WHAT'S DRIVING the BOOM
By Cheryl C Lewis -- Purchasing, 4/9/1998
The outsourcing of chemical manufacturing continues to expand at a rapid pace as producers increasingly use providers of custom and toll services as a strategic business weapon. CPI companies are assessing their core competencies and financial positions in an effort to optimize their use of capital and time, to minimize risk, and to take full advantage of the expanding expertise of specialized suppliers. Strategic outsourcing of chemical manufacturing can help purchasers achieve these goals.Custom and toll chemical manufacturing services have grown so fast that they have produced some profound--and likely long-term--changes in important segments of the CPI. Many providers of chemical manufacturing services now consider these skills to be a core competency, as opposed to the "side business" they may have been considered just a few years ago. Manufacturing service providers are moving quickly to enhance their capabilities through capacity increases, mergers, and acquisitions of other service providers.
The boom in custom and toll manufacturing also has produced a new type of purchasing professional--the dedicated outsourcing buyer. Many or even most pharmaceutical companies now have at least one person dedicated to the custom/toll buy. This "new" purchasing pro is technically trained and highly networked with peers and technical representatives from suppliers. As one purchasing manager puts it, "We're a tightly knit group because there are only a handful of us in the world."
The supply base of companies that provide chemical manufacturing services has grown quickly, but in some specialized market segments buyers have only a couple of suppliers--or even just one supplier--to choose from. This makes the role of the outsourcing buyer even more important; only through a combination of good business sense, strong technical knowledge, and close relationships with suppliers can purchasers maximize the outsourcing buy.
Strong growth hasn't stopped
Just how fast is outsourcing growing? According to a recent survey done by Purchasing Magazine, buyers say their outsourcing activities have grown an average of 9.0%-9.5%/yr over the past five years. For the next five years, buyers forecast these activities will continue to grow sharply, climbing 8%-9%/yr. Some market researchers peg the growth rate at even higher levels.
Buyers and producers say this expansion is due to a number of factors, but a move to strategic sourcing seems to be at the top of everybody's list. "Custom chemical manufacturing has become more strategic as a production method than in the past," agrees Michael Reardon, commercial development manager for Dow Chemical's Contract Manufacturing Services.
This is especially true of pharmaceutical manufacturers--by far the largest consumers of outsourcing services. "Pharmaceutical demand for contract manufacturing will continue to grow sharply," says Reardon. In Purchasing's recent survey, 32% of respondents use outsourcing for the manufacture of pharmaceuticals. Agricultural chemicals followed at 12%. Specialty chemicals, solvents, and resin purchases were all at 6%. Other types of products for which outsourcing is used include polymers, aerosols, organic pigments, catalysts, and raw materials for dietary supplements.
As is the case in most or all manufacturing industries today, CPI companies are taking a fresh look at their businesses in an effort to determine the specific operations that are most important. "Some are leaving process development and/or manufacturing to others these days," says Reardon. Through analysis, companies are determining what they do best and finding others who are experts to do the other stuff. Example: Many pharmaceutical manufacturers have found that they add value by developing new products and understanding the regulatory process. In many cases, they leave some or even all of the production process to others.
It's also a question of limited resources and capital. With time-to-market being a key ingredient to success today--especially in pharmaceuticals--manufacturers that can best focus their resources stand to get a leg up on competitors. "It's a resource intensity issue, so you work within the competencies you have, and you outsource those you do not," says Reardon.
At many pharmaceutical companies, production facilities have been rationalized in recent years, yet another factor that has increased the use of custom and toll manufacturing. Now, companies analyze product life cycles to determine outsourcing requirements. "Producing a new drug internally and possibly outsourcing later in the life cycle is preferable, assuming the new drug meets your core competencies," says John Symonds, chemical procurement director at Pharmacia & Upjohn, a global producer of pharmaceutical products based in Kalamazoo, Mich.
For many companies, especially pharmaceutical producers, speed-to-market is absolutely critical. Taking advantage of outsourcing and custom chemical manufacturing can significantly reduce a product's time-to-market. "For some products, a couple of months delay could cost millions of dollars," says Reardon.
Producers respond
Chemical companies are responding to the growth in outsourcing by giving buyers more outsourcing opportunities and options. "More demand is generating supply," says a purchasing agent for a pharmaceutical company. "The number of companies is increasing as well as the number of facilities." Companies are adding facilities, equipment, and technical capability as quickly as possible. Some are also buying custom manufacturing businesses to enhance their position in the market.
For instance, Dow Chemical added five facilities in the past year to expand its contract manufacturing services business. Three are in Freeport, Texas. These are for specialty chemical, specialty polymer, and agricultural intermediate production. Two are in Midland, Mich.--one for pharmaceutical bulk active manufacturing and one for esters and specialty plasticizer production.
Late in 1996, Mallinckrodt acquired D.M. Graham Laboratories, a contract manufacturer of pharmaceuticals. Around the same time, M.A. Hanna purchased Chase Elastomer's U.S.-based custom rubber mixing operations.
In the fall, First Chemical completed a 25% capacity expansion for batch specialty chemicals at its Pascagoula, Miss., facility.
Eastman Chemical is planning to build a facility to produce custom fine chemicals for the pharmaceutical industry, including pharmaceutical intermediates and bulk esters. Construction was to begin this year.
Gaining quality
As companies get more involved in custom manufacturing and outsourcing, buyers benefit. "Companies are getting better at it, and more are focusing on it," says a buyer for a pharmaceutical company on the East Coast. The sharp growth in the use of outsourcing services is fueling an increase in interest by producers. "Companies are making themselves more well known," says the purchasing agent from a pharmaceutical company.
The strong demand, however, is creating some problems for buyers of outsourcing services. "Today, there are more people who want to work for you compared to two or three years ago, but the really good people are getting too busy for their previously fast response time," says Symonds from Pharmacia & Upjohn. The solution, he says, is to continue to look for other good producers.
Leadtime/response time is the top concern for buyers of outsourcing services. According to Purchasing's most recent survey, 38% of respondents say this is the area they most want improved. After leadtimes, quality is the next concern for buyers of outsourcing services. Sixteen percent of buyers responding to the survey want quality improved. Survey data over the past couple of years show quality complaints on the rise, a trend that's not too surprising when one takes into account the recent rapid growth of this market.
Despite rising quality concerns, buyers say the number of GMP facilities is increasing. One buyer cautions, however, that GMP facilities are not always needed. Others point out that some producers may have strengths in some areas of quality and not in others. For example, a producer may have a strength in GMP at the development stage but have insufficient GMP practices at the actual production stage.
As always, the true key to a good supplier/buyer outsourcing relationship is honesty. "My advice to producers is to be very frank about their capabilities," says the East Coast buyer. "Don't start down the path believing you can develop the expertise along the way."
Good systems and record keeping also are important for suppliers of outsourcing services. "Companies need to be up-to-date on all standard operating procedures (SOPs) and operating and quality systems," says the purchasing agent for the pharmaceutical company. "A house in order always makes a good impression."
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