Early-stage biotech buying poses special challenges
David Hannon -- Purchasing, 1/16/2003 2:00:00 AM
There's something Lee Reed likes about purchasing for an early stage, research-intensive biotech or pharmaceutical environment. It's not quite academia, but it's not quite Fortune 500 either. Reed, director of purchasing at Cambridge, Mass.-based Alkermes, finds himself immersed in a prelaunch phase biotech firm with limited purchasing resources and big goals and expectations. While scientists at Alkermes scramble to buy the right chemicals, materials and equipment to get the company to its all-important launch phase, Reed is responsible for corralling fragmented and diverse spending habits.
Corralling a fragmented supply base
In a prelaunch biotech or pharmaceutical environment, much of the sourcing is being done by scientists or other end users, which leads to a very large supply base, as each buyer has his or her favorite suppliers and is subject to very few controls. Skimping on cost for a certain chemical or material could be the difference between prelaunch and launch, so spending control is not what it could be at a production-stage firm.
"This [fragmented supply base] is typical of an academic environment at a major university," says Reed. "Everyone has a hand in sourcing efforts and purchasing is viewed as more of a transaction support function."
So Reed is charged with letting the scientists source the materials they need without burning all of the company's cash and with bringing in more strategic sourcing wherever possible. Reed says he looks at the lack of controls as an advantage in his role by letting the "flexibility work for you instead of fighting it."
Minimizing the number of transactions is difficult in this type of organization but Alkermes is consolidating its office and lab supplies spends with preferred suppliers to gain leverage and minimize the number of transactions in heavy traffic areas.
"We went through accounts payable and looked for the thickest files and made the assumption that file thickness is directly related to the number of transactions," says Reed. "And in most cases we were right. Once we got those, we looked at how we could eliminate or reduce transaction activity."
Purchasing then used the company's Oracle system to do a PO sort by supplier and determine which suppliers were getting the most POs.
"Next we talked to the finance department and our key suppliers and asked how much we were spending with them. We requested a list of suppliers in descending dollars to see where we spent the most in the past year. We even asked the bigger suppliers to show us order activity in the past year."
Eliminating inefficiencies
Efficiency is also important at a cash-limited, prelaunch company.
One simple and effective strategy Alkermes used to analyze its processes was flow-charting all corporate processes. "We looked at how we processed a typical requisition and found there were more than 45 steps," Reed says. "All these increments had been added as needs arose over time, but sometimes after those needs disappeared, we didn't ask if we still needed to complete that step."
Reed says he realized how cluttered a purchasing process can get while at a previous biotech firm. At that firm, the purchasing group dedicated one employee for four hours a day to loading procurement data into a laptop computer and bringing it to the finance department on a disk every day. Eventually, someone asked the finance department what it did with the data, and found they basically stored it and never used it. Upon closer examination, it was found that the data collection process had begun during a software pilot and was never removed after the pilot project was cancelled.
Supplier management
At a small, prelaunch biotech purchasing organization, scientists and end users are doing much of the purchasing and sourcing of technical materials and have established relationships with suppliers directly. Rather than try to disrupt those relationships to keep "control" of supply management, the purchasing staff at Alkermes strives to add value to those relationships where sensible. One way to do that is to use suppliers as a resource for improvements, rather than trying to beat them up over price.
"For example, at my last position, we set up continuous improvement teams in the lab supply area," Reed says. "We had the suppliers answer technical questions where purchasing might not have the expertise. It gave us a chance to build a strong relationship with the supplier in that area and add value."
Planning for the green light
A biotech firm changes dramatically when it moves from prelaunch to post-launch and production phases and purchasing is one of the areas most affected by that change, as it moves from buying smaller quantities of many R&D materials, to sourcing larger production quantities. A production-phase biotech or pharmaceutical company is much more financially focused than an R&D organization and the market's expectations change dramatically when a company becomes profitable.
With all these changes, Reed says a purchasing organization has to be planning one to two years in advance for this swing and even recommends rehearsing launch activities. When the time comes, purchasing may have to hire dedicated staff for production materials purchasing, while continuing to keep existing staffers to support R&D spending for other products in the pipeline.
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