Genzyme remakes purchasing to maximize supply value
By Christopher Reilly -- Purchasing, 9/2/1999
Purchasing professionals in the pharmaceutical industry face a tough task in securing supply of a wide variety of highly specialized (and often costly) intermediates. All the while, pharmaceutical companies are focusing intently on getting new drugs to market with utmost speed.These major challenges have pushed purchasing at pharmaceutical manufacturers into a crucial role in developing the supply chain for optimum performance. Supplier selection and development have become key concepts in maximizing quality and minimizing the time it takes to develop new drugs. More and more, pharmaceutical companies are realizing that purchasing must play a greater role in drug development for these goals to be achieved.
Genzyme Corp., the Cambridge, Mass.-based manufacturer of a wide variety of pharmaceutical, therapeutic, and biotechnology products, is one pharmaceutical player that has restructured purchasing to better manage its materials requirements. Genzyme is a classic example of a high-technology CPI company that has come to understand that purchasing must be fully integrated into product development and manufacturing in order to extract maximum value from suppliers.
Purchasing evolves
About five years ago, Genzyme made significant changes in the way it sources materials. At that time, an initiative was under way at Genzyme to bolster manufacturing after receiving U.S. Food and Drug Administration (FDA) approval to manufacture Cerezyme--the company's flagship product--at its Allston Landing manufacturing site in Allston, Mass. Cerezyme is an enzyme replacement for patients suffering from Gaucher disease, which is caused by an enzyme deficiency in the body.
To handle increased materials sourcing for the scale-up manufacturing, the company restructured its materials purchasing organization, creating a centralized department with a business-unit focus.
Mary Kachinsky, director of materials at Genzyme, has been in charge of materials procurement for several years. Part of Kachinsky's responsibility is to source materials for Genzyme's Pharmaceuticals business unit, which manufactures a range of synthetic lipids, hyaluronic acid, pharmaceutical peptides and intermediates, amino acid derivatives, and drug delivery products.
Across all the company's business groups, purchasing follows the same protocols and standard operating procedures. "Each site, within each of the company's business units, has a team of materials purchasing people that supports the unit," Kachinsky says. "However, we have the corporate materials purchasing umbrella covering the entire materials group."
One of the procedures involves monthly Quality Team meetings of a cross-functional team designed to focus on supplier selection and development. For Genzyme's pharmaceutical business, the meetings involve suppliers of the intermediates and services the company buys. The team comprises members of materials purchasing, research and development, operations, quality, and regulatory functions.
In order to speed up the approval of new drug applications (NDAs) by the FDA, Kachinsky emphasizes the importance of purchasing's early involvement. "You want to make sure that you're selecting suppliers wisely from the front end," she says, adding that decisions made during this crucial time greatly affect later decisions.
"Purchasing brings a business perspective to supplier selection. Once R&D identifies an intermediate supplier based on the necessary science and technological requirements, purchasing takes a look at the supplier's financial profile, scale-up manufacturing capabilities or potential, and other factors," she says.
In terms of supplier selection, Kachinsky explains that Genzyme maintains a list of primary qualified suppliers, and tries to work within that range in sourcing strategies. "If there's a supplier that we're already doing business with, and they have the necessary capability, we'll try to use that supplier before we seek another," she says.
But she warns against locking too tightly into a sourcing agreement with an approved supplier. "In this industry, it is critical that you leave your scientists and other technical people enough leeway to be creative," she says. "You also have to give them the opportunity to look at technology that's available in the marketplace, and be flexible enough to best enhance product development. In some cases, the technology or the formulation required for an NDA may not exist within your approved supply base," she says.
The selection process
Once a potential supplier has been identified, based on their technology used to make a particular intermediate, Genzyme sends out a supplier assessment questionnaire directed to the supplier's quality systems and controls. Once returned, the assessment is reviewed by the Quality Team to ensure that the supplier meets Genzyme's requirements. "Having information up front allows us to prepare and focus on areas of particular concern."
