No More Delays for Supply
Chain Postponement in
Life Sciences
Life sciences companies with postponed supply
chains are reducing working capital and lead times
by as much as 35 percent, and obsolescence
expenses by up to 15 percent.
No More Delays for Supply Chain Postponement in Life Sciences
1
Introduction
Supply chain postponement has been around for decades, pioneered by
companies in the automotive, electronics, and consumer goods industries.
Some other sectors have lagged behind—and only recently has the life sciences
sector begun to show interest. We asked senior supply chain executives from
more than 20 leading pharmaceutical, biotechnology, and medical devices
firms what they think about postponement, what they are doing about it,
and why. According to our findings, four out of ten companies have already
deployed some elements of postponement, and nearly all the others are
actively examining its potential. The implication is clear: if you are not already
thinking about supply chain postponement, you certainly ought to be.
Many of the interested parties are still struggling to build the business case
for postponement, and then with the commitment to the changes required
to achieve the benefits. Others, however, are already reaping the rewards,
with measurable benefits of as much as a 35 percent reduction in lead time for
finished goods, a similar reduction in working capital, a 15 percent decline
in obsolescence expenses, and up to 5 percent revenue growth.
The companies raking in the benefits of postponement do four things well.
Namely, they:
• Segment their supply chain strategies and product portfolio by looking from
the market in, rather than from the supply chain out
• Adopt technologies and invest targeted capital to make the production line
more responsive and minimize changeover time, while working to drastically
reduce quality release times
• Accelerate planning cycles to respond nimbly to market demand signals
directly from the consumer, with deliberate make-to-order strategies and
decoupling points aligned to the flow of information
• Train their people (and adjust their processes and incentives) to encourage
cross-functional cooperation and end-to-end thinking
From Field of Dreams to Minefield
In the hit U.S. film Field of Dreams, a voice repeatedly tells Kevin Costner, “If you build it,
he will come.” For decades, that tagline could also have been the slogan for the life sciences
sector. Nearly any product that made it through the R&D pipeline was sure to find a market—
and a highly profitable one at that—bolstered by strong brand reputations, robust patent
protections, and an insatiable hunger for medical innovation. Business success was driven
by product availability and serial launches of new protected products.
It’s not surprising, in this context, that operational considerations were an afterthought. Although reliable service levels were
expected, they were not a source of differentiation. And hefty
margins, coupled with strict regulatory and quality control requirements, made it simpler to meet service demands by holding high
inventories rather than by making production itself more flexible.
Postponement
A.T. Kearney defines
postponement as the
deliberate choice to
hold a particular type
of semifinished goods
inventory, selecting
where to decouple and
where to site adjacent
activities—and using
information flows
directly from the
market to select when
to perform these
activities.
But the “field of dreams” in life sciences has become a minefield.
Budget-constrained payers are making it increasingly difficult to
position minor innovations at high price levels. Most markets are
tending to commoditize in generics, biosimilars, and, increasingly,
entire therapeutic areas of patented medicines. Prescriptions by
active pharmaceutical ingredient (INN prescriptions) and tenders
are forcing off-patent product marketers to compete on price and
service levels.1 At the same time, labeling requirements have grown
more complex and continue to change regularly, while marketing
departments have sought to differentiate through secondary
packaging formats. Consequently, the number of stock-keeping units (SKUs) has skyrocketed,
creating increasingly large inventories of finished goods, a potential source of obsolescence,
and further reducing net margins due to packaging and rework costs. With a proliferation of
products and formats, and with changes to markets, unpredictable demand follows, making the
problems worse. In some geographies (notably Europe), the complexity can become acute,
exacerbated by the free market movement of goods in distribution. In this new reality of tighter
margins and greater complexity, companies can no longer afford to offset a rigid operational
setup with higher stocks of finished goods. Today, a more flexible, responsive supply chain is
crucial to expand the customer base while managing both working capital and margins.
Some life sciences companies are now rising to the challenge of becoming more responsive
by holding inventory in a semifinished state, waiting for market signals (such as customer
orders or the publication of impending regulations) before they complete final steps such
as packaging and labeling. The elements of this practice, commonly called postponement,
have long been employed in other industries. Although there are many definitions for
postponement, ours refers to the deliberate choice to hold a particular type of semifinished
goods inventory, selecting where to decouple and where to site adjacent activities—and using
information flows from the market (meaning actual demand, rather than forecasts or buffer
stock levels) to select when to perform these activities. One industry where postponement
is prevalent is fast-moving consumer goods (FMCG), where margins can be low, demand
is often unpredictable, and the product frequently has a common base form. In addition, the
historical shift to low-cost country (LCC) sourcing has made FMCG supply chains long and
cumbersome, further advancing the need for postponement.
