Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies A Ten Year View of Progress on Supply Chain Excellence 05/12/2016 By Lora Cecere Founder and CEO Supply Chain Insights LLC By Regina Denman Client Services Director Supply Chain Insights LLC
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Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies A Ten Year View of Progress on Supply Chain Excellence 05/12/2016
By Lora Cecere
Founder and CEO Supply Chain Insights LLC
By Regina Denman Client Services Director Supply Chain Insights LLC
Page 2
Contents
Research Disclosure
Research Methodology Understanding the Data
A Complex System with Nonlinear Relationships Driving Profitability
Improving Cycles Managing Complexity
A Closer Look at Value Driving Improvement
Supply Chain Index: A Measurement of Supply Chain Improvement Balance Strength
Resiliency Evaluating Supply Chain Excellence: Putting It All Together
Executive Overview The Race for Growth
What Is Value? Judging Supply Chain Performance
Managing Cycles A Closer Look at Generic Pharma
Industry Focus Recommendations
Conclusion Prior Reports in This Series
Methodology: Understanding the Math and Ratios Supply Chain Index Methodology: Formulas and Calculations
Balance Strength
Resiliency A Closer Look at Inventory Turns: An Important Measurement
Research Supply Chain Metrics That Matter is a series of industry-specific reports published throughout the
year by Supply Chain Insights LLC. The series starts in May when full-year corporate reporting is
complete for the prior year. In this report series we provide a deep focus on progress over the past
decade on supply chain excellence for a specific industry. This report is a deep analysis of the
pharmaceutical industry.
This analysis is based on data collected from financial balance sheets and income statements over
the period of 2006-2015. In these reports we examine how companies made trade-offs over the
course of the last decade. Here we analyze which pharmaceutical company’s supply chain did the
best on the delivery of a portfolio of metrics during that period.
Within the world of Supply Chain Management (SCM), each industry is unique. The pattern for
pharmaceutical companies is distinctly different than consumer products or medical device
companies. It is for this reason we believe it is dangerous to list all companies across industries in a
spreadsheet and declare a supply chain leader. Instead, we think it is more prudent to evaluate
change over time, with a focus on business results within an industry peer group.
Disclosure Your trust is important to us. As such, we are open and transparent about our financial relationships and our research processes. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.
Research Methodology Supply chain leaders are in a race to deliver supply chain excellence. The question is “What defines
excellence?” and “What defines value?” Here we answer these questions. To complete this analysis,
and understand the patterns, we analyze both performance and improvement of pharmaceutical
supply chains. We believe that the best supply chains out-perform their peer groups while driving
ROIC is a measurement of the company’s use of capital. The goal of the measurement is for the firm
to drive higher returns than the market rate of the cost of capital. As will be seen in this report, for
many companies this is a struggle.
A Closer Look at Value Traditionally the supply chain team’s focus was a cost agenda. Increasingly the organization is asking
the supply chain team to focus on value. However, to guide this journey there has to be a clear
definition of value. There is no industry-standard definition of value.
To help, we started this undertaking with an analysis between supply chain performance and market
capitalization. In 2012 we calculated the correlation of seven years of financial ratios (based on
quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share
price) on a quarterly basis. The results of this initial study on the correlation to market capitalization
are presented in Table 2.
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Table 2. Correlation of Supply Chain Financial Ratios to Market Capitalization
Within the firm, 60-80% of total costs are controlled by the supply chain team. In parallel, most of the
physical assets are driven and/or defined by supply chain strategy. While market capitalization is
often driven by economic cycles we find Price to Tangible Book Value (PTBV) is a more disciplined
look at value.
Price to Tangible Book Value is calculated by dividing the share price of a public company by its
tangible book value per share. It is a ratio depicting what investors are paying for each dollar of
physical assets. For example, let's assume that Company XYZ has 10,000,000 shares outstanding
which are trading at $3 per share. Let’s assume that the same company’s tangible book value was
$15,000,000 last year. The calculation would be:
Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0
The PTBV ratio excludes intangibles: intellectual property, patents, goodwill and other intangible
assets. It is a representation of what debt holders or investors would receive if the company liquidated
all physical assets. We feel this is a measure which supply chain leaders can impact. In this report we
use the metrics that have the highest correlation to market capitalization and also evaluate which
companies have driven the greatest improvement on Price to Tangible Book Value.
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Driving Improvement In the analysis of supply chain excellence it is a mistake to look at the metrics at an annual or limited
period of time and declare a supply chain winner. Instead, it needs to be measured as a pattern over
many years. The best supply chain improvements take at least five to six years.
Sustaining competitive advantage is difficult. A bad project, a quality issue, or a merger, drives
gyrations. As a result, most companies go through ups and downs with distinct patterns. We believe
that the patterns matter. It is for this reason in this report we analyze companies’ progress during the
time periods of 2006-2015, 2006-2009, and 2010-2015. Why these time periods? Here we are
analyzing pre-recession and post-recession progress within specific industries as defined by NAICS
code designations.
