Research Korner: Pharmaceutical Case Studies

OPERATIONS & LOGISTICS MANAGEMENT: GLAXOSMITHKLINE

OPERATIONS & LOGISTICS MANAGEMENT: GLAXOSMITHKLINE   Introduction             In any given week, a large percentage of adults in the United Kingdom use some form of medication, half of these prescribed by a doctor. Sales of creams, ointments, vitamins, herbal supplements, headache pills, digestive aids, and other over-the-counter medications amount to a large sum of money. The pharmaceutical industry comprises of physical products which can be packaged, stored, and shipped, a primary reason this part of health production is truly international.             Yet, the pharmaceutical industry is in an increasingly complex and dynamic environment. There have been a lot of changes in recent years in the pharmaceutical industry and this trend is likely to continue. The opening of markets, increased buyer cost sensitivity, global competition and technological advances have increased levels of uncertainty. There has been an inexorable rise in patient expectations, increased costs of health-care and the inability of economies to meet the increased costs. Consequently, governments have introduced a number of measures aimed at increasing competition and accountability and thus reducing costs (2002). The top brand name blockbuster drugs have more than $2 billion in annual sales, and a single drug can make or break a company. The largest pharmaceutical companies (Merck, Johnson & Johnson, Pfizer, GlaxoSmithKline) each have more than $30 billion in sales. For this paper, the pharmaceutical giant GlaxoSmithKline will be used for discussion. GlaxoSmithKline is the world's largest pharmaceutical company with pro forma sales of 15 billion pounds ($22.5 billion). It has leading market positions in four classes of therapeutics. GlaxoSmithKline has number-one positions in central nervous system drugs, anti-infectives, respiratory products and vaccines. It also has the number-two position in gastrointestinal and metabolic drug sales, taking into account the Kytril, Famvir and Vectavir divestitures, according to the company. It holds an 11.6 percent share of the central nervous system drug market, 6.1 percent of the gastrointestinal and metabolic drug market, 16.7 percent of the anti-infective market, 17.7 percent of the respiratory market, and 26 percent of the vaccines market. Change is never easy, and the merger between Glaxo Wellcome and SmithKline Beecham in December 2000 to create GlaxoSmithKline Pharmaceuticals certainly caused a lot of change as the organization chose the best structures, systems and solutions with which to move forward. Now, nearly seven years on, information management (IM) is emerging with an improved, streamlined information service to serve research and development (R&D) business needs with a holistic article access strategy, of which document delivery is recognized as an important part. This situation is changing as new methods of accessing full text emerge. Funds that flow into GlaxoSMithKline are used in a variety of ways. For example, they are used to support research and development efforts as the pharmaceutical company seeks to develop newer and better drugs before their competitors. These funds are also used to support marketing and promotional efforts needed to get physicians to prescribe their drug rather than a competitor’s drug. In addition, some of these funds are used to cover the costs of manufacturing, distribution, and administration that go along with any production process, and a portion of these funds are profits, which are either given to stockholders in the form of dividends or reinvested in the company in the form of retained earnings (2004). A breakout of the uses of funds is shown in the table below:   Uses of Funds for Pharmaceutical Products ________________________________________________________________ Cost of goods                                               30% Research & development                          13% Sales, Marketing, administrations                        31% Taxes                                                               6% Net income                                                   20% Source: CMS Health Care Industry Update – Pharmaceuticals, 2003.               Before being able to analyze and comprehend the strategy used for a pharmaceutical company, it is important to first understand industry structure and competition. The market of pharmaceutical products can be divided into three segments based on the type of buyer: individual patients, group purchasers, and government ( 2004). The competition for sales differs significantly across these segments.             The structure of the pharmaceutical industry is dictated by a single fact: the large and important costs are all sunk costs. The value of a drug depends on how useful it is in treating disease, not how many years it took to conduct clinical trials or perfect the production process, nor on the number of failed projects the company had to fund in order to get a winner. Research and testing to bring a pill to market costs so much more than manufacturing that there is essentially no rational connection between price and cost, however measured. Instead, value and price depend on therapeutic effectiveness (1998).             Marketing creates additional divergence between price and “unit cost” because the value of each pill increases as it becomes better and better known as a brand name drug. While clinical value may not depend on marketing, economic value does. Once the drug is launched in the market, any distinction between the value added from increased therapeutic effectiveness and the value added from increased marketing is not wonderful.             Once GlaxoSmithKline marketing launches a drug, the brand name is worth something even if the drug has been superceded by superior competitors. The brand-name version will often continue to sell at the old high price even after the patent has expired in order to capture the consumer surplus of customers who are not price sensitive.             In addition to broadening its product portfolio, GlaxoSmithKline has strengthened its sales and marketing position. The merger creates a company with one of the drug industry's largest sales and marketing forces. It has more than 40,000 sales and marketing personnel throughout the world, including roughly 8,000 representatives in the US. Overall, the combined company will have 100,000 employees.   