Dear Colleagues! This is Pharma Veterans Blog Post #206. Pharma Veterans shares the wealth of knowledge and wisdom of Veterans for the benefit of Pharma Community. Pharma Veterans Blog is published by Asrar Qureshi on WordPress, the top blog site. If you wish to share your stories, ideas and thoughts, please email to asrar@asrarqureshi.com for publishing your contributions here.
Dear Pharma Veterans. This series of Blogs is to have a summary view of Pharma Business in Pakistan. It is a series spread over several parts covering the entire spectrum of Pharma business.
Pharma Business – OPERATIONS
SUPPLY CHAIN
In this series of Blogs, I have already completed discussion on the business-related topics. We now go over to the operations side which is equally important.
Barring few, Generic Pharma or Local Pharma in Pakistan has evolved and grown through hits and misses; not through strategic planning and execution. For this reason, some companies did not achieve desired growth, some grew but could not sustain, while a small number were able to carry sustained growth over time. For the same reason, the development of functions has neither been organized nor uniform.
It is also true that the Local Pharma did not have adequate expertise for major functional areas. As opportunities in the MNCs diminished due to mergers, many trained professionals became available for hiring. Local Pharma hired them and utilized their expertise to get to the next level.
Primary focus in this was ‘Business’; Operations came later. Business is always more gratifying because it brings revenue. Operations consume revenue. They did save money through operational efficiency, but it was revenue saved; not revenue earned, and was therefore never visible. The bottom line is that the development of business and operations was disproportionate, with operations mostly on the back burner.
Supply Chain is the second largest function in a manufacturing organization. Supply Chain is an end to end function. It starts from Planning, leads to Procurement, to Production, to Warehousing, to Distribution, and to Logistics. However, Supply Chain is not working like this practically for following reasons.
- Supply Chain itself is a rather recent concept. It was a fragmented activity split into Procurement and Materials Management.
- Production was not taken as part of Supply Chain.
- Distribution is still a part of Marketing, rather than Supply Chain
- Procurement was always kept by the owners themselves because it involved spending huge amounts of money. It was the last function to be dropped by the owners even where it was finally delegated to staff. In small to medium size companies, Procurement is still directly done by the owners.
- Production followed the same route as Procurement. It was also controlled by the owners for as long as they could; and still do.
- Distribution was controlled by Marketing because the revenue actually came through Distribution.
With so many contenders holding on to various portions of Supply Chain functions, there was no way it would unify as one function. It is still the same in all Pharma companies.
Supply Chain in Pharma is Planning, Procurement, and Warehousing. In rare instances, Production will be included, and in rarer instances Distribution will be thrown in.
As we are reviewing entire Pharma business, we shall look at all these functions anyway. It is not our topic of discussion as to who is doing what.
- Some form of planning had always been there; no matter how rudimentary it might have been. Planning has undergone various stages of refinement as the experience and insight was accumulated over time. Currently, Planning is done based on the following factors.
- Is provided by Marketing and Sales. The Distribution may refine it with the ex-company sales point of view. Depending upon the time it takes to procure materials and do the production, the forecasting window ranges from 3 – 12 months. The more appropriate form is the Rolling Sales Forecast which matches the dynamism of sales. If the planning is done on a 3 months basis, the RSF will be prepared every month for the next three months. First month will be fixed, means the forecast is not liable to change. Next two months forecast may be changed next time within a certain margin, may be 15-30% or whatever is considered fair. If the planning window is 6 months, the RSF will be prepared for next 6 months, every month. In this case, first two months will be fixed and next four months will be variable.
Forecast is the foundation of Planning. The accuracy of forecast is therefore critical to the process.
Planner will calculate the material requirement based on forecast and available inventory. She/he will then raise Purchase Requisitions, get approvals and send to Procurement.
- Value of Materials. Materials value varies greatly. Some are high-value while others are nominal-value. All are required for production, because even if you have 99% components and 1% is lacking, the production cannot be done.
Value of materials determines the amount of finances required. As a thumb rule, high-value materials should be ordered more frequently to avoid blocking finances while nominal value items should be ordered in bulk and less frequently.
A classic method is ABC analysis. A category of materials consumes 80% finances; B category takes 15% and C category 5%. If the ordering is done properly, financial management will be better.
Another way of looking at ABC is from business point of view. A category of materials goes into products that bring 80% sales; B category 15% and C category 5%.
Considering both factors will keep the inventory rational and adequate and will help in good financial management.
Do remember that Inventory is probably the biggest item consuming revenue. If done right, it will add to financial health of corporate; done poorly and it will be a ‘Black Hole’ for revenue. You know what Black Holes do.
Continued…….
