Pharma Sourcing And Procurement: The New Strategy Of Spend

Once a prodigious in-house producer of red tape, sourcing and procurement is emerging as an outward-looking partner to the biopharma business.

An objective shared by every pharma CFO today is to match, or preferably exceed, the operating profit margins of other members of the company’s competitive set.  Many drugmakers are catering to investors’ obsession with steady, predictable margin growth by making these commitments not just for the next year but for three or even five years out. Getting to goal requires not only continuous replenishment of the product portfolio but aggressive management of costs and overhead.  It follows that what was once one of the more obscure entries on the corporate income statement – sales, general and administrative expenses (SG&A) – is now a closely monitored measure of overall performance. It’s also an indicator that resides almost exclusively within the biopharma C-suite’s internal span of control.

As expenditure control becomes more prominent in biopharma management’s messaging to the investor community, attention has returned to an old mainstay of the finance portfolio:  sourcing and procurement.  Sourcing, which focuses on supplier selection and management, has become essential to addressing the heightened logistical risks of a global – and vastly more complex – manufacturing supply chain. Procurement drives the acquisition process for goods and services consumed by the full span of business support functions, including IT, R&D and marketing – all of which offer most of the low hanging fruit in driving down SG&A and reinforcing a company’s compound annual growth rate (CAGR) through lower operating expenses.

A 2016 report by Bain & Company concludes that sourcing and procurement have become the largest single expenditure category in the 16 industries it surveyed, at an average 43% of total revenues.  In biopharma, spend posted slightly higher than the norm, at 46% of revenues. Some analysts suggest that figure has surpassed 50% today, due largely to the burden of funding big global trials, more outlays for promotion, major new investments in IT, and the cost of manufacturing sensitive cell-based biological drugs in reproducible quantities. In looking to the future, the need for advanced sourcing expertise and high-touch supplier specialization means that the momentum in spend lies with activities that drive the drug supply chain.  It’s moving from one-off commodity purchases of travel, paper and widgets to integrated tools, services and systems whose costs are high enough to benefit from a more coordinated strategic approach, linked to achieving the broad economies of scale expected by Wall Street.

The operative theme is not cost, but efficiency – it’s the latter that drives the savings, which can no longer be achieved simply by “vacuuming up pennies from the carpet,” as described by one pharma procurement lead. A markedly different approach is needed. And it’s forcing a realignment of sourcing and procurement’s traditional role as a back-office operation focused on one-off, category-based cost-cutting, duplicated across multiple budget lines, where savings to the individual business units (BUs) are often difficult to capture in regular financial reporting to the CFO.

Six Signposts Of Change

“Look at the state of biopharma operations today and you will see some of the biggest changes are taking place in sourcing and procurement,” says Bob Jansen, founder and CEO of Zensights LLC, a vendor identification and advisory firm for pharma and biotech. “For procurement in particular, it’s no longer just a cost takeout.” Jansen and other practice leaders interviewed by In Vivo identify six transitions that are moving the function forward to a more influential destination:

From technical backwater to strategic dam-breaker: The traditional focus of saving money through time-limited, one-off economies is reinforced in a siloed business framework. But when sourcing and procurement is unleashed to work with and across businesses under a global operating model, the benefits of thinking strategically become apparent.  For example, a global analysis on how and where to save money forces the organization to consider that savings in one area may end up raising costs in another; or that cutting too deep to secure a temporary gain in revenue may carry disruptive long-term consequences, in which the costs of repair may far exceed the initial savings. When the business is walled off from that type of conversation, you end up with a systemic failure – not connecting the dots – and a major opportunity cost for the entire organization.

From cost-cutter to trusted partner: Sourcing and procurement is moving from a process of disconnected transactional exchanges to a networked web of relationships – full-time, long-term and grounded in the “big picture.” Says Jansen, “The best practices are aligning their responsibilities and incentives with those of their internal stakeholders to secure the best outcome for the business. This is a big departure from the past, when procurement often found itself at loggerheads with internal clients due to an overly narrow perception of cost versus benefit.  Now the goal is to help that stakeholder maximize his buying power to achieve a better ROI. When you do that with the business, you have a partner for life.”

