External Network Manufacturing Capacity Design and Procurement in the Pharmaceutical Industry

Abstract

Pharmaceutical companies typically manufactured therapeutic drugs internally; however, the increased rate of innovation in the last decade has significantly pushed the balance toward external manufacturing. Moreover, the consolidation of contract manufacturing organizations (CMOs) has generated a need for new operating models between the parties. In this thesis we study the supply chain performance due to manufacturing asset cross-validations and the contract structure of the capacity reservation agreement. Our goal is to identify ways of working between pharmaceutical companies and CMOs that close the flexibility gap between a fully internal supply chain and one with external stages, while maintaining the cost advantages of the latter.

We assess small-molecule manufacturing capacity constraints using a linearized, multi-objective optimization model. Stochastic simulations reveal that connecting all products and assets in the portfolio through cross-validations reduces the supply shortfall by 6%, while limiting the impact on a single product. However, in order not to be performance-constrained by the need to have net zero demand fluctuations across all products in the typical 24-month window between ordering and delivery, we propose an option contract-driven capacity reservation model. Such a procurement construct allows the pharmaceutical company to hedge against potential demand downside, while making potential upside accessible at constant cost of goods sold. Moreover, option contracts allow the CMO to increase its 10-year net present value per contract by 50%, at a reduced effective order lead time of 12 months.