Next, members of the purchasing and quality departments conduct a physical audit of the supplier's operations. "We look for the quality controls that should be in place to ensure that the supplier can produce the product or service repeatedly, and at the same high level of quality," she says. "For us, high quality is not a compromise, but a given.
"During the audit," Kachinsky says, "We ask the supplier to review with us any customer complaints and the related corrective action. It's very important for us to know not only that the supplier was able to correct a problem, but that they were able to correct it quickly," she says. "Downtime costs money. We want shipments to be right the first time."
Price used to be more of a factor for Genzyme in selecting suppliers. But now, Kachinsky focuses more on quality, total cost, and service value. "We ask suppliers to show us what services or value-added programs they have to offer that distinguishes them from their competition," she says.
"We also try to convey exactly what we're looking for from the supplier. Essentially, we look at our actual sales orders and our anticipated sales orders to determine our demand for the intermediate," says Kachinsky. "Then, we work with the supplier to balance the future supply and our demand, and plan production. We give our primary suppliers a 12-month rolling demand forecast that is updated monthly," she says. "This allows them to plan their side of the business and negotiate with their suppliers accordingly to support our manufacturing needs."
Cut leadtimes with close relations
One way Genzyme was able to streamline the delivery of a pharmaceutical intermediate was by working closely with the supplier for mutual benefit.
The intermediate, a media-serum used in the manufacture of the company's Cerezyme enzyme replacement product, required shipment from New Zealand. "The leadtime on the intermediate was 24 weeks," Kachinsky says. "And it was a critical supply. We were using extremely high volumes, and we were going to be increasing our demand for the intermediate over time," she adds.
But because of the long leadtime, it became an issue for Kachinsky as to whether Genzyme could get the supply as needed and in the necessary volumes.
"We sat down with the supplier's manufacturing and quality people and explained what our demand was going to look like. We asked them to take us through production of the intermediate, step-by-step, from the time they received the purchase order, to delivery," she says. "In doing this, we were able to identify areas where we could streamline the process by eliminating non-value-added steps."
Kachinsky says that it was taking almost 10 days for the purchase order to clear the company's initial order entry and credit check process before it was entered into their system. Once the order went through, the supplier had to check for raw material availability and production scheduling, which took more time and added to the complexity.
To correct this, Genzyme entered into a strategic agreement with the company.
First, Kachinsky gave the supplier a detailed, rolling 12-month demand forecast for Genzyme's use of the intermediate. This allowed the supplier to align their contracts for long leadtime material, and put Genzyme into their production queue. Next, Genzyme agreed to commit to 60 days of supply against a blanket purchase order, which allowed for rescheduling of delivery dates. "We knew that we were going to use that material, and we wanted the flexibility to reschedule delivery if necessary to accommodate our production schedules," she explains. In this way, Genzyme and the supplier were sharing risk. "The supplier wouldn't be producing product that we wouldn't buy, and we wouldn't get stuck with a purchase order that we couldn't alter," Kachinsky says.
"By giving the supplier our forecast and by allowing them to put us in their queue, we were able to bring the leadtime from 24 weeks to about 10 weeks," she says. "But then we improved it further.
"Because it took time to ship the intermediate to our facilities in the U.S. from New Zealand, we began to look at material stocking options," she says. An expansion of the agreement was reached, under which the supplier would hold a 30-day stock of material in the U.S.
As one one-month supply is used by Genzyme, another one-month supply is in transit to the supplier's U.S. storage facility, and a third is produced in New Zealand. "By doing that, we were able to reduce our leadtime down to only two days," she says. "Essentially, we shared risk with the supplier by giving them a rolling window of demand, secured by a two-month, fixed purchase order."
"The agreement also accounted for leeway if things went wrong. "We manufacture in one-month batches. If that batch fails, and we need another," Kachinsky says, "we pull the next one-month supply from the supplier's inventory in the U.S. and adjust the production and delivery schedules accordingly."
