April 16, 2014

How One Pharmaceutical Manufacturer Cut Costs while Enhancing Quality, Simplifying Processes and Streamlining Inventories

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

It has been my experience that reticence to change is one of the primary reasons that pharmaceutical companies do not actively pursue cost savings as a means of improving their profitability. It is presumed that little or nothing can be changed, so why bother looking?  Other common deterrents to pursuing cost controls:


1.      “We have a Purchasing department that is responsible for obtaining the best pricing on all goods and services.”

2.      “R&D and Operations, and Facilities know what they want, so who are we (Purchasing) to question their judgment?”

3.      “Cost control is not really a viable means of positively impacting the bottom line over the long haul.”   

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:

1.      15-20 pallets of sterile, disposable coveralls, in 8 unique sizes (Small to 5XL). These consisted of cases of 25 coveralls per case. Provided with Certificates of Conformance.
 
2.      Several pallets of 3% hydrogen peroxide, USP. These were cases of 16 ounce bottles. Provided with Certificates of Analysis.

3.      Several pallets of 70% isopropyl alcohol, USP.  These were cases of 1 litre (=33.8 ounce) bottles.  Provided with Certificates of Analysis.

4.      Several pallets of dry ice delivered on a once/week basis.

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:

1.      The average cost of one sterile, disposable coverall was approximately $20.00. Personnel routinely wore two sets of coveralls per day.

2.      The cost of a case of six (6) x 16 ounce bottles of 3% hydrogen peroxide, USP was about $240.00 (three (3) x 32 ounce bottles of 3% hydrogen peroxide, USP at Target has a total cost of $2.67). That was one expensive Certificate of Analysis!

3.      The cost of a 1 liter (=33.8 ounce) bottle of 70% isopropyl alcohol, USP was about $90.00 (a 32 ounce bottle of 70% isopropyl alcohol at Target is $1.97).

4.      The company ordered over 5,000 lbs of dry ice pellets / week for storage, pack-out and shipping of their products. The reason they needed so much was because over 50% of it evaporated prior to its use.

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:

1.      With respect to sterile gowning, a local supplier of sterile surgical gowning was contacted and could provide two sets of washable, re-usable sterile gowns on a daily-basis at a cost of about $10.00 / per operator. This was a savings of almost 75%. The vendor’s quality systems were audited and found to be compliant and the vendor provided a certificate of cleanliness and sterility for all of its gowns.

2.      The supplier of hydrogen peroxide could provide cases of 4 x 1 gallon bottles of 3% hydrogen peroxide, USP (with a Certificate of Analysis) for about $600 / case. The cost for this same quantity (= 512 ounces total) of hydrogen peroxide provided in cases of 6 x 16 ounce bottles per case was $1,280. A savings of $680 per 4 x 1 gallon case configuration.

3.      The supplier could provide larger quantities of 70% Isopropyl alcohol, USP. A 4 liter bottle was available at about $200 (a savings of $160 vs. 4 x 1 liter bottles), or a 20 liter bottle at about $550 / bottle (a savings of $1,250 vs. 20 x 1 liter bottles), or a 200 liter drum at $2,500 (a savings of $15,500 vs. 200 x 1 liter bottles).

4.      As a large consumer of dry ice, the company investigated installing a dry ice on-demand manufacturing system within its new facility. A calculated Return on Investment of less than two years, made this an attractive undertaking.

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, The CECON Group has been placing experts in over 200 scientific disciplines. CECON consultants include pharmaceutical consultants, clinical trials experts, and chemistry experts.



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