Complex buy makes supplier selection crucial

By By Christopher Reilly -- Purchasing, 9/7/2000

The custom chemical manufacturing buy is one of the toughest that buyers in the pharmaceutical market must face. The challenges surrounding this type of transaction are many and varied. These include speed in getting new drugs to market, protecting their companies' technologies and intellectual property, and certification to comply with stringent regulations enforced by the U.S. Food and Drug Administration (FDA), along with the risk that projects will fail before a return may be realized.

In addition to the usual requirements of sourcing high-quality material from the best suppliers at the best possible price, and along with on-time delivery, these challenges place added pressure on buyers to select the best custom chemical manufacturers the industry has to offer. By choosing suppliers that present the best fit with buyers' outsourcing needs and by developing strong, long-term business relationships with close lines of communication, buyers and custom manufacturers can more efficiently move custom chemical manufacturing projects through to completion.

The need for speed

One of purchasing's most difficult challenges in the pharmaceutical industry is the time factor. Time spent reworking processes or waiting for late deliveries can mean the difference between success and failure. And with stiff competition in this market, there are no rewards for second place.

"Speed in getting projects to market is critical," says Howard Hitchcock, manager of outsourcing services for Sigma-Aldrich Corp., working on site at Novartis Technologies' pharmaceuticals business, based in East Hanover, N.J. "Things like late delivery or miscommunications can cause some costly problems."

Costly indeed. It can cost more than $500 million to discover and develop just one new drug, and it can take an average of 15 years from the time the drug is discovered to the time it is ready for marketability, according to data from PhRMA, the Pharmaceutical Research and Manufacturers of America, based in Washington, D.C.

While the risks are great, so are the rewards. According to analysts' estimates, the earnings potential of a successful drug at its peak is about $400 million to $500 million annually. On a monthly basis, earnings potential could total about $40 million/month. At this rate, beating competitors to market by as little as six month's time could be worth as much as $200 million in potential earnings.

"When customers come to a contract manufacturer for a project, they need it completed right away," says Joseph G. Mancini, Jr., business manager, custom manufacturing at Cedar Chemical Corp. in Memphis, Tenn.

Speed in getting projects completed is such an issue to customers, most custom manufacturers have developed work processes designed to move projects through very quickly. Some of the most sophisticated custom manufacturers are trying to anticipate their customers' needs and are installing service capabilities accordingly. In addition, more suppliers are investing in more multipurpose units to handle pharmaceutical companies' manufacturing needs. Built with flexibility in mind, these units can be quickly configured to accommodate the manufacture of a wide variety of products.

"We recently had a meeting with a major pharmaceutical customer to discuss a developmental project," says Dennis Guthrie, commercial development manager at Dow Custom Manufacturing Services (CMS) in Midland, Mich. "In less than 60 days we were able to come to an agreement on a contract, manufacture that product, and ship it to them," he says. "This is an example of how quickly we can move."

Also, buyers continue to share information with their suppliers and are getting involved early on in the drug development process. Here, buyers can have the most effect on time and cost reduction. In fact, an emerging trend in pharmaceuticals is that buyers are demanding that suppliers share information very early in the product development process. According to one chemical buyer from the Midwest, "If suppliers want to work on a problem with us, they have to be in on it from the beginning."

Another thing that has affected the speed of getting projects through production is information technology. "We view information technology as a differentiating tool," says Dow CMS' Michael Reardon, who, like Guthrie, is a commercial development manager of custom manufacturing projects.

Several years ago, Dow made the decision to have all of its businesses use common workstations and platforms. "What this enables us to do is to use process development resources at our site in Germany, work on a process to meet the needs of a customer in New Jersey, and then ultimately fit into physical production assets in Michigan," says Reardon.

The role of purchasing

Ask buyers at world-class companies in the CPI what role purchasing should play when outsourcing custom manufacturing and services and the majority will say that purchasing can be most effective in leadership roles. The most sophisticated purchasing professionals coordinate the wants, needs and concerns of the other corporate functions, such as research and development, operations, engineering, sales and marketing, etc., and facilitate communications between their respective counterparts within the contract manufacturer's organization.

"Purchasing professionals within companies that have decided to strategically outsource have become very much integrated within the framework of their business environment," says Dow CMS' Michael Reardon. "They can play a pivotal role in improved outsourcing if they take the time and are focused," he says. "Also, they need to have expertise in understanding the varying demands of their internal organization. Then, they need to develop solid relations with the external contract manufacturing organizations to help them understand the process," Reardon says.

"The only way I see purchasing hindering the custom manufacturing process is if they don't understand it or if they treat it like any other purchased commodity," says Reardon. "Custom manufacturing is an iterative process, usually involving multiple functions," Reardon says. "And these projects are not done overnight."

