Just 5 days after my blog on magic pill for pharmaceuticals, NPPA (National Pharmaceutical Pricing Authority) reported exploring regulation to make pharma companies sell drugs under their generic name and not under any brand name. Consider two recent cases which justify such standardization to reign whimsical pricing.

1. Doxobid, a Dr. Reddy’s brand for 400mg doxophylline is reportedly sold at Rs. 83. While same formulation under Macleods generic brand is sold as Doxoril at Rs. 43.
2. An injection was charged for  Rs. 30, 950 by a retailer to hospital, while distributor’s/hospital price should’ve been Rs. 25,543. Additional cost was, of course, transferred to the patient who received that injection. There is a FDA investigation going in this case.

Alright, second example was not about the difference of prices among generics and brand drugs…. but nevertheless, such instances strengthen NPPA’s proposal to standardize drug pricing. With ~5% of any branded drug price spent on promotions, brand-owners will have very little margin left if such regulation gets approved.

Generic-makers are not in sweet spot either. If brand-makers are forced to sell some of their drugs at lower price, they have capability of flooding the market with this lower priced, but better “perceived” quality drugs. Market share struggles, in that case, will force generic-makers to get their margins higher to recover loss in market share.

In any case, both generic and brand makers need to reconsider their cost-structure now.

Following my earlier blog on Indian auto industry prospects, there has been recent report on auto-makers getting ready for introducing hybrid vehicles in India. While Toyota’s hybrid-flagship vehicle Prius is slated to be introduced early next year, its price after enormous import levies of 111% will be around Rs. 2.5 million. Compare this with base Toyota Corolla Altis model at around Rs. 1 million and you can imagine how many buyers will actually turn up to buy Prius. Clearly Toyota would need some help from the Union budget to get a relief on import levies.

Another global player trying to introduce alternate fuel vehicle is GM. They are avoiding heavy import levies by partnering with Bangalore based Reva and developing an electric vehicle (EV) indigenously. By doing so GM-Reva are planning on launching affordable EV by next year as well. But, they don’t expect significant volume. Tata Motors is also planning to get Indica EV out in markets abroad a year ahead of it’s introduction in India.

One of the major limitation for owners of an EV, that would need to be plugged-in to get “fueled”, is power infrastructure. As per Indian government’s 11th 5-year planning commission (2007-2012), there is peak power deficit 15% in India. With 90,000 MW of capacity addition targeted for 2007-2012, they plan add twice the capacity planned during previous 5-year period. And, then there are challenges of transmission and distribution of this power.

So, auto-makers seem to ahead in the game right now. With right incentive and infrastructure in place and appropriate pricing, they should be able to churn out volumes with next couple of years. Indian customer is a smart one with an eye on overall economy of owning a vehicle. So, it won’t be a hard sell at right price, provided they have charging stations available throughout the country.

Better Forecasting

This one magic pill Indian pharma industry must have in their hands soon. So far most of the pharmaceuticals have been able to manage mastering niche market of generic formulation and grow on moderate margins coupled with high volume. According to one report, 98% of the domestic Indian market is into generic drugs. Taking a leaf from developed economies, one can see that this generic drug market will very soon become low margin, cut-throat battlefield for prices. Of course, customers like me wins with that. But, for pharma companies who have bulk of their revenue coming from sale of generics, this is a challenge not so much distant in future. So, what’s the magic pill they need to take now to prepare for tomorrow?

It’s good old, optimal production planning practices. A study by Ross Systems of pharmaceuticals in the US showed that improving forecasting and planning process of pharma manufacturing by 15% can lead to increased plant output of 10% and reduced inventory of 20%. This are some significant cost cutting means by which companies can improve their margins, or stay competitive at lower prices.

… is the key to plan for market demand. Market demand for drugs may be seasonal or maybe constant throughout the year. Having accurate historical sales data can lead to some good mathematical modeling of demand pattern and can give a basic model for forecasting market demand. This can then be combined with other, non-quantifiable market factors to prepare a demand forecast.

