patheon-worldThe pharmaceutical industry lags in the sophistication and performance of its supply chains when they are compared with best-in-class companies in other industries. This is due to the complexity that has come with new drugs, more complex production technologies and evolving regulatory requirements.

In this environment, integrating and aligning the supply chain makes it more flexible, bolstering operational performance and financial competitiveness.

The complexity of drug product supply chains has increased in recent years thanks mainly to the development of more complex chemical molecules (with more synthesis steps), more suppliers and

geographies in the chain, and reduced average production volumes. Preparing for commercial release, the time from raw material to finished drug product can be as long as 2 years, and those months are fraught with hazards that can cause delays and rework, leading to extra costs, stock-outs and poor capacity utilization.

According to a 2014 survey of pharma companies by A.T. Kearney, many pharmaceutical firms have significant room to improve supply chain performance and efficiency. For example

  • Customer service levels of 90% at the best pharma companies are world-class, and equivalent to the best consumer goods companies. Average customer service levels, however, are 5% lower. A service-level improvement of just two percentage points can translate into 80% fewer stock-outs at non-generic prescription drug firms
  • Forecast accuracy, which is important for keeping inventories low as possible, and production stable, is about 90% at the best companies, but only 61% on average.

The single biggest barrier to improving performance, according to the survey’s respondents, is supply chain complexity. And while 92% of respondents see simplifying their supply chains as a strategic priority, nearly 40% of surveyed firms are not yet doing anything about it.

The Roots of Complexity
Drug manufacturing is challenged by long investment horizons and uncertain demand forecasts. The need to minimize capital intensity for new assets works against the option of using excess capacity as a hedge against – or solution to – uncertain demand. As organizations move from clinical to commercialisation, a cost-effective, responsive supply chain can only be achieved by tightly integrating drug substance (DS) and drug product (DP) supply chains.

That’s difficult because their time horizons are very different. Two months’ lead time, and 2 weeks’ batch production time are typical for DP. Machine changeover times are two to three days, so DP time horizons are quite manageable. For DS, however, the total elapsed time is typically 1–2 years. Manufacturers tend to run big production campaigns because cleaning and changeover takes 2–3 weeks, and raw material lead times can be several months to a year, depending on the complexity of the materials and where they’re coming from.

There is a similar horizon for biologics production, due to lengthy media lead times, long production times, and the six to eight weeks needed for the quality release of the active pharmaceutical ingredient (API). So while the fundamental roots of pharma supply chain complexity are the long lead and manufacturing times of DS, there are several factors which further complicate matters:

  • Regulations have become more demanding. For example, the November 2013 Drug Supply Chain Security Act requires that within 10 years, pharmaceutical companies should be able to track products at the individual package level at every point in the supply chain.
  • Compliance with VAT and duty regulations has become more complex in recent years, and can be costly to comply with, especially where the supply chain cuts across multiple geographies.
  • The definitions of starting materials, and registered intermediates, have become more elaborate, and in general have increased the number of production steps that must be validated.
  • Drug molecules have become more complex, requiring more chemical production steps, or specialized downstream processing for biologics.
  • Many new drugs target smaller indications, in general are more potent, and therefore require smaller production volumes – typically two to five tons per year instead of several hundred.
  • There may be many parties involved in the production of a molecule, and they may not have been chosen with long-term co-ordination in mind. There can be considerable cost and effort involved in managing them.

These challenges are especially acute just before or during a product launch, where unpredicted demand can cause havoc. In the past, the industry managed uncertain demand with excess production capacity and surplus inventories of both DS and DP. But today’s pressures to better use capital and assets demand a smarter solution.

A big part of the solution is to simplify the supply chain, which can be achieved with end-to-end integration that improves visibility and reduces hand-offs, and optimized inventory levels that enable flexible production capacity.

A Case Study in Supply Chain Integration
To illustrate the connection between integration and flexibility, consider a real-world case study of a newly launched product that involves three dispersed raw material suppliers, and DS and DP production. Three key raw materials are ordered from Asia and shipped by sea to the US. The critical lead time is 7-12 months, without any safety margins. DS manufacturing takes place in the US. Five chemical steps are required to produce the API.

Intermediates are produced in campaigns. Quality release is carried out at the DS manufacturer, and testing is repeated at the DP manufacturer. DP is manufactured in the US as well, reducing transportation time. In this case, no extra time is needed for drug packaging. Some of the process time inefficiencies can be seen in Figure 1. Supply chain planning adds safety buffers to the raw materials lead times to ensure on-time startup of DS and DP manufacturing.


Average buffers are one-to-two months (pink on the diagram) depending on the shipping route, and the company’s experience with the supplier. Some of the API manufacturing steps are inflexible, because of specialized plant, high asset utilization and other constraints, so buffers of up to 13% are needed to derisk the API production. In addition, a safety buffer between DS & DP adds a month or so to the timeline. QA/QC release (green) is repeated at several points as different manufacturers with different quality systems are involved.

The bottom half of figure 2 shows the supply chain after simplification. In the simplified and integrated supply chain, buffers and QA time are substantially reduced. The total time is reduced by about 3–5 months, or 13% to 22%. By replacing incoming QA steps with certificates of analysis, four releases of nine are saved for each  batch of final API: one for each raw material received into API production, and one receiving into DP.

Per batch of API, QA cost savings are $2000-$5000. For a campaign with 20 API batches, and 40 first intermediate batches, savings add up to $180,000 per year. In addition, fewer QC method transfers and less validation work has to be done, saving at least another $100,000-to-$200,000 per API. Processing fewer samples also reduces operational and technical errors, cutting the number of expensive out-of-specification (OOS) investigations.

With more stringent supply chain management, down times in production are reduced and inventory levels can be reduced. This typically translates to a total supply chain cost avoidance. And with less (but better distributed) inventory, and fewer repeated QC steps, the supply chain can better accommodate unanticipated surges in volume.

Why Change is Your Only Option
Historically, the pharmaceutical industry has deployed cruder tools than we’ve discussed to manage problems in the supply chain, such as using air freight, amassing huge safety stocks, and contracting for dual or triple supply. But these solutions are expensive and, today, ever less sustainable.

Of course, integrating a supply chain is enormously challenging, and if the drug substance and product manufacturing are owned by different parties, it becomes even harder. Before there can be strong collaboration, a great deal of work will have to be done to establish standards and processes.

But, as we have shown, the benefits of supply chain simplification and integration, measured in time, cost and improved responsiveness to demand, are substantial. These benefits cannot, however, be retrieved overnight, in one giant leap. Integration must be accomplished during a period of time, in many small steps. Clearly, it’s time to start.