Stock Keeping unit (SKU) and packaging component portfolio control is a critical activity for organisations. Ensuring the correct balance between a commercially advantageous portfolio, whilst minimising unnecessary pack and component variants is a challenge faced by many healthcare product companies as they grow their product range and expand into new markets. Therefore ensuring there are decision making processes in the organisation to manage required levels of complexity is a key aspect of effective pack management.
In this blog series I will describe key features of a complexity management capability in an easy to digest format. I hope you find this information useful. We are always searching for ways to improve our work, so if you have any feedback, please do not hesitate to contact me at Andrew.Love@be4ward.com.
Why does Packaging Complexity occur?
Many healthcare product companies have broad product portfolios that they are selling in multiple markets. Beyond the US and big five European markets, sales volumes can drop dramatically for individual SKUs. Even within those markets, portfolio expansion and specialised products can result in low volumes. These effects result in an explosion of packaging components of ever decreasing volumes, creating a significant overhead cost (often referred to as a ‘hidden factory’) to manage and maintain, and reducing run times on packaging lines. We have seen healthcare product companies where >50% of their SKU portfolio have daily sales volumes of less than 30 packs, yet where packaging batches supply years of stock.
So why does this happen? We suggest four main root causes:
1. Maximising the sales value of the portfolio
As margins are squeezed and new blockbusters are becoming increasingly difficult to find, healthcare product companies are focusing their attention on maximising the value that they can extract from their current assets. One of the significant ways they can achieve this is to create and launch as many existing product variants, in as many markets, through as many channels as possible. For many companies this represents a significant change of strategy as traditionally they would have focussed their attention on a few large products in the larger volume markets.
2. The move to higher value, lower volume products
Many new products coming to market are for treating more complex conditions with increasingly tailored therapies. Whilst these products may be very high value, the product volume is typically much lower than traditional pharmaceutical products. Moreover they often have complex dosing regimes, devices or combination products that require specialist and complicated packaging.
3. Legislation and regulation drivers
Legislative and regulatory requirements are continually becoming more stringent, e.g. Braille, font size, authentication, tamper evidence etc. The requirements and development of this legislation is not harmonised across all of the different legislators globally, and in some cases it could appear that any effort to harmonise is met with a counter requirement for differentiation. This not only results in added complexity through new features having to be added to the packaging, but those requirements being necessary for some markets but not others (yet a product may be packed for all markets on the same packaging line).
4. Local requirements and preferences
Requirements here can fall into two groups – necessary requirements to meet the needs of the market e.g. language, and local marketing and historical preferences e.g. a 28 or 30 tablet blister count. Some of these are captured in local regulation and it can be difficult to differentiate between what is a ‘must have’ and what is a ‘nice to have’. But even where it is not a mandated requirement, it can be very difficult to shift a local preference.
Packaging complexity creates a number of consequences for healthcare product companies and their customers. These include:
1. Compliance issues
It is essential that the correct products and components are supplied to the correct markets with the latest approved product information. With an ever-increasing portfolio complexity, exercising appropriate jurisdiction control over what is supplied where and when gets ever more difficult. Also, many companies have tried to overcome the complexity of supply to the smallest markets with standard ‘general export’ type packs, only to find unexpected and uncontrolled local repacking or over labelling activity e.g. where standard leaflets are replaced with locally sourced local language ones. These sorts of practices obviously present an unacceptable compliance risk if not managed effectively.
2. Lost commercial opportunities and product unavailability
Sometimes the financial trade-off between the supply of a unique variant to a specific market versus the cost of supply doesn’t merit selling that product in that location. Whilst that may be considered a victory in minimising complexity, it is a lost opportunity due to an unsuitable supply chain and there are patients in that country that don’t have that product or product-form available to them. It is therefore a bit of a hollow victory, and if the company had more cost effective capabilities to supply and maintain such variants, this could have been avoided.
