Metamorphosis of Best Cost Country Sourcing: The Future of Procurement

By Guest Editor

March 02, 2017 at 5:35 AM

By Aditi Dev 

Best Cost Country Sourcing (BCCS) is a traditional approach followed by companies to source from suppliers having lower cost of production. The factors that mostly contribute to lower production cost would typically include low raw material cost and low labor costs. But today, new factors such as long-term sustainability, increased leadtime, inflated wage rates, greener supply chain, safety and compliance requirements, cost of logistics, integration of suppliers, selective demands and preference for different products, the macroeconomics and demographics of a country are all considered for sourcing. Such factors lead to innovative and cost-saving opportunities and in turn enable companies to reach the best-in-class level of the BCCS Maturity framework.

BCCS Maturity Framework

The BCCS maturity framework consists of three levels: basic, advanced and best-in-class.

BCCS Maturity Framework.jpg

 

 

 

 


Please click on images to enlarge for viewing. 

The basic level focuses on supply chain and development of suppliers and the advanced level focuses on use of integrated supply chain for cost optimization and reduction. However, the best-in-class level focuses on the BCCS supplier competency, enhancement of product features and enables the BCCS strategy to respond effectively to the dynamics of supply chain markets.

Case Study

A Fortune 500 pharmaceutical (pharma) company wants to negotiate with suppliers to manufacture syringes and in the process wants to find the best design and the BCCS strategy for the product. The geographical scope of the business case includes North America (NA), South America and Asia.

Introduction

A Fortune 500 pharmaceutical company wants to negotiate with suppliers who manufacture syringes and the locations were selected based on supplier availability. The supplier, in this case, is a Contract Manufacturing Organization (CMO). The filling and the packaging process in the supply chain of prefilled syringes used for vaccination is outsourced to the CMO. The formulation is provided by the pharmaceutical company.

The syringe produced by an integrated supplier consists of the following steps:

Formulation. Formulation includes developing the drug to target the requirement. Pre-formulation includes studying the mechanical, chemical and physical properties to match the excipients that will be added to the Active Pharmaceutical Ingredient (API).

Injection molding. For the complex structure of a syringe that includes a plastic barrel, a plunger and a cap; the process of injection molding is carried out. The process starts with heating the plastic and converting it to liquid. The liquid is then injected into the mold in an inverted shape of the desired design. After cooling, the mold solidifies and the die is opened. The head of the plunger, which is also made by an injection molding process, is attached to the plunger handle. 

After formulation and the development of the barrel, the syringe is filled with the drug. The syringe is finally packaged and sent to storage.

The process flow chart is as follows:

process flow chart.jpg

 

 

The cost break-up of a syringe:

  • Formulation accounts for 53% of the total cost of production of syringe.
  • Injection molding accounts for 16% of the total cost of production of syringe.
  • Filling process accounts for 3% of the total cost of production of syringe.
  • Indirect cost accounts to 28% of the total cost of production of syringe.

syringe cost break up.jpg

 

 

 

 

 

 

Fig 2. Cost break-up of a syringe in NA.

The cost driver analysis shows that: 

  • The contribution of raw material varies from 36% (China) to 56% (NA) of the total formulation and filling cost of syringe. 
  • The contribution of utilities varies from 2% (China) to 9% (NA) of the total formulation and filling cost of syringe.
  • The contribution of labor cost varies from 16% (China) to 35% (NA) of the total formulation and filling cost of syringe.
  • The contribution of indirect cost varies from 18% (China) to 28% (NA) of the total formulation and filling cost of syringe.
  • Indirect costs in the U.S. is 65% and 69% higher compared to Brazil and China respectively, The filling cost for production of syringe is 47% and 53% higher compared to Brazil and China.

Cost comparison region-wise:

  • The U.S.: The cost of a 5-ml syringe in the U.S. is less by 5% and 6% compared to a 10-ml and 12-ml syringe respectively.
  • Brazil: The cost of 5-ml syringe in Brazil is less by 5% and 6% compared to a 10-ml and 12-ml syringe respectively.
  • China: The cost of 5-ml syringe in China is less by 4% and 6% compared to a 10-ml and 12-ml syringe respectively.

