Robbinsville, NJ, May 3, 2016—
DCAT Benchmarking, a new member service of the Drug, Chemical & Associated Technologies Association (DCAT), announces the release of its first benchmarking study, Value Creation in Pharmaceutical Procurement. The study examined the role of Procurement organizations in pharmaceutical companies in delivering value with respect to direct materials (i.e., products and services used in pharmaceutical development and manufacturing). The study was developed by the DCAT Research & Benchmarking Task Force, composed of pharmaceutical Procurement executives from DCAT member companies.
“Every Procurement leader wonders how its organization stands in relation to others in the industry,” said Tyson Popp, Vice President and Chief Procurement Officer of Mallinckrodt Pharmaceuticals and Chair of the DCAT Research & Benchmarking Task Force. “Today’s Procurement organization is tasked not only with achieving cost reductions or cost avoidance, but is also charged with advancing ways to deliver value to its company. The study examined how and to what extent Procurement organizations in the pharmaceutical industry are meeting this goal.”
The study evaluated whether Procurement groups in the surveyed pharmaceutical companies are positioned for value creation and achieve value creation for their companies through: (1) Procurement’s organizational design, functions, and activities, including talent management; (2) Procurement’s level of engagement with senior executive leadership, internal customers (i.e., pharmaceutical business units), and suppliers; and (3) other means of influence by Procurement organizations as it relates to direct materials. A total of 47 benchmarks were assessed in the study.
“As a non-profit, member-supported global business development association, DCAT was in a unique position to assemble a group of senior Procurement executives from its member companies to develop a quality, in-depth benchmarking study,” said DCAT Executive Director Margaret Timony. “We are delighted with this first effort and look forward to feedback from our members for future studies.”
The study was administered to large, mid-sized, and small pharmaceutical companies with minimum annual sales revenue of $250 million. For purposes of this study, “large” pharmaceutical companies refer to companies with annual revenues of $10 billion or more, “mid-sized” refers to companies with annual revenues of between $1 billion and $9.9 billion and “small” refers to companies with revenues of less than $1 billion.
Procurement Organizations: Value Generator or Not?
More than three-fourths (76%) of respondent companies described the operating model used by their Procurement organizations as highly evolved, classifying their Procurement organizations as a value generator (41%) or as advanced (35%).
“Value generators” have certain key elements. Procurement takes an active role with executive management and internal stakeholders to define, set, and execute business strategy and evaluate performance. Supplier relationship management is highly evolved with Procurement organizations actively involved in supplier development and supplier-led innovation.
“Advanced” Procurement organizations manage all spend through category management and strategic sourcing through a competitive sourcing process with clear and fully adhered decision rights for Procurement with formal supplier relationship management in place.
Supplier Relationship Management: Strength or Weakness? The study also examined companies’ Supplier Relationship Management (SRM) programs. Although more than three-fourths (76%) of respondent companies described the operating model used by Procurement as highly evolved, far fewer companies described their SRM programs as advanced.
Less than half (41%) of respondent companies said that they have more advanced SRM programs, with 18% having fully integrated SRM programs and 23% having established SRM programs (see figure below).
For purposes of the study, a “fully integrated” SRM program is one in which SRM is an integral part of overall corporate strategy with a full focus on value creation. The Procurement organization’s company is seen as a “customer of choice” for a select number of suppliers and is fully integrated with select suppliers.
“Established” refers to formal SRM programs with joint improvement initiatives between suppliers and Procurement that have clear governance.
At the other end of the spectrum, more than half (53%) of the respondent companies had a limited SRM program, defined as having select projects with some suppliers with select SRM initiatives going beyond cost reduction but that are still more tactical and operational in nature. Six percent (6%) of companies had no SRM program in place.
Procurement: Where is Its Place at the Table with Senior Executive Leadership? The study found that about half (53%) of respondents said their Procurement groups were engaged on an ongoing basis with senior executive management in corporate annual budget planning, shared operational objectives, acquisitions/mergers, strategic alliances/partnerships, and corporate risk management.
However, a lower level of engagement in long-term planning was reported. Only 41% of respondent companies said that their Procurement groups are involved on an ongoing basis in corporate long-term planning compared to 56% of respondent companies who said that their Procurement groups are involved in annual corporate planning. Thirty-five (35%) of respondents said that Procurement was not involved at all in corporate long-term planning.
Procurement: Measuring Influence with Internal Customers (i.e., Pharmaceutical Business Units) Although respondent companies see their Procurement groups as key instruments of value creation, the business units of pharmaceutical companies lead certain important functions.
Metrics: Going Beyond Cost Reduction or Not? The study found that Procurement uses value-based metrics to evaluate suppliers on a limited basis with cost improvement ranked as the dominant measure of supplier performance and metrics measuring reduction in cycle time and improvements in inventory management also ranking high (see figure below).
In contrast, when looking at value-based metrics, only 12% of respondent companies measure revenue and/or profit gains from supplier innovation. Less than one-third (33%) of companies measure revenue and/or profit gains from productivity improvements from suppliers.
The study also found that certain tools in measuring performance are not equally applied in the evaluation of suppliers by Procurement and by the evaluation of Procurement by suppliers. Over half (59%) of respondent companies said that Procurement uses scorecards to evaluate strategic suppliers or preferred providers, but only 18% of such suppliers evaluate Procurement’s performance using scorecards.
Procurement’s Role in Talent Development and Management: Where do Skills Stand?
To be able to deliver value for their companies, Procurement organizations must have employees with the requisite skills. The study examined Procurement’s role in a variety of areas, including skills in negotiation, leadership, and strategic/critical thinking, cross-functional knowledge and expertise, as well as the ability of Procurement to attract, develop and retain qualified employees (see figure below).
Methodology An online survey was administered to the Chief Procurement Officers or Functional Equivalents between October 2015 and January 2016 of DCAT member companies with minimum annual sales of $250 million. The survey was developed by the DCAT Research & Benchmarking Task Force with support from external consultation and DCAT staff. The results of that survey served as the basis of the report, which was issued in April 2016.
As a not-for-profit, member-supported business development association for the global pharmaceutical manufacturing industry, the Drug, Chemical & Associated Technologies Association (DCAT) is committed to providing programs, events and services that help our members expand their network of customers, suppliers and colleagues in the industry. Founded in 1890, DCAT is the industry’s premier business development association whose membership is comprised of companies that manufacture, distribute or provide services to the pharmaceutical, chemical and related industries. With over 450 corporate members, DCAT is headquartered in Robbinsville, New Jersey.
DCAT Director of Communications
The Drug, Chemical & Associated Technologies Association (DCAT) is a not-for-profit, global business development association whose unique membership model integrates both innovator and generic drug manufacturers and suppliers of ingredients, development and manufacturing services, and related technologies. We are committed to provide programs, events and services that help our members meet their business objectives, expand their network of customers and suppliers, and gain insight into industry trends, markets, and those issues impacting pharmaceutical development and manufacturing.