balancing capacity, expense and inventory to maximize customer service and increase profitability...

Balancing Capacity, Expense And Inventory To Maximize Customer Service And Increase Profitability

Ken ThomasManager, MSSC Capabilities

9/18/2003 Ken ThomasCopyright © 2000 Eli Lilly and Company

2

Pharmaceutical Supply Chain Management:Optimizing Customer Service and Corporate Results

Characteristics of the Industry Make Pharma SCM Unusual

•Products keep people alive and healthy

• Low probability of success during product development

• SC managed for “100% CSL”

•Make large capital investments at high risk

• Regulation ties market access to process validation

• SC design completed years before launch

• Registration ties sourcing decision to market access

• Limited, slow and expensive sourcing changes

• Technical/regulatory complexities of manufacturing

• Outsourcing risk evaluation needs to balance cost reduction

• Capital intensity of manufacturing • Idle capacity is desirable, at the right place and right time

• Cost of inventory vs. value of a sale • Customer service the priority, inventory control secondary

……


3

Supply Chain Design Supply Chain Operation

•Must ensure 99% customer service in all scenarios

•Must effectively utilize fixed assets and working capital

•Must adapt to the marketplace in spite of regulatory influences

“Pulling the right levers” will improve the balance of customer service level, cost, flexibility and risk management to fit the

marketplace needs of each product

•Must happen during development to support regulatory requirements

•Must balance risk of clinical failure with speed to market of successful products

•Must enable a robust and responsive supply after launch

LAUNCH

0

20

40

60

80

100

HypothesesGeneration

CandidateDevelopment

Production

Submit

Commercialization

% o

f c

ost

fix

ed

Optimizing pharmaceutical supply chains happens before and after launch.We will focus on Supply Chain Design first and then Supply Chain Operations.


4

LAUNCH

0

20

40

60

80

100



Production

Supply Chain Design Supply Chain Operations

Commercialization

Supply chain design begins four years prior to launch:

1. How much capacity?

2. Located where in the world?

3. Lilly owned?

Submit

Pharmaceutical supply chain design: Managing the inherent risk while designing robust chains

Capacity addition and sourcing decisions are made at time when the probability of success is 20% - 40%

Capacity &Sourcing

Capital Funding

Process design & construction

Supply Chain Design


5

1. Capacity Strategy: Global capacity with contingency

Probability-based simulation

models: probability ofsuccess is 20% - 40%

Sales Volumes & Inventory TargetsSales DOT’s, Dose/DOT

Form/Fill Units/DOTLaunch Probability, Launch Timing

Clinical TrialMaterial timing, sourcing

and registration

Cost of Excess Capacity

& Cost of Lost Sales

Productivity“Learning” Rates

For any single molecule;• the inputs have tremendous uncertainty• too much capacity is too expensive• too little capacity means missing high margin sales

The solution:

• Standard technology platforms for common molecule types

allows the uncertainty to be managed using a “portfolio” approach.

• The agreement between development and manufacturing to use

standard “kits”allows accurate modeling of total product family capacity requirements.

• The common technology groups function as “manufacturing networks”.

Capacity Target Forecasts

Uncertain


6

SourcingOptimization

Models

2. Sourcing Optimization: A Lilly-focused quantitative analysis…

Income benefits

Sales Volumes &Inventory Targets

Available Capacity

Licensing Agreements

Productivity“Learning” Rates

SiteProduct Mix &Requirements

Timing forSource

Changes

Value of AdditionalCapacity

Goal: Maximize the value of manufacturing by selecting the best product mix for Lilly networks

Free SalesCertificate


7

…augmented with qualitative considerations

Marketing Strategy• Location of major markets• Launch timing/sequence

Manufacturing technology• Processing requirements• Complexity• Learning curve• Tech support requirements

Health and safety• Containment level• Special hazards• Experience

Environmental• Permitting• Impact• Treatment technology

Regulatory• Validation timing• Compliance

Financial/income benefit• Manufacturing cost• Duties and tariff barriers• Net income• Capital costs• Contingency plans

Manufacturing site• Fit with site mission• Available capacity• Human resource requirements• Lilly vs. non-Lilly site

Qualitative factors can’t be included in simulations: Judgment about Lilly networks influences the design to be the best internal supply chain.


