E&Y - Forging an agile, secure supply chain: 5 Insights - September 2013

Tom, the CEO of Big Pharmaceutical Co., had urgent questions after hearing about a possible contaminated lot of biologics at one of the company’s far-flung network of plants. If the lot was contaminated, the consequences for patients and the company — financial, legal and reputational — could be enormous.

Just yesterday, he had asked Steve, the Head of Supply Chain, about the status of the company’s lots and batches, and Steve had said, “We don’t know.” Tom wondered: What if the lot made it to pharmacy before it could be tracked and destroyed? What if other batches at the same plant were contaminated? Which supply chain point was most vulnerable to fluctuations? What would this mean for product supply?

Patient outcomes were at risk, and so was the company’s business. Was Big serving its customers in an optimal way in terms of time and profitability? Did it even know what its true cost to serve was? With Big’s new push into emerging markets, having supply meet demand had never been more critical.

Tom started thinking more deeply about Big’s supply chain. Since the company went global a decade ago, there had been lingering concerns about an ever-expanding supply chain that had moved beyond the legacy blockbusters to encompass a much broader and more complex product line. Big was counting on a broader range of products to deliver the financial performance it needed.

Insights for executives5

Forging an agile, secure supply chainThe case for combining performance improvement and risk management

Life Sciences

Of special interest to Chief operating officers Chief risk officersVice presidents of tax

The questions piled up: can we meet our market commitments? What about our relationships with our suppliers and contract manufacturers? Are we ready to deal with the potential for rising theft, diversion and counterfeiting while controlling costs? Do we have the right processes to balance global supply and demand in a more complex supply chain? And what about regulators across the globe — can we be sure we’re in compliance and that we’ll remain in compliance as regulations shift?

In other words, did Big Pharmaceutical Co. have the agile supply chain it needed to not just survive, but thrive?

Could the supply chain deal with unprecedented complexity and risk while focusing on customer service and costs as well as anticipating change? Was the supply chain compliant, reliable and flexible in this ever more volatile business climate?

Do we have the right processes to balance global supply and demand in a more complex supply chain?

Big Pharmaceutical Co. needed more visibility into its supply chain. Tom needed to understand Big Pharmaceutical Co.’s greatest supply chain risks and how to prioritize them. He reached for the phone to call Steve. It was time to rethink Big Pharmaceutical Co.’s approach to supply chain.

2 | 5 Insights for executives [Life Sciences]

Why now?Key customer satisfaction indicators include on-time order fulfillment. With global supply chains spread across continents, visibility in terms of product traceability, manufacturing facility reliability, product margins and ability to meet market demands is key. Companies with limited supply chain visibility risk moving blindly in a rapidly changing landscape. Many are reassessing which capabilities they should develop and which executives, such as chief marketing officers and chief risk officers, should spearhead the efforts.

Recent EY surveys reveal that while life sciences companies are consistent in their recognition and prioritization of industry issues, there are clear differences in how leading and lagging companies are mobilizing to address those issues. The industry is no longer moving as a single pack — the gap between leading companies and laggards in supply chain visibility is growing, and companies that don’t embrace the realities may soon find the gap difficult to close.

How does it affect you?A global supply chain amplifies a world of vulnerabilities — from local events such as disasters or strikes to differing tax and regulatory regimes across the world. Limited visibility into the supply chain increases the odds that your company’s response to new business requirements and potential

risks will be fragmented, limited and delayed. Inadequate understanding of the risks in managing a more complex global supply chain may lead to interrupted supply, or worse.

What’s the issue?In today’s global business environment, supply chain reliability and agility are more critical yet less assured than ever. Supply chains have become more complex, they involve more risk, and cost and margin pressures have never been greater. The competitive stakes are higher, especially in gaining access and share in emerging markets.

Life sciences supply chain management in the current complex, fast-paced, cost-conscious environment requires a comprehensive, disciplined approach and relentless application of the organization’s tenacity to implement it. The first vital steps are to improve the accuracy and transparency of customer, item, batch and inventory data. Companies that can see clearly across their supply chain operations can be more flexible and respond quickly to get the right product at the right time to the right customer.