3. Manufacturing inefficiencies
Small volumes obviously mean small pack runs and lots of change-overs. This is generally counter to the objectives of a packaging operation, whom are measured on cost of goods, production efficiencies and line utilisation. We have seen many examples where the packaging line spends more time being changed over than actually producing product. Complexity can also create needs for specific additional tooling, equipment and hand finishing.
4. Support function inefficiencies
In addition to manufacturing inefficiencies, there is a whole ‘hidden factory’ in the support functions supporting the product and component range e.g. additional regulatory staff maintaining licenses and product information, increased volumes of artwork change, more purchasing activity, more warehouse space. This is often invisible and not considered in the cost of supply.
There are two main types of obsolescence (where materials are no longer fit for use) that we would consider; packaging components and finished product. Economic order quantities can mean that the volumes of packaging components purchased have a disproportionate amount of forward cover versus the typical rate of change of those components. Therefore high amounts of materials can be written off when components are changed.
Similarly, high inventories of low sales volume finished pack stock, caused by minimum packaging line order quantities risks obsolescence due to shelf life expiry, causing either product write-off or repacking.
So why is packaging complexity necessary? We would suggest there are two main reasons:
- Market access: you cannot sell the product in this market without meeting these specific requirements, whether they be legislative or not.
- Commercial advantage: providing these features gives an advantageous position in the market and the incremental impact on cost of goods is outweighed by the commercial benefits obtained.
So some complexity may be considered ‘good complexity’ because it presents value in terms of the financial return from the sale of the product. The key is to learn how to cope efficiently with this ‘good complexity’ whilst developing methods to control the other type of complexity – the ‘bad complexity’.
Unfortunately there does not seem to be any ‘golden bullet’ that will help you to do this easily. Rather, there are a series of techniques that can be applied across the portfolio to manage the complexity and create an optimal portfolio. In the following pages we will outline a series of tips for how to do this. These are broken into two sections:
Part 1: Techniques to control non added-value complexity and,
Part 2: Techniques to cope with added-value complexity
Packaging Complexity Management Tip 1: Understand the product/therapy strategy and value of complexity
Is the commercialisation strategy for the product and therapy and the subsequent value of complexity understood?
Different products will have different requirements for the complexity of the packaging componentry and SKU portfolio. This can be driven from many factors, including but not limited to:
- Therapeutic, titration and dosing requirements
- Unmet medical needs
- Legislative requirements of countries the product will be marketed in
- Competitor activity and the competitive environment
- Commercialisation strategies for the product
- Market positioning and product cost profile
- Product lifecycle, line extension and patent expiry strategies
- Combination products, starter packs, special usage requirements and other opportunities to assist patients and healthcare providers
- Product protection, temperature and security requirements
- Likely local dispensing requirements
Prior to undertaking any complexity reduction activities it is important to understand and document these requirements to:
a) Ensure they are clearly defined and met
b) Ensure they are maintained as needed
c) Ensure appropriate control can be provided to prevent further non-essential requirements emerging
Packaging Complexity Management Tip 2: Understand the portfolio, volumes and lifecycle of SKUs
Is the portfolio, volumes and lifecycles of your SKUs understood?
The next step in a complexity reduction activity is a detailed understanding of the target SKU portfolio. The scope of this may be certain brands, geographic areas, supply chains or perhaps your entire company portfolio.
For the chosen portfolio, you will need to understand:
- The description of each SKU – product, dose form, strength, volume.
- Where are they supplied from, which market(s) are they supplied to, which distribution lanes are used?
- What is the subsequent component range?
- What are the SKU volumes?
- What is the financial contribution of each SKU?
In addition, it is important to understand where each SKU is on its product lifecycle; are volumes increasing or decreasing. Typically, products go through lifecycle: launch, growth, maturity, and tail off. The value of portfolio complexity often varies through this lifecycle. Therefore, it is important to understand where a product is on its lifecycle as products where the volumes are likely to increase need to be considered differently from tail products where the volumes are declining.
This is the first of a series of 7 blogs giving a view of methods to deal with packaging complexity. Should you have any questions about this or any of my other blogs, or would simply like to request a copy of my booklets, please don’t hesitate to contact me directly on my email.