To understand the differences by industry, let’s take a closer look at the healthcare value chain.
When we compare the 2006 to 2015 industry averages, we can see that the pharmaceutical industry
improved in all of the metrics covered in this report. The pharmaceutical industry is one of the few
industries with higher performance in 2015 when compared to 2006. The reason? Historically, the
pharmaceutical industry is a supply chain laggard. As product development slowed in clinical trials,
and global complexity increased, supply chain became a more valued core competency.
Table 3. Changes in Industry Average Values of the Supply Chain Metrics That Matter When the 2006 Averages Are Compared to 2015
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Supply Chain Index: A Measurement of Supply Chain Improvement The Supply Chain Index is the measurement of improvement used in this report. The foundation of
the Supply Chain Index starts with understanding the resulting pattern when two supply chain metrics
(generally ratios) are plotted over time on an orbit chart. As shown in Figure 2, the orbit chart enables
the visualization of performance patterns. In this case the company is Amgen. The average values for
the two financial ratios of operating margin and inventory turns are shown in the box, and the annual
progress is shown as points on the chart. The best scenario is notated in the upper right-hand corner.
The pattern of Amgen’s performance, as shown in Figure 2, is very characteristic of most companies.
While there is improvement for 2013-2015, the company struggled to drive improvement in these two
critical metrics over the period of 2006-2013.
Figure 2. Example Orbit Chart of Amgen
This is not unusual. We seldom see a company making linear improvement at the intersection of
these two important metrics. As you will see in the case of pharmaceutical companies, many
companies are not even making improvement in one of the two metrics.
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Contrast the patterns of BMS and Merck in Figure 3. While BMS is operating at a higher level of
inventory turns (6.27), the company has a lower operating margin (.08). In contrast, Merck has a
higher operating margin (.15) and lower value for inventory turns (2.77). Both companies are at the
same performance level in 2015 as they were in 2006. This is despite many, many continuous
improvement and Lean projects. You might ask, “How can this be?” Answering this question is the
goal of this report.
Figure 3. Example Orbit Chart of Inventory Turns versus Operating Margin for 2006-2015 of BMS vs. Merck
Also note BMS has a tight pattern while Merck’s results have greater variability. We call this
resiliency. A tighter pattern is more resilient. In this case BMS’ results were more resilient than those
of Merck.
Due to the complexity of the charts, our first challenge in the creation of a methodology was to define
‘Supply Chain Improvement’. This was our goal in building the Supply Chain Index. We wanted to
develop a means to analyze improvement across a variety of industries, with applicability to
companies with different levels of revenue, and at different levels of supply chain maturity. With each
chart we measure balance, strength and resilience in performance metrics within a peer group for the
Supply Chain Metrics That Matter.
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Balance Balance in the supply chain is a constant struggle. Growth requires an increase
in inventory. Forecasting and managing a new product launch is difficult.
Excessively long Days of Payables leads to weakened supplier health. The
examples are endless. The two metrics which comprise our balance measure
are Revenue Growth and Return on Invested Capital.
The balance measure in the Supply Chain Index is a mathematical calculation
of the vector trajectory of the pattern between growth and ROIC for the periods of 2006-2015 and
2009-2015.To understand this measurement, imagine a four quadrant grid with growth and ROIC on
the two axes. In our calculation, the overall trajectory of this vector from Year 0 (2006) to Year 9
(2015) is simplified into a single value which represents the company’s ability to balance growth while
improving ROIC.
Companies that were able to drive improvement in both metrics scored the best, while companies
that deteriorated in both metrics scored the worst. The companies are then stack-ranked based on
factor ratings. In Figure 4 we profile Amgen at this intersection.
Figure 4. Orbit Chart of Growth vs. Return on Invested Capital (ROIC) for 2006-2015 for Amgen
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The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high
balance score.
Strength A successful supply chain is strong and reliable. Supply chain leaders strive to
deliver year-over-year improvements in both cost and inventory management.
Our research on pattern recognition has uncovered a rich relationship between
operating margin and inventory turns. For most supply chain leaders, these are
some of the most important measures of their performance. Not only are they
important, they are more directly influenced by day-to-day supply chain
decisions than other, and more broadly used, corporate metrics. It is for this reason they are the two
components of our strength factor in the Supply Chain Index.
The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between inventory turns and operating margin for the periods of 2006-2015 and 2010-
2015. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.
To understand the calculation, imagine a plot—an orbit chart—of inventory turns and operating
margin. In this report, performance is graphed on an annual basis from an origination point
representing performance on the two metrics at Year 0 (2006). The overall trajectory of this vector
from Year 0 (2006) to Year 9 (2015) is simplified into a single value which represents strength.
Improvement on both metrics simultaneously is graphically shown as movement to the upper-right
quadrant with increasing values for both inventory turns and operating margin over the period.
