to new alternate sources doesn’t cause ‘flash floods’ upon the latter; b) learn to calculate safety stock provisions based on a quick read of the shortage situation as it evolves and the variability that it will introduce in demand; c) establish rapid reaction cycles with multi-functional communities communicating trough social media, whereby demand surges are assessed and new supply plans are put together quickly to respond to the build up of demand.
- Switch from planning for the market to planning by major customer – traditionally, Generic manufacturers plan supply by product and considering total market demand. However, given that shortages by one company are having so much impact on other companies, fluctuations of demand are very different from one customer to another because the business of each manufacturer varies tremendously from customer to customer. Thus, you should at least consider the following: a) subdivide Demand Planning and Demand Management processes by key customer; b) subdivide inventory and inventory replenishment by key customer as well. This will make it easier to manage demand and to manage supply so that issues in one customer don’t affect as much the service to another customer.
Today, the measure that is most commonly used by Generics manufacturers to defend against the demand surge that often occurs when a competitor goes on backorder, is Inventory Allocation. However, Allocation is what I call a ‘rogue process’ because it by-passes the natural processes of supply chain management. When this affects a few products, that’s fine. But what I see happening in Generics is that the % of the portfolio affected by Allocation has become quite large in many cases. It is for this reason that I said earlier that we have reached a tipping point, beyond which manufacturers really must replace the ‘wholesale’ use of Allocation by the methods described above, all of which converge on this one idea: manage supply by customer and with each customer. And this is a shift for which most companies are not well equipped and where much work remains to be done.
Tony great insight!!
After 20 years with Apotex and Teva, with the last 7 in a Senior Management Demand Role and with all the new “flavors” of S&OP, IBP etc and frequent changes at the executive level we have struggled to get back to the fundamentals or adapt tactical or operational execution plans!!
Organizations still struggle to truly “work together” on one common goal….the customer!!
Thank you, Donald. Yes, Generics Pharma is actually getting better, I think, at managing operations but as firms carry on projects to implement practices and systems, the market changes and new practices are needed. Firms need to leap frog from traditional methods (S&OP, forecast-driven supply chains, etc.) into advanced frameworks – working in now mode, event driven demand management, intimate collaboration with customers to manage the supply chain, tight integration with suppliers to drastically reduce supply chain cycle times, etc. Having an ERP and an APS and running monthly S&OP cycles is totally not enough.