Best Practices for Supplier Evaluation and Rationalization

As pharmaceutical companies continue to merge operations, acquire other companies, and establish partnerships with complimentary entities, there are many challenges that need to be addressed. In many cases, there are duplicate operations for manufacturing, storage and distribution, all of which need to be evaluated to ensure that the most efficient and cost-effective option is chosen. It must also be determined if the new network model is able to meet the needs and requirements of the company.

Supplier Rationalization

Standard practice is to establish a team of cross-functional experts that are tasked with defining the desired future state for the consolidated operation. There are many factors that are included in this evaluation – not the least of which is the proliferation of suppliers for both goods and services. Even within single organizations, there are multiple suppliers that can be rationalized; when consolidating operations, this is compounded and is one area that requires careful consideration. As the old adage goes, “Don’t throw the baby out with the bathwater!”

Supplier rationalization is never a popular topic, and in many instances, there are long-term (and close) relationships that no longer make economic sense. To prevent emotions from interfering in the primary business objectives, it is suggested that a very structured approach be adopted when evaluating the form and function of supply relationships. In many cases, there will be multiple suppliers that are able to provide undifferentiated products and services, and supplier reduction can be done based on a combination of quality, price and service considerations. There will also be suppliers that are of a more strategic nature, with single and sole providers having been qualified during product approval. These suppliers are more difficult to change – although it is always possible to re-qualify an alternative supplier if necessary.

The focus of this discussion will be on suppliers with whom there are similarity in products and services, but from whom it makes economic sense to rationalize from many to one or two suppliers. This can at times impact personal relationships between functional groups and their preferred suppliers. As such, it is important to exercise emotional intelligence and follow a process that is purely objective. Which raises the question, what is the current best practice for supplier rationalization? I have a personal motto for this — “When in doubt, do your research!”

Good Supply Practices

Following this line of thought led me to a project that has been initiated by Xavier Health and includes participation from many thought leaders and regulators in the life sciences industry. Aligned with the concept of GxP, the team that has been working on this project has developed a simple approach that they call “good supply practices” or GSP.

The primary difference of this approach from standard supplier evaluations focused on what the supplier can and cannot do is the premise that taking an inwardly directed approach has a better outcome. Effectively, this approach looks at problems and issues from the perspective of what the company is doing to cause these problems versus what the suppliers are doing wrong. It’s an interesting approach, to be sure. Behind the approach are three concepts:

1. Supply by Design

2. Self-Qualification

3. Relationship Risk

I will not go into the different aspects of this Supply by Design approach other than to highlight the fact that the supplier evaluation process includes a broader range of cross-functional participation. Teams comprise representation from quality; regulatory compliance; sales and marketing; commercial manufacturing; information technology; finance; logistics and warehousing; legal; technical field service; third-party management (CRO, CMO, 3PL); environmental health and safety; and technology and product development areas.

Including this broader team in the definition of supply requirements, self-qualification and relationship risk assists in highlighting critical qualification criteria that can then be used to evaluate suppliers. It is also valuable to include external service providers (or their internal advocates) as there could be considerations that need to be taken into account when eliminating one supplier or introducing a new one.

The most common criteria used when selecting suppliers include:

• Cost
• Quality
• Safety
• Delivery (availability)
• Service
• Social Responsibility
• Convenience (ease of doing business and simplicity)
• Risk (business continuity)
• Agility
• Innovation

Engaging With Suppliers

Irrespective of what approach is taken for supplier rationalization, it is important to engage directly with key suppliers to develop an understanding of their overall business operations, vision and values. The cultural fit between suppliers of goods and services – and the companies that they serve -  is an important one. Suppliers are an integral part of the product lifecycle, and relationship models should be developed to ensure that expectations are correctly set, and that appropriate metrics and service-level agreements are established.

Engaging in this activity can be very valuable, with benefits far in excess of the goal of a reduction in the overall number of suppliers. Over a series of supply chain-related projects, I have worked with cross-functional teams to understand their overall supply chain, beyond the direct relationships with suppliers and all the way down to the extended network of the supplier’s supplier’s supplier. Delving into these relationships is valuable in identifying the weakest links in the overall chain, enabling risk mitigation and supply continuity.

A key factor, and one that is of increasing concern to regulators and health care professionals, is surety of supply for pharmaceuticals and related products. Recent weather-related factors created major shortages of critical items that are used in all medical situations, for example, saline. Puerto Rico is a location that is still recovering from storms that tore the island apart in 2017.  Sourcing locations for products and materials is a major risk that needs to be understood and planned for. During the supplier evaluation and rationalization process, it is important to understand not only related suppliers but also the source location of materials that are critical to the surety of supply. Business continuity planning is a topic that should not be taken lightly; if suppliers are unwilling or unable to share these plans and strategies, it may be an indicator to make a change!

Conclusion

The spotlight is increasingly on responsible supplier selection and qualification. There are many horror stories related to adulteration of raw materials, active pharmaceutical ingredients (API) and even key ingredients. In many cases, these have been the result of a lack of transparency in the end-to-end supply chain with procurement decisions driven by economic factors resulting in unqualified suppliers across the n-tier chain. Mandates and guidelines from regulators in both EU and U.S. have extended the GxP requirements from manufacturing and into the global supply chain. Good Distribution Practices (GDP) define the roles, responsibilities and standards that should be adhered to from procurement and receipt of API, excipients into manufacturing, distribution, and ultimately, return and destruction. An element of this is evaluation and qualification (to include customer qualification), in effect, ensuring that all participants are operating within the legal supply chain framework.

Using the lens of overall supply chain safety and security, and the integrated flow of goods, information and cash, it is possible to more fully understand the inter-dependencies and the need for open and honest commercial relationships across the extended supply chain.