For example, let’s compare Eli Lilly and Novo Nordisk. These two companies compete in the diabetic
care sector. Note in Figure 5 that Novo Nordisk is driving a slow rate of improvement on the two
metrics, while Eli Lilly is struggling to drive improvement and going backwards during the period of
2011-2015.
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Figure 5. Orbit Chart: Operating Margin vs. Inventory Turn Comparison of Eli Lilly and Novo Nordisk A/S
As a result of this pattern, and driving higher and more sustainable results, Novo Nordisk’s ranking on
strength in the Supply Chain Index is higher. The companies are then stacked-ranked based on
performance and assigned a strength factor. The strength ranking is 1/3 of the Supply Chain Index.
Resiliency Resiliency is an adjective easily tossed around as one of the important qualities
of a successful supply chain in today’s volatile world. However, the concept of
resiliency is difficult to define, and there is rarely clarity among stakeholders as
to what resiliency is or should be.
As we plotted orbit chart after orbit chart, we could see that some supply chains
had very tight patterns at the intersection of operating margin and inventory
turns, and that other companies had wild swings. We wanted to find a way to measure the variation.
So, we turned to the experts at ASU. After evaluating several methods to determine the pattern in the
orbit chart, we settled upon the Euclidean Mean Distance between the points.
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These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving
Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection
of inventory turns and operating margin. (The calculation is outlined in the Appendix of this report.)
These metrics, both critical for any supply chain, are components of both the strength and resiliency
metrics in our Supply Chain Index model.
The tightness of the pattern (mathematically speaking, the Euclidean Mean Distance) indicates the
ability of a supply chain to maintain a tight, consistent pattern across these two metrics as the
business environment shifts and changes over a nine year period (2006-2015). As shown in Table 4,
supply chain resiliency varies considerably by industry. The pharmaceutical industry is more resilient
than contract manufacturing and consumer electronics, but more volatile than consumer packaged
goods.
Table 4. Supply Chain Resiliency by Industry
The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower
number for resiliency is an indicator of a tighter pattern and greater reliability in results over the time
Evaluating Supply Chain Excellence: Putting It All Together In the overall analysis each company is judged by their own potential to make progress. While the
average values of a company’s performance may be higher,
in the Supply Chain Index we are evaluating companies on
their ability to drive year-over-year improvement and reliable
progress on the metrics that we believe matter.
The Supply Chain Index is a measurement of supply chain improvement. Each of the factors—
balance, strength and resiliency—as defined above, comprises 1/3 of the total score.
𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐼𝑛𝑑𝑒𝑥™ = 13𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 + 1
3𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝐹𝑎𝑐𝑡𝑜𝑟 + 1
3𝑅𝑒𝑠𝑖𝑙𝑖𝑒𝑛𝑐𝑦 𝐹𝑎𝑐𝑡𝑜𝑟
The Supply Chain Index results for Pharmaceutical companies are shown in Table 5.
Table 5. Supply Chain Index for Pharmaceutical Companies for the Years of 2006-2009, 2010-2015 and 2006-2015
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The companies making the most improvement are Amgen, Bayer Group, Biogen Inc., Novo Nordisk
A/S, and Roche Holding AG. Three of these companies also outperform their peer group on Price to
Tangible Book Value.
Companies that are underperforming their peer group can drive supply chain improvement faster than
higher-performing companies. As a result, when evaluating supply chain excellence, it is important to
look at improvement and performance together. We use this analysis to determine the best
performing supply chains through our Supply Chains to Admire methodology.
Astrazeneca 2011: In October, we launched an online Supply Chain Academy, providing ongoing
internal training to drive further improvements across our end-to-end supply chain. Alongside this we
ran an internal leadership program to reinforce the cultural aspects of more efficient supply chain
processes. In October, we announced an investment of $200 million to build a manufacturing facility
in China Medical City in Taizhou, Jiangsu province, China to meet growing local demand for our
products and expand availability of our products to people in urban and rural communities. This will
be our first manufacturing site to be built using Lean principles from the outset. These principles are
being applied from the planning stage to the whole facility, including operators, products, components
and equipment. We are designing equipment to meet varying demand, enabling fast, reliable
changeover. We also seek to identify where processes could fail, designing systems to minimize
these risks.6
Capital expenditure on supply and manufacturing facilities totalled approximately $388 million in 2011
(2010: $333 million; 2009: $360 million). As part of our overall risk management, we carefully
consider the timing of investment to ensure that secure supply chains are in place for our products.
We also have a program in place to provide appropriate supply capabilities for our new products. At
the end of 2011, approximately 9,600 people at 23 sites in 16 countries were working on the
manufacturing and supply of our products.