8

3. Final decision: Can revenue be increased by using third party manufacturing?

LillyNetworks

New Products from pipeline

Brand sale or deletion

For most products, the Lilly Manufacturing strategy is

TPO’sLate lifecycle products

Continuous Lilly capacity management (capital avoidance) via late life sourcing changes

Third Party


9

Brand sale or deletionTPO’sNew Products

from pipeline

• Special technology• Regulatory/registration issues• Licensing agreement limitations• Time to market

Excellent pharmaceutical supply chain design means optimized capital investment and maximized revenue:

1. Managing capacity in standard technology networks2. New products are sourced to robust and flexible sites3. Reliable TPO’s are utilized for late lifecycle products

Exceptions Exist

Third Party

3. Final decision: Can revenue be increased by using third party manufacturing?


10

Supply Chain Design Summary

Sources of: Complexity Uncertainty Variability

Pipeline “volume”Candidate characteristicsProbability of successClinical resultsApproval timing and scopeManufacturing technologyLaunch forecast accuracyExisting portfolio performance

Responses to: Complexity Uncertainty

Variability

Outsourcing: CapitalStandard “kits”: Capital

Learning curve: ExpenseCapacity utilization policy: Capital

Launch guidelines/timelines: InventorySourcing: Revenue

Design for 100% CSL and maximum efficiency

Probability-based, stochastic simulation IT tools

People with experience, skill, knowledge, insight and judgment


11

Supply Chain Operations: Maintaining 100% Customer Service

Level and Maximizing Efficiency

0Production

LAUNCH

20

40

60

80

100



Supply Chain Design Supply Chain Operations

Commercialization

Key global processes

1. Demand Management2. Inventory, Risk & Customer

Service Level3. SC Planning4. SC Optimization

Supply Chain Operations


12

1. Supply chain operations are anchored by a sales and marketing commitment to forecast accuracy

Forecast completeness and monthly accuracy reviewed by the senior marketing executive committee monthly

European Performance – June 2003

% Complete

90

10097

1 month completeness

Demand Management


13

2. Inventory Management: Patient Needs and Financial Realities Demand

a Service-based Approach to API and Finished Stock Inventories.

Inventory targets developed from a supply chain perspective establish the foundation for an operations plan that ensures 99% CSL in predictable and

unpredictable circumstances.

Demand/Supply Variability

Launch guidelines and global timeline to ensure robust launches in spite of forecast uncertainty

Joint probability analysis of demand and supply uncertainties ensure 99% customer service

Risk Management

Risk management analyses protect sales from “special cause” upsets in

supply or demand

Time

99+% Customer Service

Inv

en

tory

Packaging order size and campaign planning to balance cost of inventory and utilization of capacity

Lot/Campaign size

Inventory Management


14

3. Global Supply Chain Planning (GS&OP)

S&OPSite operational plans are

built for many products in a few markets

F/F/FSite

F/F/FSite US market

EU market

Japan marketF/F/FSite

APISite

APISite

Inventory TargetingSC plans are built for

one product in all markets

How to reconcile?

GS&OPGS&OP


15

A Global S&OP for 11 Products, 7 Sites, 4 TPO’s and 4000 SKUs

Long rangeLong rangePlanPlan(each(each

product)product)

APOAPODemandDemandPlanningPlanning

SalesSalesForecastForecast(2 years)(2 years)

GS&OPGS&OPPacketPacket

Global S&OPGlobal S&OPPlanPlan

(Manufacturing)(Manufacturing)

ProbablizedProbablizedFamilyFamily

ScenariosScenarios

APOAPOSupply Supply NetworkNetwork

ScenariosScenarios

AdditionalAdditionalDemandDemand(CT, etc)(CT, etc)

InventoryInventoryTargetsTargets

InventoryInventoryForecastsForecasts

Inventory and Inventory and Investment PlansInvestment Plans

(Finance/Treasury)(Finance/Treasury)

ExecutiveExecutiveApprovalApproval

OtherOther

SAPSAP


16

4. Global capacity balancing and profitability optimization: Making the ‘doable’ version 1 plan better

V1 Global Network S&OP

Balance Capacity:“Best” utilization plan?

