Contract Packagers Focus on the Supply Chain
Drug firms seek efficiencies in turnkey partnerships.
By David Vaczek, Senior Editor
Short-run requirements at McKesson’s RxPak are supported by efficient retooling processes that minimize production downtime.
As pharmaceutical companies focus on wringing inefficiencies from production and distribution processes, they are requiring more services from their contract packaging partners.
Drug firms outsourcing packaging are looking to contract packagers to squeeze out supply-chain costs and help quickly deliver finished product into the marketplace.
To meet these requirements, contract packagers have expanded services well beyond traditional services such as material selection and testing, and component assembly. Customers are often requiring turnkey or “super-outsourcing” arrangements. In these partnerships, contract packagers often manage supply-chain resources, purchase packaging materials, and manage finished inventory to ensure just-in-time delivery.
Packagers have also focused on reducing make-ready times. And they are adopting flexible tooling to produce product based on smaller customer orders that are responsive to market demand.
Howell Packaging (Elmira, NY) began its pharmaceutical packaging business in the 1960s, producing packaging components and assembling and distributing patient-starter samples for Bristol Laboratories, now a part of Bristol-Myers Squibb. “For many years, our contract packaging work was simply providing manufactured packaging components, a controlled environment, and the ability to assemble customer-supplied elements,” says Joe Lally, marketing manager, packaging for pharmaceuticals.
“Over time, there has been a technological leap in the sophistication of contract packaging equipment and in the entire production environment,” he says. Lally points to the introduction of robotics, vision systems, and other technologies that minimize hand labor and ensure accuracy and reliability.
“In addition, the entire scope of what is being asked of today’s contract packagers has changed. It is not uncommon for suppliers today to be directly involved in planning, forecasting, procuring, and distribution. In many cases, clients are outsourcing every aspect associated with specific product lines,” Lally says.
TestPak (Whippany, NJ) has upgraded inventory and enterprise systems to support faster, more-accurate inventory reporting, expediting the supply of inbound and outbound goods, says Bill Eveleth, vice president, sales and marketing,
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For flexible production scheduling, TestPak employs tooling that can be used interchangeably on multiple lines, so product can be scheduled for concurrent, rather than sequential, runs.
Eveleth says that for some customers, the packager manages raw materials and intermediate and finished-goods inventories. “We have experienced an increase from customers requiring turnkey and other value-added services. This is driven by the recognition that we can help them reduce costs and actually reduce overall turnaround times,” say Eveleth. “As a critical link in the supply chain, we have visibility into the entire process. We know materials lead times. In many cases, we can deliver better materials pricing through our established vendor relationships,” he adds.
“TestPak gets involved at the earliest stages, providing clinical supplies as well as stability samples. Besides project and logistics management, our outsource services include package design, materials selection and sourcing, and regulatory assistance,” Eveleth says.
Kevin Carter, sales executive at McKesson’s contracting packing division, RxPak (Memphis), says that companies’ outsourcing philosophies vary. “Some brand companies lean toward keeping things in-house in order to have more control over them. A lot of demand for our contract packaging services comes from smaller drug companies and generic manufacturers,” says Carter.
“The use of functional work teams is promoting stronger relationships. Instead of one project manager assigned by the customer to a product, you will have one or two people involved in every project looking for problems and solutions related to their entire portfolio. The first thing we do is sign a confidentiality agreement, so we can sit at the table and discuss their business concerns and plans,” Carter says.
While some customers choose to supply the packaging materials and printed materials, Carter says that RxPak can often purchase and supply material more cost-effectively by drawing on close supplier relationships. “We know the lead times on the materials and, if a problem arises, we can work it out without the customer being involved or even knowing there is an issue, reducing problems for our customers,” he says. “It’s better for us if we have longer-term fixed forecasts when we are buying the materials. The printed components are always more risky to carry, because you might have a change in labeling. We try to buy as much unprinted material as possible, so we can respond flexibly to label changes,” he says.
McKesson’s repackaging operation addresses the speed-to-market concerns of some customers. Repackaging is a different business model from contract packaging, under different FDA regulations. McKesson buys the product from the brand or generic company and repacks it under the McKesson label. “This gives us and our customers flexibility for projects with tight time lines. Often we can get the repackaged product into the supply chain faster,” he says.