From rule-maker to consultant adviser and negotiator: For years, the operating premise of procurement strategy lay with issuance of formalized guidance and directives adopted with little input from the BUs. These were often selectively applied or even ignored as stakeholders took up purchasing on their own. Instead, leading-edge sourcing and procurement groups are looking outward to help the organization identity top-quality vendors, products and services relevant to the company portfolio. This fosters the familiarity necessary to successfully negotiate pricing and contract conditions in concert with the business, often on preferential terms. Adds Jansen, “It’s a priority for the in-house staff to learn more about the sourcing and purchasing landscape than anyone else in the organization – a valuable knowledge asset that lies outside a BU’s normal frame of reference.” It also gives the sourcing and procurement team a seat at the table where BU investment decisions are made, and at the beginning of a transaction rather than at the end.

From one-size-fits-all to a more nuanced service approach: Positioning as an in-house consultant also gives the sourcing and procurement lead more leeway in advancing solutions that address the different needs of company stakeholders. “Purchasing for a drug development project, a commercial launch program or an IT investment – each require different approaches and levels of knowledge and expertise. Obviously, building a purchasing plan for a new product launch has to be done faster and must be fluid and flexible enough to cope with variable market conditions,” Jansen points out.  “In contrast, negotiating a service contract in IT follows a more predictable path and can be adjusted within a longer timeframe.” In other words, a good sourcing and procurement lead will relate and adjust accordingly. 

From insularity to innovation: As a technical operation with a defined – if limited – span of control, sourcing and procurement has lacked the bandwidth to test out new ideas.  But as pharma reinforces its commitment to outsourcing most non-core activities, the practice has the opportunity for leadership in making outsourcing a driver of in-house innovation.  Purchasing leads are building new capabilities. These include advanced data analytics, such as access to user-friendly purchasing selection templates; competitive intelligence, covering rival pipeline developments, launch and brand promotion spend; and stakeholder engagement, where potential partners are cultivated along with supplier due diligence and performance benchmarking. The aim is to make sourcing and procurement the “go to” destination for best practices on project management, from uncovering hidden value in a price solicitation to the vetting of human capital.  This requires in turn the ability to transfer these learnings throughout the organization with training that emphasizes not only the standard rules for negotiation but the “soft skill” values inherent in a global, joined-up purchasing model.  

From inside operator to external image-builder: A globalized biopharma supply chain depends on third party suppliers to handle a mounting number of sensitive tasks.  It’s a trend that also raises a company’s exposure to risk.  In this environment, sourcing decisions can carry significant consequences beyond the front office.  Jansen puts it this way: “Never under-estimate the impact of a poor partnering decision on a company’s reputation with its customers, which is priceless.”  And an active sourcing and procurement culture offers more than damage control; it can anticipate and avoid those messy situations in the first place. (See sidebar for perspectives from Roivant Sciences GMBH exec Kris Ungvarsky.)

Adamas – Sourcing With A Soft Touch

As the visibility of the sourcing and procurement function has grown, biophama companies are pursuing a variety of organization models, with the guiding precept being a structure that isau courantand relevant to the business.  Although most companies continue to locate the function within the finance department, others are opting to place it where the work best complements other, related priorities.  Robert Freeberg, senior director for strategic sourcing at Adamas Pharmaceuticals Inc., which recently launched its first successful CNS drug,Gocovri (amantadine),for Parkinson’s disease, tellsIn Vivo his new role puts him within the Legal Division – but the real sponsor is the company’s founder and CEO, Greg Went.

“Adamas is a small company with a very lean management team," he explains, But it was our CEO’s insistence from the start to include a dedicated group on sourcing and procurement.  His rationale was the pending launch of our first product, the success of which demanded strong execution around a complex manufacturing supply chain.  I am located in the Legal Division, reporting to our general counsel, who also serves the company as chief business officer, and where we also have strong ties to other key functions like finance and project planning – CEO Went is also a strong believer in a matrixed reporting structure.”