0%

10%

20%

30%

40%

50%

60%

70%

% Theoretical

Working Capital:“Best” investment plan?

Strategic InventoryCarrying cost of inventory exceeds gross margin of sales

0

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 102

105

108

111

114

117

Days Sales/Days forward coverage

$M

illi

on

s Cost of inventory

Loss of gross margin

Review the portfolio:“Best” SKU plan?

Analysis of Portfolio ChangeSales$ vs. EVA

CAN $6,031

BRA $4,790 ARG $1,998

TUR $3,256 AUS $2,717

MX $2,579 POL $2,041

VZ $1,744 HUN $2,027

NZ $424 $-

$200$400$600$800

$1,000$2,000$4,000$6,000$8,000

$- $2,000 $4,000 $6,000EVA$ ('000s, 3-YR NPV)

Sal

es$

('00

0s,

3 ye

ars)

Version 2: A global supply plan that is possible possible and more profitableand more profitable


17

SC Operations Summary

Operate for 100% CSL and maximum efficiency

Sources of: Complexity Uncertainty Variability

RegulationsCompetition (generic or therapeutic)Forecast accuracySupply reliabilitySpecial cause events (Hurricane)Sourcing changesTechnology transferSRM issues

Responses to: Complexity Uncertainty

Variability

Scheduling: ExpenseInventory: Inventory

Capacity: CapitalSourcing: Revenue

SKU adjustment: ExpenseEOQ adjustment: Inventory

Risk Mitigation: Capital/Inventory

People with experience, skill, knowledge, insight and judgment

Integrated ERP: Information, simulation and execution


18

The opportunities for impact are increased when the scope of thinking extends beyond manufacturing to all functions in the Value Chain.

ResearchAnd

DevelopmentManufacturing

Sales andMarketing

The value chain is as strong as it’s weakest link. Care must be taken to ensure manufacturing is an integral part of the firm’s business

model.


19

Stronger integration is critical

Integration will increase business opportunity, increase speed to market and reduce cost

•“Accountable for forecast”•“Engaged in

capacity decisions”

•“Line extension reviews”

•“Robust control strategies”•“Standard technology platform”

•“High yields at launch”

“Make what we need:

Never run out”

“Throw the processover the wall”

R&D Integration

S&M Integration

-

-

+

+


20

R&D Integration

S&M Integration

-

-

+

+

Lilly’s own journey towards a better integration.







Never run out”


90’s

2010

MRPII Class A sales affiliates

100% ToolkitDevelopment

ManufacturabilityReviews

DevelopmentManufacturing

Staff

Shared accountability for investment

decisions

Global Value Chain Optimization

75% forecast accuracy


21

Virtual Firms

R&D Integration

S&M Integration

-

-

+

+

90’s

2010

Collaborative IT Transactions

Lilly engaged in supplyChain design and sourcing

Manufacturing on In-licensing team

Collaborative Forecasting

Collaborative Value Chains

Collaborative SCM Processes

Integration with Sales Partners

Integration with External

Research Partners


Never run out”








22

For each product, at each point in the life cycle, an optimum balance for the supply chain exists

Product XYZ

Inventory Expense CapitalCustomerService

+ =+At launch

+ =+At peak

+ =+At deletion


23

The IT Tools We Know Can Simulate Our Supply Chains

…but optimization remains a human activity.

BusinessProcess

IT Tool

Role-specificCompetencies

SelectionCriteria

CurriculumPath

TrainingEvents

Manufacturing Strategy and Supply Chain Capabilities Framework

Current objective: Improve the capabilities of 300 people in 18 months

IndividualTraining

Plan

SkillQualification


24

Competency Model: Demand Management Coordinator

DEM

AN

D M

AN

AG

EM

EN

T C

OO

RD

INA

TO

R

PER

FO

RM

AN

CE C

OM

PETEN

CIE

S

DESIGN AND OPTIMIZE PLAN, SCHEDULE, AND OPERATE

BUSINESS CONTINUITY

GOVERNANCE FORECAST AND PASS DEMAND SIGNALNegotiate forecasts with sales affiliates and 3rd parties and generate 30 months of forecasts for all SKUs for each marketConduct quarterly forecast reviews with market affiliatesEnsure robust forecasting processes are in place at each market affiliateSupport and drive affiliate OSSCE processesWork with launch teams to ensure forecasts are generated 24 months prior to launchEnsure replenishment plans are being created by affiliatesWork with affiliates to establish safety stocks as identified in Supply Chain inventory target process

