Strategic procurement & cost optimisation of pharmaceutical raw materials

Testing the suitability of an alternative material is very time-consuming and resource-intensive. Consequently, it makes sense to do this only for those pharmaceutical raw materials that justify the effort through potential cost optimisation or other tangible benefits. The same applies to the creation of competition with existing service providers – this requires serious, comparable, and, above all, improved offers from competitors.

For these reasons, the materials were grouped into homogeneous pharmaceutical material categories under the following criteria:

• Material family
• Cost-differentiating characteristics
• Manufacturing methods
• Market access, price influences, & producers 

On the basis of the consolidated material groups, as well as the expected annual quantities and a general specification, quotations were requested from suppliers worldwide, along with the corresponding regulatory and technical documentation. For efficient processing and in consideration of the Asian market’s working culture, which is based on trust and individual emails, this was carried out in the form of a semi-automated email process.

This approach made it possible to request the information necessary for a detailed review and, above all, to discuss a market price level for most raw materials.

In addition to the requested prices, a cost-benefit assessment was also required in order to ensure the resources are used in the most effective way. Therefore, in the second step, the restrictions and complexity of potential material changes and negotiations were discussed internally in parallel to the price inquiries. In addition, the likelihood of switching and the prospect of a price pass-through to the patent-holding pharmaceutical companies were assessed.

Together with the results of the market price survey, a complete picture was now available to evaluate the best course of action. A material ROI calculated from the expected projected savings, the associated resources required, the influence of the respective restrictions, and the likelihood of occurrence all formed the starting point for a concrete action plan.

In the third phase, a procurement strategy and approach per material were developed and prepared for implementation.

Demand-side and supply-side levers were developed to maximise leverage for supplier negotiations. The most effective levers identified involved expanding the supplier market from local to global, changing from a mainly 1-supplier to a 2-supplier strategy, adjusting contract pricing models from fixed prices to seasonally predictable spot prices, and adjusting order quantities and supply chain operations.

3 significant strategic options were developed:

1) Trader tender:

Some raw materials, due to quantities or market conditions, did not allow for negotiating directly with the manufacturer, or these traders were required to play a necessary role in the supply chain. In these cases, a competitive trader tender was conducted. In this way, re-qualification of the manufacturer could be bypassed and the competition between several traders could be used.

2) Direct sourcing and volume commitments

Many materials could be purchased directly from manufacturers without restrictions. Through improved coordination of required annual volumes and procurement commitments, planning risks could be reduced and production capacity better utilised. In addition, margins were reduced by bypassing some intermediaries. Together with manufacturers, collaborative partnerships were improved through various initiatives and overall supply chain costs were optimised.

3) Qualification of alternatives

For some pharmaceutical raw materials, alternatives offered at the same quality but at a significantly cheaper price could be identified. In product areas that were not subject to manufacturer qualification, the alternatives could be used directly after extensive testing. In the second step, the current suppliers were negotiated with under competitive circumstances. In the case of pharmaceutical raw materials that were manufacturer-bound due to the necessary approvals, a qualification process was initiated if a change was deemed strategically relevant. This reduced procurement risk and provided an alternative source for price negotiation.

The negotiations with existing suppliers were prepared individually with the involvement of procurement and relevant supply chain managers, yielding savings of 7% p.a. on average. Trader tendering resulted in savings of 31%. Contracting alternative sources resulted in average savings of 48% which were yet to be confirmed by the qualification process. The qualification of these manufacturers and raw materials was initiated. The process to qualify the alternative source and have it approved lasted between 6 and 18 months depending on the individual material.