Part A To some, providing a global service may feel a little daunting and it certainly does have its complications – differing copyright laws being just one of them – but on other levels it feels like the most logical way of providing a service which when it comes down to it, is the same whatever country you happen to be in. When Jean-Pierre Garnier became boss of Glaxo Wellcome and SmithKline Beecham when they merged four years ago, he realized that without huge innovation the company was at risk. Increasing competition from other pharmaceuticals and practically empty pipelines meant that Garnier had to rethink how the firm could maintain its 7 percent market share. His solution was Tadataka Yamada, his top researcher, who was instructed to find a totally new way to discover drugs. It is easy to understand why quality is of utmost importance in the field of pharmaceuticals. Alongside other industries where safety is critical, the pharmaceutical industry is heavily regulated and for obvious reasons: mistakes in product design or production can have severe, even fatal, consequences for patients (1999). To ensure a place in the emerging market, given today’s competitive environment, industries must achieve internationally accepted quality levels. Global competition calls for higher levels of quality, efficiency and service. As the pursuit for global manufacturing expanded, several standards organizations worldwide developed guidelines on quality. Terms like quality control, quality assurance, quality management, quality policy, quality plan, quality system, etc., acquired different or conflicting meanings in different countries. However, it is all easier said than done. Pharmaceutical companies cannot make new drugs just at a whim. Neither can they sell them as easily. These processes have to go through certifications and quality management. There are certain series of standards such as the International Organization for Standardization (ISO). Recognizing that there was a need of standardization for quality management as well as for quality assurance, the International Organization for Standardization (ISO), headquartered in Geneva, established ISO-TC - which was a technical committee on quality - to write new quality standards (1996). There creates the basis for thorough and unambiguous documentation and that each pharmaceutical product runs through various stages of the quality control process during production - from the laboratory analysis of the base materials and tests during each individual production stage right through to the final checks (1993). These tests and checks, for example, verify that the active agent content and its release correspond precisely with the manufacturing specifications. When numbering individual production batches and managing test and release information, provides the manufacturer with assistance (2002). More extensive analysis options are also available, enabling product quality to be tracked through analyses of the number and type of fault reports per batch. This industry solution is also augmented by options for total quality control in the production of medications and sample data for various administration forms For example, pharmaceutical companies need to accurately weigh out all the substances and materials according to the formulas prescribed by the authorities before production actually begins. (2002) The security of documents in the pharmaceutical industry has become a critical issue since the advent of electronic data transfer. The regulations also require that secure, computer-generated, time-stamped audit trails are used to record the date and time of operator entries and actions that create, modify or delete electronic records.   èAdvantages             Expectations of the standard, for the most part, are based on previous experiences or claims made for it cited in the literature of the major ISO certification bodies, such as the British Standards Institute (BSI), Lloyd’s Register Quality Assurance (LRQA) and SGS as well as from empirical research studies. Among the cited benefits of ISO 9000 are: <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> increased market opportunities, as customers will see you as more effective and better organised; </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> reduced costs; </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> stronger reputation in the eyes of stakeholders; </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> reduced waste (time and materials); </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> win more business through complying with an internationally recognised and respected standard; </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> compete more effectively through increased customer satisfaction (SGS, 2001); </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> improved management control; and </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> higher profit margins, sales per employee and a higher profit per employee than the industry average (1993). </li> </ul> Empirical studies conducted in the USA ( 1994) and in the UK (1996) found that the main external benefit of the standard was higher perceived quality by the customer, the main internal benefit being better documentation. The preservation of reliable records depends in part upon the maintenance of essential metadata as it is a vital tool in helping an organization fulfill the recordkeeping specifications required by external bodies, including compliance with ISO 9000 requirements. The purpose of the guidelines is to improve the quality of products and services while increasing productivity and reducing costs. This standard has increased the importance and profile of many records management programs. Organizations have always kept records, but prior to ISO 9000 such managers considered them to be a necessary evil instead of an essential component of a quality system (2002).  (1996) found the highest ranked benefit to be improved efficiency, followed by an improved awareness of procedural problems – both internal benefits.   èDisadvantages              (1997) outlined ten main criticisms of ISO 9000 including: (2) quality by inspection is not quality; (b) too heavy reliance on people’s and, in particular, assessors’ interpretation of quality; and (c) when people are subjected to external controls, they will be inclined to pay attention only to those things which are affected by those controls.              (1996) identified eight major disappointments with becoming ISO 9000-certified. The main one cited was the time required to write the associated manuals, while the high cost of implementation came a close second. Of the seven major problems of the standard, once it was implemented ( 1996), the highest ranked was the high cost of maintaining the standard, closely followed by the high volume of paper work.              (2001), while agreeing that ISO 9000 was based on good intentions, suggested the following problems with the standard: (a) the fact that the standard creates unnecessary paper work is unquestionable; (b) the four main areas of cost (time, training, consultants, and registration) may never actually be recouped; (c) the standard may interfere with new and better ways of operating; and the standard is too general and not industry-specific.               