Independent Independent DemandDemand

Independent Independent DemandDemand

Dependent Dependent DemandDemand

Dependent Dependent DemandDemand

Provide one source of forecast data for manufacturing and provide the one forecast to manufacturingSupport plant site demand processesEstablish and execute long range forecasting processes with LMRMaintain DDS dataPublish DDS metrics to plant sites and hold them accountable for the quality of the dependent demand statement

SUPPLY CHAIN DISCIPLINE AND BUSINESS SKILLS TRANSFERABLE INTERPERSONAL AND LILLY-SPECIFIC BUSINESS SKILLS

Supply Chain Skills

Supply Chain Skills Business Skills

Business Skills

Product/Process Knowledge

Product/Process Knowledge

Business/Regulatory Knowledge

Business/Regulatory Knowledge

Transferable and Interpersonal

Skills

Transferable and Interpersonal

Skills OrganizationsOrganizations

Lilly Business Processes

Lilly Business Processes Systems/ Tools/

Resources

Systems/ Tools/ Resources

Corporate FinancialManufacturing FinancialCorporate StrategyPharmaceutical industryC4I (SPC, root cause)Market analysis

Local regulatory guidelinesLocal tax, trade, and reimbursement guidelinesLanguage

Therapeutic classesGlobal marketsCompetitive intelligenceLilly products and brandingLilly product ArchetypesManufacturing toolkitsDistributionProduct formsSupply Chain mapsLaunch and registration timelines

Forecasting/PlanningCapacity ManagementInventory ManagementRisk ManagementFlow TechniquesSupply Chain DesignSourcingAPICS

As in the Leadership CM (Harbin)Scenario planningDealing with/quantifying ambiguitySystems thinking (5th Discipline)

Sites/AffiliatesTPOsNetworksMSOCSMECBrand TeamsProcurementFinancial/TreasuryProduct Teams

APO (SNP, Demand)Business WarehouseManugisticsNetworks CollaborateAllocation MatrixSAP (R3)Supply Chain Web/WellSpotfireForecast and Production plans

OSSCE – siteBusiness Plan and LRPAlliance ManagementLaunch ManagementNetwork S&OP (detail)OSSCE – Supply ChainProcess control and capability cycle (“Radiator Diagram”)

SAP reportsMGSSupply AgreementsThe “Damn Book”

DevelopmentCM&CMSSC (all groups)

Supply Supply Chain Chain

Metrics Metrics (Forecasting(Forecasting

))

Supply Supply Chain Chain

Metrics Metrics (Forecasting(Forecasting

))

Collect data and create forecast accuracy reportsConduct quarterly affiliate reviewsMonitor data quality metrics for forecasting system (INET)Publish and archive metricsCreate MSSC and MSOC Customer Service review

SKU Portfolio SKU Portfolio Management Management

SKU Portfolio SKU Portfolio Management Management

Support routine analysis of portfolioMaintain accurate SKUs in ManugisticsMaintain accurate supply networks in ManugisticsEnsure timely creation of item codes and forecast data in Manugistics

AllocationAllocationAllocationAllocation

Monitor forecasts and assure affiliates are adhering to allocation plan


25

Content © 2003 Eli Lilly & CompanyDesign © 2003 PRH Consulting Inc.