35 Insights for executives [Life Sciences] |

What’s the fix?Reliability-centered maintenance programs are going to come under increasing pressure as the risk of wear-out failure grows exponentially. These programs need to be supplemented with two parallel activities: a regulatory-accelerated replacement strategy and an operational risk management framework. The first focuses on accelerating and prioritizing replacement and financial recovery while the second focuses on a more formalized avoidance program and predictive assurance of response mitigations.

Implement a regulatory-accelerated replacement strategySome jurisdictions have already addressed accelerated recovery of the financial costs of asset replacement through rate riders or surcharges. However, many other jurisdictions experience a longer recovery time and less certainty in rate base. Regulators themselves are conflicted. They recognize the urgency to replace certain assets but struggle with the cost that will be passed on to ratepayers. As a result, the onus is on the utility to articulate the risk profile to the regulator and create awareness of the risks and mitigation plans.

The utility must empower the regulator with a compelling case for investment that aligns with the public’s need for reliable energy distribution. A critical asset risk and investment plan allows utilities to quantify the potential financial consequences of a critical asset failure using the current risk profile and the proposed risk profile resulting from the replacement program. This type of analysis can support the creation of the compelling case regulators seek.

Understand the tax implications associated with accelerated replacement

The IRS has recently issued guidance that will impact the tax treatment of these expenditures. Because the regulatory treatment of these tax conclusions presents risks and opportunities, a utility will need to carefully analyze the regulatory dimension of these tax issues. Data analytical precision allows a utility to reflect these impacts to support its desired regulatory conclusions in a manner that gives the regulatory body confidence that the utility has complied with applicable auditing and reporting requirements. As a result, applying analytics allows a utility to realize an immediate tax benefit through “look-back” provisions and capture future benefits that satisfy regulatory and IRS demands for reporting accuracy.

Use a framework to manage the operational riskIn addition to playing the long game in terms of asset replacement, utilities need to manage in the short term the operational risk associated with aging assets. All utilities have a mitigation strategy of some kind to address operational threats. However, not all know whether their mitigation activities are working.

An effectively designed and deployed operational risk management framework helps determine whether risk mitigation activities are working, particularly before an operational threat occurs. The framework encompasses four interrelated components: periodic assessment, key indicators, loss data and modeling. It considers not only the unsafe event, but also the latent failures that may exist, such as organizational influences, unsafe supervision and other preconditions for the unsafe act.

Enable the operational risk framework with data analyticsUsing advanced data analytics to enable framework activities gives utilities the ability to understand not only what has already occurred, but also why it happened and what may be lurking around the next corner. There are three levels of analytics to consider:

• Descriptive analytics mine past data to report, visualize and understand what has already happened (lagging indicators).

• Predictive analytics leverage past data to understand the underlying relationship between data inputs and outputs to understand why something happened or to predict what will happen in the future across various scenarios (leading indicators).

• Prescriptive analytics determine which decision and/or action will produce the most effective result against a specific set of objectives and constraints (modeling).

Deploy the framework more effectively using a Governance Risk and Compliance (GRC) platformA GRC platform can enable a more effective deployment of the operational risk management framework. It allows utilities to use surveys or test plans to perform periodic assessments, enter risk indicators already identified by management and track the indicators by linking them into source systems already providing operational data.

Utilizing a single GRC platform to track, measure and monitor operational risks provides management and executives with a single point of view and the reporting to enable proactive decision-making when it comes to failing assets.



Supply chain

Social media comments

Health authority inspection

Consent decreeDo not make

product. Do not collect revenue

FDA makes new rule — Evaluate options

Warning letter — Regulatory response needed

Competitor has product

availability issues. You sell more!