Kachinsky stresses the importance of closely monitoring the program by both purchasing and the supplier to avoid excess inventory or potential shortages. "The 12-month demand forecast worked as our monitoring tool to adjust volumes and schedules," she says.
According to Kachinsky, this approach doesn't work for every intermediate. "Sometimes leadtimes are rigid," she says. "For instance, a bioreactor run for protein therapy takes 60 days, and that can't be altered," she says. "But often there are other elements of the process that you might be able to speed up. And every supplier provides different opportunities."
Strategies for improvement
Kachinsky says that success in pharmaceuticals supply management will be based on how well purchasers are able to develop the supply chain. "Purchasers need to establish strategic, long-term relationships with primary suppliers, fully understand their capabilities, and develop a flexible, responsive line of supply," she says. "Also, they must continue to look for cost-reduction opportunities that benefit both parties."
For Kachinsky, another key element for improvement is the development of electronic commerce. "The sooner suppliers can start using some form of electronic commerce, the better. E-commerce will eliminate the need for a lot of the paperwork involved with purchasing," she says. "Also, it will allow me to send my 12-month demand forecasting to the suppliers electronically, or even have our systems integrated so that they receive changes in real time."
What do buyers want from suppliers?
Here are some traits that buyers of pharmaceutical intermediates are looking for from their suppliers, based on interviews with buyers, analysts, and suppliers:
- A proven track record of performance.
- Consistent quality and assurance of timely supply.
- Sound process development and improvement skills that will help the supplier and customer reduce costs.
- Flexibility and responsiveness to deal with problems that arise. Also, buyers want their suppliers to be diligent in working toward problem resolution.
- Early involvement in the development of new drugs, including help with regulatory processes.
- Financial security.
- A broad range of technological capabilities. As buyers prune the supply base, they want to develop relationships with those suppliers that can handle a variety of projects. Not just current projects, but those that have yet to come down the pipeline.
Other pharmaceutical market issues
As purchasing pros in the pharmaceuticals market develop ways to fine-tune their materials sourcing, some emerging market trends have begun to take shape.
"Volume demand for drug intermediates is growing, along with the need for capacity," says David Hurwitz, principal and analyst at Arthur D. Little Inc., a consulting firm located in Cambridge, Mass. "Also, the complexity of the new molecules means that there will be a need for even more capacity in the future, because it will take more total reactor volume to make individual new active ingredients," Hurwitz says. "There will be more steps, with more time involved, and effective capacity in the marketplace is going to decrease," he says.
"The net effect for pharmaceutical manufacturers is that there will be a bigger market for advanced intermediates for pharmaceuticals, which will mean more outsourcing," Hurwitz says.
Roger Shamel, president of Consulting Resources Group, a market analysis firm based in Lexington, Mass., says that opportunities will come from different areas in the future.
"Developments in genomics (areas of medicine that deal with a genetic focus on treatment of disease), or the potential impact on the chemicals that are going into the intermediates used to make the genomics, will bring about many opportunities for growth in the next ten years," Shamel says.
"Genomics is an area of health care that has been getting a fair amount of press lately, and some analysts believe that it will be an area of considerable growth in the next decade," he says.
"For pharmaceutical companies, this could be viewed as a threat or an opportunity," says Shamel. "To stay competitive, pharmaceutical companies may soon have to balance how much research and development they do in this area with their current projects."
Overseas competition
"While the U.S. makes up about 80% of the global market for pharmaceutical products, that dominance may be shifting," according to Shamel. "Some countries are encouraging U.S. and European pharmaceutical companies to do their custom manufacturing in countries such as the former Soviet Union, where scientists are cheap," Shamel says.
"Also, Ireland offers tax advantages to pharmaceutical manufacturers; many are building multimillion-dollar facilities there," Shamel says.
The U.S. also may begin to see more competition from China, in terms of intermediates and generic drugs. "China is getting better at making purer grades of pharmaceutical intermediates," says Shamel. "And the result is that buyers will find lower prices available from overseas competition."
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