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For decades, the pharmaceuticals industry delivered high margins and steady growth rates through long-held patents and innovative products. Over the last years, however, that picture has changed dramatically. Today, the pressure is growing as generic drugs continue to enter the market. In addition, R&D requirements and marketing efforts are rising constantly, while governments and health insurance companies exert growing price pressure on the industry.
At the same time, business complexity is increasing, due to operations in emerging markets as well as legal, regulatory and supply-chain related challenges. As a result, diminishing margins are already reflected in stock price developments.
Consequently, pharmaceuticals companies are searching for new ways to raise revenue and improve efficiency in every business area. One of the biggest margin-engines that promises to reveal significant untapped value potential in the future for the pharma industry is procurement.
Procurement plays an important role in efforts to achieve efficiency in pharmaceutical operations. Masters are distinguishing themselves from the rest by ensuring spend control and collaborating effectively across divisions and functions with their supplier networks and internal stakeholders. Thereby, companies on a journey to high performance not only create more innovation, but they also achieve up to 2 to 3 percent higher savings that translates into $20 to $30 million per year per $1 billion of spend.
Compared to other industries, pharma and life science companies are lagging behind in procurement, despite the potential benefits that mastery can bring to them. The gaps can and need to be closed quickly. To do just that, pharma procurement organizations must focus on the following imperatives:
Break up the silos: Formalize collaboration between business functions and sourcing category heads
Know where all your money goes: Increase cost management for indirect categories
Think innovation: Collaborate with suppliers to bring in fresh ideas
Procurement strategies have vast potential to work wonders in a wide variety of business areas, such as risk control, human resources, supplier management and innovation. These can help companies meet the challenges of the industry.
Our research shows that the market will continue to see more frequent and more sophisticated sourcing programs, higher cost-cutting and innovation targets and increased implementations of supplier management systems. And, as these transformations take root, CPOs will work more closely with CFOs and COOs to ensure that new processes and systems are adopted across the enterprise to sustain the value they create.
In short, pharma procurement organizations will certainly be among the most fascinating areas to work in during the next years.
April 28, 2012
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