GlaxoSmithKline 2011: In 2011 the FDA approved the highest number of new molecular entities
since 2004, and nearly a third of these approvals were for therapies to treat rare diseases. This is in
line with the FDA’s priority to address the public health needs of special populations. Enforcement
and compliance activity increased in the manufacturing and global supply chain, as well as in drug
advertising and promotion. The FDA developed its goals for the renewal in 2012 of the Prescription
Drug User Fee Act (PDUFA) with a focus on enhancing the science of drug development, improving
the quality of evidence in applications, providing a more efficient and predictable review process, and
maintaining public confidence.7
Our record demonstrates the success of this approach. Although reported turnover fell 3% in 2011,
we have delivered underlying sales growth of 4% in each of the past two years. We anticipate that 5 Roche Holdings AG, 2010 Annual Report, March 2011, p. 3, http://www.roche.com/rhi_ar_2010.pdf, accessed April 1, 2016. 6 Astrazeneca, 2011 Annual Report, March 2012, p.38, https://www.astrazeneca.com/content/dam/az/our-company/investor-relations/presentations-and-webcast/Annual-Reports/2011-Annual-report.pdf, accessed April 4, 2016. 7 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.14, https://www.GlaxoSmithKline.com/media/325141/annual-report-2011.pdf, accessed April 4, 2016.
than doubles Abbott’s branded generics pharmaceutical presence in Latin America and further
expands its presence in emerging markets. On December 12, 2014, Abbott acquired control of
Veropharm, a leading Russian pharmaceutical company. Through this acquisition, Abbott establishes
a manufacturing footprint in Russia and obtains a portfolio of medicines that is well aligned with
Abbott’s current pharmaceutical therapeutic areas of focus.28
A supplier’s recall of product in August 2013 in certain international markets negatively impacted
International Pediatric Nutritional sales in the third and fourth quarters of 2013, as well as the first two
quarters of 2014. While there were no health issues associated with this supplier recall and the
supplier subsequently determined that the product had been safe for consumption, this event created
significant disruption in these markets. The decline in 2014 U.S. Pediatric Nutritional sales primarily
reflects lower infant formula revenue. U.S. Pediatric sales were flat in 2013 due to lower formula
share, partially offset by higher sales of toddler products.29
In 2014, Abbott management approved plans to streamline operations in order to reduce costs and
improve efficiencies in various Abbott businesses including nutritional and established
pharmaceuticals businesses. Abbott recorded employee related severance and other charges of
approximately $164 million in 2014. Approximately $20 million is recognized in Cost of products sold,
$53 million is recognized in Research and development and approximately $91 million is recognized
in Selling, general and administrative expense. Additional charges of approximately $39 million in
2014 were also recorded primarily for accelerated depreciation. In 2014 and 2013, Abbott
management approved plans to reduce costs and improve efficiencies across various functional
areas as well as a plan to streamline certain manufacturing operations in order to reduce costs and
improve efficiencies in Abbott’s established pharmaceuticals business.30
Astrazeneca 2012: We are committed to high product quality, which underpins the safety and
efficacy of our medicines. To help assure compliance and quality, we maintain a comprehensive
quality management system. Our continuous improvement program allows us to upgrade our systems
and minimize environmental impact. By focusing on increasing efficiency and cutting waste, we have
reduced manufacturing lead times, average stock levels and inventory costs. We have also improved
customer responsiveness. We apply Lean production business improvement tools and methods to
28 Abbott Laboratories, 2014 Annual Report, March 2015, p. 61, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-proxy, accessed April 11, 2016. 29 Abbott Laboratories, 2014 Annual Report, March 2015, p. 63, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-proxy, accessed April 11, 2016. 30 Abbott Laboratories, 2014 Annual Report, March 2015, p. 66, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-proxy, accessed April 11, 2016.
our manufacturing plants and entire supply chain to improve efficiency, quality, lead times and overall
equipment compliance responsibility and supported by dedicated compliance teams. Our Internal
Audit Services (IA) function provides independent assurance.
Due to our strategy to outsource most API manufacturing, we need an uninterrupted supply of high
quality raw materials. As such, we place great importance on our global procurement policies and
integrated risk management processes. We purchase materials from a wide range of suppliers and
work to mitigate supply risks, such as disasters that disrupt supply chains or the unavailability of raw
materials. Contingency plans include using dual or multiple suppliers where appropriate, maintaining
adequate stock levels and working to mitigate the effect of pricing fluctuations in raw materials.
In 2014, we implemented a new process for third party risk management. This process, which
consists of four steps and applies to all our suppliers, downstream supply chain partners and local
business development partners, assesses risk based upon defined criteria, including that related to
anti-bribery and anti-corruption, data privacy, the environment and wages. Each step of the process
provides an additional level of assessment, and we conduct more detailed assessments on those
relationships identified as higher risk. Through this process we seek to better understand the
partner’s risk approach, ensure the partner understands and can meet our standards and mitigate
risk.
To help secure our future, we are identifying and recruiting emerging talent and investing in
internships and recruitment opportunities globally. For example, we conduct a global program to hire
recent graduates for our procurement, quality, engineering, IT and supply chain functions. We also
have a graduate program for IMED, which complements our established IMED Post Doctorate
Program for researcher recruitment.