Qualifying suppliers

Competition is very stiff in the custom-manufacturing marketplace as well as in the pharmaceuticals markets. The fact that many custom-manufactured products and processes are eventually used to produce medicines, coupled with the fact that so much money is at stake if projects are not completed on schedule, adds pressure for buyers to select the best custom manufacturers available. While most buyers farm out their outsourced projects to a base of a few, trusted suppliers, sometimes it is necessary to qualify new custom manufacturers. This is most often the case when a particular technology, chemistry or presence in a specific geographic location is required.

And buyers aren't the only ones who must take time to qualify the companies and projects they will work on. According to Cedar Chemical's Joe Mancini, contract manufacturers decline nine out of 10 initial project proposals. Reasons may involve the overall economics scheme of the project, incompatible equipment, or a broad spectrum of other factors.

When qualifying new custom manufacturers, buyers and sellers agree that customers should talk to other companies to determine the reputation of the contract manufacturer. It is also important for buyers to know precisely what they want from a contract manufacturer in terms of the product. By asking thoughtful, probing questions, buyers can determine which contract manufacturers have the best potential fit.

In the custom manufacturing arena, reputation is very important. According to Sigma Aldrich's Howard Hitchcock, most custom manufacturers get about 40% of their total business from one or a few customers.

What about companies that are looking to break into the custom chemical manufacturing market or those that have very limited experience? Hitchcock says that these companies are unheard of. "Because so much is riding on the development of these projects, custom manufacturers need to have established a reputation and long track record for excellence in order to succeed," he adds.

Another factor that is critical to custom manufacturer selection is the on-site audit. Buyers, usually accompanied by research and development, quality assurance, operations, manufacturing and management personnel can learn a lot about a contract manufacturer's operations, corporate culture and commitment to projects by touring the suppliers' plants or facilities.

The following is a list of some questions buyers should ask custom chemical manufacturing suppliers before entering into an agreement:

• Who else have they done projects for?

• Do they have the necessary equipment and facilities?

• How long have they been in business?

• Do they provide analytical services and progress reports?

• Do they have the required certifications?

• Are they interested in a long-term or short-term contract?

• What product quality assurance measures do they have in place?

• What raw material sourcing assistance can they provide?

• What process improvements have they made?

• What cost-reduction techniques have they implemented?

What's most important to buyers?

In a recent survey of buyers who outsource custom manufacturing and services, Purchasing asked what factors are most important in selecting custom and specialty manufacturers. On a scale of 1-10 (10 being the most important), buyers rated a variety of criteria when selecting suppliers.

With quality in the custom manufacturing market generally considered to be a given, it's not surprising that "pricing" led all other factors in qualifying and selecting suppliers of custom manufacturing services with an average rating of 8.7.

"I like to know what kind of cost-reduction techniques suppliers can bring to the table before entering into an agreement with a custom manufacturer," says Sigma-Aldrich's Holliday-Levy. "Vendor-managed inventory and electronic commerce programs can make all the difference when selecting suppliers for new projects," she says.

Another highly rated criterion was "services offered," which received an 8.4 average rating from buyers. This high rating suggests that buyers continue to look for total value in the products and services they receive from suppliers.

"Many customers want their custom manufacturing and specialty chemical suppliers to handle many steps of a project," says Cedar Chemical's Joseph Mancini, Jr. But Mancini adds that if this is the rule, certain steps, such as waste management and removal, are the exception. "Customers often want whatever waste comes out of the project. They keep a close eye on all waste streams because they don't want anything to come back to haunt them," Mancini says.

Other factors receiving very high marks includes leadtimes (7.3) and suppliers' technical expertise (7.0).

Aside from high-quality material, on-time delivery and lower pricing (three areas every buyer of custom manufacturing services expects), Sigma-Aldrich's Holliday-Levy identifies a differed area for improvement by her custom-manufacturing suppliers. Her request centers on trust and the development of stronger business relationships.

"I want our suppliers to understand that we are doing all that we can to partner and improve the business relationship," says Michelle Holliday-Levy, director of purchasing at St. Louis, Mo.-based Sigma-Aldrich Corp. "We have no hidden agenda. If suppliers could come to understand that, then we could move projects through to completion very quickly together," she says.

To illustrate, Holliday-Levy describes a recent project with a contract manufacturer. "I laid out everything on the table for them and outlined everything that they needed to do in order to complete the project on time," she says. "When they were unable to meet the delivery deadline, they were mortified and even angry. I told them that I was sorry that they didn't believe me," she says.

Stronger communications

Unlike commodity purchasing, which, according to some buyers, can come down to "three bids and a cloud of dust," the custom chemical buy is much more specialized and requires a great deal more attention on the part of the purchasing professional.

More attention often means the need for close, almost daily communications between buyer and supplier. Also, many pharmaceutical projects brought to custom chemical suppliers involve new technologies. This demands not only a strong relationship and commitment to working together, but it also involves a very clear understanding of all aspects of the project.

