Reducing Risk and Lowering Costs in an Outsourced Manufacturing Model

By Michael Webster, Director of Life Sciences, Ross Systems

Outsourced manufacturing has exploded in the last 20 years to become a standard for companies ranging from emerging biopharmas to the global pharmaceuticals. Lowering costs, focusing on core competencies and mitigating financial and compliance risk are often cited as drivers for the outsourced business model. However, there is no provision in the predicate rules that allows a company to outsource the responsibility for ensuring compliance and good manufacturing practices. The Food & Drug Administration (FDA) dictates that the marketer submitting a therapy for regulatory approval is ultimately responsible for the end-to-end safety and compliance of the product. This includes all sourcing, materials management, manufacturing, packaging and shipping, even when these functions have been outsourced.

Our business puts us in contact with hundreds of emerging and established bio/pharma companies around the world every year. In this article, we seek to share the consistencies, best practices, pains and goals that are pervasive in the outsourced business model. Companies that are in transition to commercial distribution of their products should find the experiences of other Life Science companies, serving as the basis for this article, compelling and useful.Accountability is not just for the CFO and CEO. Stakeholders, the FDA and the SEC all want accountability. The ability to produce a secure audit trail for any and all transactions, financial or material, is critical to accountability. Greater accountability leads to better Bankability, which is crucial for an emerging biopharma. Steps taken to ensure financial and regulatory control will bring enormous value to everyone with a stake in the company’s success.

In the pursuit of accountability, the outsourced business model introduces an inherent conflict: owning the responsibility for the production batch and lot record but not being in direct control of the process. Good construction of the manufacturing and quality contracts, building strong personal relationships with contract suppliers, and good audit controls are a proven to help mitigate risk and speed production. In measures, some have chosen to go beyond reliance on paper and people to optimize and protect their supply chain safety. Through the use of standard, off-the-shelf technology, these companies are proactively ensuring adherence to Good Manufacturing Practices, speeding the time to market and reducing production costs without directly managing the manufacturing or materials management process. They are having their cake and eating it too.

Utopian Pharmaceuticals (sic) outsources the manufacturing of product. Their strategy is trust but verify. They verify many aspects of the production process by running a parallel Life Science focused supply chain management tool set to transfer inventory, quality and manufacturing data electronically from their manufactures. They share a 24 month rolling forecast with their raw material suppliers and manufacturers to lower costs on advanced production commitments. Their automation systems calculate lead times for optimum shelf life and minimum inventory caring costs based on the planned manufacturing jobs needed to meet forecasted demand. As inventory is received at third party sites, they have near real-time status of all quantity and quality inventory statuses. Their internal system controls warn and report the out-of-compliance use of material. Production job starts and daily status reports are displayed on their critical issues dashboard along with forecasted shortages and potential inventory expiration. As their therapeutic is being processed, the batch record data including quality control (QC) test results, machine usage, labor time, material inputs and outputs are tracked. Their lot record is complete from PO and raw material receipt to the final distribution (patient/clinic or final commercial distribution location). The contractor’s operations are monitored, not driven or micromanaged from Utopian’s supply chain monitoring system.

There are several methods that companies like Utopian use to collect this data. In the simplest approach, some collect the inventory and production data via email and fax, and then re-key it manually into their system. This is an acceptable approach, but requires valuable head count and is prone to human error. The second approach is to present a secure web-based data entry screen for third party manufacturers and distribution centers. In some cases, it is impractical to expect your partners to provide double data entry in their system as well as yours. The best practice we have seen is in the collaborative approach – pulling pre-existing data entered in the manufacturer’s or distributor’s system in an XML or flat file format and uploading the data automatically on a daily basis. The data exists and can be extracted with a minimal one-time integration effort.

