Mighty Molecules: Strategies for reclaiming the Global API Throne

2. Changing paradigms to build speed

Fortunately, there is a way to emerge out of this vicious loop. If the principles discussed below are implemented, it may enable a faster flow of projects in the R&D pipeline:

• Instead of the current practice of capacity scheduling, limit the WIP of development projects in the system and ensure that a new one is taken up by only any one of the currently being worked upon projects is completed. This will prevent capacity loss due to interruptions.
• Since disruption of work is unavoidable if the full-kit of information, materials and approvals is not available beforehand, a separate preparatory team can organize a full-kit before a project enters the WIP list.
• Plans go haywire quickly by trying to manage projects using deadlines by triggering multi-tasking when everything becomes urgent. Moreover, using a WIP limit makes it impossible to use predefined date commitments. Therefore, use a common global priority system to ensure sync between teams.
• Use daily management and predefined issue resolution frequency rather than the usual process of intervention close to committed dates to enable task completion at the fastest possible pace.
• Eliminate individual task level buffers and track buffer consumption at the project level vis-à-vis the work completion, to get visibility of all the projects in the company’s R&D pipeline and take timely expediting/corrective actions wherever judicious.

(For more details, visit https://www.vectorconsulting.in/research-publications/life-sciences/generic-drug-development-the-prescription-for-success/ .)

Once these steps are implemented, a group of 50 chemists and 100 analysts who would, in the earlier way of working, typically give an output of 8-10 projects per year would start delivering 15-18 projects per year! The speed with which projects are completed can be leveraged to establish partnerships early with formulation companies.

How to leverage operations for competitive advantage

Similarly, a closer review of current manufacturing practices in this industry will indicate that there are several sources of capacity wastages that result in burgeoning lead times and longer working capital cycles^xiv API companies. Let's examine the causes of these wastages and why they mostly go unnoticed.

Sources of capacity wastage

1. Wastage due to starving bottlenecks

Each API molecule manufactured needs to take a predefined route of steps for manufacturing, and set-up change tends to be time-consuming. Each route will have its own bottleneck or capacity-constrained resource. Any idle time on these bottlenecks costs the company in terms of reduced output and increased lead time. It will be interesting to note that some of the capacity wastage is created during the planning stage itself. The reasons are as follows

Starvation due to month-end skew

Most of the API plants are run with monthly schedules. Output is committed by the plant for a month and any delay/rework during the month needs to be covered by expediting the last stages of manufacturing during month end. Often these last stages are non-bottlenecks for a product.

In order to deliver volume for the month, manpower is shifted from bottlenecks to non-bottlenecks resulting in starvation at the bottleneck and wastage of capacity.

This manpower shifting prepones the output declaration from the first week of the next month to the last week of the current month, creating a backlog for the next month before it starts. This again puts pressure on production at month-end of the subsequent month-end cycle repeats.

Machine efficiency losses

Machine efficiency is at its best if the processes are strictly adhered to, and the technical parameters are precisely achieved.

However, very often, due to the ageing of machinery inefficiency of utilities, the necessary parameters are not precisely achieved In the stipulated time. For instance, in spite of following procedures correctly, it may take more time to reach the required temperature during drying.

If this can be prevented by continuously tracking to ensure that the machines function at their best, the time saved will be equal to the output earned.

While this may sound very simple, such improvement projects are usually overlooked for two reasons. Firstly a consistent demand capacity gap is rarely experienced in planning. This is because annual sales targets are anyway based on estimated capacity based on previous experience (with wastages built-in).

Secondly, because of margin pressure, the top management tends to be more focused and drive cost reduction projects than productivity improvement projects.

2. Wastage due to planning horizon

Monthly production plans are a combination of actual orders and 3-month forecasted orders since most API companies have to serve unregulated markets (transactional deals; difficult to predict) in addition to the regulated markets (more predictable). So, closer to due dates, very often, the order quantity/ priorities get changed. So this means that set-ups have to be changed, a few WIP orders set aside, and some other urgent order/s processed. When urgencies of this nature hit an API company, they perceive themselves as short of capacity (pain felt- expediting, sale loss or delay in delivery).

However, companies never perceive themselves as having wasted capacity since they almost never have excesses of FG inventory (evidence of capacity stealing) in their warehouses (which logically should have been created due to forecast inaccuracy). The reason for this is the buying practice of formulation companies. Since they tend to change their priorities at the last moment, most of them are amenable to picking up any FG that has been created at their behest or at least adjusting it in the credit terms. Voila – no excess inventory on the books!

Interestingly, this is one of many capacity wastages that can be traced to formulation companies.

3. Wastage due to ordering practice of formulation companies

Because of their buying practices, formulation companies (whether captive or otherwise) end up keeping 4 months to one year of API inventory in their warehouses. They also trigger orders and replenish when the stock levels fall below a particular, very conservatively calculated, “minimum” level (3 - 6 months of sale)on an urgent basis. While this stock may be being maintained in the formulation company’s books, stealing the capacity to make this ahead of the required time becomes a source of capacity wastage for the concerned API company. Further, it is inevitable that when there is so much inventory being held that some of it will expire and will have to be sent back to the API vendor and repurposed. This becomes an additional source of capacity wastage.

