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Here’s How AstraZeneca Creates Value Beyond Cost Savings through Strategic SRM
In today’s challenging environment of the pharmaceutical industry, one of the primary goals is of course cost control – and often aggressive cost control, at that. As such, it is the role of many professional procurement teams to be almost entirely devoted to reducing spend. However, leading companies are evolving the role of procurement, tasking teams with delivering value beyond savings through advanced supplier relationship management (SRM) functions, such as integrating suppliers into the company’s processes and streamlining supply chains.
But implementing meaningful SRM practices means much more than simply managing supplier relationships. It means establishing mutual commitments between buyers and well-chosen suppliers. It means mutual transparency, and laying the framework to innovate collaboratively in efforts that deliver predictable, repeatable results. It means managing each relationship in a manner that aligns supplier activities to the common goals of the enterprise.
As the role of procurement evolves, the challenge is to optimize suppliers’ value through the establishment of accountable business partnerships. As Tyson Popp, Vice President and Chief Procurement Officer of Mallinckrodt Pharmaceuticals and Chair of the DCAT Research & Benchmarking Task Force, puts it: “Today’s procurement organization is tasked not only with achieving cost reductions or cost avoidance, but is also charged with advancing ways to deliver value to its company.”
The Drug, Chemical & Associated Technologies Association (DCAT) is a not-for-profit business development association composed of innovator- and generic-drug manufacturers and suppliers of ingredients, development and manufacturing services, and related technologies. The DCAT Research & Benchmarking Task Force, composed of DCAT member representatives, identifies and develops studies that examine the crucial issues impacting the pharmaceutical manufacturing value chain.
SRM for Value Creation
A recent DCAT study, Value Creation in Pharmaceutical Procurement, which was administered to large, and mid-sized, pharmaceutical companies, evaluated how procurement functions are positioned for value creation.
The results were interesting – especially with regards to SRM. Although 76% of respondent companies described the operating model used by their procurement organizations as “highly evolved” (35% said the function was “advanced”, and 41% said it was a “value creator”), far fewer said the same of their SRM programs.
(Image source: dcat.org)
Only 18% said they had a “fully integrated” SRM program – i.e. one in which SRM is an integral part of overall corporate strategy with a full focus on value creation. A further 23% said that they have formal or “established” SRM programs – defined as joint improvement initiatives between suppliers and procurement that have clear governance.
But the majority (53%) of respondents said that they had only a “limited” SRM program – one in which only a few, select projects with certain suppliers went beyond cost reduction initiatives, though still remained mostly tactical and operational in nature. 6% of the companies surveyed had no SRM program in place at all.
Evaluating Supplier Performance
A modern procurement function should exist to identify and drive organizational value beyond cost savings. However, the DCAT survey found that the number one value-based metric – standing head and shoulders above the rest – used to evaluate suppliers remains “cost improvement over time”. 100% of the companies surveyed used this metric when evaluating suppliers, with metrics measuring “reduction in cycle time”, and “improvements in inventory management” also ranking highly.
(Image source: dcat.org)
Of far less concern were metrics measuring “revenue and/or profit gains from supplier innovation” – cited by only 12% of the companies surveyed. Less than one-third (31%) of companies measure “revenue and/or profit gains from productivity improvements from suppliers”.
To deliver better value for their companies, procurement needs to continue to move away from negotiating deals and striking new partnerships based on cost alone. Rather, it needs to be relationship-driven, striving to forge more inter-dependent partnerships within the supply base that can offer value over and above price.
Manufacturing in 16 and working in 100 countries, AstraZeneca (AZ) is one of only a handful of biopharmaceutical companies that spans the whole value chain of a medicine – from discovery through to development, manufacturing, distribution and commercialization. As such, the need for a constantly evolving and effective procurement and supplier management strategy is great.
Since 2012, AZ has been developing its procurement methodology – known as iProcure – with John Hudson as the company’s Supplier Management Leader. Back in 2008, AZ launched its new Supplier Sourcing and Management Framework (SSMF), which was the first attempt to put in place a global standard for procurement and supplier management activity. However, it soon became clear that, while SSMF was successfully deployed globally, there were issues that resulted in inconsistent adoption.
As Hudson explained to State of Flux, there became an increasing need over the years to drive greater value from the management of key suppliers through the lifecycle, as opportunities to realize savings from sourcing activities became more challenging. The strategy needed to evolve.
“We realized that to effectively embed a single, standard, global way of working across this diverse network, it would have to have inherent flexibility built into it,” says Hudson. “This flexibility then enables the procurement practitioner to be both responsive to business needs and maintain compliance with the spirit of iProcure. Importantly, this then enables them to maintain strong relationships with important suppliers and the support of their key stakeholders. Ultimately, users need the framework to quickly guide them to make informed choices about what is the best approach for them, their stakeholders, their suppliers and AZ.”
Effective Supplier Segmentation
One of the key elements of AZ’s revised approach was the effective segmentation of suppliers. This meant that increased focus on prioritization could be realized, and that SRM could be more effectively applied where it had the potential to add the most value. Then, the next step was to define the right governance model for the prioritized suppliers, which set clear expectations of what was needed from the partnerships, while still remaining relatively flexible. “We combined […] spend evaluation with a category criticality assessment to give a combined spend and criticality output. This refocusing enabled us to successfully identify which relationships were the most important to us and how we should try to manage them,” said Hudson.
Segmentation is of course a dynamic process. It has to keep pace with changing markets and opportunities. If a company wants to expand into Asia, for instance, it might need to complement its existing supplier base with suppliers in Asia – subsequently, the relationships with these new suppliers become top priorities due to their strategic location.
Other suppliers may be prioritized due to expertise – but the important thing is that an SRM program is in place that facilitates continual evaluation of the size and mix of a supplier base. If necessary, procurement can re-segment suppliers as and when the company’s strategic priorities change, and continue to manage all relationships in a consistent manner.
Building and managing business relationships requires active participation by all, and effective engagement with internal resources. Always, it is imperative to focus on the total value of each relationship, and to find ways through which competitive advantages can be gained via effective client-supplier collaboration, as a highly-functioning ecosystem of suppliers and partners continues to grow.
The last word goes to John Hudson.
“We are now well positioned and very keen to explore the broader value proposition of supplier management. We recognize that an effective supplier management program opens up other key value streams which we need to capitalize on; notably innovation, increased pace of delivery and speed to market, improved quality, and better supply performance.”
Creating value beyond savings is set to be a hot topic at this year’s ProcureCon Pharma conference, taking place this October at the Westin in Philadelphia.
Be sure to download the ProcureCon Pharma 2017 Agendafor more top insights and challenges facing the industry today.