Introduction
Over the last several years, a lot has been written about the changing relationship landscape between buyer and seller, particularly when we consider relationships that are as deep and as complicated as ones that involve the manufacturing of active pharmaceutical ingredients (APIs) and drug substance. The thread of many of these articles is that over time the relationships between buyer and seller have become deeper, more mutually dependent, and require a different mind-set on both sides of the desk to ensure the durability and success of the relationship, starting from the initial contact through to contract execution.
This article does not seek to re-write the huge body of material that exists discussing the detail process required to investigate, validate, and ensure that a high-quality process exists between buyer and seller; our aim is rather to look at the relationship between these two parties from a strategic perspective and understand that when the buyer’s and seller’s strategy is aligned, it enables not only the fulfilment of contractual requirements but also opens the doors to supplier triggered innovation and a richer overall conversation. The complaint often levied at Pharma buyers is that they are overly focused on price. This perception can only be supplanted by relationships that are founded on superior value and not lower price.
The authors have spent many years on the purchasing side of big Pharma. I (Giles Breault) have been Chief Procurement Officer of two major Pharma companies, Novartis Pharma and Aventis, and before that held a very similar role at F. Hoffmann La-Roche. My business partner, Sammy Rashed, has held senior procurement and productivity strategy roles with Merck & Co. as well as Novartis Pharma. We have collectively seen API manufacturers, contract manufacturing organizations (CMOs), and contract research organizations (CROs) develop and manage their relationships with big Pharma across the full range of possibilities from extreme focus on tactics to more sophisticated strategic approaches. Our experience has shown us an extraordinary unevenness in relationship management techniques from suppliers and in many cases an apparent unawareness of the tenets that make for long-term, mutually beneficial relationships.
The Beyond Procurement Study
Several years ago we set out on a separate mission to determine the future of procurement, recognizing that the future view that the function itself held was often unique to the individual company or industry. We set out to understand if there was any commonality across those visions. The “Beyond Procurement” project, as we dubbed it, included surveys, follow-ups, and in-depth focus groups to bring out what Purchasing teams believed to be their ultimate strategic direction. The first round of this study was heavily Pharma and Healthcare industry focused. More data and additional rounds of discussion have validated those early understandings across many industries (“Beyond Procurement, Options for procurement to drive company-wide productivity, Survey report”; EBS Universität für Wirtschaft und Recht, Wiesbaden, Germany, 2012; please contact us for the full report—[email protected]).
The upshot of this study was that most companies surveyed identified “supplier centric” approaches as the top two future imperatives for Purchasing. They were: Sourcing Innovation, and driving a new relationship management process with suppliers that relied much more on value creation and not price management. See Figure 1.
Figure 1. Identified “Top Ten Options” for procurement to drive company-wide productivity, and beyond.Follow-up discussions in focus sessions showed that most Purchasing organizations had begun to realize that endless pursuit of cost reductions was somehow undermining the creation and development of long-term strategic relationships. In 2013 we set out to further investigate this on an industry-specific basis and created the Productivity-in-Pharma Think Tank to explore the issue with a group of senior procurement leaders.
The first Pharma Think Tank explored why so few Supplier Relationship Management (SRM) programs had failed to deliver the lofty strategic goals originally promised and had often missed the innovation opportunity altogether. Most of these programs had envisioned a platform on which a supplier-buyer relationship would sit and be managed. Sadly, most of the systems turned into nothing more than a simple set of risk or performance management processes. While such systems may have prevented “value leakage,” the ability to tap new ideas, enhanced capabilities, or collaborate on problem solving was still eluding big Pharma.
While the report card for SRM systems being a panacea for managing important relationships was pretty poor, the dialogue at the Think Tank did bring forward considerable discussion and insight into the system that is needed to guide relationships, and thus provided guidance into how providers of complex products such as APIs need to plug into such systems.
