By: Gerard Pearce

Published: July 2008
Source: Medical Product Outsourcing - An international magazine focuses on medical device outsource manufacturing, including regulatory mandates, market shifts, and legal concerns.

FDA Crackdown

Of all the FDA warning letters recorded in the last two years that relate to manufacturing and quality, nearly one in five cite problems with supplier controls.  SQA has spoken with hundreds of large healthcare companies over this time, and found that supplier quality management is a universal challenge.  Warning letters are only one symptom of the stresses on the supplier quality function.  Poor supplier controls contribute to a Cost of Quality for typical pharmaceutical companies that is six times greater than other industries, such as semiconductor or automotive.  Regulatory, commercial and consumer pressures are underlying factors that can cause stakeholders to feel that managing the supplier quality function is more than a matter of business–– it’s a matter of survival.

Contributing Factors

The two factors that impact the situation more than any other are resources and change.  And in most cases, these two are related––that is, resources become imbalanced due to a change in the environment.

From a resource standpoint, many companies find it physically impossible to provide “care and feeding” for all the suppliers in their supplier base.  Often, the supply base becomes enlarged over time––slowly through redundancy or obsolescence, and quickly through mergers or acquisitions.  Even with the most up-to-date supply bases, the resources available to audit, monitor, and manage all of the suppliers can be stretched to the limit.

From a change standpoint, the supplier quality function is vulnerable from several directions.  Internally, commercial pressures will not allow a team to expand with its supply base if the production outcome remains the same.  If anything, there is constant pressure to reduce resources.  Externally, suppliers merge, diverge, move, and rename.  Lower-cost sources emerge––usually in other parts of the world.  Although cheaper from a product or materials cost, these offshore suppliers require more resources due to time, distance, language, visibility, and regulatory factors.  Also, as supply quantities fluctuate, resources are often wasted on suppliers who are inactive or rarely used.
In any case, every company we examined faces challenges such as supply chains expanding, diversifying, and becoming more complex, while available resources remain static, or worse, shrink.

Strategies for survival

Of all the large healthcare companies examined, we found that the leaders in supply quality management share several common initiatives, from strategic to tactical.  All of these activities contribute to reducing the Cost of Quality, either through reduced cost of compliance, elimination of non-value activity, reduced scrap, or increased efficiency through supplier development.  The following recommendations are based on these common initiatives:

• Define and align strategic and business goals.  Supplier quality management will struggle unless it is considered part of a company’s strategic direction.  By combining business drivers (e.g. fewer and better suppliers) with regulatory obligations, it is possible to achieve compliance that adds value.
• Know your supply base.  The more up-to-date supplier knowledge you can maintain, the better you will manage the cost of quality.  At the very least, categorize suppliers, so you know where to direct your limited resources for the best return.  In categorizing suppliers, go beyond criticality, and look at capability, capacity, compatibility, and risk.
• Focus your limited resources.  Focusing resources comes from knowing your supply base (see above).  Although best practices dictate that you should focus efforts on strategic supply partners, many industry leaders set aside a significant portion of their resources to handle their worst performing suppliers––i.e. those with the greatest potential for improvement.  Direct your team on strategic activities.
• Standardize methodology and tools.  Out of necessity, multi-dimensional companies, sometimes breed isolated supplier quality management functions.  By gaining consensus on ways to measure and manage suppliers’ resources, results can be shared across the organization. This develops a powerful and value-adding synergy between teams.  Visibility between these teams is critical to this synergy, and should be a central theme to any standardization effort.
• Squeeze more out of your audit program.  Best practice companies demand value from their audit programs––not just compliance.  Consistent with the move to fewer and better suppliers, audits should be used to gauge a supplier’s strategic compatibility, and potential for long-term partnership.  Your audit process should also include a significant amount of up-front “housekeeping” to keep your supply base lean.  Even something as simple as confirming a supplier’s name, address, and current status prior to scheduling activities provide benefits across the organization.
• Share more responsibility with your suppliers.  Manual exchanges with suppliers are a burden on both of you.  The most efficient way to collect critical data is to capture it once––at the source.  That source is your suppliers, and ideally they provide performance information into a collaborative environment that you can both access and use as a basis for strategic decisions.  While some companies have introduced a supplier portal to facilitate purchasing transactions, few have taken it to the level of sharing quality data.  This includes multi-aspect supplier scorecards, self-audits, and exchanges of everything from certificates of compliance to corrective actions.  Obviously, appropriate controls, checks and balances must be in place for verification, and a commitment is required on all sides.  However, suppliers that embrace this concept of pushing responsibility for data collection to the source will find it to be a win-win scenario.  They improve, they see more business, you see better quality, and a reduced cost of quality.
• Outsource necessary, but non-critical tasks. If your supplier quality team is large enough to audit all the suppliers and focus on supplier development with strategic partners, then you are in the minority.  Most successful companies focus their resources on the best and the worst suppliers, while utilizing an objective third party to absorb the balance, or any exceptions.  Used on-demand, and under the banner of your own audit methodology, a third party makes an effective and necessary extension of your organization.
• Foster and use your Business Intelligence.  There is no excuse for not automating all of your data exchange and collection activities.  Aside from the obvious efficiency benefits, every advance in this area opens doors to capabilities not feasible under the current order.  For example, take the electronic capture of audit results.  This data can be made available to all stakeholders across the company.  The results can be linked with any related corrective action or follow-up (or history), and may be combined with other results to answer questions like, “Who are my riskiest suppliers?” and “What are typical problem areas for suppliers of a particular commodity?”  The best companies share this data with suppliers, using it to drive action and improvement.
  
  

Ultimately, the principles of successful supplier quality management within the healthcare industry are no different from other industries––regulated or not.  Survival comes by adapting your resources to change––or as H.G. Wells put it, “Adapt or perish, now as ever, is nature’s inexorable imperative.”

(Notes: FDA Warning Letter statistics between October 2005 and October 2007.  17% of letters relating to manufacturing and quality include specific reference to deficiencies related to 21CFR820.50 – Purchasing Controls.  In a PriceWaterhouseCoopers 2002 presentation on “Productivity and the Economics of Regulatory Compliance in the Pharmaceutical Industry,” pharmaceutical companies were rated at 2-sigma, with a Cost of Quality of 20%, versus semiconductor companies that were rated at 5-sigma, with a Cost of Quality of 3%.)