The Utopian example is a reality today at some forward thinking companies. The systems they use are off-the-shelf software and the automated data collection is built into their manufacturing and quality agreements. It is possible, and many companies today rely completely on the contract supplier, to collect the right data and optimize the manufacturing process. This is essentially a head-in-the-sand approach. You, as the responsible party, stand to gain or lose the most by depending on your suppliers to lower your costs of production and ensure the quality of your finished product. By bringing the batch and lot record in house, you can take a proactive role in lowering costs and mitigating compliance risk during an audit or recall.

The payback lies in the availability of key, actionable business data. Users of lot/batch record data collection systems have experienced measurable benefits:

1. Lower head count.

a. When proper planning is available, fewer people are required to react to disruptions.
b. Project accounting controls track labor, material and expenses, eliminating manual entry.

2. Improved shared forecasts reduce production costs and the potential for supply crisis.

a. Batches are analyzed more quickly and lot/batch releases can happen days sooner. 3. Supplier performance can be measured and optimized.

a. You can match order specifications (material specifications, target delivery dates,      quantities, etc.) with actual deliveries to gauge supplier performance.

4. Improved production performance data improves efficiency through better decision making.

a. Inventory quantities are clearly available with the corresponding QC status.
b. Production yield analysis and standard versus actual lot costs can drive decisions with      measurable financial impact.

Project accounting is a must in this environment. Beyond the virtual manufacturing floor, benefits are also gained in the ability to track costs of inventory and production by lot, batch, product, project task and sub-tasks. Each time a material changes status or location, a journal entry is posted behind the scenes. Your accountants and controller can make better use of their time when they are not forced to make manual journal entries and reconciliations. When making the decision to maintain your own lot and production record in an outsourced model, one of the common concerns is the cost versus risk factor. You may ask: “As a 50-100 person virtual company, how can I afford to implement an automated system in such a complex supply chain?” The answer is with today’s off-the-shelf systems, you can’t afford not to. As well, you have the right to have high expectations of your vendors and measure them to your standard.

As with any project, scope of supply and measured benefits are critical to determining success or failure. To ensure success, our experience shows that you should expect the following from an automated materials lot and batch record system:

1. Critical issues dashboard

a. Reliability Index for suppliers and manufactures
b. Schedule performance
c. Yield analysis
d. Advanced warning of to be expired material, if unused

2. Planning dashboard

a. Monthly/yearly rolling schedule
b. Demand Planning – Forecasting tool set

3. Self-contained, independent, lot and batch record

a. Observe and collect:
i. Planned purchases, Jobs/batches, finished good fulfillment
ii. Daily inventory warehouse location and QC status
iii. Received inventory quantity, incoming testing, and vendor analysis
iv. Quality test results, and sample collection & testing
v. Daily job start, daily job status, and finished good count
4. Automated processing of orders from clinical/commercial order through shipping.
5. Bi-directional lot trace from anywhere in the supply chain.
a. Raw material to patient/clinic or final commercial distribution location.
6. Visibility to distribution partner inventory levels and replenishment planning.

The first step in deploying a system to gather the data above is to write the requirements directly into your manufacturing and quality agreements with your manufacturers. The data should exist in your contract manufacturer’s system and with open technologies available – the transfer of the data should be straight-forward. Cooperation and communication is all that is required to execute. Budgets for a system as described above typically start at $150,000 or about $5,000/month using a lease program. Many venture-funded biopharmaceuticals are unwilling or incapable of making a cash purchase of such a system, so they may choose a lease or subscription model.

Smoothing the Transition from Clinical to Commercial Manufacturing

Companies in clinical later phases of development preparing commercial operation are offered another unique advantage in deploying an outsource manufacturing collaboration system: constructing a visible supply chain automation and optimization system, before applying for marketing approval, saves valuable time in scaling the company. With systems already in place, flipping the switches from a clinical to commercial environment is a very small effort, measured in days not months or years. By deploying a system to remotely monitor and control your supply chain, you have already completed and validated 95 percent of the work required to move from clinical to commercial operation.