Turnkey contracts force contract packagers to focus on efficient manufacturing as well as materials procurement planning,” says Jason Aymerich, sales manager, Diamond Packaging and Diamond Contract Manufacturing (Rochester, NY). “Customers are trying to reduce the number of people they have in procurement, by making it the vendor’s responsibility to maintain packaging standards and to purchase all packaging components. The turnkey approach creates a more vertically integrated supply chain, where the copacker becomes more of a partner with the customer. Many of these turnkey contracts come with three-to-five-year agreements,” Aymerich says.
Diamond Packaging has seen interest in outsourcing models from consumer product manufacturers in many industries. “We received several bids on turnkey packaging proposals in 2006,” says Aymerich.
“Pharmaceutical companies will want the contract packager to supply all of the components of a package. These could include a thermoformed tray, paperboard, folding carton, labels, shrink wrap, and corrugated carton,” he says.
Customers are not ordering large quantities of finished goods and paying for the entire run after it is packaged. Instead, the customer provides an annual volume forecast with a “firm” order, such as for 60 days, that binds them to purchase only that amount. The contact packager purchases the materials from approved vendors at prices the customer has negotiated and bills the customer only for product finished and shipped to meet short-term requirements, Aymerich says.
“This outsourcing takes a lot of inventory off their books and a lot of planning. They are limiting their liability from production overruns or [the need for] required graphics changes. If they change their forecast, they are not obligated to take the material,” he says.
The burden is on the copacker to manage material inventory and package production efficiently. “We are essentially floating the customer a loan on these components for 30 or 90 days. We have to control waste and anticipate the cost of money, freight costs, and other costs associated with ordering and owning the components,” he says.
Aymerich says that Diamond Packaging has focused on producing shorter runs at lower cost to limit production to volumes the customer has committed to purchase.
“Some packagers will offer aggressive pricing for long production runs and keep their fingers crossed that the forecast won’t change. For many customers, we are lowering our make-ready costs. This allows us to offer better prices on smaller orders. The pricing difference is less dramatic because you are amortizing a smaller internal cost,” Aymerich says.
Tapemark (West St. Paul, MN) manages customers’ purchasing and inventory to ensure available product, while minimizing inventory investment and risk.
Tapemark employs Kanban scheduling systems. In this method, raw materials and finished product are supplied at each stage of production, based on marketplace demand. Maximum inventory levels are calculated based on factors including manufacturing cycle times, transit times, the product’s quality history, and where the product is in its life cycle, says Jeanne Busch, materials manager.
“Our customers are very interested in risk management on the supply-chain side. They want us to help with product design, and the purchase of all materials, and, in establishing risk control, to ensure material quality and supply continuity,” says Busch.
“Companies that carry a lot of inventory to guard against service failures are exposed to a lot of risk if the product has to change for quality reasons or events in the marketplace. We will manage the entire inventory program, from material sourcing to finished-goods supply,” she says.
Busch says Tapemark works with customers to analyze inventory needs and investment dollars at each stage of production. The customer has enough finished goods to respond to market demand, with the rest of the product in the raw-material state for quick conversion into finished product. “The whole supply chain triggers based on what happens in their market. If the market slows, the customer is not driving more demand from us, and we are not driving more demand from our suppliers,” says Busch.
“The ultimate target is to maximize the product’s shelf life. The clock starts ticking with the manufacture date of the active ingredient. Production speeds and inventory flow are managed to match the demand, so the product arrives just in time to replenish supplies,” she adds.
As a manufacturer and packager, Tapemark offers customers one source for package and product quality control. Design for Six Sigma methods at the package and product design phase ensure that product can be produced efficiently. “We have embraced continuous improvement and lean manufacturing elements and are constantly using these tools to improve our business processes,” says Kim Mueller, vice president, business development, Tapemark.
“Our partnership with the customer starts very early in the design stage, when we can think about package design in relation to the medical device components and drug delivery systems that we manufacture,” says Mueller.
“In the world we live in today, we don’t want to hold any inventory at all. When we optimize the flow of material, we mitigate everyone’s risk and maximize the shelf life of the product,” she adds.