INN stands for international non-proprietary name.
1
No More Delays for Supply Chain Postponement in Life Sciences
1
About the 2015 A.T. Kearney Postponement in Life Sciences Study
We surveyed more than 20 senior
supply chain executives from the
life sciences sector. Participants
account for six of the world’s
top 10 pharma companies. More
than one-half work for companies
with revenues of more than
$12 billion, and 90 percent of the
participants’ companies have
a turnover of at least $1 billion.
Small and large molecule
manufacturers comprise 45 and
48 percent of the total revenue
of each sector, with smaller
representations from medical
devices and OTC firms.
In addition to the survey, we also
held in-depth discussions to delve
into select topics, including:
• How companies define
postponement and how they
apply it in their supply chains
(for example, by decoupling
point, galenical form, packaging
technology, production
concept, or region)
• What benefits postponement
contributes
• How roadblocks to implementation can be overcome
The study was conducted in the
first quarter of 2015.
• Why companies postpone
• Which product types are best
suited to postponement
No Longer Postponed
Many of these same drivers of FMCG postponement have now arrived in life sciences, but perhaps
20 years later. When we surveyed a representative sample of more than 20 senior supply chain
executives from pharmaceutical, biotechnology, and medical devices firms (see sidebar: About
the 2015 A.T. Kearney Postponement in Life Sciences Study), we found that 38 percent have
implemented full late-stage customization within the past three years.2 While this group already
reports material benefits, many continue to track the effectiveness of late-stage customization
and explore how to further increase its business impact. Another 48 percent of the executives
surveyed are incrementally applying some aspects of postponement but have not yet embraced
a full supply chain postponement strategy. Ten percent have completed their assessment and
decided not to proceed, and just 5 percent have not considered postponement at all (see
figure 1 on page 3).
Geographically, among the companies using postponement, just 38 percent apply them
in all locations. The rest employ them exclusively in Europe, the Middle East, and Africa
(23 percent); Asia Pacific (20 percent); Latin America (17 percent); or the United States and
Canada (3 percent). This geographic distribution reflects the relative complexity and
homogeneity of market dynamics and requirements in the different regions, as well those
geographies where higher growth is expected.
Interestingly, many of the companies’ reported late-stage customization activities are not true
postponement. For example, some companies in Asia Pacific are pasting new labels on top
of old ones rather than leaving goods unlabeled until assigned for delivery; strictly speaking,
they are performing rework rather than postponement. Certain other companies simply delay
the physical deployment of inventory, while still maintaining a finished good stock and push
strategy for replenishment—without addressing the underlying processes and information
flows needed for true postponed fulfillment.
Late stage is defined as the assembly, labeling, and packaging stages of manufacturing.
2
No More Delays for Supply Chain Postponement in Life Sciences
2
Figure 1
More than 80 percent of life sciences executives surveyed are applying elements of supply
chain postponement
Have not considered
5%
Supply chain postponement ruled out
10%
Some postponement aspects already applied
Full late-stage customization implemented
38%
48%
Note: Late stage is defined as the assembly, labeling, and packaging stages of manufacturing.
Source: 2015 A.T. Kearney Postponement in Life Sciences Study
Figure 2
Postponement enables a more responsive supply chain
Select benefits of supply chain postponement
• Availability of business
continuity inventory
• Rapid resupply capability
• Increased reliability
• Sales uplift of up to 5%
• Lead time reduction of
20–35% for finished goods
• Reduction in obsolescence
expenses of 10–15%
Resiliency
Costs
Service
enhancement
Working
capital
• Decreased exposure
to regulatory changes
• Working capital reduction
of 10–35%
• Reduced fraud exposure
Source: 2015 A.T. Kearney Postponement in Life Sciences Study
A Winning Proposition
Participants in the 2015 A.T. Kearney Postponement in Life Sciences Study that engage in
late-stage customization say that it has made their supply chains more responsive (see figure 2).
First, they report that their supply chain is more resilient and that customer service has improved.
For instance, semifinished inventory can be rapidly mobilized to guarantee business continuity
in the event of unforeseen disruptions elsewhere along the supply chain. Similarly, increased
flexibility makes it easier to quickly resupply markets and otherwise respond to large fluctuations
No More Delays for Supply Chain Postponement in Life Sciences
3
in demand—for example permitting the business to confidently reply to (and indeed win) new
tender opportunities:
• Participants attribute sales uplifts of as much as 5 percent to postponement.