There is little difference between a forecast for clinical and commercial material with the exception of the individuals creating the forecast (Trials Management versus Sales Management). As well, an order for clinical material and an order for commercial product are nearly the same. For example, a clinical order is received and recorded (entered into the order entry system). The clinical order stays on hold until the Clinical Trial manager provides approval, the materials manger then assigns a lot released from QC and allows shipping of the therapeutic from the third party warehouse. Similarly, a commercial order uses the same functionality and work flow with the exception that the trial manager is replaced with a sales manager. The inventory is managed in the same way. The order in this case generates revenue, posts to the ledger and posts to the receivables module for collection.

Transitioning Between In-house and Outsourced Manufacturing

Commercial transition may also bring a change to the company’s approach to outsourcing. Hybrid in-house/outsourced manufacturing is an increasing trend. This is especially true when a therapeutic exceeds forecasted demand. Some biopharma companies, not able to anticipate the success of the commercial roll-out, are at maximum internal manufacturing capacity and turn to contractors to fulfill the balance of the demand. This scenario creates an immediate and compelling need for systems to monitor for efficiency and compliance. Similarly, if a company is outsourcing manufacturing while in phase three, and plans to bring production in-house after marketing approval, having systems in place to manage materials and production puts them at an extreme advantage from a time and resource perspective.

Selecting the Right Vendor

There are a number of considerations to keep in mind when evaluating pharmaceutical supply chain solutions. You should start by integrating the knowledge and skills across the business into a systematic approach: developing a strategy, justifying the business case and selecting the right partner to formulate a roadmap for implementation.

Develop a strategy. Cost, timing, internal resource requirements and a general approach to implementation must be carefully crafted to be closely aligned with the strategic direction of the company

Understand the business case. Establish clearly defined business objectives and measurable goals. Can an investment in new or upgraded business systems be justified? What are the business benefits, return on investment, and total costs involved?

Select the right partner. Your partner’s fit to your company culture is a must. Beware of sales people who can’t say no. They should be as concerned about their reputation, your success and keeping your business as they are about obtaining it from the start. Talk to peer companies (similar in size and geography) that are using the system you have selected. Their experiences with the system and vendor – your future partner – are invaluable.

Formulate a roadmap for implementation. Developing and following a thorough implementation plan is crucial for success. Effective planning helps retain focus, builds momentum, mitigates risk and serves as a communication tool for the organization.Aside from these specific steps in planning and preparation, it’s important to take a hard look at the company behind the solutions to make sure it is focused on delivering solutions in your industry; has a proven track record of successful customer partnerships; and provides solutions today that will scale to meet your needs of tomorrow.

Focused.Achieving enterprise efficiency requires focused solutions – systems that were designed for your industry and are proven to implement quickly will lower the total cost of ownership. As such, your technology partner should be unique in its focus on pharmaceutical, clinical and commercial enterprise management, with experience and a deep understanding of the challenges unique to the life sciences industry.

Proven. Investigate the company’s customers and affiliations. Do they have experience delivering value to similar companies? From biotechnology to pharmaceuticals to nutraceuticals, vendors who display proven performance and industry leadership will be well equipped to support today’s rapidly changing market and regulatory demands. The most important factor is to talk to their references, take your time and ask the hard questions.

Better. Software solutions are not created equal. You should look for a technology partner that you can grow with – one with an intense commitment to the industry who can fully understand the evolving needs of your business and translate those needs into future capabilities. The application of a systematic approach to operational effectiveness combined with the right technology solutions will result in a core business infrastructure that sustains compliance, efficiency, flexibility and scalability over time.

In Summary

Outsourced manufacturing holds many potential benefits but also harbors a new set of risks. Mitigating the risks created by compliance with governmental and industry regulations starts with control over the ability to manage, capture and track quality information throughout the supply chain.

Since the right technology decisions can directly and positively impact the bottom line through quicker deployments and taking advantage of all revenue opportunities, CIOs and CFOs should carefully evaluate their options as early as possible in the product development cycle in order to reap the most value and benefit.