GlaxoSmithKline 2012: Our end-to-end supply chain program, which began in 2013, is designed to
reform and simplify our supply chain. In 2014, we introduced processes to improve coordination
across each stage of production from sourcing and manufacturing to more efficient delivery of our
products to patients and consumers
In 2014, we introduced the GSK Production System (GPS) across our Pharmaceutical manufacturing
sites. The GPS is a standard way of working to identify and eliminate the root causes of accidents,
defects and waste. This standardized way of working will improve our processes and performance.
For example, at our site in Cairo, Egypt, deployment of the program has resulted in a 26% increase in
production with a decrease in manufacturing interruptions of more than 40%.
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Consolidation of our supply base also helps to simplify our Pharmaceutical manufacturing and supply
chain operations and during 2014 we reduced the number of third-party suppliers who manufacture
medicines on behalf of GSK, by a further 8%, compared with 2013. We have also continued to reduce
complexity in our supply base by standardizing specifications for goods and materials that we buy
and pursuing integrated sourcing processes.
We continued our initiative to reduce the complexity of our Pharmaceutical product portfolio, which
allows us to simplify both supply chain and commercial operations and reduce risk and complexity
while increasing service levels. In 2014, we achieved a 19% reduction (against our 2012 baseline)
which equates to more than 4,000 discontinued packs.31
We have faced challenges during the year with several of our Consumer Healthcare manufacturing
sites primarily in North America. However, affected supply lines are now fully operational and we
expect to see increasing benefit from resumption
in supply during 2015. We have undertaken a comprehensive operational review of our supply
network and are investing heavily in a multi-year program to ensure future sustainable supply
including improvements in systems and capacity, more training for our people and addition of new
roles, particularly in key areas such as quality and engineering. We are also working to reduce our
exposure to single source supply. In 2014, we continued to roll-out GSK’s commercial Enterprise
Resource Planning (ERP) system across the Consumer Healthcare business. This new platform
allows us to make better commercial decisions and drive financial efficiencies as we standardize and
consolidate data, forecast and plan on the same system, save time and money on system
maintenance and upgrades, and become more efficient in how we do business with our customers.
With 11 Consumer Healthcare markets added in 2014, 26% of global consumer healthcare revenue is
now on the system and we expect to fully complete the roll-out by 2020.32
In 2014, we introduced Fingerprint, an end-to-end supply chain serialization program that will apply
unique serial fingerprints’ on many of our products. The unique identifiers will be recorded in a
database so the product can then be scanned and verified against the database at any point in the
supply chain. By the end of 2014, 48 packaging lines at 14 of our sites had serialization capability.33
31 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.30, https://www.gsk.com/media/603031/annual-report-2014.pdf, accessed April 11, 2016. 32 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.35, https://www.gsk.com/media/603031/annual-report-2014.pdf, accessed April 11, 2016. 33 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.42, https://www.gsk.com/media/603031/annual-report-2014.pdf, accessed April 11, 2016.
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We have been establishing Core Business Services (CBS) to bring together our support functions in
order to streamline and standardize functional support to the business. Six CBS regional business
centers already support 93 markets, representing 65% of GSK sales. Further, the enterprise resource
planning (ERP) platform that we are implementing is replacing a large number of separate outdated
IT systems across the company, giving us common databases and standard business processes that
will help us simplify our operations, drive efficiencies and give us detailed analytics to improve our
day-to-day operations and decision making.34
Inventory of £4,231 million increased by £331 million during the year. The increase primarily reflected
the impact of stock building for new product launches and remediation of the Consumer Healthcare
supply chain, partly offset by a favorable exchange impact.35
Roche Holdings AG 2014: In order to manage our supply chain more effectively on an end-to-end
basis, an enhanced technical product management approach was implemented and significant
progress was made in 2014. This includes clearer governance for sourcing decisions and better
defined strategic supply plans over the product lifecycle.
Roche has established a dedicated Supplier Relationship Centre (SRC) in order to work more closely
with key suppliers on innovation. In 2014, Roche increased the scope of the SRC to form an
Innovation Centre of Excellence to include more external partners and drive innovative strategies. We
introduced a new fast-track process to deliver more ideas and value in shorter time. To date, 45
innovative business cases have been approved and 32 are in progress or have been implemented.36
Through partnerships with governments and other stakeholders, we aim to build disease solutions
which support infrastructure development, support training and education and improve supply chain.
We also plan to work with private insurers to create policies that cover treatment for cancer and that
have regional, rather than a local risk pool. We also have plans to develop centers of excellence, as
well as create a pan-African platform for healthcare professional education to train specialists. There
is enormous scope to make a difference to patients in this part of the world.37
Counterfeiting of medical products is a serious and growing global problem. The World Health
Organization (WHO) defines a counterfeit medicine as ‘one which is deliberately and fraudulently
mislabeled with respect to identity and/or source.’ It estimates that counterfeiting, substandard 34 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.51, https://www.gsk.com/media/603031/annual-report-2014.pdf, accessed April 11, 2016. 35 GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.66, https://www.gsk.com/media/603031/annual-report-2014.pdf, accessed April 11, 2016. 36 Roche Holdings AG, 2014 Annual Report, March 2015, p. 69, http://www.roche.com/gb14e.pdf, accessed April 11, 2016. 37 Roche Holdings AG, 2014 Annual Report, March 2015, p. 86, http://www.roche.com/gb14e.pdf, accessed April 11, 2016.
