CORRECTION: A previous version of this article conflated a move by Merck KGaA toward a demand-driven supply chain with the case study on Merck & Co. The reference has been removed.
- A study by McKinsey & Company revealed that 35% of the pharmaceutical industry's profit and loss can be attributed to the supply chain, compared to the 8-12% rate seen by the consumer packaged goods industry.
- In fact, the healthcare industry can hold inventory for twice as long as best-practice rates, suffer six times as much obsolescence and expect lead times fifteen to fifty times greater than other industries. Yet, many of these costs could be diminished if supply and demand planning processes are integrated.
- That's why Merck & Co. set out to transform its supply chain, according to a case study by Kinaxis. By integrating its systems across its four planning hubs, 80 distribution centers and 20 internal and external sites, the company hopes to manufacture according to demand and diminish inefficiencies.
Merck & Co.'s 2015/2016 Corporate Responsibility Report reveals the company's manufacturing initiatives for two simple mandates: reduce costs and increase capacity. Optimizing supply chain management to better match production with buyer demand promises to do both simultaneously.
"Our manufacturing division has undertaken an ambitious program to reduce the cost of production by reducing underutilized capacity, increasing efficiency through Lean and Six Sigma projects at manufacturing sites, reducing procurement spending, and improving supply performance, including on-time deliveries and reduction of supply shortages," the company wrote in the report.
But the mandate is easier said than done. In addition to Merck's various planning hubs and private manufacturing facility, the company also operates 148 external manufacturing plants and produces 10,300 different product size finishes. In addition, each facility likely communicates with a number of pharmaceutical ingredient suppliers, packaging companies and distributors. The scale of the company's operations alone complicates any forecast.
Yet the real problem lies not in the scale, but the company's former inability to minimize storage, lead times and other logistics costs due to a lack of internal data.
Many companies operate on an established safety stock or production level because that's the way it has always been done. When it comes to contracting with suppliers and external manufacturers, changes in scale must be justified ... and a lack of data makes that process difficult.
The case study suggests Merck & Co. realized this was a problem and sought to integrate its systems into a single platform capable of both supply and demand planning. For example, the change allowed the company global visibility for all of its finished goods, and segmentation of goods to better determine when exceptions are necessary.
However, such integrations and shifts in processes are not simple. For any manufacturer working with several Enterprise Resource Planning (ERP) systems, change management can be among the most difficult processes, as daily tasks are completely transformed. The most difficult part, according to the case study, was ensuring buy-in from all the related but often siloed departments. After all, the shop floor will be just as affected as the procurement team.
While the company may have only begun its transformation process, the projected changes may allow it to set loftier goals in the future.