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 the larger markets, portfolio expansion and specialised products can result in low volumes. These effects result in an explosion of packaging components of ever decreasing volumes, to manage and maintain. This can create a significant overhead cost, often referred to as a ‘hidden factory’ and reduce run times on packaging lines. We have seen healthcare product companies where more than 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:
Therefore both good and bad complexity exists. The key is to learn how to manage good complexity, that which presents value in terms of financial return from the sale of product and develop methods to control bad complexity.
Unfortunately, there does not seem to be any ‘golden bullet’ that will help you to resolve these complexities easily. Rather, there are a series of techniques that can be applied across the portfolio to manage the complexity and create an optimal portfolio. At Be4ward, we have developed a three-stage approach incorporating these techniques to help you.
Step 1: Understand your portfolio
This can be broken down into three main activities:
Step 2: Eliminate the ‘Bad Complexity’
There are many aspects of complexity that have crept into portfolios but don’t drive value either for the customer or in your own operations. Whilst these may have occurred for legitimate reasons, they need to be weeded out and addressed.
Step 3: Introduce capabilities to cope with the ‘Good Complexity’
Once you have assessed your portfolio, pruned and removed sources of unnecessary complexity, you will be left with a portfolio that adds value to the customer and that meets the commercial objectives of your organisation. However, it is likely that there will still be small volume products and elements of complexity that are necessary to be supplied. You therefore need to determine methods for how you can supply these products, without excessive economic cost to your organisation.
From engagements with our clients, there are three key learnings to highlight:
1) Look at the bigger picture, not just your packaging operations
Whilst many of the problems from portfolio complexity manifest themselves in packaging operations, it is rare to be able to solve them by taking action just within the packaging facility. Moreover, there are further benefit areas to be considered outside of packaging operations. It is essential to take a cross-functional approach involving Commercial, Regulatory, Supply Chain, Packaging and Technical designing solutions across the supply chain to meet commercial and regulatory needs.
2) It is difficult to generate sufficient savings on high margin product
Pharmaceutical, Biotech and Medical Device products are generally high margin and in most cases the loss of sales through the discontinuation of SKUs is difficult to counter by comparative cost savings, particularly where the packaging element is a small percentage of the cost of goods. It is often better to find a mechanism to keep small volume SKUs available through alternative supply strategies, for example shared packs or late stage techniques. Shaving off a few SKUs from a packaging operation rarely makes much difference to overhead costs and in our experience, the only way to generate meaningful savings is through significant rationalisation allowing you to shut facilities.
3) Commercial sponsorship is key
From the above, the role of Commercial can be seen to be key. In the most successful programmes, Commercial have provided the lead sponsorship and want to simplify the portfolio. This is not a route to dodge robust business cases but a mechanism to overcome the inevitable resistance that occurs when changing or withdrawing product.