Roche Holdings AG 2015: e also launched the VENTANA HE 600 system globally. A fully
automated hematoxylin and eosin (H&E) tissue staining system, it enhances patient safety by
avoiding cross-contamination, and produces exceptional staining quality. This system improves
workflow by eliminating the need to manually mix reagents. In a global test Doubling the already
market-leading throughput of our current instrument from 200 to 400 results per hour is a key feature
of the cobas c 513. This new instrument is used in laboratories for the analysis of HbA1c levels in
blood samples from people with diabetes. The cobas c 513 is an essential tool for healthcare
providers coping with the ever-increasing number of people with this condition. Another key milestone
in 2015, the FDA approved the cobas 6800 and cobas 8800 systems and the cobas HBV, cobas HCV
and cobas HIV viral load tests. The fully automated systems offer the fastest time to results, the
highest throughput and the longest walkaway time available among automated molecular platforms,
providing laboratories both improved operating efficiency and flexibility to adapt to changing testing
needs. The new tests are the next generation of our viral load tests, which clinicians use to manage
the treatment of people with hepatitis B or hepatitis C virus as well as HIV. The US approval follows
the 2014 launch of these systems and tests in countries accepting the CE mark.** conducted in 2015,
more than 4,000 slides from laboratories in 12 countries were stained on the VENTANA HE 600
system and reviewed by 67 pathologists, with excellent results.49
The African continent is developing quickly, with the GDP expected to increase by 5% in 2016.6
Significant strides have been made in improving health outcomes in many countries. However, major
challenges remain, particularly in sub-Saharan Africa. Poor outcomes persist in sub-Saharan Africa
for a multitude of reasons, including low disease awareness, late presentation of patients with
disease, limited quantity and poor quality of healthcare institutions, lack of medical specialists,
uncertain supply chain quality, low government priority, little to no local prevalence data and limited
funding.50
In 2010, we initiated a program at Roche to increase security in our supply chain. We are
implementing a number of new technologies, including overt and covert anti-counterfeiting features,
2D barcoding, mass serialization techniques and tamper-evident packaging. On completion of the
program, slated for 2018, every Roche product, folding box, case and pallet will have a unique 48 GlaxoSmithKline, 2015 Annual Report, March 2016, p.89, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf, accessed April 11, 2016. 49 Roche Holdings AG, 2015 Annual Report, March 2016, p.35, http://www.roche.com/gb15e.pdf, accessed April 11, 2016. 50 Roche Holdings AG, 2015 Annual Report, March 2016, p.84, http://www.roche.com/gb15e.pdf, accessed April 11, 2016.
Recommendations In supply chain benchmarking it is important to look at performance and improvement of peer
companies over time. The orbit charts are useful to see these patterns. As companies study supply
chain excellence and corporate performance, we recommend that they:
1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data. Organizations should benchmark companies within an industry. Each industry has unique rhythms and
cycles. As a result, supply chain excellence analysis needs to be within an industry. No company within
the pharmaceutical supply chain has exercised power to improve the value chain. The industry has
largely been a follower of supply chain practices and a late adopter of technology.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier. Supply chain leadership teams should analyze the total portfolio of metrics and study progress at the
intersections of the Effective Frontier. Companies with higher performance are using more advanced
analytics to plan outcomes and design the supply chain.
3) Apply Systems Theory. Teams should evaluate performance over time to understand improvement while realizing they are
managing a complex system. The functions should be aligned to a balanced portfolio of metrics
representing the Effective Frontier, while functional metrics should be focused on improving reliability
(first-pass yield, OEE, hands-free orders, etc.).
4) Focus on Building Value Networks. No pharmaceutical company is driving improvements in value chain effectiveness. While many of these
companies could be a powerbroker in the industry to redefine outside-in processes, all companies are
accepting the limitations of the inside-out supply chain. To drive the necessary change, the
pharmaceutical company needs to take charge of the supply chain in the channel and translate and
orchestrate demand.
5) Learn from Other Industries and Use a Steady Hand to Drive Improvement. Companies within the pharmaceutical industry are late adopters of supply chain analytics and Supply
Chain Operating Network technologies. To make the necessary improvements, they must move past
their “ERP-centric view” and build outside-in processes.
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Conclusion The supply chain within the pharmaceutical industry is increasing in importance to deliver on the
objectives of quality, drug efficacy and reliability. Risk mitigation, and counterfeiting are important
cornerstones for the end-to-end supply chain vision.
