Value Chain Transformation for Life Sciences - 2 | Value Chain Transformation for Life Sciences. The extent and pace of industry changes facing life sciences companies demand a

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  • Value Chain Transformation for Life Sciences: Enabling Speed, Efficiency and Product Certainty in a Volatile Market

  • Page 2 | Value Chain Transformation for Life Sciences

    The extent and pace of industry changes facing life sciences companies demand a much different operational response. Today, focus and speed-to-value are the mantras. The products that life sciences companies bring to market have to be the right ones (safe, secure and compliant) for the right customer segment; reach the market efficiently (in the leanest, most cost-appropriate manner) and return value quickly (in terms of time to value and generating the promised outcome).

    However, being right, fast and efficient can only be achieved through a seamless integration of the R&D, supply chain and commercial functions. In this paper, Accenture will show how achieving that integration will require transforming life sciences traditional supply chains into dynamic and segmented end-to-end value chains that fully align with and enable the companys business strategy and act as engines of financial growth.

  • Out with the old, in with the newClearly, life sciences traditional supply chain approaches have become an unaffordable luxury against the backdrop of todays operating realities: Product lifecycles are decreasing, truncating both launch times and time to peak sales. Peak sales themselves are smaller; by 2015, generics are expected to account for 39 percent of market spending, up from 20 percent in 2005.1 As individual product revenues shrink, heightened regulatory pressures and increasingly stringent compliance specifications have put new pressure on resources.

    Additionally, the customer is changing: At a macro level, life sciences companies must learn to operate in an environment where the majority of revenue will come from unfamiliar emerging global markets, with their own sets of regulations, patient needs and cultural preferences and expectations. At a micro level, well-informed individuals, integrated provider networks, and the government and other payers have started to wield much more substantial power in treatment therapies and the prices the market will pay, causing a shake-up at the very core of life sciences product-to-market models.

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    Supply chains that pushed products into markets without aligning to customer needs; disconnected operations across business functions; and a one-size fits all approach across markets with varying needsthese relics of a different age will have to go. Today, how life sciences companies manage industry changes across every aspect of their operations will be a key differentiator for achieving future high performance. Its time for life sciences companies to take everything they know about supply chains and turn it on its head. Its time for value chain transformation.

    1. IMS Institute for Healthcare Informatics. The Impact of Patent Expiries on Global Spending on Medicines.

  • Page 4 | Value Chain Transformation for Life Sciences

    What is value chain transformation? Value chain transformation is the process of moving from traditional inside-out based operations to a model where the key business outcomes desired define how every point of the chainfrom the customers customer to the suppliers supplier is set up.

    In value chain transformation, the voice of the customer is the main driver behind the business strategy and the appropriate response. The company starts from the point of getting the customers requirements embedded into the value chain design. This outside-in, value-driven premise is opposite the traditional supply chain approach that pervades in life sciences, where most companies develop a supply chain to push out to their customers, rather than being led by their needs and designing a response to them.

    From there, true value chain transformation is marked by integrationand getting the most out of the strengths of every participant at every point in the supply chain. The objective is to achieve a perfect match between the organizations end-to-end supply chain capabilities and the customers requirements, in a cost-appropriate manner. Aligning in this way will turn the value chain into a financial engine for the business: whereas traditional supply chains have been structured as cost centers (only costs money and does not add value), a value chain adds value by executing to the business strategy and turns from a cost center into a profit driver.

    This idea of the value chain as a profit driver is a critical piece that has been missing from the current life sciences picture. Efficiently and effectively operating an end-to-end value chain requires making the links between the financial levers related to the operational metrics transparent. For example, if a company wishes to focus on superior service as its competitive differentiator, that decision may lead to higher costs because of the need for higher inventories or the need to be closer to markets with key suppliers and warehouses. But what must be drawn out is the conclusionthe increased revenue and/or marketshare that result.

    The fundamentals of value chain transformation are not new concepts; retail and high tech companies, for example, have understood and worked toward this ideal for years. Life sciences companies have lagged other industries, but they stand to benefit from the wisdom gained elsewhere. By applying lessons learned by the industries that have gone before, life sciences companies can accelerate both the necessary changes, and the resulting benefits: competitive advantage in the marketplace and a sustainable underpinning for future success.

    How do life sciences companies achieve value chain transformation?Based on our experience helping many clients across many industries achieve value chain transformation, Accenture has distilled the process of successful transformation into four broad steps:

    Step 1. Understand the imperatives for the companys value chain, based on its business strategy and its customers needs.A life sciences company needs to determine its competitive essence, taking into account industry trends and, critically, the voice of the customer, when determining its strategic imperatives. A life sciences company will typically differentiate on one or two of three strategic imperatives: cost, service or innovation (see Figure 1). It is not possible to excel in all three. Then, the company creates different segmentation models for each of its primary customer segments and the customer needs in each segment shape the supply chain response.

  • Page 5

    Efficient Responsive Agile

    Cost

    Speed Service

    Cost

    Speed Service

    Cost

    Speed Service

    Figure 1. Life sciences companies typically differentiate in one or two areas: speed, cost, or service.

    Step 2. Diagnose the supply chains current performance.Once the company has established its strategic goals and points of competitive differentiation, it must understand its maturity in terms of supply chain capability, so that the company can begin to target gaps and areas for performance improvement.

    Accenture has identified four stages of supply chain maturity as life sciences companies move toward value chain transformation (see Figure 2):

    Functionally focused supply chains, in which decisions are made in isolation for process-based or regional objectives, and in which skills, capabilities and lessons learned are not shared or replicated across the company. Functionally focused supply chains tend to have a reactive approach to problem solving, with a short-term view and minimal consideration for overall business outcomes.

    Efficiency and cost focused supply chains, in which projects are implemented to solve siloed process and/or functional problems to reduce costs in a specific area, rather than to address overall supply chain objectives. Efficiency and cost driven supply chains are inside out focused, with different regions often working on similar projects and not addressing global needs. A typical portfolio of initiatives for a company in this stage will include ERP rationalization, strategic sourcing cost reduction efforts, improving forecast accuracy, nascent stages of sales and operations planning, moving from measuring LIFR (life item fill rate) to OTIF (on-time in full) and IT platform consolidation.

    Demand-driven supply chains, in which core supply chain functions collaborate on key strategic issues and common objectives. Companies with demand-driven supply chains drive collaboration with suppliers and customers, share information and ideas to solve problems, and leverage downstream data to make trade-off decisions.

    Value-driven supply chains, in which supply chains are segmented to address specific market needs and drive greater levels of economic value. Different segments may have different trade-offs, but in all cases, greater visibility comes to every point of the value chain This visibility gives a company more insight earlier on, allowing the company to manage its entire value chains more proactively and orchestrate outcomes.

    Value-driven supply chains are also marked by system-wide, integrated improvement approaches: the organization develops a disciplined management system that integrates processes, technology and people and operates with a common set of principles.

    Source: Accenture.

  • Page 6 | Value Chain Transformation for Life Sciences

    Figure 2. The stages of maturity progressing to value chain transformation.

    Stages of Performance Improvement Maturity

    Impact

    Stage 1

    Stage 2

    Stage 3

    Stage 4

    Functionally Focused Silo based decision making Lack of systemic capabilities Inability to build on

    learnings Fire Fighting

    Efficiency and Cost Focused Focus on scale