Is the pharmaceutical industry ready for value based procurement?

Abstract

In the U.S. news, healthcare related headlines frequent the covers of newspapers and make regular primetime news appearances and the U.S. is not alone. The world is awakening to a need for more equal access to healthcare for its citizens and governments believe this equality will be achieved through tighter regulation in huge healthcare markets such as the pharmaceutical industry. To sustain shareholder value, as a result of these changing price structures, Novartis sees a need to reassess its sourcing and procurement strategies, assessing the feasibility of value based procurement, through staged implementation. While all procurement organizations tend to focus on maximizing cost savings for a company, this approach can often alienate suppliers and leave untapped value on the table. This additional value can be captured through long-term supplier development and collaborative work to utilize a supplier's knowledge, while maximizing the value proposition both for the company and the suppliers. For this early research, there was a focus on packaging equipment at pharmaceutical production facilities. The goal has been to understand the types of savings which could be achieved by purchasing extending its measure of success beyond price reduction to include value, such as through enabling increased quality or flexibility. As a company formed from many individual companies with a myriad procurement maturity, Novartis has an extended geographic and physical footprint which requires many disjointed groups to come together to produce products. This project has focused on developing a new procurement strategy to help optimize and standardize the procurement of Novartis's packaging lines at the manufacturing facilities, enabling them to work more cohesively to deliver greater benefit to the company. Additionally, following a successful pilot of the proposed sourcing practices in the packaging equipment space could be replicated in other category spaces both in the Pharmaceutical division and throughout Novartis's other six divisions. Novartis will continue to develop and produce drugs, as the predecessor companies have excelled in doing for more than a hundred years but it should also realize what expertise should be core and where others outside of the company excel.