To understand who performed best within the peer group, we systemically analyzed pharmaceutical
company performance on the Effective Frontier. While Nova Nordisk and Biogen are driving
significant improvement, no pharmaceutical company meets the criteria of performance better than
their peer group on the Supply Chain Metrics That Matter while driving improvement.
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Prior Reports in This Series Over the course of the last four years our methodology has changed and matured. You can track our
progress and find industry-specific information here:
Supply Chain Metrics That Matter: A Focus on Retail Published by Supply Chain Insights in August 2012. Supply Chain Metrics That Matter: A Focus on Automotive Published by Supply Chain Insights in September 2012. Supply Chain Metrics That Matter: A Focus on Automotive Published by Supply Chain Insights in August 2015 Supply Chain Metrics That Matter: The Cash-to-Cash Cycle Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: A Focus on the Food and Beverage Industry Published by Supply Chain Insights in December 2012. Supply Chain Metrics That Matter: Driving Reliability in Margins Published by Supply Chain Insights in January 2013. Supply Chain Metrics That Matter: A Focus on Hospitals Published by Supply Chain Insights in January 2013. Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Consumer Electronics Published by Supply Chain Insights in April 2013. Supply Chain Metrics That Matter: A Focus on Apparel Published by Supply Chain Insights in May 2013 Supply Chain Metrics That Matter: A Focus on Contract Manufacturing Published by Supply Chain Insights in August 2013 Supply Chain Metrics That Matter: A Focus on the Automotive Industry Published by Supply Chain Insights in October 2013
Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012) Published by Supply Chain Insights in November 2013 Supply Chain Metrics That Matter: Third Party Logistics Providers Published by Supply Chain Insights in December 2013 Supply Chain Metrics That Matter: A Critical Look at Operating Margin Published by Supply Chain Insights in December 2013 Supply Chain Metrics That Matter: A Closer Look at Pharmaceutical Companies Published by Supply Chain Insights in April 2014 Supply Chain Metrics That Matter: A Closer Look at Chemical Companies Published by Supply Chain Insights in May 2014 Supply Chain Metrics That Matter: A Closer Look at Food and Beverage Companies Published by Supply Chain Insights in June 2014 Supply Chain Metrics That Matter – A Focus on Pharmaceutical Companies Published by Supply Chain Insights in April 2015 Supply Chain Metrics That Matter – A Focus on Chemical Companies – 2015 Published by Supply Chain Insights in May 2015 Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies-2015 Published by Supply Chain Insights in June 2015 Supply Chain Metrics That Matter: A Focus on Consumer Products – 2015 Published by Supply Chain Insights in August 2015 Supply Chain Metrics That Matter: A Focus on the High-Tech Industry – 2015 Published by Supply Chain Insights in January 2016 These reports, and additional information on the Supply Chain Metrics That Matter methodology, are available at our Supply Chain Insights website and in the Beet Fusion community.
Here we share more data to help the reader understand the math behind this report.
Methodology: Understanding the Math and Ratios Throughout this report we reference a number of commonly used financial ratios. Each company has
a unique potential. The potential is based on the size of the company and the drivers within the
industry. As shown in Figure A, each has a major impact on the company’s potential on the Effective
Frontier.
Here is a summary of the definitions of the ratios used in this report.
Figure A. Measurement Definitions
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Supply Chain Index Methodology: Formulas and Calculations
Supply chain leaders are competitive. Each wants to drive performance improvement faster than the
peer group. To gauge improvement, companies need to compare and benchmark. To make this
easier, we developed the Supply Chain Index. In the building of the Index, we used financial ratios
versus absolute numbers. The use of ratios allowed us to compare companies regardless of size, and
also compare companies across currencies.
The Index has three factors: balance, strength and resiliency. In this report, the three factors were
calculated for the periods of 2006-2009, 2010-2015 and 2006-2015. Our goal was to understand pre-
recession and post-recession trends while also looking at progress over the longer-term view. The
companies within the industry are stack ranked based on performance within each factor and given a
ranking. The rankings are then built into an index based on overall performance of the three factors.
The math behind the Index is defined below. This methodology was built in cooperation with the
Operations Research faculty at Arizona State University (ASU) in the spring of 2014.
Balance To develop the balance factor used in the Index, we evaluated a scatter plot of revenue growth and
Return on Invested Capital (ROIC) for a specific company. The balance factor (B) is the proportional
difference of points on an orbit chart for the period of 2006-2012 at the intersection of revenue growth
and Return on Invested Capital. To calculate the balance factor, let iREV denote the revenue growth
of the ith time period, iROIC denote the return on invested capital of the ith time period and n denote
the total number of periods under consideration. Thus the balance factor is defined as:
−+
−−
=1
1
1
1
11
ROICROICROIC
REVREVREV
nB nn
.
