BAY-MED Pharmaceuticals Technical Note: Pharmaceuticals are mar...

BAY-MED Pharmaceuticals

Technical Note: Pharmaceuticals are marketed in two forms: ‘Generic’, which is the ‘active ingredients’ or molecular formulation of the product eg Salicilic Acid and ‘Brand’, the brand-name for the drug normally given by the proprietal owner of the formulation eg: Disprin, Aspirin.
Margins are generally higher on Brands and historically, branded drugs are perceived as more reliable and consistent in terms of quality. Within the pharmaceutical industry, proprietal companies are now releasing licences to produce drugs as generics, but keeping brands at higher prices in advanced healthcare markets.

Background:
BAY-MED Pharmaceuticals Ltd (UK) – BPL are a small scale producer of generic drugs under licence from large brand names. Until recently, their operation has been small and focused mainly on production and supply within the UK National Health Service and steady B2G (Business to Government) sales to several countries in Sub-Saharan Africa, the Oceanasia and the Indian sub-continent. These are largely sold CIF due to attractive volume-rate concessions.

As a company, they have built their reputation on high quality products, strong in-bound supply contracts, stable pricing and secure supply availability of raw and refined ingredient materials with a good reputation as timely payers and a company that don’t try to buy ‘cheap’ or pay late. Supply security is a key SCM objective of the company. On the Pull side, their reputation for reliable supply, high quality and affordable products and excellent client relationships have made them a ‘go-to’ supplier for several Governmental procurement agencies and purchasing offices. The overarching strategy of the current BAY-MED Board of Directors has always been sustainable profits but with a clean legal, ethical and reputation score-card in a highly litigious industry.
In addition, BAY-MED have highly developed internal and external communications networks, which integrate suppliers and provide essential upstream and downstream information within the supply chain. This coupled with tightly controlled inventory management regulating production requirements based on constant (eg Arthritis treatments) and variable (eg, Flu vaccines) demands for finished pharmaceutical products.

Reputation for quality and stringent, rigorous raw material and processed goods testing is crucial to reputation in the Pharmaceutical industry. BAY-MED policy is that it’s own SSH (Safety, Security and Hygeine) Department conduct quality tests on all purchased chemical and technical product ingredients. This is expensive and has lead to purchasing from top tier suppliers with high reputations for quality products, usually with a premium on price. The Board are aware that outsourcing testing and quality control might be cheaper, but have resisted pressure to contract external testing services, preferring to rely on their own in-sourced capacity.

They have recently been shortlisted as potential international expansion partners for a large US Pharmaceutical brand, CELLATECH, who are looking for reliable strategic partners to expand their generics conversion from brand-only markets in Nigeria, Indonesia, Shri Lanka and Bangladesh by owning and operating localized production facilities in those countries. BAY-MED is attractive to CELLATECH through their knowledge of the generics market and their excellent production and technical knowledge. It is anticipated that BAY-MED’s role within the partnership will be to expand into the management of manufacturing and distribution of generics in several Developing Economies.

CELLATECHs offer for the generics concession and licence will be 8% of Revenue on overseas sales and 12% of profit. BAY-MED’s SCM and Purchasing efficiency is therefore of key interest to them, even though they will have no role in the management of BAY-MED, generic drug production, distribution or sales. They have concerns at the costs of extensive reliance of in-house services used by BAY-MED and their abilities to absorb the expansion demands required by the project.

BAY-MED Structure:
The company main site (management and production) is sited in Slough UK and consists of the following departments and functions:
• SCM - Inbound logistics (mixed own fleet and subcontracted vehicles)
• SCM – Internal procurement
• SCM – Purchasing (External contracting)
• SCM - Storage and warehousing
• SCM - Outbound Logistics
• Production and Packaging
• Sales and Promotion
• Safety, Security and Hygiene (in-bound and final product quality testing)
• Human Resources
• R and D (basic and largely involves optimizing drug effectiveness – flavourings for childrens medicines, injectable versus oral delivery regimen systems etc)
• Legal and national pharmacological registry compliance team
• Customer services, after sales and product ‘hotline’ service.