Negotiation Points

  • China is the best cost country for sourcing the syringe because of lower raw materials and labor costs.
  • Suppliers buying raw materials from suppliers in China in big volumes will be able to get discounts on variable costs which would lead to reduction in the final product cost.
  • CMO industry players enjoy approximately 35% to 40% profit margin for injection molding and filling process and the buyer can negotiate based on this information. 

The steps that should be incorporated in order to reach the best-in-class level of BCCS maturity network for the case illustrated above are:

Creation of overall supply chain concept. The first step starts with analyzing the portfolio of products and identifying the products that are labor-intensive because in such cases, BCCS is applicable. Further, the targeted products, supplied components and segments of the value chain that will benefit from the implementation strategy can be assessed. Aspects such as patent expiry and generic drug competition can also be considered. 

In the case illustrated above, outsourcing steps of the supply chain such as injection molding and filling will help the pharma company focus more on drug discovery and drug marketing. Therefore opting for a CMO in China is the recommended BCCS strategy.

Develop world-class suppliers. After suppliers from the best cost countries are finalized, they should be supported to deliver improved performance. Supplier development teams will help in implementing these teams and their function would depend on the relationship with the suppliers and the upcoming trends that would benefit the supplier and the customer. With respect to the case illustrated above, there are two options:

  • New suppliers: For new suppliers, the development team should focus on reduced costs, scalability, quality, lower drug development risk, reduced drug commercialization development times, manufacturing expertise, proper manufacturing facility and labor skill etc.
  • For long-time suppliers: As the suppliers develop good relation with the client, supplier development initiatives such as lean manufacturing or Six Sigma should be initiated to ensure supplier competence and improvement. As the relationship between the supplier and client becomes more stable, specialists and experts can be included for consolidation of CMOs, technological modification, new compliance requirements, drug research and development.

Build the organization with distinctive capabilities. In order to achieve the objective of developing the suppliers the prerequisite is to have a specialized team consisting of specialists with distinct capabilities.

The requirement for development of suppliers is hiring specialists related to procurement and they include: Purchasing specialists who focus on market research, category knowledge, contract management, vendor selection etc.; product engineers who work on reducing cost of product by focusing on raw material cost, utility cost, labor cost, indirect cost etc.; green specialists who focus on sustainable product and environment friendly raw material, process and finished product; quality engineers who help the suppliers to develop quality systems and monitor quality and safety; logistics experts who can work on distribution and logistics costs and reduce leadtime.

Optimize the integrated supply chain. Integration has been a significant factor for cost reduction. However, to implement the strategy framework, steps like optimizing the integrated supply chain by reducing storage time, distribution costs and lead times should be initiated.

In the pharma industry, getting the drug to the market can take years. It depends on factors such as quality, manufacturing efficiencies, safety, primary and secondary packaging etc. So, in addition to the benefits of an integrated supply chain, the sourcing should be done from integrated suppliers in the low cost countries.

In this case, the design should be prefilled syringes for primary packaging. Certain high-performance olefin polymers can be custom molded, subjected to reduced temperature and can be sterilized and such options can be innovatively used that enhances sustainability. Limiting contact and use of fewer primary materials over a product life cycle will have a sustainable impact and will be economically beneficial to production.

Use BCC supplier competence for product development. In countries such as China, there is a talent pool of engineers who can be used for product development, innovation, lower development costs, lower lead times and find alternate substitutes for raw material.

In the case illustrated above, CMOs such as Shandong Xinhua Pharmaceutical, Zhejiang Hisun Pharmaceutical, Zhejiang Huahai Pharmaceutical, Tianjin pharmaceutical, Asychem Laboratories that operate in best cost countries like China can be used for product development and their facilities can be used for manufacturing. The benefits of using a BCC supplier competence includes cost reduction, cost containment, improved infrastructure of the CMOs in China, product development by talented product engineers, skilled labor force, improved current good manufacturing practice (CGMP) standards etc.