Demand Planning & MRP

For basics of demand planning and MRP you can refer blogs on this site. In general, this is long to medium range planning of demand and inventory. It takes into account 12-month rolling forecast to develop monthly/weekly production plan. Benefits of doing these steps right for pharmaceuticals would mean greater stability of plans, less changeovers, less reactive decision making, and lower inventory.

Goal here is to -  achieve target customer satisfaction level (by stocking enough drugs) with least possible inventory levels.

Inventory decisions such as…

• safety stocks
• reorder points
• reorder batch size
• customer service level

… play important role in achieving this goal.

Typical output of demand planning and MRP cycle is a monthly and weekly production plan for each formulation at each of the processing facility.

Production Planning & Scheduling

The output of demand planning and MRP – a formulation/facility assignment – leads to short term planning at factory level. This is an intensive computational step. Information about current inventory levels, optimal batch sizes, batch processing time, relevant capacity, formulation contents and portions is used at this stage to prepare best production schedule that can…

• provide stable plans and reduce changes to production schedule
• reduce overtime by improving labour utilization
• fewer changeovers
• increased throughput
• reduced inventory level
• improved customer service
• improved morale and increased confidence in execution

No wonder then, that all these improvements can lead to significant cost-advantage for pharmaceuticals. With dwindling profit margins, pressure on costs will lead pharmaceuticals take this route in near future. Smart ones are already on their way of getting their whole supply chain under review.

Supporting Systems

Staying on top of current inventory levels would require real-time monitoring. There are many ERP solution available in market that can not only keep track of inventory, but also of processing data such as capacities, recipe, batch sizes, etc. Such systems can also be created from scratch and expanded on as-needed basis. For any system to enable best production planning for pharma business, it needs two essential components – an ERP system and an APS system.
ERP system keeps track of all the data input – sale history, inventory levels, recipe, factory capacity, etc.
APS (advanced production scheduling) system does all the computations based on adopted philosophy and goals programmed.

These two systems together make the magic pill that can help pharmaceuticals to stay healthy and battle-ready for oncoming pricing battle.

Two Factors for Seeking Advice

I met an owner of a medium sized machine shop last week. Let’s call him Mr. C. Mr. C came across as someone who knew his trade. He has an extensive experience in metallurgy and machining science. I was curious about knowing his business model and the kind of set up he had. The purpose of my meeting him was to let him know about my passion about manufacturing excellence and see if there is anyway I can help him improve his operations. Upon hearing my marketing pitch, Mr. C asked me a very candid question. “I have been running my business for few years now, and with good amount of success. So, tell me why should I take your advice on the way I run my manufacturing?”, he asked. A very good question, I said to myself. To answer the question, I shared with him my personal approach of seeking advice.

Knowledge and Criticality of the matter. These are the two factors I consider for deciding whether or not I need to seek advice on any matter.

As a general rule, if I have a knowledge about that matter (how to make my manufacturing more productive? – for example), then I don’t need a second opinion on that. But, knowledge by definition means “acquaintance with facts, truths, or principles, as from study or investigation”. So, someone else may have more knowledge on the matter based on their study and/or experience. For a critical matter, it makes sense to confirm my hypothesis by discussing it with someone more knowledgeable than me. The level of involvement of this person with more knowledge (call it an expert or a consultant) will be at different levels based on depth of knowledge I have about the matter.

After sharing my personal philosophy, I offered Mr. C couple of options to test my manufacturing excellence knowledge vis-a-vis his own. And, we decided to explore further for any critical challenges he may be facing.

Three Factors of Testing Knowledge

Of course, there is no standardized exam for testing somebody’s knowledge. So, options I offered to Mr. C included three factors that test depth of knowledge – brain, heart and guts.

