Value Creation in Procurement: Where Do Pharma Companies Stand?

By Patricia Van Arnum - DCAT Editorial Director

May 18, 2016

How do Procurement organizations of the large and mid-size pharmaceutical and biopharmaceutical companies measure up in value-creation activities? The benchmarking study by the Drug, Chemical & Associated Technology Association (DCAT), Value Creation in Pharmaceutical Procurement, examines the role of Procurement organizations in delivering value with respect to direct materials used in pharmaceutical development and manufacturing).

The study, developed by the DCAT Research & Benchmarking Task Force, composed of pharmaceutical Procurement executives from DCAT member companies, measured a total of 47 benchmarks. The study evaluated whether Procurement groups in the surveyed pharmaceutical companies are positioned for value creation and achieve value creation for their companies through: (1) Procurement's organizational design, functions, and activities, including talent management; (2) Procurement's level of engagement with senior executive leadership, internal customers (i.e., pharmaceutical business units), and suppliers; and (3) other means of influence by Procurement organizations as it relates to direct materials.

The study was developed via an online survey that was administered between October 2015 and January 2016 to the chief procurement officers or functional equivalents of DCAT member companies with minimum annual sales of $250 million. Some key findings are highlighted below

Figure 1: Procurement's Operating Model for Direct Materials
Source: Value Creation in Pharmaceutical Procurement, Benchmarking Study, DCAT, April 2016.

Procurement organizations: value generator or not?
More than three-fourths (76%) of respondent companies described the operating model used by their Procurement organizations as highly evolved, classifying their Procurement organizations as a value generator (41%) or as advanced (35%) (see Figure 1)

For purposes of the study, "value generators" have certain key elements. With value generators, Procurement takes an active role with executive management and internal stakeholders to define, set, and execute business strategy and evaluate performance. Supplier relationship management is highly evolved with Procurement organizations actively involved in supplier development and supplier-led innovation. For purposes of this study, "advanced" Procurement organizations manage all spend through category management and strategic sourcing through a competitive sourcing process with clear and fully adhered decision rights for Procurement with formal supplier relationship management in place.

Supplier relationship management: strength or weakness?
The study also examined companies' supplier relationship management (SRM) programs. Although more than three-fourths (76%) of respondent companies described the operating model used by their Procurement organizations as highly evolved, far fewer companies described their SRM programs as advanced. Less than half (41%) of respondent companies said that they have more advanced SRM programs,with 18% having fully integrated SRM programs and 23% having established SRM programs (see Figure 2). 

Figure 2: Level of Maturity of Supplier Relationship Management Program
Source: Value Creation in Pharmaceutical Procurement, Benchmarking Study, DCAT, April 2016.

For purposes of the study, a "fully integrated" SRM program is one in which SRM is an integral part of overall corporate strategy with a full focus on value creation. The Procurement organization's company is seen as a "customer of choice" for a select number of suppliers and is fully integrated with select suppliers. "Established" refers to formal SRM programs with joint improvement initiatives between suppliers and Procurement that have clear governance

At the other end of the spectrum, more than half (53%) of the respondent companies had a limited SRM program, defined as having select projects with some suppliers with select SRM initiatives going beyond cost reduction but that are still more tactical and operational in nature. Six percent (6%) of companies had no SRM program in place.

Procurement: Where is its place at the table with senior executive leadership?
The study found that about half (53%) of respondents said their Procurement groups were engaged on an ongoing basis with senior executive management in corporate annual budget planning, shared operational objectives, acquisitions/mergers, strategic alliances/partnerships, and corporate risk management (see Figure 3). However, a lower level of engagement in long-term planning was reported. Only 41% of respondent companies said that their Procurement groups are involved on an ongoing basis in corporate long-term planning compared to 56% of respondent companies who said that their Procurement groups are involved in annual corporate planning. Thirty-five (35%) of respondents said that Procurement was not involved at all in corporate long-term planning.

Figure 3: Procurement's Engagement with Senior Executive Management
Source: Value Creation in Pharmaceutical Procurement, Benchmarking Study, DCAT, April 2016.

Procurement: measuring influence with internal customers (i.e., pharmaceutical business units)
Although respondent companies see their Procurement groups as key instruments of value creation, the business units of pharmaceutical companies lead certain important functions. Between 57% and 67% of respondents said that Procurement participates in planning and managing demand of direct materials (raw materials, clinical trial materials, commercial supply of drug substances, commercial supply of drug product, and packaging component), but that demand management is led by the business units Similarly, between 50% and 67% of respondents said that the business units lead specification management of direct materials in these segments.

Metrics: going beyond cost reduction or not?
The study found that Procurement uses value-based metrics to evaluate suppliers on a limited basis with cost improvement ranked as the dominant measure of supplier performance and metrics measuring reduction in cycle time and improvements in inventory management also ranking high (see Figure 4 at end of article). In contrast, when looking at value-based metrics, only 12% of respondent companies measure revenue and/or profit gains from supplier innovation. Less than one-third (33%) of companies measure revenue and/or profit gains from productivity improvements from suppliers.

The study also found that certain tools in measuring performance are not equally applied in the evaluation of suppliers by Procurement and by the evaluation of Procurement by suppliers. Over half (59%) of respondent companies said that Procurement uses scorecards to evaluate strategic suppliers or preferred providers, but only 18% of such suppliers evaluate Procurement's performance using scorecards.

Procurement's role in talent development and management: where do skills stand?
To be able to deliver value for their companies, Procurement organizations must have employees with the requisite skills. The study examined Procurement's role in a variety of areas, including skills in negotiation, leadership, and strategic/critical thinking, cross-functional knowledge and expertise, as well as the ability of Procurement to attract, develop and retain qualified employees (see Figure 5 at the end of the article).

Survey respondents rated Procurement strongest in having employees with negotiations skills, followed by cross-functional knowledge and expertise and then strategic/critical thinking skills. Procurement groups were rated not as strong in having employees with strong interpersonal skills, leadership skills, and in developing employees.

Figure 4: Metrics Used to Evaluate Supplier Performance   Figure 5: Procurement's Role in Talent Development and Management

Source: Value Creation in Pharmaceutical Procurement, Benchmarking Study, DCAT, April 2016.

 
    Source: Value Creation in Pharmaceutical Procurement, Benchmarking Study, DCAT, April 2016.

 

About DCAT and the study
The Drug, Chemical & Associated Technologies Association (DCAT) is a not-for-profit, global business development association whose membership model integrates both innovator and generic drug manufacturers and suppliers of ingredients, development and manufacturing services, and related technologies. The study was provided by DCAT Benchmarking, a complimentary service provided exclusively to DCAT member companies. DCAT member company representatives may download a copy of the study on DCAT Connect, the association's online member community; further information is provided here.