Strength Strength factor is a similar calculation to balance factor, but with a focus on the intersection of
operating margin and inventory turns. For this analysis, we used a scatter plot of operating margin
and inventory turns on an orbit chart for a specific company. Let iOM denote the operating margin of
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the ith time period (e.g. ith year), iIT denote the inventory turns of the ith time period and n denote the
total number of periods under consideration. The strength measure (S) is defined as:
−+
−−
=1
1
1
1
11
ITITIT
OMOMOM
nS nn
The denominator reflects that there are n-1 differences between n time periods. Figure B depicts the
intersection of operating margin and inventory turns for an example company. The difference in
operating margin and inventory turns between the first and last time period is shown.
Figure B. Inventory Turns and Operating Margin Intersection for an Example Company
Resiliency The resiliency factor is a measurement of the tightness of the pattern at the intersection of operating
margin and inventory turns for a given company. For companies that did well, and had a tight pattern,
the value will be lower than companies that lacked reliablity for the period. To develop the value, we
considered a scatter plot of operating margin and inventory turns for a specific company. Let dij
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denote the Euclidean distance between a pair of points i and j and let m denote the total number of
pairs. The resiliency measure (R) is defined as the mean distance of all possible pairs of points at the
intesection.
That is,
∑∑>
=i ij
ijdm
R 1
Figure B shows an example of the opertaing margin and inventory turns intersection for an example
company. Table A shows the distances between every possible pair of points at the intersection. The
resiliency is calculated from the mean of the distance values and is equal to 0.7335.
A Closer Look at Inventory Turns: An Important Measurement In an ideal world, companies want to turn inventory faster. The faster the turns, the faster the cash
turnover, and the greater contribution to market valuation.
There are two primary measurements for inventory turns. Both are used in the industry. Often they
are used with clarity of the underlying definition. The results are very different.
One ratio is based on inventory turnover as a ratio based on revenue, and the other measures the
inventory turnover ratio based on cost of goods sold. In the period of 2013-2014, at Supply Chain
Insights, when calculating the Supply Chain Index rankings, we used financial information from
YCharts. The methodology used by YCharts is to calculate inventory turns as Inventory Turnover =
Revenue / Average Inventory where Average Inventory is equal to the average of the last two
reported inventory levels of the specified frequency. However, in this report, and the subsequent
series of industry-specific reports, we will be using the cost of goods sold formula:
Inventory Turnover = Cost of Goods Sold/Inventory.
As can be seen in Tables A and B, the two calculations yield very different results. The larger the
margin in the industry, the greater the difference. With operating margins of 22%, the difference in the
measurement is especially relevant for pharmaceutical companies. Consider the differences between
Table A and Table B. When turns are viewed as a ratio based on revenue, the inventory turns value
for the industry for the period of 2006-2015 is 8.44 versus 2.43 for the same period when measured
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based on cost of goods sold.
It is for this reason that in the calculation of the Supply Chain Index methodology in this, and
subsequent reports in this series, we are using the cost of goods sold method in the calculation of
inventory turns.
Table A. Inventory Turns Analysis for All Industries Using Revenue/Average Inventory
.
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Table B. Inventory Turns Analysis for All Industries Using Cost of Goods/Inventory Analysis
Looking at Trends We use orbit charts to track and depict changes in year-over-year results at the intersection of certain
metrics that we measure. Here are two orbit charts which compare Operating Margin to Inventory
Turns. The first chart is a reflection of the calculation as Inventory Turnover = Revenue /Average
Inventory and the second depicts Inventory Turnover = Cost of Goods Sold/Inventory.
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Figure C. Inventory Turns (Revenue/Average Inventory) and Operating Margin for the Period of 2006-2015
Figure D. Inventory Turns (Cost of Goods/Average Inventory) and Operating Margin for the Period of 2006-2015
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As you can see, the difference in the number of inventory turns during the observed timeframe (2006-
2015) were 7.60 turns according to the original method, while average inventory turns were 6.27
using the new method.
Pharmaceuticals is a unique industry, in that compared to other industries, margins are extremely
high. So when the methodology for calculating industry turns was adjusted, we found the inventory
turns were overstated when using YCharts data. This drastic change can be explained by the
difference in using revenue versus using cost of goods sold in calculating inventory turns. Because of
the large revenue margins that pharmaceutical companies have, it is possible to skew the ratios when
cost is not taken into account.
In our countdown for the Supply Chain Insights Global Summit, we will be publishing a series of
reports on the Supply Chain Metrics That Matter by industry. In this series we will use the cost of
goods definition for inventory turns.
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Corporate Overview Data In looking at the data, it is useful to understand the size and scope of the company. To help the
reader, here we share some overarching corporate data.
Table C. Pharmaceutical Companies Overview
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About Supply Chain Insights LLC Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of
operation. The Company’s mission is to deliver independent, actionable, and objective advice for supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.
About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written four books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; and the fourth book, The
Shaman’s Journal 2015, published in September 2015.
With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a
year on the evolution of supply chain processes and technologies. Her research is designed for the