“It’s no secret that suppliers know that Pharma has good margins” says Alejandra Garcia, Senior Vice President, Procurement at DSM.
“We’re charged a higher premium, because Pharma is considered a high margin industry.”
In the latest episode of the PharmaSource podcast Alejandra shares her initiative at DSM to protect Margins, and how she uncovered and reduced the ‘Pharma Premium’ suppliers were charging her business.
Margin Protection Levers
“Margin Protection comes down to three main levers. the supply lever, the demand lever and then the process lever.
1. The Supply lever really address a question from whom we buy.
What are other sources here, how we can maximise how we can bring more diversity to our supplier base. How we can bring this diversification in terms of value performance or service with suppliers and also increase our supplier diversity.
2. The Demand Lever which is for whom we buy, This is where the work and alignment with the business is critical. Because this is where we go into strategic planning into inventory optimization and operational efficiencies in the supply chain.
3. The Process Lever. We need to have good visibility on data around cost allocation and pricing for example. We also need to assess with our suppliers if we can go to design for value or performance for value.”
“Fantastic procurement should reduce the waste across the supply chain. So we have joint targets with the business, and then make sure that we have good compliance.
We can achieve this by bringing our suppliers all together to reduce waste in our supply chain.”
Uncovering the Pharma Premium
Alejandra explains how she worked with peers across different industries to uncover the “Pharma Premium” that suppliers were charging DSM.
“We did is a series of different workshops, inviting companies with lower margin such as banking to benchmark certain services that we were buying with these companies. We benchmarked categories that are not highly specialised such as computer maintenance and consultancy services.”
“We had a candid conversation with them and surprise, surprise, we proved the hypothesis that we were paying over-price on certain products and services because suppliers know we play in a high margin industry.”
“The premium was in the range from five to twenty percent, depending on the service and the product again, and also the region”
The benchmarking took place initially in Europe and then was rolled out in the United States and Asia. In all cases, these pilots confirmed that DSM were overpaying services.
“While some might argue that Pharma needs a unique price structure, At the end of the day, if I have my Dell computer here, it’s completely irrelevant if I use this for pharma, or for banking, or for an insurance”
Re-negotiating terms
The team as DSM used this information to proactively negotiate new terms and the conditions with suppliers, aligning contracts to what they discovered in the benchmarking
“With this information, we went back to our suppliers to have an open conversation, say, ‘Hey, we’re finding out what’s going on'”
DSM were able to present suppliers with a clear framework of well-research information and use this to renegotiated agreements, reduce price or adjust payment terms.
Alejandra acknowledges that driving an initiative like this can be uncomfortable.
“This approach may be provocative. Some of my colleagues, when I discuss these over a couple of drinks, find it uncomfortable to challenge the status quo, because we like to think that that Pharma is a high margin industry. “
“But I think that times has changed. We need to be mindful that unprecedented inflation and cost impact will stay longer and will have a permanent mark in the way that we buy.”
“Customers and consumers are suffering from it. So we also need to be mindful and find new solutions and new ways to make it happen.”
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