Supplier management: How to find the balance between cost and quality

Supply chain leaders are consistently faced with pressure to reduce costs. While other industries may be able to explore a review of the quality, in the pharmaceutical industry quality standards cannot be sacrificed in the pursuit of cost efficiencies.

This leaves pharmaceutical supply chain executives in a difficult position of balancing competing interests. They must simultaneously maintain stringent quality standards while also ensuring they are operating in the most cost-efficient way.

Rick Calabrese, Global Director of Corporate Quality Systems at Sartorius, explains that when you are faced with this challenge, it all comes back to the triangle of cost, quality and delivery time.

It all comes back to the triangle of cost, quality and delivery time

Throughout his career, it has been made clear that while you can have two of these, you will struggle to secure all three. He says that “if you need something quick and high quality, you can do it but it’s going to cost you. And if you want to keep costs down, but it needs to be high quality, then it’s going to take you a lot longer”.

Bruce Guenter, Director of Commercial Trade and Distribution at Radius Health points out though, that when it comes to the pharmaceutical supply chain, there will be limits on timescales depending on the product. So a plan to limit costs and maintain quality with a longer timeline may not be possible. When you are handling life-saving drugs with a patient waiting, you cannot be creative with delivery times. It is only when your product does not have such constraints that you can approach delivery in a cost-effective way.

With few avenues to explore to ensure high quality and low cost, we share three areas to consider where you may be able to reduce costs through increased vendor collaboration.

Look beyond traditional cost-saving methods

The more you learn about your vendors’ business operations and integrate them more fully into your own forward plans, the better you will be able to discover potential areas of efficiency.

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Bruce believes it is crucial to ‘walk the walk’ and see your vendors’ operations in action. By conducting periodic operational audits, you can go through their process on-site and understand the different aspects, from where they stage and pack products to how closely they are following their procedures.

During this process, you may be surprised at what you find. Bruce shared that once during his career, he visited a vendor and during a warehouse tour; he learned the vendor had a free trade zone. This was something his employer had been previously unaware of but was able to utilize for their benefit.

By seeing an operation in action, you can discover new areas and capabilities that could benefit you in the long run

Conducting this level of review on a global scale can be a difficult task, but this is when it is important to rely on your regional teams to build stronger vendor relationships and consider where there is potential for efficiency in their region.

Test the scope for innovation

As long as your quality team is supportive, then you should be seeking out areas of innovation that could lead to cost savings.

For supply chain leaders, Bruce believes it is important “not to be rigid or stay within your paradigm of thinking”. He recommends “thinking outside of the box, even if it might seem like you’re asking ridiculous questions”. Ingenuity often starts from a series of crazy ideas and you may shocked by what it could potentially yield.

There is always time to think your way creatively through a problem and consider innovative ideas. But you have to ensure you open the conversation to innovation.

During reviews, much of the time is spent on metrics, capabilities and studying profits. But it can be worth taking a step back to ask if there is another way we could be doing this? Is there a way we could drive greater efficiencies at a lower cost? Is there something that we are missing?

Bruce shared an example of where they were able to substantially reduce costs by shipping drug material with ancillaries using the same shipping container. By using the empty space in one box and ensuring the integrity of the product was not affected, they were able to halve their shipping cost.

Bruce reiterates that when you are seeking out innovative approaches, it is crucial to “be under the guidance and tutelage of the quality group and fully consider any issues”. You need to be sure that you have all of the appropriate data to make an informed choice, so your innovation will not cause any future issues.

Should you be ready to negotiate as your needs change?

Yes. There is always the opportunity to re-tool your current arrangements. Whether you are coming to the end of service agreements, increasing operations or entering new markets, you should always be aware of what is available to you in the market. This may show you areas where you could be gaining increased efficiencies through further integration with current partners or new agreements.

Bruce shared the significance of reconsidering your current agreements after certain milestones, such as a product launch. While pre-launch, you may have been making a number of assumptions about your needs, following the launch you will be in a better position to know where your partnerships may need to change. With a greater level of awareness across the full process, you may also be able to spot areas of inefficiencies.

As you gain additional experience and insight, you can utilize this to inform your vendor choices and more clearly share you needs for particular activities.

If you are also in the process of increasing your scale of operations with a vendor, then it might be worth re-opening the cost conversation. You may believe that you are receiving the best economies of scale available, but Bruce recommends taking the approach of “trust, then verify”. He shared his experience of increasing the number of shipments with a vendor and bringing up the topic of peer pricing. If you are sending over the additional business, you may be able to obtain reduced costs.

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Bruce also recommends taking a clear view of the performance of your existing vendors. He suggests using “standards for operation metrics, bringing in quarterly business reviews, looking into activity-based costing and eliminating miscellaneous expenses”. If cost efficiency is important to you, as Bruce puts it, you have to “get down to the nuts and bolts of what you are being charged for”. Understanding the full spectrum of vendor costs will allow you to identify areas where you could drive savings.

What are the potential inefficiencies of your cost-saving initiative?

One aspect that is often overlooked is the potential impact and inefficiencies of proposed cost-saving methods.

In some cases, the cost of change may actually outweigh your savings. As Bruce puts it “it’s not only the lowest cost that wins, there is always a variety of factors to consider”.

If you are changing your operations from one vendor to another, you have to consider both the hard and soft costs of this transition. Bruce offers a number of areas to review, including; expiration clauses, the cost of IT and the impact on back-office functions.

Cost should never be the singular driving force behind a decision, there are a multitude of factors and people to consider before making a final decision

Without taking these factors into consideration, you won’t understand your true cost savings. As Bruce explains, “if someone says I can do this for X but it is going to cost us 30% more to do the change, then that has to be accounted for before we go forward”. It may be true that you take an initial cost for a long-term gain, but a new set of systems may actually be more costly long-term to implement and manage.

Bruce also stressed the importance of people considering what is happening both upstream and downstream of their part in the supply chain. For example, someone in procurement may buy a large quantity of a product, but not consider the person who has to manage the warehouse budget. While they may secure a great unit cost, they could lose these savings in additional warehouse expenses.

To address this, Bruce suggests that you “either diffuse the idea or find a creative alternative”. He reiterates that for any cost-based initiative “you’ve got to be checking with your internal colleagues from the overall profit and loss process”.

Be sure to assess the global impact of your change. What barriers could affect the success of the change? How can you adapt your plan to make it more successful regionally?

You also need to consider the global impact of your proposed change. Bruce shares that when you are in a global organization, “your particular change might work well in one part of the world, but maybe counterproductive in another”. Without taking a regional approach to how this change will be implemented, you may create further issues down the line. Bruce offers the example of using a leading piece of technology. He said that “if you’re shipping into places such as the Ukraine or India, where the infrastructure is not as progressive, then it may create more problems than benefits”.