The pharmaceutical industry is fortunate enough to be relatively immune to the changing fortunes of the global economy and the instability of financial markets. Even so, the changing global economic landscape has focused thoughts in the industry on the challenges of procurement and the dynamics of relationships with suppliers.

As in many industries, pharmaceutical companies know that whether the global economy is ailing or in rude health, the all-important factor in a successful procurement strategy is to get the basics right.

“The challenges we face are in three categories,” explains Dennis Truax, senior director procurement, international, for Eli Lilly.

“Firstly, there are the fundamentals: driving productivity, getting the best value for our spend and taking cost out. Productivity in particular is a big factor for our industry. Secondly, we have to improve supplier relationship management programmes, partly by educating line business managers on their responsibilities as the owners of those relationships.”

“The third challenge is our risk management programme, of which the implementation is a big focus for us. It is a challenge because some of the information you need to do that is not always readily available,” he adds.

“We are fortunate that the impact of the global downturn is not as pronounced in this industry.”

Founded in 1876, Lilly is the world’s tenth-largest pharmaceutical company, and is consistently ranked as one of the best companies in the world to work for, prizing excellence and integrity as key corporate values. It is the company behind many well-known drugs, including Humalog insulin for diabetes, Zyprexa for schizophrenia, Cialis for erectile dysfunction and Erbitux for colorectal cancer.

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Procurement is an important focal point for a company that is committed to supplying innovative products in a highly competitive, research-intensive market.

Suppliers play a vital role in enabling the company to live up to its commitments to patients and customers, and Lilly goes to great lengths to ensure that it engages suppliers that are highly compatible with its business, and who can balance its goals of innovation and cost effectiveness.

In many cases, Lilly requires suppliers that can offer innovative technology as well as creative business processes. At the same time, however, new ideas must be backed by a solid, sustainable business.

“Risk management is more prominent because of the economic downturn. Although we had a programme in place the downturn accelerated its implementation. It became important to accelerate the cycle and make improvements as we go along,” says Truax.

As many companies are finding, there is no silver bullet that helps an organisation achieve a better analysis of its partners in the supply chain and enhanced risk management. 10% inspiration must be matched by 90% perspiration.

“It means working harder and a lot of prioritisation. You need to decide where to focus. It is easy to say that you want to improve fast, but there is no magic to it except hard work. We prioritise by sharing a lot of information within our broader business and the feedback we get helps us to increase the sense of urgency around key matters that merit more attention,” adds Truax.

Lilly’s success in supplier selection

Just as the economic downturn has not drastically affected Lilly’s global business performance, nor has it radically changed the way in which the company approaches supplier relationship management. It has, however, caused it to emphasise the importance of managing these relationships effectively and around clear goals. Truax and his team have, therefore, ramped up the rigour with which those relationships are evaluated, managed and maintained.

“Trust is the single word that counts, and it can only be built through open and clear communication.”

“We are fortunate that the impact of the global downturn is not as pronounced in this industry, far less than in construction or telecommunications, but there are still very important issues to consider in terms of supplier relationships,” he says.

“Risk management from a preventative point of view is very important, so we carefully assess credit ratings in terms of long-term viability. There is also a continuous process, regardless of the economic cycle, to build relationships with key suppliers.

“We started to focus on that five years ago, although there is still room for improvement. We are always looking at our programme to make it better, and we always will.”

A crucial element in achieving this improvement is the ability to share information openly with suppliers, and for those suppliers to reciprocate. Truax recognises that trust is the cornerstone of sustainable partnerships along the supply chain, and is the only solid basis for a mutually beneficial relationship. At the same time, however, he accepts that it is not something one can conjure out of thin air. Once again, hard work and commitment must combine.

“Trust is the single word that counts, and it can only be built through open and clear communication. It takes a while to achieve, for people to get to know each other and for an open discussion of goals to take place. There needs to clear alignment and there must be measures in place that both sides see as credible. Both sides must perform and live up to the commitments they make,” he explains.

He readily accepts that there is nothing new or groundbreaking in this line of thinking, but while it may be common sense, he believes that mistakes can be made with the obvious strategies precisely because they may seem familiar and, therefore, mundane. It is his firm belief that there still needs to be conscious effort on both sides to build fruitful partnerships with suppliers. Nothing can be left to chance and everyone must recognise the role they play in delivering mutual benefit.

“Our programme makes it clearly visible,” he says. “Building supplier relationships is a joint responsibility between procurement and the other line businesses within our organisation. We teach our procurement people about how to establish internal relationships, we give them the tools and a common language to communicate with the rest of the business.

“In many cases we find that external suppliers are willing to invest and to change their processes in order to build strategic relationships, but both sides need to see the advantage of doing so. Also, we don’t find target this commitment in all segments of our business. We focus on where the biggest advantage will come from that kind of strategic relationship.”

“Recognising where the most value will be generated from sustainable, long-term supplier relationships is vital to Lilly’s procurement strategy.”

Target selection

Recognising where the most value will be generated from creating sustainable, long-term supplier relationships is vital to Lilly’s procurement strategy, and is a line of thinking that should be relevant for any company, regardless of industry sector.

After all, maintaining constant vigilance and delivering continuous improvement in supplier relationships demands time and effort, which should be focused on those areas that yield the greatest business value.

In line with his theme of prioritising the basics of procurement, Truax believes that refining the processes that govern supplier relationships should begin with the very first steps in the initial stage of choosing a supplier.

“We build certain things into our supplier selection process, one of which is the issue of cultural fit,” he says. “We need to ensure that there is the right attitude on both sides to build something better than the original contract. So, we start early with how we choose our partners. Forethought eliminates many mistakes.”

Within Lilly, the criteria for supplier selection are clearly laid down, as is the process for owning and managing the relationship within the company. At the same time, however, the process is not carved in stone, as it must remain flexible and responsive to changes in the market and changes in the business. This need for agility has been highlighted by the turmoil in the global economy.

“We call it evolution, not revolution,” Truax adds. “The core of our processes is sound, but we are always looking to learn from how relationships change. During the downturn we have learnt some lessons that we will use going forward. For instance, our risk management strategy will stay a key focus even when the economy improves. Should it happen again then it will be good to be better prepared. Organisations must maintain their learning going forward.

“We intend to retain our rigour in the good times when they return. We must be thorough and vigilant in the good times as well as the bad times.”