ANALYSIS & DESIGN TEAMSANALYSIS & DESIGN TEAMS

Ron Bohl(SCM) Steve Mueller (SFP)John Burks (SFP) Paul Owen (SCM)Jana Forster (SCM) Jon Rucker (SCM)Tom Futter(DMC) Rob Rutherford (SFP)Allison Leer (DMC) Mark Seitz (SCM)Karen Maupins(SCM)

Sponsored by:Ken Thomas (MSSC)

Internal Project Manager: Laurie PoteetSchool of Manufacturing and Quality

Notes

1. Events are grouped generally according to the phase of the curriculum map and then by content.

2. Actual sequence through the path will vary, depending on individual assignments, background, and career goals. I.e., if your assignment requires it, look ahead on the curriculum path and pull events forward to an earlier point.

Notes

1. Events are grouped generally according to the phase of the curriculum map and then by content.

2. Actual sequence through the path will vary, depending on individual assignments, background, and career goals. I.e., if your assignment requires it, look ahead on the curriculum path and pull events forward to an earlier point.

Development Event

Number

Title

SP 2 pages Website/CBT

Availability

= Fully available

= Partially available (e.g., may be out of date, or intended for another audience, etc.)

= Not available (i.e., needs to be acquired or developed)

Learning EnvironmentGP=Group-pacedC =CoachedSP=Self-Paced

Delivery Method

Supply Chain Project and Governance Consultant Development Path

I N T E R M E D I A T EI N T E R M E D I A T EI M M E D I A T EI M M E D I A T E

A S S E S S M E N TA S S E S S M E N T

Supply Chain ConsultantProgress Assessment

Supply Chain ConsultantProgress Assessment

A S S E S S M E N TA S S E S S M E N T

Supply Chain Project and Governance ConsultantDevelopment Assessment

Supply Chain Project and Governance ConsultantDevelopment Assessment

ENTRY

ENTRY

ADVANCEDADVANCED

Orientation to Supply ChainOrientation to Supply Chain

Development Event

60

New Employee Orientation

GP 16 hours Classroom

Development Event

118

Corporate Introduction to GMP


New to LillyNew to Lilly

Development Event

80

Welcome to the Supply Chain Organization

SP 35 pages Readings

Development Event

72

How Demand Works at Lilly


Development Event

74

Introduction to the People You Work with –Supply Chain

C 1 hours 1-on-1

Development Event

213a

How to Communicate with Product Teams, Affiliates, and Manufacturing Management

C 1 hours 1-on-1

11STST 1 8 M O N T H S 1 8 M O N T H S E N T R Y E N T R Y 11STST 6 M O N T H S6 M O N T H S > 1 8 M O N T H S> 1 8 M O N T H S

Development Event

9

Supply Chain Management Operations


Development Event

7

Overview of OSSCE


Development Event

222

I am a Consultant Workshop


Development Event

120

Performing as a Business Policy/Process Owner

C 2 hours 1-on-1

Development Event

12

Business and Manufacturing Financial Concepts and Reports

C 6 hours 1-on-1

Development Event

43

Root Cause Analysis


Development Event

044a

Strategic Thinking


Development Event

2

Orientation to the SFP Job Family

SP 60 pages Web/Look-up

Development Event

228

Orientation to the Supply Chain Consultant Role


Development Event

229

How to Do Competitive Intelligence and Benchmarking


Development Event

313

Introduction to Web-based Supply Chain Information Sources

C 1 hours 1-on-1

Development Event

31

Basic Crystal Ball User Skills

C 1 hours 1-on-1

Development Event

32

Basic SpotfireUser Skills

C 1 hours 1-on-1

Development Event

326

How to Develop a Case Study

C 5 hours 1-on-1

Development Event

323

Creating Business Presentations Using PowerPoint

C 4 hours 1-on-1

Development Event

70

GDMS Business Processes

C 4 hours 1-on-1

Development Event

204

Overview of Interpreting Supply Chain Metrics Results

C 2 hours 1-on-1

Development Event

116

GMP Update


Development Event

102

CPIM Certification Curriculum (APICS)


