So says John Bicheno, Senior Research Associate, Lean Enterprise Research Council, Cardiff Business School in ‘Cause and Effect Lean – Lean Operations, Six Sigma and supply-chain Essentials’. This estimate covers all industry sectors, including those where change is much less heavily regulated than Pharmaceuticals. You can only imagine what the figure is in this sector, where the risk and cost of change has been hugely prohibitive.

So what does this mean for Pharmaceuticals? It means that the opportunity for major improvement in cost of goods occurs early on and through the development process, prior to submission of the registered information. Once details have been lodged for material specifications and supply sources, validated batch sizes, manufacturing routes, contract manufacturers, storage facilities and contract analytical laboratories, these are effectively locked in for the life of the product – and so is the cost and risk along with it.

This fascinating fact is gleaned from an email from Professor Daniel Jones ‘Planning for Flow’. Professor Jones, as well as being Founder and Chairman of the Lean Enterprise Academy, is well known for co-authoring, along with Jim Womack, ‘The Machine that Changed the World’, a landmark study of the automobile industry based on the largest and most thorough study ever undertaken in any industry. Sponsored by the Massachusetts Institute of Technology (MIT), this was a five-million-dollar, five-year, fourteen-country International Motor Vehicle Program’s study of the worldwide auto industry.

When Dan Jones went into a Pharmaceutical plant, he estimated the end-to-end supply-chain was probably twice as long as the 319 days it took to get a well know fizzy drink from mining of the bauxite for the aluminium can, to filling of the shelves at Tesco.

The message here is clear. The sector has massive scope to make transformational changes in the supply-chains that bring product to market.

This may seem far fetched, but the only true business measure of value is based on what the ultimate customer is prepared to pay for. When organisational activity is assessed against this criterion, the vast majority of activities will fail the test. We store, queue, inspect, wait, re-work, re-do, return, re-visit, re-process………the list goes on.

The only certain way to increase value adding activity is to map current processes using the appropriate tools and eradicate waste in all its forms. The exemplar sectors have been doing this for many years with great success. Is it not time you started?

For many biotech and emerging pharma companies intent on getting into the clinic, or indeed carrying on to commercial supply, outsourcing is the only feasible option given the need to conserve cash. Often and perversely, skills and experience of the laws of commercial exchange are not regarded as high priority, even though vast sums of money may be spent with third parties. Not only that, but the third parties need to be managed in a relationship where the balance of power shifts dramatically pre and post contract. Ignore that at your peril!

It is now becoming increasingly recognised that procurement of outsourced services is a vital cross-functional process (not a function called ‘procurement’) with a life-cycle that covers definition of need, supplier selection, terms of agreement and payment completion. Involvement of the appropriate people at each stage is of fundamental importance.

This process is not rocket science, can be applied using structured tools and techniques, and can be adopted across the organisation for maximum impact on ‘value for money’.

If a company outsource's major operational activities such as clinical trials, manufacture, logistics services, etc then these will likely have a significant effect on financial statements. The company’s procurement processes are a large contributor to internal controls.

• How are outsourced services and materials being controlled through the procure-to-pay cycle?
• What controls are there on consumption and movement of inventory?
• What controls are in place at the contractor's sub-contractors?
• Do contracts reflect the need for higher levels of audit access?
• Do you have a register of all third parties subject to corporate governance?
• Are legal, finance, purchasing, internal audit and end users all on the same page?
• Is information being supplied by third parties accurate and appropriate?

You may well have this all under control, but it may be worth checking again!

Skeptical?

Well, consider the following:

You company is gearing up for launch of a new product in tablet form. Five different batches of API have been made and all are approved. The first two validation runs of secondary drug product have been produced, consuming batches 1 and 2 of API and part of the batch 3. There are still more than two and a half batches of material left for this last run. All set to complete the third validation run to meet regulatory requirements for launch.

Then, during review of batch 4 by the sponsor company’s QA department, it is discovered that an out of specification result had been improperly documented and compromised the validation of that particular batch. One and a part batch left now. The partial quantity of batch 3 was insufficient quantity to produce a complete validation batch of tablets. We need that last batch 5 of API to complete the validation and launch the product.

What do you think? Batch 5 was an early manufacture, had been used out of sequence, and had expired 2 days previously. There was insufficient stability data to justify an extension. The next campaign of API was still at the planning stage and would be ready too late for launch.

Could that never happen to you?