Part B Comparing the contribution of TQM and ISO, it will be found that the companies adopting TQM achieve higher improvement than those adopting ISO at all levels of application. Companies which had fully implemented ISO had an average improvement of 36 per cent, while companies which had fully implemented TQM had an average improvement of 99 per cent. The comparison shows that TQM as a whole is more beneficial than ISO (1999). The ISO 9000 series is currently used in more than 90 countries. The standards that it provides apply to a variety of areas of manufacturing and service organizations. The standards developed by ISO and the implementation of these standards are voluntary. ISO does not have any legislative power and is not a part of any government or the United Nations. Governments as well as individual companies make the decision to voluntarily integrate ISO standards into their systems on a voluntary basis. Also, many companies decide to implement ISO 9000 to reduce costs related to quality problems such as after-the-fact inspections, warranty costs, and rework. ISO 9000 is also implemented to have an edge over the competition. A few governments require that some industries meet the international standards that ISO 9000 has created. On the other hand, the total quality management (TQM) philosophy of many organizations stresses a systematic, integrated, consistent, organization-wide perspective involving everyone and everything (1999). Quality standards for pharmaceuticals have been built up over the years from experts from industry, pharmacopoeial authorities, regulatory agencies and academia and are based on experience and the need to safeguard the safety and efficacy of the product, for the sake of the patient’s health (2002).             Pharmaceutical companies also followed the path of achieving a quality certification; namely, ISO 9000 accreditation, in the pursuit of excellence (1993). Certification is attractive as a means of impressing new customers and convincing existing ones that they are dealing with a progressive company, which is continually seeking improvements. However, certification was seen as a stepping-stone on the journey towards excellence. Certification was found to represent a milestone, a recognition that progress is being made and that TQM efforts are paying off. Enthusiasm for TQM can quickly fade if there are no tangible results. The survey indicates that commitment to TQM among senior management is high. Strong leadership has directed companies to attempt to make the TQM process “belong to the company” and so foster employees ownership.             Total quality management has demonstrated its potential to be a successful way for organizations to eliminate costs, improve productivity and gain a competitive edge in the marketplace (1999). One of the main elements of TQM is the need for adequate customer focus. Companies have to identify current and future consumers’ needs and their level of satisfaction and loyalty. It is foreseeable that in the future global consumers will become increasingly demanding, in particular with the development of TQM in the less-advanced countries (e.g. China, South America and South-East Asia). Any changes which are made have to be undertaken with customer’s needs given full consideration, therefore this TQM dimension constitutes a stimulus to business innovation ( 1999). In the late 1970s and early 1980s, a great awareness of the need to provide a greater level of protection than was required by simple legal compliance led to the development and adoption of internal global EHS standards by all the heritage companies that merged to form GlaxoSmithKline. These standards defined the ways of working that met or exceeded legal and regulatory requirements in all countries in which heritage GlaxoSmithKline companies did business. Compliance with both legal requirements and internal standards were tracked through routine audits of all manufacturing and research and development operations ( 2004).             Total quality management strategy at GlaxoSmithKline called for establishing a formalized, ongoing quality assurance program that would improve the company's efficiency and enhance service to customers, which would help the company to grow and become more profitable. ISO certification requires that the company develop a quality-management system to ensure that products and services conform to customer requirements. The system must be subject to continual performance improvement. There is perhaps no better way to demonstrate return in a service industry than through measurable quality of service and ISO certification to be a powerful tool in measuring and maintaining customer satisfaction ( 1993). TQM led to measurable bottom-line benefits and many other organizations was quick to follow down the TQM route to quality ( 1990). Henceforth, the TQM adoption strategies suggested that many had simply attempted processes that could be described as overlay and resulted in low levels of ownership and poor integration far from being of advantage to quality management, it became counter-productive with staff losing motivation and are able to demonstrate quality improvements with concomitant improvements in production and decrease in costs (1996). A successful implementation of TQM can lead to improvements in the quality of products and services, reductions in the waste of resources, and overall increases in efficiency and productivity. Such improvements contribute to good customer relations, growth in market share and sustained competitive advantage (1990). The benefit of the use of management systems has recently been demonstrated by the ability of the company to maintain its levels of compliance and environment, health and safety performance during the last merger of companies to form GlaxoSmithKline. The company is now embarking on a programme to embed sustainable development into the fabric of the operations. The initial phase is to look at natural resource utilization, both to improve efficiencies and to examine the possibility of a greater reliance on renewable resources. The emphasis at present is to develop and implement processes in research and development, procurement, capital expenditures and other related areas. These areas will be controlled through the use of management systems and then tracked by audits (2004). There is a commonality between TQM and ISO in terms of contribution. For both factors, the contribution from “little use” to “much use” increases slightly. The contribution increases dramatically at the high use stage. This result has many implications. Theoretically, it suggests a learning effect in applying quality methods. Practically, the suggestion is that companies should not be half-hearted in applying quality methods, and that companies should not be frustrated at the slow contribution of quality methods at their earlier stage of application. It also suggests the necessity of continuous improvement.

OPERATIONS & LOGISTICS MANAGEMENT: GLAXOSMITHKLINE

OPERATIONS & LOGISTICS MANAGEMENT: GLAXOSMITHKLINE Introduction In any given week, a large percentage of adults i...