CMO consolidation will support 100% virtual supply chains

By Nick Taylor

- Last updated on GMT

Related tags: Supply chain, Supply chain management, Logistics

Consolidation of CMOs will support use of completely outsourced production and distribution networks in the near future.

Pharmaceutical industry pressures are driving the need for innovative thinking in all business areas, including production, packaging and distribution. For some companies, notably specialist therapy providers, a virtual supply chain will become a viable, and possibly vital, option.

The business case for virtualisation is clear. It enables a company to shift to a flexible cost base, reduce the risks associated with investing in new assets and access new technologies and skills​”, says a PricewaterhouseCoopers (PwC) report.

Despite these benefits a big pharma is yet to virtualise its entire supply chain. Many companies have committed to outsourcing large portions of production but virtual model adoption has been restricted by concerns about the reliability of contract manufacturing organisations (CMO).

PwC expects CMO consolidation to alleviate these concerns by creating a small number of global players with the capabilities to be true strategic partners. Virtual model pharmas will select a few CMOs that have a clear understanding of the products and processes being outsourced.

After entering into the relationship the CMO and client must remain in close contact. Use of interoperable systems and adoption of common practices will support this goal and make CMOs extensions of their clients.

Outsourcing the entire supply chain increases the importance of deal making. As such, companies must ensure they hire good negotiators to forge strong commercial contracts and in-house experts to select and monitor CMOs.

Fourth-party logistics

Maturation of the logistics industry will also support adoption of a virtual model. PwC says some providers are developing into fourth-party logistics (4PL) providers by expanding into supply chain management and coordination services.

4PL providers will eliminate the need for in-house capacity by “distributing healthcare packages directly to patients or their healthcare providers efficiently and economically​”. As with CMOs, companies must build strong relationships with 4PL providers if the initiative is to be a success.

Service innovator alternative

PwC proposes the virtual model as one option for suppliers of specialist therapies. The other option is to view the supply chain as a revenue generator, as opposed to a fixed cost.

In this scenario the supply chain must manage a network of suppliers providing health management services, as well as core manufacturing and distribution tasks. Some companies, notable Fresenius, have begun this process by providing dialysis machines and care.

Taking this approach differentiates the company, creates new revenue streams and improves customer loyalty. However, changing to this “very different​”​model requires a significant “cultural adjustment​”.

A supply chain that’s sufficiently mature to manage a vast network of suppliers and yet sufficiently nimble to respond rapidly to the demands of numerous different customers​” is also needed.

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