Reducing Risk in Supply Chain: Ensuring Continuing Quality While Working with Outsource Partners

The industry has become more aware of potential disruptions to our supply chains thanks to big issues in recent years. Toothpaste, milk, and pet food marketing has suffered as a result of serious contamination issues. Pharmaceuticals and biologics have not been exempt from the challenges of outsourcing. Here are some steps companies can take to reduce their risk and solidify supply chains.

The manufacture of a biopharmaceutical is a complex process with many steps and materials used throughout the operation. While we often view certain key materials, such as cell culture media, chromatography resin or filling vials, as critical materials, any material used in production that is not available when we need it becomes a critical material. Thus, every item used in our process has the potential to disrupt our schedule. And with the operating cost of some plants exceeding $100,000 per day, delays can quickly become very expensive.

The challenge of securing our supply chain to mitigate the risk of disruption is magnified when we are dealing with contract manufacturing organizations (CMO).

There are two cases to consider: the materials provided to us by our CMO and the materials used by our CMO. Though most of us focus primarily on the first case, the second case is also worthy of our attention, particularly in light of the problems faced within the last few years by heparin distributors. This leads to the further question of how far back in the supply chain we should evaluate risk.

There are several approaches to risk analysis and mitigation. Most of us are familiar with the standard approach of tabulating potential weak spots and ranking them for their potential to cause disruption and for the effect of their disruption. Many risk mitigation strategies are built on this approach, with alternative options evaluated for dealing with potential issues.

Certainly, this is a productive activity for all organizations to go through as a means of identifying weak points and developing measures to reduce the potential for disruption.

But whatever our analysis method used, once we have listed the potential issues we are left with creating plans to minimize the disruption in the event of an occurrence. For most materials, the preferred backup is a second source. However, for some materials, such as bulk drug substance, establishing a second source may be very expensive.

Then the questions become: how do we decide when to establish a second source?; how far do we go in preparing for a second source?; and what can we do to reduce the need for a second source? Most experienced supply chain managers have faced the question of when to let a supplier go and find a replacement. The worst horror stories reflect not the failure of the supplier, so much as the failure of the client company to either prepare for the eventuality of supplier replacement or of the failure of the client company to manage the supplier relationship, and thus be surprised by a sudden failure on the part of the supplier.

Every outsourced project has the potential to need an alternate supplier, and thus the time to begin looking for the alternate is while we are looking for the primary. When we send out a request for proposal (RFP), we typically work with multiple firms to ensure we are receiving a competitive bid. While one firm may stand out among several as the better choice for our project, it is rare when there is not a second choice that is a good runner-up.

Many firms will elect to solicit proposals before conducting all the due diligence required for making a selection. On-site audits are expensive and may be limited to two or three suppliers, whereas the RFP may be distributed to five or six.

The audit itself is an opportunity to establish personal relationships that extend beyond the current project. Suppliers view the audit as an occasion to educate the potential client regarding the skills and services available, hoping that if they are not successful in acquiring the current project, they will be on the short list for future projects. Also, clients benefit from learning first hand the capabilities of the CMO.

Many proposals are prepared, especially at the larger CMOs, by a staff that is different from the manufacturing staff that will perform the work. An audit provides one-on-one interaction between client staff and manufacturing staff. Thus, the client auditing personnel should not be limited to Quality Assurance, but should include team members with sufficient technical background to evaluate the technical capability of the CMO.

It is true that every client ranks the compliance level of the CMO as the most critical characteristic: if the CMO does not meet compliance requirements, there is no point in looking further at their capability. But in every technology transfer and manufacturing operation technical challenges arise; the CMO that has the technical capability to address these challenges may well be the better partner, even if the initial cost seems higher. Delays while technical problems are being resolved can quickly increase the expense.

During the RFP and due diligence process the client can discuss backup alternatives with the CMO. The preferred vendor should be asked about their policies for technology transfer in the event of an interruption in supply. Will there be a license fee related to the use by the second CMO of the technology implemented by the first CMO? Can batch records, development reports and other documents that are in possession of the client be transferred to an alternate CMO? What restrictions will the CMO place on the transfer of materials to a second supplier? Answers to such questions may affect the selection of the CMO. Agreements reached during initial negotiations can be included in a letter of intent, which then forms the basis of the supply contract. Waiting to negotiate these details until after technology transfer is under way leaves the client at a disadvantage.

In addition, during the due diligence process, agreement in principle can be negotiated with the backup supplier. Few vendors will turn down the opportunity to be the fall back position just because they were not selected first. Here again, the client has the most leverage before the final contract is signed with the first choice CMO. In the biopharmaceutical industry, we are fortunate to have many experienced CMOs to choose from, and our second choice vendor can help us prepare a plan for transfer of the process that includes costs and timelines. Thus, we can be confident that we know (and our executive team knows) we have done our homework and are prepared for eventualities.

After we have prepared a backup plan including a second supplier, we know the costs of transfer and are ready to implement the plan if needed. We work diligently so that we will not need to call on our backup supplier.

How then, do we ensure we do not have failure in our primary supplier? There are two types of catastrophes: those resulting from outside factors (such as earthquake or tornado) and those from inside factors. Foremost among these is the loss of trust between supplier and client.

The relationship between two firms is really a set of relationships between people within the firms. And just like every personal relationship, to be successful they must be built on trust and mutual respect. Trust is built on a series of transactions, usually verbal commitments to deliver specified information by a given time. Repeated failure to deliver as promised is a certain recipe for loss of trust.

The client expects the vendor will have problems; no project goes exactly as planned and issues always arise. The question is how the vendor deals with the issues. Are problems communicated promptly? Are results shared openly? Does the client overreact to bad news? Is the client quick to shift blame to the vendor? Does the vendor listen, and respond to, the concerns of the client?

This author recalls a case where the decision was made to change the supplier of a particular service. During the telephone call in which it was explained to the vendor the company would no longer be using their services, the vendor expressed surprise at the client’s dissatisfaction. The client’s reply was, “How could you be surprised? In every conversation we have had over the last two months, we have complained about your service.”

Because of the high cost of changing CMOs, most client companies recognize the need to develop strong personal relationships that are built on professionalism and trust. It is appropriate for the client to request a change in the CMO project manager if there is a problem with responsiveness. However, sometimes the problem lies with the client company in which it devotes too few resources or untrained personnel to manage the vendor. Outsourcing the management role to a specialist who is experienced in representing client interests is less expensive than allowing a relationship to deteriorate because of insufficient internal oversight.

The struggle to secure our supply chains is never ending and filled with challenges. Reducing the risk of changing suppliers by building a backup and doing everything possible to avoid needing that backup are two ways to limit project delays and expense.

This article was printed in the March/April 2010 issue of Pharmaceutical Outsourcing, Volume 11, Issue 2. Copyright rests with the publisher. For more information about Pharmaceutical Outsourcing and to read similar articles, visit www.pharmoutsourcing.com and subscribe for free.