Lean supply chain practices in the pharmaceutical industry

Prof Raymon Krishnan and Daniel Sherwood

The idea of Lean comes from the Japanese word ‘muda’ meaning waste. Popularised by the manufacturing practices of Toyota, the essence of Lean is to eliminate any waste or any function that consumes resources but does not create any value.

Adopting such an approach to the pharmaceutical industry has, however, met with little documented success in the past. Regulatory compliance issues, globalisation, production and pricing pressures are all placing overwhelming demands on the profitability and competitiveness of both large and small companies.

In a report released in 2006, it was identified that “drug manufacturing currently wastes $50 billion per year” and that “many companies are waking up to the value of creating more efficient operations”.

Some of the multi-national drug-manufacturing giants have turned to traditional lean manufacturing practices to transform their operations from the high margin, low-productivity model of the past.

Success has unfortunately been elusive, as traditional lean practices are not well suited to the pharmaceuticals’ complex, highly variable production schedules that make use of shared-asset production environments.

In 2006, for example, South East Asia was hit by the bird flu virus. The only preventive medication available was Tamiflu but due to the sudden surge in demand, the manufacturer was not able to meet demand. This was partly due to the fact that one of the key ingredients – a species of the star aniseed herb that is only cultivated in some parts of China – was not available. Faced with such uncertainty, the concept of lean manufacturing simply cannot work.

There are other companies that have turned to technology in the hope of providing a leaner, demand-based production. In the same survey on the manufacturing performance of 1,500 pharmaceutical manufacturers both big and small, it was noted that even after spending millions on enterprise resource planning (ERP) systems, advanced planning and scheduling (APS) systems, and other traditional technologies, many companies are still chasing performance improvements at the plant level.

Only a third of those companies surveyed felt that their IT systems have delivered their expected return on investment (ROI). Respondents in the survey cited lack of information visibility as one of the key failures. Other major reasons include the lack of awareness of variability and lack of support for Lean principles.

To achieve the benefits of Lean, pharmaceutical manufacturers, especially the multi-national companies, need global visibility of production performance, and optimisation and simulation solutions that help model scenarios for more agile performance.

They must battle the main manufacturing’s performance killer called ‘variability’. There are very few industries that deal with as much variability in products and processes as drug makers. Pharmaceutical product mix averages to 20% in new stock keeping units (SKU) per year, due to market demands for different strength, packaging type and presentation type such as tablets, capsules or liquids. Additionally, there is up to 60% in overall SKU volatility due to the emergence of substitutes brought about by new discoveries that may render existing products obsolete!

Most successful Lean implementations have been in high-volume, low-mix manufacturing. Lean will be successful in meeting predictable demand efficiently at the lowest possible cost. Implementing traditional Lean is indeed a struggle in the pharmaceutical industry. Major issues are faced, such as product mix in the hundreds, coupled with numerous work centres and with significantly more process and demand. Here, variability is the norm and the only constant is change.

The future does, however, look more promising. Next-generation optimisation software and methodologies appear to be able to adapt to traditional lean manufacturing techniques. This new software will take into account variability and take steps to mitigate its impact by changing traditional performance metrics, using flow-path management to derive more flexible approaches to define value streams and organisational structure. In addition to this, at least one pharmaceutical giant has cut cycle times and inventory in half or more, whilst achieving on-time delivery rates as high as 99% by using alternate means of calculating inventory, capacity planning and lot sizing.

As mentioned earlier, to begin reducing the $50 billion per year waste, manufacturers need to consider leveraging on this modified lean approach and combine it with flow-based manufacturing methodologies, simulation and analytics software, and variations on demand-based pull scheduling.

The next-generation solution will enable companies to break down organisational silos and integrate manufacturing operations. Decisions can be made on the basis of product flow through the factory, not by individual departmental metrics, improving control over key performance indicators.

Secondly, it will improve decisions that impact the bottom line. Improved real-time data is fed back into the enterprise resource planning and other business systems for better visibility, planning, and decision-making. By feeding more accurate data from the plant floor into other business systems, manufacturers can slash inventory and reduce cycle times up to 80%.

Finally, it will help to determine best practices and prioritise metrics based on current business goals and challenges. Simulations will allow manufacturers to model solutions to scenarios such as the reduction of cycle times more effectively. Most importantly, it can help accurately identify where reductions in variability will most benefit the bottom line. This will provide a clearer area in which to focus.

Whilst lean strategies lend themselves more easily in environments with stable and predictable demand with low variability, the next generation of ERP tools, if implemented and managed correctly, lend themselves to aiding us in our quest for a lean supply chain. More work and closer examination certainly needs to be done in this area and ideas and suggestions on the ‘best’ solution will certainly be welcome by stakeholders.

Raymon Krishnan is the president of the Singapore Logistics & Supply Chain Management Society and a Fellow of the Australian Logistics Academy. His portfolio currently includes that of program director of the MSc in Strategic Supply Chain Management from the University of Wales conducted by the society in Singapore. He can be contacted at raymon@logis.com.sg.

Daniel Alfred Sherwood, is a practicing logistician in the pharmaceutical industry and is currently conducting research in this area towards his MSc in Strategic Supply Chain Management with the University of Wales. He has been involved in logistics since 1986 and has worked for leading 3PL companies like Singapore Technologies Logistics and Bax Global. Whilst working in the pharmaceutical industry during the SARS and bird flu epidemics, he discovered that there is much to be done in improving the supply chain management aspects of the industry and is of the opinion that Asia is ill-equipped to handle the complicated requirements of pharmaceutical products such as the correct implementation of cold chain logistics practices.

Excerpted from MHD Supply Chain Solutions, March/April 2008, pp.58-9.

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