• BRAIN – stores knowledge of the past. This is something most of the exams test… which is fine in academia, but misses two other factors of testing knowledge.
• HEART – shows personal attitude of the person. Every problem has (n+1) solutions… where, n = number of solutions one has already considered. Attitude plays a key role in picking up one of these solutions. Hence, it is important that while seeking advice from a more knowledgeable person, his/her attitude also matches or complements yours. Otherwise, you won’t be comfortable with the best advice provided to you.
• GUTS – indicates foresight and innovating thinking based on past knowledge and present attitude. No matter how much experience one may have, every problem is a new challenge and needs some degree of intuition to solve it. Building a case study and proposing a solution for that would demonstrate intuitive ability of your advisor.

Answering Mr. C’s simple question made me articulate the internal process of seeking advice that I’ve been practising for a while. Thank you Mr. C !!!

Customization of Process Improvement

Continuous innovation and up-gradation is a challenge many companies face during their expansion phase of product life cycle. Achieving growth with incremental improvements is one way to extend expansion phase. However, linking such improvements with a specific “brand” – like Lean, Six Sigma, TQM, BPR, Kaizen, cost reduction – would be a mistake. Not only because selecting a single brand would exclude benefits from other methodologies; but also because, an opportunity for customization of process improvement is lost.

Problems faced by companies are specific to their conditions. Even, companies in similar industry and during similar phases of their life cycle, they have their unique challenges. So, why use off-the-shelf tools and methodologies? Customizing process improvement programs (PIPs) gives companies chance to focus on specific problems, while still utilizing standard tools of improvement. There is nothing wrong with standard tools (Lean, Six Sigma, TQM, BPR, Kaizen, cost reduction), but it’s their reckless application that wastes lot of valuable time and resources. Hence, using such tools within a defined framework helps focus their effectiveness. Over the years, I have come to realize a refined way of approaching a PIP. This is an evolution of my earlier approaches where I used standard tools for PIP.

A Unique PIP Approach

Developing a customized PIP, that has long lasting impact and sustainability, is a process by itself. And, it begins with laying certain foundation. A right mindset goes a long way in leveraging efforts of all involved in this PIP. Training in certain hard and soft skills prepares the soil on which seeds of improvement can be sown with great success. Also, determination of right approach for improvement is key. On a broad scale, there are three types of management approaches – control management, incremental management and innovation/breakthrough management. Each of these styles is suitable for specific life-cycle phase in which company operates. The PIP discussed here is specific to incremental management style of operation. So, if your company is in the market of fading demand, then no incremental improvement will help keep it alive any longer. In such situation, there is a need to cannibalize your existing set of products and make entry into new markets. That’s innovation management and it needs entirely different mindset and skill-set.

After initial preparations, it’s top management’s job and responsibility to define goals for their organizations to march towards. Goals defined for such should have strong links towards that ultimate goal of making money (for business organizations, of course). Once that is defined, a complete chain of KPIs needs to defined that links highest level goals to smallest details of execution. For each of the KPIs thus defined, an accountability matrix can be defined to ensure functional division of labour to achieve the ultimate goal that is sought.

The next step is to manage constraints within each identified projects. In the world of diminishing resources, no team ever has time to address all the issues. Hence, concept of focussing on constraints is valuable from that perspective. For the identified constraints, scoring low hanging fruits is the best way to get snowball effect going. Tools of lean methodology are best suited for this. Demonstrating visible and early successes gets momentum going for next phase of PIP where, one would want to uncover hidden improvements with the help of initiatives from all involved. This is a stage where lot of data analysis may be needed to do cost-benefit analysis of any improvements. Six Sigma tools are best suited for this stage of PIP.

Most important aspect I learnt of PIP is following a “quick prototyping” approach. Whatever improvements are discovered, big or small, need to be immediately implemented. General FMEA is advisable to avoid catastrophic side-effects of improvements, but holding off such implementation till every small detail is planned and accounted for is waste of opportunity. Management support in this stage is crucial to understand philosophy behind rapid prototyping and not to punish small failures… but to focus on the pursuit for big victories.