• Service levels are reported to improve, which is especially important for large molecules
and medical devices, where customers expect service levels of close to 100 percent.
• Respondents say that lead times for finished goods in postponed supply chains have
dropped by between 20 and 35 percent.
• There is a 10 to 15 percent reduction in obsolescence costs, thanks to smaller lot sizes that
decrease exposure to regulatory changes.
• A top benefit cited across all life sciences subsectors is a reduction in working capital—
anywhere from 10 to 35 percent—as a result of lower inventory levels.
Four Pillars of Successful Postponement
Supply chain postponement in the life sciences sector is far from easy. First, the sector covers
an extraordinarily diverse range of products—medical devices, such as prosthetics; smallmolecule chemical drugs, such as antibiotics; and large-molecule biotechnology drugs, such
as vaccines and anticancer treatments—and some product classes are easier to postpone
than others. Secondly, efficient and adaptable quality and production processes are essential,
triggered by good planning and effective information flows—yet for the reasons discussed
earlier, life sciences firms have tended to de-emphasize certain capabilities in operations.
Finally, postponement requires flexibility at manufacturing facilities; often, however, the current
asset base is not adequately configured and may require new investment. Furthermore, many
companies outsource their production to third parties, and the need to handle variable demand
can challenge conventional contracts and relationships.
Based on our analysis of survey responses and a number of follow-up interviews with
supply chain executives, we have discerned four key enablers of successful postponement
(see figure 3 on page 5):
1. Clearly segmented supply chain and portfolio strategies
2. Swift replenishment technologies
3.Fast planning cycles
4.Right-skilled staff
1. Segment supply chains and portfolios by looking from the market in
Increasingly, the ability to customize route-to-market strategies at the product market level
is becoming critical to maximize market access and achieve commercial potential. In many
markets, direct-to-customer distribution models (whether to the patient, the hospital, or
the pharmacy) are one avenue life sciences companies are pursuing to better understand—
and deliver on—what their customers need and value. These models offer the advantages of
greater security, customer centricity, and, potentially, efficiency (through disintermediation),
but they also require much more agile and responsive supply chains that postponement
can help enable.
No More Delays for Supply Chain Postponement in Life Sciences
4
Figure 3
Enablers of successful postponement
Enabler
Clearly segmented supply
chain and portfolio strategies
Description
• Postponement models tailored
to portfolio complexity, sales volume,
and demand volatility
• Smart automation
Swift replenishment technologies
• Fewer or faster changeovers
• Shorter quality release times
• Real-time view of supply and demand
Fast planning cycles
• Smaller batches and frequent changeovers
• Agile planning and distribution processes
• Cross-functional cooperation
Right-skilled staff
• End-to-end mindset
Source: 2015 A.T. Kearney Postponement in Life Sciences Study
To determine where it makes the most sense to postpone, successful companies look at three
dimensions (see figure 4 on page 6):
• Portfolio complexity: Postponement makes most sense for products that diverge
exponentially from a common core, late in the production process. For many medical devices,
complexity builds progressively along the supply chain—so although postponement makes
sense in many cases, case-by-case evaluation and careful placement of the decoupling
point are vital. By contrast, for small- and large-molecule pharmaceuticals, the myriad of
labeling and packaging requirements (some of them marketing-driven) means that variants
tend to proliferate at the very end, making them excellent candidates for postponement.
• Volume: Postponement is most heavily indicated for finished goods with low volume but
whose semifinished precursor presents much higher aggregate demand. This characteristic
is very common in large-molecule pharmaceuticals, which tend to be used in low-volume,
high-value, specialist-prescribed products. Additionally, the short shelf lives and high
value of large-molecule pharmaceuticals place finished goods stock at elevated risk of
obsolescence—as opposed to intermediate (postponed) stock, for which the product rotation
is much higher (reducing this exposure). Again, medical devices vary case by case, though
often the final product is provided to individual physicians and matched to specific patients;
in these cases, postponement is a valuable strategy. By contrast, while some small-molecule
products do exhibit these characteristics, frequently the volume of sales and widespread
distribution leads to high volumes, even at finished-goods SKU level.
No More Delays for Supply Chain Postponement in Life Sciences
5
Figure 4
Large molecule manufacturers stand to benefit the most from supply chain postponement
Postponement favorability
Less
Dimension
Portfolio complexity
Volume
Demand volatility
More
1
Key questions
2
3
4
• Where are the natural break
points in the supply chain?
