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| Utilising manufacturing plant effectively for profit in the pharmaceutical sector |
| The future of the pharmaceutical industry depends upon the development of new drugs and new markets. It is therefore not surprising that this absorbs the energy of decision makers in most pharmaceutical companies, as well as accounting for nearly 25% of the UK’s total manufacturing research expenditure. In this quest for progress one source of profit is being overlooked, which means hundreds of millions of pounds are lying undiscovered and untapped within the industries existing operations. |
| Manufacturing and packaging plants are all too often seen as a ‘necessary evil’. Some of the world’s largest pharmaceutical companies have even toyed with the idea of outsourcing all of their packaging. It doesn’t matter if a plant is a contract packager, or part of a multi national drug company, there is approximately £3/4m - £5 million pounds of additional potential profit in every pharmaceutical plant in Europe and North America. This untapped potential can be realised through a step change improvement in productivity. Unique constraints placed on pharmaceutical operations such as clean ups, conformity and approval all contribute to making it difficult to run as efficiently as, say, a soft drink canning line. However not only is improvement on this scale extremely valuable, it is also possible. |
| Recently, a few companies in the pharmaceutical industry have followed a proven, new method of productivity improvement, and have all managed to achieve productivity improvements of between 20 and 50%. This method has been developed in other industries where it has never failed to deliver productivity improvement below 10%. Due to the nature of the pharmaceutical business, improvement is extremely valuable. One of the world’s most successful pharmaceutical companies added £3.5 million pounds to the profits of just one of its sites using this methodology. What follows is a description of that project including how and why improvement is possible. (Due to confidentiality the name and some of the details of the project have been concealed.) |
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| The financial benefit of a 10% improvement of two different processes can be remarkably different depending upon the business situation. Defining the value of improvement is always the first stage of the improvement process. |
| There are a number of ways that a business can turn increased productivity into profits. Firstly, if the market requires it or a market can be found, then selling additional product is usually the most profitable. This is attractive because the only additional casts are raw materials and shipping – rarely a large part of the total sales price in this industry. The labour is already paid for, there are no additional machines to depreciate and of course the fixed overheads stay the same. Productivity improvement creates new time out of existing operations. In this plant the value of improvement on one of the lines was as worth over £1 million. This was because the supply did not meet demand. Each blister pack had a sales price of £4.80. The material cost of the tablets in each pack was £0.40 and the total packaging material cost and shipping was less than £0.20/pack. Clearly the reason for the high £4.20 marginal profit is due to the millions of pounds of costs involved in bringing this drug to market. |
| The business situation of the products that this plant produced fell into three categories: |
- The first was a consumer product, made on two lines, which was an ‘over the counter’ lotion. Customer service failures meant that several thousand outlets throughout Europe were out of stock. Customer service levels below 100% nearly always have a financial impact, and this was true here - as well as future market share implications this was losing the company revenue every day. It was calculated that 1,200 extra packs could be sold each day. If productivity could be improved to cover this then that would be worth £5,000 per day, or £1.8 million per year. A model was also used to calculate the future market share implications of shorting the market. Simply put this model recognises that when customers who are loyal to a brand are forced to buy a competitors product (due to availability), some will stay with the competitor and not return.
- The second category was a process that just kept up with demand. This required some overtime during busy periods. The opportunity on this process involved contract packing. The company was outsourcing some of its product, the equivalent of 20% of the lines current capacity. The cost of this outsourcing was £400,000 per year. The first 20% improvement in output was therefore worth £1/2 million pounds to bring the contract back in house, and a further 8% was worth £40,000 p.a. in reduced overtime.
- The third situation was a serious quality problem. This involved the production of small tubes of topical cream. The preparations had taken place for a product launch, however unfortunately they were unable to control the weight of the finished product to within the required tolerances. This resulted in the launch being postponed by two months, at an estimated cost of £900,000. As the new deadline approached they were no closer to being able to solving the tube weight problem.
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| In each case straight forward analysis, and the use of existing information allowed an accurate value to be calculated for the improvement of each process. |
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| Now that the value of improvement was known we were able to analyse the current process performance of processes which needed increased output, identify what the potential capacity of the process was, and understand the problems that were limiting output. The quality problem was tackled in a different way, as explained later. |
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| The value of the quality problem was straight forward to value – another delay would cost a further £900,000. Valuing problems on the other processes is not as simple, but can be done easily and scientifically. Now that we know the value of improvement we can understand the value of one hours lost production. If we take the blister process where supply could not meet demand, one extra hour, at current efficiency, was worth £616 per hour, where as one hour lost on the contract packing line was worth £171. |
| 3 Categories of problem |
| The 3 categories that the problems fell into were downtime, slow running and waste. |
- Downtime problems
This included area clearance, machine jams and breakdowns. The value of one hour’s downtime is straight forward - £616 or £171.
- Slow Running
If a machine runs without stopping for 2 hours, but only ran at 50% of its potential speed, then 1 hour is lost due to slow running. By understanding the actual normal speed and the potential speed a time, and therefore a financial value, can be calculated. In the case of the blister process the design speed was 90 bpm (blisters per minute), but due to problems with the labeling machine it had only been validated at 75 bpm. This 16% loss in speed equated to more than 900 hours per year, or more than £575,000p.a.
- Waste
Every time finished product is thrown away it has two costs: The first is the cost of any raw materials that are not recoverable, the second is the time spent producing it. This lost time cannot be recovered and can have knock on soft effects such as delivery to time and customer satisfaction.
The latter is often the biggest, albeit hidden cost to the business. The combined affect of waste can easily impact a business bottom line to the tune of £500,000 per annum.
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| Given the huge commitment in terms of resource and expenditure required to license new drugs, it is no surprise that operational efficiency in manufacture does not always take first priority. |
| However, it is a fact demonstrated by our own experience that many millions of £s of bottom line profit are lost each and every year through lost time and lost waste on the manufacturing floor. |
| This is not because Manufacturing teams are not doing their jobs. Far from it. It is usually that additional pressures and constant fire-fighting taking place each and every day, means that there is no time to sit back and objectively challenge what has always taken place. |
| It is very tempting to dismiss this article as fanciful and “it wouldn’t be the case here” Our experience with working with in house teams in a wide variety of businesses from Pharma to Chemicals to Defence is that this is not the case. |
| If your business could earn an extra £1million on your bottom line this year, what would you do with it? |
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| To discuss this approach in more detail contact Andrew Hawes at Newton Consulting’s office on 01543 481557,or andrewhawes@newtonconsulting.co.uk, or visit the website at www.newtonconsulting.co.uk |
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