The TRM Canvas
What ultimately evolved from the Think Tank conversation was what we call the Trading Relationship Management (TRM) canvas. Its primary use is to help practitioners on the procurement side to evaluate their internal processes, infrastructure, and capability (human assets) for building a more robust system to interact with suppliers that elicits new ideas, encourages a conversation around value instead of price, and protects the intellectual property of both. See Figure 2.
Figure 2. TRM Canvas®. Trading Relationship Management.What emerged in subsequent interactions with sellers and buyers is the usefulness of this tool for suppliers to gauge the depth to which they are supporting the buying company in its quest for value and engaging it in a way that meets the end-customer at complementary levels of strategic alignment.
The TRM canvas provides practitioners (buyers and sellers) with a visual guide to the process of addressing customers’ unmet needs by matching them with unique capabilities within the supplier base. The starting point of this is Figure 2, Step 1. The teams responsible for supplier development join forces with other company functions to understand exactly what the internal downstream stakeholders need, as well as the external environment and ultimate customers’ demand.
Most teams charged with supplier recruitment and development are relatively remote from the sales side of the organization, may be just as remote from the production environment, and may never have a solid grasp of downstream needs. There exists a need to build the internal infrastructure that allows sourcing teams to regularly access sales and marketing teams and especially Key Account Managers (KAMs) who more directly interface with important customers. This infrastructure equally needs to cover access to the production environment.
How do sourcing teams get access to customer needs? This moves us on to Step 2 of the process (Figure 2). In fact most organizations receive “customer demands” in the form of requirements passed through many internal organizations before reaching the responsible buying/technical teams. An example of this might be a new API or packaging system for a product. Each of these is a strong candidate for improvement through a better dialogue with suppliers, but without fully comprehending the need, the procurement team is left with only a specification and a challenge to find an appropriate provider at the lowest cost. A more complete solution is for sourcing teams to better understand the ultimate need, ideally by being directly involved with customers or internal clients where the questions of manufacturability, operability, and potentially the needs of the ultimate patients are evaluated.
The next step in the process is to understand how sourcing teams effectively scan the market, understanding available new capabilities and seeking out the best possible solutions among existing and not-yetknown suppliers (Figure 3, Step 3).
Figure 3. Trading Relationship Management maturity model.Our experience is that most organizations do this in a way that actually impedes the creation of new solutions and a broader discussion with suppliers about new capability. Purchasing teams normally operate through the use of formal bidding processes that end up focusing on a very narrow portion of the relationship, namely price. This traditional process forces a commoditization of the “buy” and shuts out a conversation that revolves around value. This is the first stage at which providers of API manufacturing, development, or research services, etc, should be mindful where they connect into the procuring company’s process. A lowest-bid-wins approach is generally detrimental to the provider’s interest when the discussion should be better focused on the overall value represented by the vendor’s solution.
Step 4 (Figure 3) is the crucial step of acquiring product innovation, new processes, and new ideas that are a product of the supplier’s knowledge or jointly developed between buyer and seller. However, this step also comes with a significant new responsibility to ensure that each company’s IP is protected and that benefit sharing of new ideas is clearly set forth. This part of the process is more than just the buying organization throwing open its doors and inviting all new ideas; it requires systemic facilitation to seek the right kind of innovation and be able to filter and push forward the ones that are most needed by internal clients and ultimate customers.
The remaining two steps, Steps 5 and 6, complete the cycle (Figure 3). Once new ideas are identified, the challenge is to ensure that they are not lost in endless rounds of evaluation or die simply because there was no process to take them forward. Innovations and new ideas need to be quickly evaluated and championed through internal organizations and across barriers. A regular process of innovation evaluation must be sanctioned by senior leadership (potentially even the CEO) to ensure that new ideas do not get lost or simply ignored. The last step finally connects the innovation to the source of the internal need or even the ultimate customer. To enable this, we turn back to the same business infrastructure that allowed sourcing teams to identify the need in the first place. The ability to bring back new capabilities to the operations, and production teams or even to sales, marketing, and KAM teams through a structured process closes the loop directly connecting marketplace needs with supplier capability.