• What is the typical order size?
• What is the tender environment?
• How volatile is demand?
• What is driving volatility?
Large molecule
Small molecule
Medical device
Source: A.T. Kearney analysis
• Demand volatility: The third dimension for postponement is volatility, and in particular
the likelihood that a product will see unpredictable changes in demand, coupled with the
importance of quickly meeting that demand to adequately serve customers and achieve
revenue and distribution growth. Again, this matches well to large-molecule products.
For example, an unexpected outbreak of infectious disease can create a sudden flood
of urgent tenders for tens of millions of vaccines. Furthermore, tender-based procurement
is increasingly frequent in this sector, following a trend also seen for both medical devices
and small molecules. Indeed, some countries are even extending them to entire therapy
areas, offering a “feast” for the companies that win and “famine” for those that do not.
Products in the earlier stages of their life cycle also generally present higher demand volatility
than mature products. Postponement can be a useful technique to maintain the flexibility
to swiftly meet the demand that arises from a winning tender, a brilliantly successful product
launch, or unanticipated market opportunities.
Interestingly, although postponement is best suited to large molecules or complex small
molecules, postponed supply chains are more common in simple small molecules, where the
primary and secondary packaging steps are often decoupled. That said, large-molecule
manufacturers are more advanced than their small-molecule counterparts in one aspect of
postponement: that is, the former are more likely to deliberately hold inventory in a semifinished
state, whereas the latter tend to push products through the supply chain in a more
continuous process.
We saw this in Europe at a rapidly growing biotech company that was grappling with high
demand volatility and write-offs. In a bid to improve its working capital and security of supply,
the company decided to hold drug products before the labeling and packing processes.
No More Delays for Supply Chain Postponement in Life Sciences
6
Supported by rapid production, the company was able to configure products only when
actual orders were received. This allowed write-offs to be reduced to just a small fraction
of pre-postponement figures, while reducing overall working capital.
2. Adopt technologies for a more responsive production line
Given the traditionally limited need for lean processes in life sciences manufacturing, the use
of internal capital assets is normally scheduled far in advance. But in a postponed world, greater
responsiveness is essential; highly adaptive scheduling, flexible materials management, and
near real-time quality clearance are imperative.
Some companies that successfully use postponement establish dedicated packaging and
labeling lines for their low-volume products. This way, they keep changeovers to a minimum,
and lines can quickly respond to changing demand. Also, the layout is often altered (for
example, changing straight production lines into a U-shaped formation) to consider operator
movements for a greater variety of products in order to speed up small-batch manufacturing
and reconfiguration. And small-scale, modular shop-floor setups make it easier to introduce
dedicated robotic technologies to ramp up production and assemble multiple products (such
as syringes) that demand high quality and precision.
Other thriving companies retain the traditional straight-line setup, but they apply new
technologies such as digital position sensors combined with servo, stepper, and direct current
(DC) motors to fully automate changeovers. Another very recent enabler is white-line production,
where country-specific information is only added to lidding films, boxes, and inserts later—
when they are in the packaging line—reducing changeover times to less than 10 minutes.
These strategies are especially effective for lower-value, high-volume products such as simple
small molecules.
Electronic batch records, shared in real time, and release-by-exception policies are used to
slash quality release times, especially where contract manufacturing organizations are involved.
Life sciences companies also apply continuous improvement methodologies to significantly
reduce quality assurance lead times, while adapting their quality control protocols to enable
bright stock manufacturing and distribution without losing lot control and sub-lot traceability.
One pharmaceutical manufacturer slashed production and quality approval lead times by more
than 50 percent to enable a postponement strategy. The company achieved this feat by tackling
the problem from the bottom up and the top down. Working methods were thoroughly
reexamined and challenged, at the same time that the latest technologies were brought into
play. Leadership and front-line staff worked collaboratively throughout the effort in a series
of high-intensity workshops where new approaches were rapidly tested and buy-in for the
changes promoted.
3. Accelerate planning cycles to react to market signals
Postponement, by its very nature, means smaller batch sizes, as manufacturing transitions from
a make-to-forecast to a make-to-order (or market replenishment) model. But few life sciences
firms have planning and information flow processes that are configured to recognize and react
quickly to pull signals from the market. A make-to-order configuration model requires nimble
and robust IT systems, as well as planning and distribution processes that can turn on a dime.