Development Event

089a

Professional Development and Networking

C 1 hours 1-on-1

Development Event

55

Advanced Visual Basic User Skills


Development Event

59

Measuring Continuous Improvement with Learning Curve

C 4 hours 1-on-1

Design and OptimizeDesign and OptimizeGovernanceGovernance

Plan, Schedule, and OperatePlan, Schedule, and Operate

Forecast and Pass Demand SignalForecast and Pass Demand Signal

Development Event

126a

Using the Governance System

C 1 hours 1-on-1

Development Event

26

Systems Thinking


Development Event

25

Statistics and Statistical Thinking


Development Event

329

Process Control and Capability Cycle

C 1 hours 1-on-1

Development Event

330

Overview of Non-manufacturing Functional Strategies


Development Event

67

Intelligent Risk-taking

GP 7.5 hours Classroom

As Needed

Development Event

24

Scenario Planning


Development Event

458

Decision Sciences


Common Supply Chain ModelsCommon Supply Chain ModelsDevelopment Event

455

Wheel Wright


Development Event

68

Partners in Leadership


Common Supply Chain ModelsCommon Supply Chain ModelsDevelopment Event

216

Change Management


Development Event

211

The “Damn Book”


Development Event

213

Customer Service Orientation


Development Event

73

Design of C4I Control Systems


Development Event

322

Supply Chain Management Technical Ladder

C 1 hours 1-on-1

PROFICIENT

PROFICIENT

Audience: Supply Chain Project and Governance Consultant

Project: Supply Chain Management

Project #: ELI 104

Date: 10/23/03

For: School of Manufacturing and Quality

By: Peter R. Hybert and Dottie A. SoelkePRH Consulting Inc.3 DanadaSquare East, #101, Wheaton, IL 60187(630) 682-1649

NOVIC

ENOVIC

E

EXPE

RTEX

PERT

Development Event

19

Basic Risk Detective User Skills


Development Event

104

Overview of the Supply Chain Process, GS&OP (GSCP/GNCP)

C 3 hours 1-on1

Development Event

110

Overview of Sourcing

C 5 hours 1-on-1

Development Event

224

Developing an External Network

C 1 hours 1-on-1

239

Development Event

327

Completing Strategic Projects

C 1 hours 1-on-1

Development Event

400

MSSC Governance

C 1 hours 1-on-1

Development Event

435

Factory Physics


442

APO Basics

2 hours

Development Event

C 1-on-1

Development Event

444

ITP for MSSC


Development Event

456

Financial Analysis for Management


Development Event

457

Principles of Supply Chain


SP 2 pages Print

Development Event

58

Recommended Readings


26

Supply Chain Management Skill QualificationGlobal Sales and Operations Planning for Supply Chain Analyst

Overview

Directions for completing the coaching guide

Skill qualification is delivered in a structured-coaching format. Using this format, the managing process owner will hold a coaching session with the supply chain analyst to assess the analyst’s capability to appropriately participate in the supply chain process for Global Sales and Operations Planning. The intent of the skill qualification is twofold:1. Verify that the supply chain analyst has a basic competence in the key supply chain processes and can deliver quality outputs to customers. 2. Allow the managing process owner the opportunity to offer suggestions to further enhance the supply chain analyst’s ability to perform these processes at a level beyond basic competence. In preparation for this qualification session, the supply chain analyst should be ready to share with the process owner the following information for one network under his/her responsibility: The most recent GS&OP data pack


27

It’s about reducing customer risk and maximizing shareholder returndesign and operate supply chains to enhance customer service, not cut costs.

Focus on risk management and mitigationdesign and operate reliable supply chains, impervious to the predictable and unpredictable

Partner with Development to deliver:Flexible process and technology platform and robust process control strategy

Partner with Sales & Marketing to deliver:Good short-term forecast (local country management owns S&OP) Good long-term forecast (review by senior Sales & Marketing staff)

In an increasingly complex environment, collaboratecollaborateManufacturing functional collaboration – Process Engineering, Science & Technology, QualityCorporate functional collaboration – Sales & Marketing, Research & Development Business partner collaboration – Research & Development, Sales & Manufacturing Third Parties

Supply Chain Management is successfully completed by peopleDefine competency Establish selection and curriculum elementsTrain and develop Qualify and reward

Conclusion

balancing capacity, expense and inventory to maximize customer service and increase profitability...

Documents

responsive supply

global capacity

little capacity

capacity strategy

balancing capacity

ken thomas copyright

eli lilly

right time cost of inventory