How Do Providers Match Their Offering to the Buyer’s Need?
Can providers of critical services and products (API providers, CMOs, and CDMOs [Contract Development and Manufacturing Organizations]) utilize the Trading Relationship canvas in a way that helps them identify where they exist within the supplier hierarchy of a Pharma company, and how can they up their play to become an indispensable partner? We can apply a maturity overlay to the TRM canvas that helps both sellers and buyers understand the relative level of strategy and maturity that exists between the buying company needs and the supplying company’s ability to serve.
At the lowest level (the js), the process of acquisition is a tactical process where the principal play is aggregation risk management, and evaluating performance on a limited number of factors. While few API suppliers or providers of critical services will ever find themselves at the short end of this stick, it is important to understand the mentality of the buying company. A full and open dialogue between buyer and seller is not achievable because there is not a corresponding level of maturity between the buyer’s and seller’s strategy and needs. A selling company representing growth opportunities, new capability, and innovative ideas will have significant difficulty in selling to a company interested in aggregating and commoditizing its needs.
To a lesser degree when one evaluates the ks in the TRM canvas, a dichotomy between needs and off ers still exists. We would posit the many sellers find themselves in this position, that is, attempting to provide a buying company with better value propositions, innovation, and value enhancing proposals, only to find that the buying company lacks the sophistication to take on board the value accretive proposal, treat it with security, and assure that it will be taken up in a facilitated process. The best use of the maturity overlay is to understand where these diff erences between the buyer’s expectations and its internal infrastructure exist such that proposals can be tailored to the buyer’s level of capability and sophistication.
Ultimately it is the desire that both buyer and seller move to level l. This is the highest level of interaction and where the open flow of communication from a provider is matched with the buyer’s capability and internal infrastructure to identify nurture and push forward innovation and new value enhancing ideas. Providers should understand this landscape before moving forward with an innovation agenda, to ensure that it is consistent with the buyer’s strategic intentions and the requisite ability to manage the innovation.
Conclusion
Experience has taught us over the years that procurement organizations do not fully understand the required infrastructure, skills, and resources required to drive a robust and sustainable process of innovation acquisition. The many linkages between the customer’s need (internal or external), the technical sourcing teams, and the internal processes that evaluate and select innovations are so poorly understood and implemented that this forms an almost immediate barrier to the effective dialogue between buyer and seller that could expose and create new value.
The TRM canvas can help both buyers and sellers to gain an understanding of their capabilities and internal mechanisms, and use it as a diagnostic tool to critically appraise their innovation acquisition process. Buyers can use the TRM model to assess and improve weaknesses within their systems and providers can use it to critically understand their customers’ level of sophistication and tailor appropriate solutions to those strategic needs.
Giles Breault, co-founder of The Beyond Group AG, is a career Productivity, Supply Chain, Sourcing and Procurement executive with strategic and operational experience in the Pharmaceuticals, Electronics, and Aviation industries. Previously he was Head of Global Productivity and Business Services as well as Chief Procurement Officer, Novartis Pharmaceuticals, Senior Vice-President, Aventis Pharmaceuticals, and held several senior positions at F. Hoffmann-La Roche in the US and Switzerland. He is an acknowledged expert in the field of Global Procurement, Productivity and Offshoring/Outsourcing, and has led several Procurement & Supply Chain restructuring efforts focused at maximizing the return on investment in supply chain and procurement resources.
Sammy Rashed is a procurement strategist and productivity advisor, with 20+ years’ experience in senior management primarily focused in the Pharmaceutical industry. Over his career at Novartis Pharma and Merck & Co., he has transformed and headed Procurement organizations in Canada, Europe, and globally across all regions, where he created and drove the strategy to transform the function and develop its talent. Now principal and co-founder at the Beyond Group AG, he has become a recognized thought leader on growing procurement into a broader productivity champion, and also serves as an executive partner for corporate research with the Institute for Supply Chain Management (European Business School, Germany).