Why buyers outsource
By Christopher Reilly -- Purchasing, 1/14/1999
Intense competition in chemical and pharmaceutical manufacturing, combined with increasing importance of speed in getting a product to market demand that purchasing keep fine-tuning supply strategies to get maximum value from the supply base. Unique procurement challenges faced in these industries cry out for purchasing professionals to continuously examine the cost-saving and time-reduction benefits possible through outsourcing the development and manufacture of fine/specialty chemicals, pharmaceutical intermediates, or other high-technology chemical products.The logic behind outsourcing is that it can be more cost-effective for a chemical or pharmaceutical manufacturer to contract an outside specialist than it would be to handle costly, highly specialized, and/or low-volume manufacturing processes in-house. When developing new products, technological expertise is at a premium. In many cases, companies don't have the skills, technology, time, or access to materials required to complete essential development or manufacturing steps efficiently.
Enter the provider of custom/toll manufacturing services. Over the past several years more and more CPI companies have staked out territory in highly specialized chemistries that are critical to success in pharmaceutical development and other niche markets. For purchasing professionals under pressure to reduce costs and help speed time-to-market, the answer for optimum supply management and effective product development has been to outsource various manufacturing steps, at various levels of maturity.
Outsourcing on the rise
Because the benefits of outsourcing are seemingly tailor-made to deal with the challenges of new-drug development, it's not surprising that many purchasing professionals have reported near-double-digit growth in the amount of custom/toll manufacturing they've outsourced in recent years. The consensus of purchasing pros and industry experts we interviewed was that growth in outsourcing will continue at a slightly lower but still steady rate of 5% to 10% through at least the year 2000.
Commenting on the growth in outsourcing, Nick Jawdosiuk, purchasing specialist at Sigma-Aldrich, a specialty chemical distributor, manufacturer, and buyer of custom chemical services based in Milwaukee, Wis., says that the number of products his company develops has grown significantly in the past few years. "With this growth, increasing competition, and the emphasis on speed in getting projects ready for market, it stands to reason that companies are increasing their use of custom chemical/toll service suppliers," he says.
Based on findings from recent CPI Edition of Purchasing surveys, several trends have emerged that point to strategic measures taken by purchasing managers to improve supply base management in the wake of outsourcing popularity. They are:
* Source domestically if possible. Despite the increasingly global marketplace, about 80% of custom manufacturing purchases are made with U.S. service providers. In fact, many buyers deal with "domestic firms only" to avoid problems caused by trade restrictions, environmental and safety discrepancies, and customs and shipping delays associated with outsourcing overseas.
* Make purchasing more technical. Many chemical industry companies have shifted people with a high level of technical capability into purchasing. Other firms have gone outside their companies and hired highly technically trained people for their purchasing organizations.
* Have purchasing lead the buying team. For many companies that purchase custom/toll manufacturing products or services, purchasing takes a leadership role in cross-functional teams. These teams exist specifically to handle supplier selection, development, and evaluation.
* Create close, long-lasting supplier relationships. To eliminate unnecessary costs and strengthen the links of their supply chains, buyers are leaning toward developing strategic alliances with custom service providers and specialty/fine chemical suppliers.
* Look more closely at how assets are managed. Strategic economic value added (EVA) programs designed to maximize asset allocation, operational efficiency, and evaluate supplier performance are being put into more frequent use.
Companies use custom manufacturers for pharmaceutical ingredients and a variety of chemical intermediates more than for any other type of chemical product. Other important markets include agricultural, specialty polymers, coatings, and specialty/fine chemicals.
What buyers want
While most buyers generally are satisfied with the service they get from custom chemical/toll service providers and specialty suppliers, we asked purchasing professionals to identify some areas suppliers could improve to make outsourcing easier.
The most common response dealt with the willingness of the supplier to accept and share some of the risk involved with undertaking a new project or product launch.
Merck, Inc.'s Bob Kanuga elaborates, "In the pharmaceutical industry, there are a variety of evaluation steps that a new project must undergo before it is ready to go to market," he says. The evaluations include preliminary safety testing, clinical testing, and a lengthy Federal approval process.
"Once a project has been proposed, it is common to have to wait six to 18 months or more for NDA approval from the FDA," Kanuga says. It is clear that a lot can change during that period of time, and there is really no way to guarantee return on investment for the supplier.
Sharing risk is especially crucial where a specific technology or equipment is necessary to outsource the project, Kanuga says. Often, the supplier does not currently have that technology or infrastructure in place, and the cost of implementing that process adds to the risk of undertaking the project. "There is always the danger that you'll come to the end of evaluations and have no product," he says. It's the sharing of the cost to implement that infrastructure and the anticipation of what customers want that Kanuga and many other PMs would like to see more of.
Some suppliers, Kanuga says, are beginning to think proactively about what customers want, which is good news to purchasers. "One example is suppliers that are gearing up to offer low-temperature reactions," Kanuga says. That is to say that some custom suppliers are beginning to put chemistries, processes, and equipment capabilities in place to deal with potential projects before they are proposed.
Working together
Harold J. Tenbarge, purchasing manager at Eli Lilly & Co., a manufacturer of pharmaceutical products headquartered in Indianapolis, Ind., has a similar view of risk. Tenbarge encourages his custom chemical supplier base to get involved very early in a development project's life cycle.
"We ask suppliers to begin investing in process development when a project is in pre-clinical and early-phase-I clinical evaluation, though final volume of business to the supplier is not determined until late in the development of the project," Tenbarge says.
In what may be a direct result of continued supplier relationship building, Bill Knab, purchasing manager of custom manufacturing at basf in Mount Olive, N.J., says he has noticed recent declines in what he terms, "the cherry-picker syndrome." Knab explains this distinction as being the tendency of suppliers to work with a company on outsourcing projects only if they are considered by the supplier to be "easy" for one reason or another.
Some of Knab's purchasing goals have been to develop close working relationships with the key members of his roster of about 50 custom chemical suppliers, consolidate leverage, and limit the "cherry picking" of projects his company outsources.
But Knab admits, there's a lot of give and take involved. "Custom chemical suppliers must realize that they're going to be asked to work on some more difficult projects as well as some easy ones," he says. "On the other hand, if you're inflexible [in negotiations] you'll soon find that you have no high-quality suppliers that will work with you," Knab adds.
Other areas for improvement
Sigma-Aldrich's Nick Jawdosiuk says he would like to see more vendors in the market that deal in small volumes of product, such as orders of 50 to 100 grams, or 1/2 kilogram or less. He says that it would also be an improvement for custom suppliers to keep inventories of some products.
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