Going Lean - The pharmaceutical industry is subject to very special requirements: strict approval procedures, rising cost pressures in the healthcare industry and lost sales due to competition from generic manufacturers.

Yet some of their difficulties are self-inflicted, and pharmaceutical companies can make their processes significantly more efficient - as a comparison with operational excellence initiatives in the automobile industry demonstrates. Even product development can be restructured on "lean" principles.

At first glance, the pharmaceutical and automobile industries have little in common - drugs are not cars, after all. The type of customers and legal requirements of the two industries are likewise highly distinct. Drugmakers are faced with a range of special problems: Approval procedures for new drugs are becoming more and more stringent while cost pressures continue to rise as politicians and health insurance companies seek to stem rising costs in national healthcare systems. The companies also face the prospect of falling revenues as patents expire and generic manufacturers launch competing products.

A Homemade Problem

Yet some of the challenges facing the pharmaceutical industry can be traced back to the companies themselves: The development of new drugs has become markedly more cost-intensive in recent years. Compared to other industries, pharmaceutical companies rely heavily on in-house value creation. Organization of the value-creation chain in the industry is often sub-par; in production in particular, there is often a great deal of waste. Many different lot sizes and packaging variations mean that machines have to be retooled frequently. On average, wait times and other activities that do not directly result in revenues account for 60 % of production time. Pharmaceutical companies can therefore significantly increase their efficiency if they successfully restructure their production and logistics processes.

Lean Management and Operational Excellence

The automobile industry, which has faced similar cost pressures for decades, has already gone through just such a slimming-down process. Manufacturers have reduced their share of the value creation chain to their core competencies and restructured their production and logistics processes so that parts are only delivered to the assembly line when needed. This has allowed manufacturers to shrink their inventories substantially. And overall equipment effectiveness (OEE) exceeds 90 % in the automobile industry. Porsche provides an impressive example of the methods used by carmakers to achieve such significant efficiency gains.

Over the past 20 years, the carmaker has implemented the principles of "lean management," reducing its work processes to the essential. Porsche is constantly looking for ways to improve its organization. The objective is for all employees to continuously question the company's processes and optimize them step-by-step. The experts at the group's consulting company Porsche Consulting, whose 250-plus employees have been supporting companies in the industrial and service sectors around the world for years, talk about "operational excellence."

And Porsche has it in spades. Manufacturing costs for a Porsche 911 today are significantly lower than in 1991. The reason: Porsche has continuously improved its production processes and made them more efficient. Moreover, today Porsche engineers keep the production process in mind when designing new products. But above all, competitive, efficient processes are made possible by Porsche's decision to keep only the production steps in-house that comprise its core competency.

Room For Improvement

Pharmaceutical companies can learn from the automobile industry, as successful consulting projects by Porsche Consulting in the industry have shown. The transformation begins with the development of new drugs. Over recent years, the average product development time in the automobile industry has decreased by 28 %; in the pharmaceutical industry, by contrast, it has risen by 31 %. Just as in the automobile industry, pharmaceutical companies can involve all departments, such as production, labor, marketing and sales, in the product development process from the beginning. A precise procedure defines individual steps - from the identification of a gap in the market to clinical tests and even the design of the package. The time-to-market for new products can be reduced by up to 25 %. It is also easier to identify unpromising products at an earlier stage. A company can save millions.

There is great potential for efficiency gains in production as well: Porsche Consulting projects in the pharmaceutical industry have shown that production and filling equipment can be retooled from one drug to the next up to 40 % faster. For instance, machine operators must perform as many work steps as possible before the machine stops operating (external changeover). Moreover, one person can operate multiple machines at once provided that they follow a defined tact. In this way, staff requirements can be reduced by up to 30 %.

Another area ripe for optimization is the enormous stocks held by drugmakers. In order to be able to deliver upon demand, stocks of some drugs are so large that they would cover a year's worth of demand. The result is that companies are often forced to destroy stocks when drugs have passed their sell-by dates, the packaging has been changed or demand has dropped. But the same supply capability can be achieved through short lead times in production and quality control - and with substantially smaller stocks and thus a significant impact on working capital.

An Example From Porsche

Here again Porsche can lead the way: In its Leipzig logistics system, Porsche has reduced the stock days' supply for required parts to under one day on average. Clearly defined processes and stocks deliver an additional advantage: comprehensive transparency. Fluctuations in the supply chain become visible very early and thus countermeasures can be defined in time. The reduction of stock was made possible by applying lean production principles to logistics: Employees and material follow a clear tact and parts are re-loaded as infrequently as possible.

Above all, however, the carmaker came to regard the supply chain as a whole - and the supply chain for cars is even more complex than those in the pharmaceutical industry. A Porsche consists of over 15,000 parts and several thousand supplier reference numbers. The steering wheel alone - one of 150 assemblies - emerges from a multi-step supply chain in which the trim, buttons and leather come from different suppliers with production steps in a dozen countries. And although there are millions of possible variants, Porsche can name a delivery date for customers within two minutes.

Unlike with cars, customers in the pharmaceutical industry generally do not accept delivery lead times. Nevertheless, the experts from Porsche Consulting have been able to help their clients in the industry to reduce stocks by up to 30 %. They rely on the "pull principle," in which current usage determines what is produced and therefore also which preliminary products need to be delivered. The finished goods stock must only last until more of the product can be produced. In the next step, a production rhythm is defined: different products are put through the machines in the order in which setup times can be kept to a minimum. This optimal sequence of products always stays the same; only the respective quantities are re-determined each time - in accordance with demand.

One thing is clear: The pharmaceutical industry is subject to very special requirements. Nevertheless, many successful optimization principles from the automobile industry can be applied to the pharmaceutical industry as well. Pharmaceutical companies that are able to significantly improve their operational performance and responsiveness will be the market leaders of tomorrow.