In part two of our series on cost control strategies for pharmaceuticals, CECON consultant 1569, specializing in the formulation, manufacturing, packaging, and dosage development of pharmaceuticals, walks us through a personal experience where he was able to lead a pharmaceutical company to realize significant cost savings.
COST CONTROL STRATEGIES IN PHARMACEUTICALS: PART 2
For pharmaceutical manufacturers, it is true that approved raw materials and components, validated processes and methods, and qualified equipment and facilities cannot be changed without significant cost and effort. Yet it is frequently (and mistakenly) assumed that these constitute all of a company’s expenses or that they cannot be modified in some way that can result in significant savings. Let me share an experience to demonstrate the fallacy that little can be changed in a regulated industry that might positively impact a company’s profitability.
A few years ago, I was retained to assess a stem cell manufacturer’s warehousing operations to see what steps could be taken to consolidate and manage their on-hand inventories to accommodate relocation to a new facility. The new facility’s warehouse was only 3,000 ft2—about one tenth the size of the current warehouse—a challenging proposition to support expanded operations.
The first order of business was to evaluate all of the items inventoried in the warehouse and to understand why they were maintained at their current levels. Surprisingly, the company routinely kept on-hand unique inventory items. To name just a few:
The R&D group and Operations provided Purchasing with specifications and consumption rates on each of these materials and Purchasing took this information and negotiated supplier contracts to obtain the supplies at volume discounts.
In my assessment of on-hand inventories, I was not concerned about the suitability of these items for their intended use or their estimated rates of usage; but I was very concerned with minimum inventory levels, turn rates, expiry dating, etc. This exercise led me to ask: Are there better supply configurations for each of these materials that would require less space? I was surprised to learn:
Based upon this preliminary analysis, it became obvious to me that in addition to “right sizing” the company’s on-hand inventory for the new site, there were real opportunities for significant cost savings too. In assessing other supply configurations, it was learned that:
These and other similar cost savings valued at a total of approximately $700,000 per year were identified during transfer of the company’s warehousing operations into the new facility. Although finding savings was not the primary objective of the assignment, it turned out to be an important benefit. The company’s Chief Financial Officer was ecstatic as these savings went right to the bottom line. While I was not aware of the company’s profit margin, I estimated it was between 20 and 30%. If true, these savings would equate to an increase in sales of $2.33 to $3.5 million dollars per year, each and every year.
Most noteworthy was the fact that in not one instance was it necessary to change a quality specification, re-validate a process or method, or re-qualify a piece of processing equipment. On the contrary, quality was enhanced, processes were simplified, and inventories were streamlined and optimized.
While this is but one example of a pharmaceutical company where significant savings were found, this is not the lone instance where I have found similar situations within pharmaceutical companies or other FDA-regulated organizations. It has been my experience that NOT finding comparable opportunities is more the exception than the rule. Yet these savings often go unrecognized.
Since 1985, CECON has been placing experts in over 200 scientific disciplines. CECON consultants include pharmaceutical consultants, clinical trials experts, andchemistry experts.