Manage supply market dynamics. For a company to reach the best in class category, it should try to enhance the competitiveness of BCCS strategy. This includes implementing strategies to align with the changing trends in the dynamics of emerging markets and managing the supply market dynamics to effectively contribute to the sourcing strategy. 

Initiation of short-term and long-term activities would benefit the results of BCCS strategy and help to add the advantages from the supply side dynamics. Short-term activities include competitive benchmarking, signs regarding disruptions like delayed shipments and inadequate working capital in the hands of suppliers. The long-term activities include extensive research on the supply market, consumers, and expansion of facilities in emerging markets like China.

In the case illustrated above, factors such as cost savings leads to emergence of the CMO industry in China. Lower capital requirement, lower wages for skilled labor, lower overhead lower taxes and devalued currency make the CMO industry in China a good option with the benefits of a pool of engineers to work on the development of the product and a greener supply chain.

The growth of the middle-class strata of society in China and their contribution to the economy has led the government to focus on drug discovery and healthcare. Top CMO companies in the world are planning to extend facilities in China and Chinese players are also investing in technology and collaborating with foreign players in the CMO industry. All these events make the BCCS strategy implementation in China in collaboration with Chinese CMO industry a win-win situation for big international pharma companies and for growing CMO players in China. Therefore the inclusion of supply side market dynamics for pre-filled syringes works in favor of implementation of BCCS strategy.

Conclusion

BCCS is a significant procurement strategy used across many industries with the primary focus being consumer goods and retail. As the pharma industry gets more acquainted with the CMO industry, it is imperative to not only work on the implementation but also to understand the framework of BCCS. As BCCS strategy embraces innovative insights and moves towards a higher level, it is the need of the hour for companies and suppliers to improve their operations by realizing what stage they belong to within the BCCS strategy framework. It is essential to collaborate with suppliers where both sides can have a symbiotic relationship and utilize the economical and sustainable benefits of the best-in-class level of the BCCS maturity framework. 

Note: The percentages mentioned in the article are approximate values and can deviate from the actual value by +/- 5%.

Sources:

www.strategyand.pwc.com/media/file/Strategyand-Best-Cost-Country-Sourcing.pdf

http://www.pharmafranchisehelp.com/2016/10/manufacturing-of-parenteral-preparations-injections-large-small-volume-parenterals.html

http://specialtypharma.com/Main/Back-Issues/Injection-Molding-in-the-Pharmaceutical-Industry-154.aspx

https://www.pharmaceuticalonline.com/doc/the-benefits-of-contract-manufacturing-0001

http://www.contractpharma.com/issues/2010-09/view_features/the-future-of-contract-manufacturing

https://www.westpharma.com/en/blog/2012/May/Lifecycle-Planning

https://www.vetter-pharma.com/en/services-solutions-en/commercial-manufacturing/product-lifecycle-management

http://www.prnewswire.com/news-releases/pharma-leader-series-top-30-pharmaceutical-contract-manufacturing-organisations-cmos---market-industry-trends-technologies-and-prospects-2015-2025-531033371.html

https://www.pharmaceuticalonline.com/doc/chinese-cmo-landscape-0001

http://beta.rodpub.com/public/uploads/234888CMOs_and_Finsihed_Dose_Manufactuing_in_China.pdf

http://www.madehow.com/Volume-3/Syringe.html

Aditi Dev is an independent consultant focusing on developing cost models for various industries such as chemicals, mining, pharma, packaging, and agro and categories such as products and services. She worked as a financial consultant at Deloitte and prior to that, as a Research Analyst at Beroe Inc., a procurement intelligence company. She has worked on cost model analysis that brings out the benefits of cost models in Supply Chain Management related to areas such as best cost country sourcing, sustainability, design innovations, new processes and machinery, supplier reliability and various other aspects that can be implemented across the supply chain so that procurement insights are provided through cost models. She has a degree in MBA(Finance) from Christ University.



Tags: purchasing Global Sourcing Outsourcing Supply chain management Procurement commodities sourcing chemicals costs plastic contract manufacturing
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