No More Delays for Supply Chain Postponement in Life Sciences
7
Yet despite the difficulties, some companies manage to pull this off. Take the case, for example,
of a leading pharmaceutical firm that established stronger, more formalized planning linkages
with its country affiliates to increase its ability to detect market demand signals. The company
achieved not only nearly instant notification of new orders, but also had near real-time
transparency of local pipelines, sales activity, and on-hand reservable inventory—allowing
it to greatly improve market anticipation and planning for demand. Although IT played a role
in bringing about this change, most of the benefits resulted from strengthened processes
and protocols.
Such adaptable planning cycles and variations in production output are especially challenging
to third-party provider relationships, where prices often depend on periodic volume commitments and production schedules communicated weeks, if not months, in advance. In a postponed world, sometimes companies must consider how they combine their products to fully
utilize their partners’ manufacturing assets, or alternatively buy blocks of time in a contract
manufacturer’s production line, coupled with the labor availability to allow for changes to output.
Despite the challenges and potential inefficiencies, our survey respondents find that postponement still pays off.
4.Train staff in cross-functional cooperation and end-to-end thinking
Postponement is built on cross-functional cooperation and end-to-end thinking. Collaboration
is much closer between the supply chain and commercial functions. Design considers not only
how to make a product stand out from its competitors, but also how to balance the marketing
advantages of differentiation with the supply chain benefits of commonality. Operationally,
some industry leaders are taking a page from the playbook of the automotive industry,
where team leaders responsible for connected parts of the production value chain meet
at the beginning of each shift to jointly resolve quality or manufacturing problems, and share
accountability for end-to-end order delivery.
IT plays a crucial role in enabling end-to-end thinking. Leading companies make extensive use
of visual management tools, for example so that manufacturing teams can react immediately
to issues that might affect production, and so that planners become immediately aware of
inventory and demand signals.
The importance of high-performing teams to successful postponement cannot be understated.
Managers at leading firms can attest that teams need to complement the hard, technical
skills with what Katzenbach and Smith, in their seminal 1993 Harvard Business Review article
“The Discipline of Teams,” described as mutually reinforcing capabilities and a commitment
to “a common purpose, set of performance goals, and approach for which they hold themselves
mutually accountable.” In this regard, the human resources construct, metrics, and incentive
schemes will typically need to be changed to encourage agile delivery, doing away with
conventional metrics that often value level loading, absorption, and finished goods availability.
No More Delays for Supply Chain Postponement in Life Sciences
8
Getting Started
For the nearly 50 percent of life sciences executives who are still just dipping their toes in the
supply chain postponement waters, we can offer three pieces of advice:
• The business case is unlikely to be built around a single benefit. Executives should develop
a comprehensive value case, including estimates of savings (such as reduced obsolescence,
greater resilience, and lower working capital) alongside the benefits to revenue (for example,
from service level improvements, access to new markets, and tender responsiveness).
Full cases invariably demonstrate step changes in performance and are vital tools for
investment discussions.
• Once suitable pilots are conducted, commit to implementing postponement quickly, at scale,
and across geographies. The risks of implementing such changes to the operating model
can be mitigated; on the other hand, risk tends to increase under a “go-slow” approach, which
creates confusion in operations and serves only to delay the benefits.
• Engage front-line workers to develop solutions that are truly applicable to operations.
While new technologies will deliver a major part of the benefits, ways of working will need
to be challenged and rewritten. While top-down approaches can work, a bottom-up
approach is usually better.
The potential benefits of postponement can be huge, so it is never too soon to get started.
Authors
Bill Tribe, partner, Chicago
[email protected]
Oliver Eitelwein, principal, Düsseldorf
[email protected]
Michael Wise, partner, New York
[email protected]
The extended postponement team includes Claire Jarvis and Jim O'Keefe, who also contributed to this study.
No More Delays for Supply Chain Postponement in Life Sciences
9
A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
Americas
Atlanta
Bogotá
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
São Paulo
Toronto
Washington, D.C.
Asia Pacific
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Taipei
Tokyo
Europe
Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Düsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Middle East
and Africa
Abu Dhabi
Doha
Dubai
Johannesburg
Manama
Riyadh
For more information, permission to reprint or translate this work, and all other
correspondence, please email: [email protected].
The signature of our namesake and founder, Andrew Thomas Kearney, on the cover
of this document represents our pledge to live the values he instilled in our firm and
uphold his commitment to ensuring “essential rightness” in all that we do.
A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.
A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited,
a company organized under the laws of England and Wales.
© 2015, A.T. Kearney, Inc. All rights reserved.