Strong communications are especially important in outsourcing custom manufacturing and services that involves the transfer of proprietary information and intellectual property. According to Dennis Guthrie, at Dow CMS, addressing these concerns can be the most sensitive area of contract manufacturing.

It is understandable for buyers and suppliers to be reluctant to share information about proprietary technologies. In many cases, this information constitutes the company's competitive advantage. So naturally, buyers and contract manufacturers alike bring these concerns over the use of their intellectual property to the negotiating table. And this can be a very time-consuming process. Addressing proprietary concerns and drawing up contracts can take anywhere from a day to a year or more.

"Coordinating the paperwork of a secrecy agreement between buyer and seller is something that should be handled quickly and efficiently," says Cedar Chemical's Joe Mancini. "If you hold the project up in red tape, you minimize the probability that it will go through."

But Dow CMS' Guthrie says that the time it takes to reach an agreement can be minimized if both sides enter discussions with an open mind.

"Both sides must recognize that each has its own concerns, and that these concerns must be addressed and resolved in order to work together," Guthrie says. "If each listens to the other, a mutually acceptable solution can almost always be reached," he adds.

Another factor to consider is the unknown. "Things can happen while working on a project," says Reardon at Dow CMS. "Communication plays a crucial role in that," Reardon says. "Both sides of the transaction should be managing each others' expectations so that there aren't any unwanted surprises."

"Custom/specialty chemical manufacturers and their customers can often have very differing views on a project, which can cause major problems down the line," says Howard Hitchcock, Sigma-Aldrich's manager of outsourcing services. "If you start with a good idea and you work with a good contract manufacturer, you expect that what you'll end up with will be good," he says.

Custom manufacturers identify "listening to customers' needs" as the most important thing to keep in mind when entering into a contract. "This is an iterative business," says Dow CMS' Reardon. "We have to be sure that we completely understand what customers want. If we're not listening correctly, then we won't be able to respond correctly," he says.

"The greatest communication tools in the world are useless without a clear understanding of what the customer needs," says Reardon. "Short of that, it's simply garbage in, garbage out."

Large or small?

While most purchasing professionals agree that physical size takes a back seat to other supplier-selection criteria-such as appropriate equipment, financial stability and the necessary certifications-using a large or small custom manufacturer can present very different benefits and challenges. Each supplier has its own strengths and weaknesses, and though some types of suppliers tend to be better in certain areas than others, the most important factor is selecting a supplier you feel comfortable with based on the total fit of their operation with your outsourcing needs.

Larger suppliers typically provide the benefit of a wider breadth of services, based on a large portfolio of capabilities and an infrastructure of resources to back it up. Many buyers with complex, multistep syntheses seek larger custom manufacturers to handle their projects. In some cases, buyers of these services can save some money by having a large custom manufacturer handle several steps of synthesis, rather than having to take the project to different custom manufacturers for each step of production.

"It comes down to how complicated the project is and how complicated are the resources you need to tap into," says Reardon at Dow CMS.

Smaller custom manufacturers have their own benefit as well. For instance, some smaller contract manufacturers provide only a few types of custom synthesis, but they do these very well. For some buyers, this experience and expertise is a major selling point.

Others may use smaller custom manufacturers because they feel that their projects will receive closer attention because the company is more dependent on the business generated by the project. One buyers' complaint of larger custom manufacturers is that if their project isn't a very large account, they will be treated as being secondary to the big money makers. Some purchasing professionals use smaller custom manufacturers for the level of customer service, innovative ideas and speed in getting things done only a smaller company can provide.

Another factor is whether the chemistry coming to the custom manufacturer is finalized or whether the customer anticipates or desires to have improvements made to their technology. Smaller organizations are usually more inclined to complement technologies brought to them, while larger custom manufacturers tend to be able to improve on existing technologies, based on lessons learned from previous projects.

Future outlook

With regard to the future of custom manufacturing, buyers and suppliers identified some trends taking shape.

"We have seen much more strategic orientation toward outsourcing," says Michael Reardon. "We're seeing much more professional outsourcing groups within companies looking to take a strategy forward, as opposed to the way outsourcing used to be done, which was to tactically outsource something when they needed to," says Reardon.

"We'll see a continued thrust in outsourcing," agrees Dennis Guthrie. "Now, companies are coming to realize that outsourcing can help them get things done faster, cheaper and better," says Guthrie. By outsourcing strategically and effectively, they can make a significant difference in their bottom line."

Another trend involves consolidation. "In the pharmaceutical market, for instance, there is a lot of fragmentation. There probably isn't even any one company with double-digit market share," says Reardon. "Companies are consolidating to bring together their product pipelines and technologies for greater critical mass and economies of scale."

"The custom manufacturing industry over the next decade will see the same thing," Reardon adds. "While there are a lot of companies now with fewer, specialized areas of expertise, we will continue to see companies add services and capabilities through strategic alliances, as well as through mergers and acquisitions," Reardon says.