The assignment has also guided Freeberg’s reliance on company culture in defining his group’s mandate going forward. “I came to Adamas after serving in a similar capacity at Gilead Sciences, a much larger enterprise.  My remit there was to support the North America commercial organization, but here at Adamas my role is broader, across both direct and indirect spend, and the focus is on drilling down to emphasize capabilities that fill the missing gaps in the knowledge base of my principal stakeholder, the business unit [BU] budget holders. They have far more expertise than I do in areas like clinical development and commercial launch strategy, so I have defined our lead to be the identification and recruitment of the right suppliers based on the requirements of the business.  In other words, we strive to engage with and understand the supplier sourcing space in its broadest, most illuminating context, with the goal of fostering true long-term partnerships between the supplier and the business budget-holder instead of a one-off transactional exchange.”

Freeberg continues, “It’s a counter to the ‘tribal knowledge’ of the budget-holders, who all have different competencies, nor the time or commitment, to take that forward look at newcomers who might be better positioned to bring value and innovation to the organization. Finding and informing Adamas colleagues of more options in accessing that fresh talent, while also comparing and evaluating supplier’s strengths and weaknesses, defines our mission.”

In striving to enlist the budget-holder as a co-owner of the supplier/vendor relationship, Freeberg also takes exception to a standard practice of sourcing and procurement: the vendor preferred list.  “We’ve decided against making such lists – it’s too prescriptive, limits the possibility of a creative response to a new supply chain problem, and can sometimes lead to a bad outcome for the business.” 

In that regard, Freeberg points to a bias of his profession, where the aim of any negotiation with a supplier is to save money.  “You go in as a tough bargainer, push for the most favorable deal, and hand the contract back to the BU with a strong feeling of satisfaction of doing good for the company. But often what happens is it leaves the supplier in a position where he feels squeezed, can’t turn a profit from the transaction, and ends up cutting corners and providing an inferior level of service.”  He notes there are risks in taking this stance – “The downside of this model could be less control.  A counter to this concern is what we are doing to increase transparency in comparing supplier capabilities and raising the visibility of spend decisions at all levels, along with a business-owner led, cross-functional approach to supplier engagement.  Today, we are more of a facilitating consultant than owner of the process of guiding Adamas’ direct and indirect spend.”

Actually, Freeberg says the sweet spot for strategic sourcing is not expertise but trust – where the metric for success is making savings contingent on value, which is best determined by and with the business. “The goal is to make the business owner responsible for the final decision on supplier selection and the subsequent management of that relationship.  Instead of a fixed list, we now have in place a supplier comparison template, which helps structure the analysis a cross-functional business team should make in deciding among candidates x, y or z.” 

Future States

It may be a play on words, but what matters most in sourcing and procurement is taking stock – evaluating trends in the transactions landscape, consulting frequently with budget-holders, widening the circle of productive supplier relationships and wresting more value from every dollar deployed. A range of companies interviewed byIn Vivo expect these characteristics will shape the profession in the years ahead.  The pressure to justify our contributions with hard analytics is only going to increase. Budget constraints, partly driven by the huge expenditures biopharma companies face in keeping pace with manufacturing requirements and IT advances, will compel sourcing and procurement to prove it is helping the business meet its sourcing objectives in the most cost-efficient manner possible. It has to be able to produce the evidence that its internal clients have the best product or service, for the purpose intended.

Building on that theme, Robert Freeberg says his advice to any CEO is to keep the team lean – the last thing biopharma needs in the future is a bloated sourcing and procurement function.  “The importance of this task might justify a larger effort, but to do so would erode its greatest value, which is to aid and complement the objectives of the larger business. I’d also avoid calling sourcing ‘strategic’ because what we do must be co-owned by the budget-holders; as long as we are involved in key projects for the business then our association with strategy is a given.”

At Adamas, says Freeberg, the future of sourcing and procurement will center on building generalist capabilities to match the expertise of specialists running the business or clinical enterprise.  “We are looking to retain the flexibility of a small, good consultant, along with specific skills like negotiation and project management; supplier ID; and strong data analytics, especially in modeling different scenarios using a simple spreadsheet template, where you can change certain variables to anticipate a potential supplier’s position and thus develop the right response for the business.”  Finally, the company intends to establish an evaluation process for best practice to uncover why projects with outside vendors worked – or didn’t work.  “Such retrospective analysis is critical for a new enterprise like Adamas, as it provides guidance for improving our purchasing and consultancy performance in the future,” he states.