Inflexible supply agreements with

suppliers, third-party manufacturers

European labeling not

approved, delay shipment

Poor master data definitions —

not sure which product to

ship to which customer

Demand outstrips

supply — sales forecast

accuracy and volatility

Quality issues with API sourced

in Asia

Supplier facility suffers storm damage and key material is delayed

Plant in North Carolina has utility

(power, water, waste) issuesCMO can

meet new serialization

requirements!

New plants in

Ireland and Singapore —

invest $1 billion

Post-merger process

integration and reliability

issues

Unexpected FDA inspection —

only minor Form 483s

Mix-up in specifications and labeling — rework

product

Supply network design not tax

effective

Identified suspect fraudulent returns

and credits — save $15 million

DEA finds product mix-ups

in warehouse and returns

Cost to serve outstrips margins

in emerging markets

Successful pilots of UDI/UDID

Product launch

Start

PlanLo

gistic

s

Procure

Make and test

What’s the bottom line?Increasing visibility and leveraging risk management can help your company develop and sustain an agile supply chain that is compliant, efficient and flexible. The benefits are substantial — increased shareholder value, the ability to be first to market in emerging markets and an operations landscape that is fertile ground for increases in productivity.

Companies that don’t strive for an agile, transparent supply chain are putting the company, shareholders and even patients at risk. A consent decree or warning letter can significantly damage a company’s value and make it vulnerable to a takeover, wanted or not. In today’s complex environment, life sciences supply chain leaders are finding ways to create agile, cost-effective, safe and secure supply chains by leveraging performance improvement and risk management at the same time.


Want to learn more?

For related thought leadership, visit www.ey.com/lifesciences

The answers in this issue are supplied by:

Jamie HintlianPrincipal, Americas Advisory Life SciencesErnst & Young LLP +1 617 375 [email protected]

Frank BaroneSenior Manager,Americas Advisory Life Sciences Ersnt & Young LLP+1 732 516 [email protected]

Ed TomlinsonSenior Manager,Americas Advisory Life Sciences Ernst & Young LLP+1 215 448 [email protected]


We want to hear from you!Please let us know if there are subjects you would like 5: insights for executives to cover.

You can contact us at: [email protected]

EY | Assurance | Tax | Transactions | Advisory

Let’s talk: protecting performanceSafeguarding reputation and business performance is a top priority for organizations today. Rising commodity prices are leading to greater competition for available resources and placing an ever-tightening squeeze on margins. Intense emerging market competition is forcing companies to manage internal and external access to critical information. Industry consolidation, aging assets, complex global supply chains and tighter regulatory scrutiny add to the complexity of today’s business environment. In an era bursting with opportunities and unbounded vulnerability, organizations have to rethink how they can simultaneously protect the business and accelerate performance.

Breaking down silos, identifying the risks that matter most, automating internal controls, and using advanced data analytics and GRC technology give organizations the ability to do more than protect themselves from the worst. These steps also give organizations the agility to seize the opportunities that create lasting value across the enterprise. Learn more at www.ey.com/protect

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About EY’s Advisory Services Improving business performance while managing risk is an increasingly complex business challenge. Whether your focus is on broad business transformation or more specifically on achieving growth, optimizing or protecting your business having the right advisors on your side can make all the difference. Our 30,000 advisory professionals form one of the broadest global advisory networks of any professional organization, delivering seasoned multidisciplinary teams that work with our clients to deliver a powerful and exceptional client service. We use proven, integrated methodologies to help you solve your most challenging business problems, deliver a strong performance in complex market conditions and build sustainable stakeholder confidence for the longer term. We understand that you need services that are adapted to your industry issues, so we bring our broad sector experience and deep subject matter knowledge to bear in a proactive and objective way. Above all, we are committed to measuring the gains and identifying where your strategy and change initiatives are delivering the value your business needs.

© 2013 Ernst & Young LLP. All Rights Reserved. SCORE No. BT0333ED 0114

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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E&Y - Forging an agile, secure supply chain: 5 Insights - September 2013

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Transcript of E&Y - Forging an agile, secure supply chain: 5 Insights - September 2013