Financial Details (Current -GBP):
Revenue: 15,000,000
PCOGS: 10,000,000 (Cost of goods and services external to the operation/organization)
Other Costs: 2,900,000
Profit (pre-tax):    2,100,000

Expansion and New Project Prospectives:
CELLATECH have requested that the board of BAY-MED prepare an initial on-site pitch involving presentations from the following Departments/Functions:
Production
Quality Control
SCM and Purchasing (YOU!)

In your role as SCM Manager, the CEO of BAY-MED has asked you to prepare a presentation which will address 10 key issues that CELLATECH need to be reassured about. The CEO wishes to see a 12 slide summary of the presentation which needs to address issues under consists of the following headings (Within *s)
1. *A DIAGRAMTIC OF THE CURRENT SC NETWORK OF BAY-MED*

2. *KEY STRENGTHS OF BAY-MED SC* - Base this on the basic linear SC model and indicate BAY-MED’s SC factor priorities (Price, Service Level, Supply Security)

3. *PURCHASING AND RECEIPT PROCEDURES* A flow diagram showing the operational sequencing of the full purchase process. This must show initiating internal order through to validation of delivery prior to invoice payments and indicate key product inspection points.

4. *PRODUCTION EQUIPMENT PURCHASE STRATEGY* If the company expands and is given the licence to extend production operations to 4 other countries, would production machinery and specialist (sensitive) equipment purchase be centralized or de-centralized? Provide 3 rationales to support your view including M/R/O supply considerations.

5. *INVENTORY MANAGEMENT* Molybdinum is a low contaminant, inert lubricant used in pharmaceutical production machinery. It is used mainly during the adhoc supply of pre-loaded syringes, used mainly in emergency vaccination campaigns (meningitis, cholera etc) and epidemic outbreak situations. Unit cost/Tonne is £4,500, the average annual use over the past three years has been 30 Tonnes with re-order costs of £300. Carrying costs are calculated as being 25%. Define the type of Inventory Re-Order used and show how you would set the Economic Order Quantity for Molybdinum? What would be the change in Total Inventory Costs if the K factor was reduced to 10%,   Re-Order Costs reduced to £150 by using SMI alert systems and the Cost Delivered increased to £4,800/Tonne?

6. * COST OF GOODS SOLD SENSITIVITY* CELLATECH are concerned about current PCOGS relative to revenues. They feel they are high for the Pharmaceutical sector. Your projected revenues at project breakeven (5 years) are Euros 40 Million with Purchase Costs of Euros 24 Million and profit of Euros 6 Million. Show the Profit Leverage Ratio with a reduction of purchase spend to 50% of revenue (sector standard) and give one example each of what you might consider to achieve this through Strategic, or Operational purchasing management.

7. *BAY-MED versus BAY-MED - CELLATECH STRATEGIC COMPARISONS* Using the Push – Pull Model, outline any differences in the overall strategic approach between BAY-MED in its current form and the new BAY-MED-CELLATECH partnership. How will the push-pull boundary change and over what aspects?

8. *SHIPPING AND DELIVERY OF SENSITIVE GOODS* A longer term strategic plan is that you establish a BAY-MED Quality Testing Facility near Ibadan. The site is 60 km from Lagos, Nigeria, a huge projected growth market, and will require delivery of highly sensitive calibrated equipment provided by (mainly German and French) manufacturers. How would you contract delivery and what INCOTERMS would you request in contract negotiations? Give 3 rationales.

9. *EXPOSURE TO FOREX VARIATION* Operations and production in the new sites will involve significant levels of operational and tactical overseas purchasing over a range of currencies. Outline 3 strategies that you would consider to protect BAY-MED against forex fluctuations. Particular concern is expressed over sales cost recovery from ‘soft’ currencies and how they relate to production costs. (Cash to Cash cycle)

10. *SUPPLIER SELECTION AND COMPLIANCE* Growth in the pharmaceutical industry and releases of patents for generic use has created a move toward shorter term supply contracts and more strategic ‘shopping around’ at both supply and procurement side, particularly for raw materials and ingredients. Supplier evaluation is vital to construct a suppliers database. List and weight (rank) Four key criteria that BAY-MED would assess new suppliers by.