Eliminating capacity wastage

Reducing wastage of capacity due to this heavily buffered ordering practice of formulation companies is possible only if ~100% reliability at shorter lead times can be consistently demonstrated by their API partners. For this, API companies have to abandon the monthly planning approach and instead implement processes in their procurement, quality control and manufacturing that enable the flow. The major steps involved in enabling alignment of capacity to market pull are:

• Decoupling of RM procurement lead time from manufacturing lead time by maintaining stock replenishing based on consumption. This will ensure the high availability of RM at reduced stock levels since forecast errors do not affect it.
• During planning, ensure optimization of product mix for throughput maximization.

Implementing these ensures that flow improves and month-end skew is eliminated. Some of the gains from these efficiencies in terms of higher output (30-40% increase), at lower WIP (~40% reduction)/FG (25-30% reduction) inventory and shorted working capital cycles can be passed on to the customers to bring better price competitiveness if required.

At the same time, the high availability (>90 % daily of made-to-stock items) that the new system enables can be leveraged to gain a decisive competitive advantage by offering ready delivery of API to formulation companies. Since formulation companies are also very keen on reducing working capital stuck in the RM, such a reliable vendor who can reliably offer small and frequent offtakes as and when they need it will be viewed as Godsent and is sure to gain higher and higher SOB from them over time.

Conclusion: API can be done right^xvxvi

Below is a simple simulation of how such an Indian API company can stack up against a Chinese API company once it has become an efficient partner to formulation companies. Clearly, profitability can be increased significantly by increasing output from the same capacity and converting this into sales without increasing fixed costs. So if most of the API companies adopt these practices, it can indeed turn India into a globally competitive API manufacturing hub.

An afterthought

These steps will surely help the Indian Pharma industry re-establish its footprint in the API business. However, it must be added that since more than 75 per cent of India’s KSMs imports originate from China^xvii, there is still a significant supply risk. Supply disruptions in KSA may squeeze margins and raise product prices. So API companies will next need to find ways to strengthen the moat around their business by integrating backwards to KSM and other basic intermediates.

How can that be done? That’s another story.

End notes and References:

i) APIs are also known as bulk drugs, that deliver the intended outcome for patients; APIs are needed for manufacture of drugs including capsules, tablets, etc,.
ii) https://theconversation.com/the-world-needs-pharmaceuticals-from-china-and-india-to-beat-coronavirus-138388#:~:text=The%20US%2C%20Europe%20and%20Japan,APIs%20imported%20to%20the%20US.
iii) https://daxueconsulting.com/api-industry-in-china/
iv) The companies who produce and sell APIs need their product to get registered with US FDA by filling a Drug Master File [DMF] which makes sure that the facilities of the API manufacturing company are in proper shape and are safe.
v) https://en.wikipedia.org/wiki/2017_China%E2%80%93India_border_standoff
vi) https://www.financialexpress.com/industry/sme/msme-eodb-despite-being-worlds-pharmacy-why-indian-pharma-is-dependent-on-china-for-bulk-drugs/2386143/
vii) https://pharmaceuticals.gov.in/schemes viii) Advantages that’s giving China a cost advantage include - scale (some Chinese facilities are said to be 10-15 times larger than the average Indian facility), local supply of KSAs, other chemicals and intermediates (while Indian manufacturers have to source most of these from China), and significant government backing (e.g cheaper electricity) ix) https://journals.sagepub.com/doi/full/10.1177/1741134319887782 x) https://www.cnbctv18.com/healthcare/why-china-has-an-edge-over-india-in-api-manufacturing-6331911.htm
xi) https://journals.sagepub.com/doi/full/10.1177/1741134319887782
xii) https://timesofindia.indiatimes.com/business/india-business/china-hikes-prices-of-key-drug-ingredients/articleshow/78242710.cms
xiii) https://www.expresspharma.in/api-manufacturing-finally-getting-the-attention-it-deserves/
xiv) https://www.intouch-quality.com/blog/manufacturing-in-india-vs-china
xv) https://www.cnbctv18.com/healthcare/why-china-has-an-edge-over-india-in-api-manufacturing-6331911.htm
xvi) rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=20379
i) https://www.financialexpress.com/industry/sme/msme-eodb-despite-being-worlds-pharmacy-why-indian-pharma-is-dependent-on-china-for-bulk-drugs/2386143/
ii) https://pharmaceuticals.gov.in/schemes
iii) Advantages that’s giving China a cost advantage include - scale (some Chinese facilities are said to be 10-15 times larger than the average Indian facility), local supply of KSAs, other chemicals and intermediates (while Indian manufacturers have to source most of these from China), and significant government backing (e.g cheaper electricity) iv) https://journals.sagepub.com/doi/full/10.1177/1741134319887782
v) https://www.cnbctv18.com/healthcare/why-china-has-an-edge-over-india-in-api-manufacturing-6331911.htm
vi) https://journals.sagepub.com/doi/full/10.1177/1741134319887782
vii) https://timesofindia.indiatimes.com/business/india-business/china-hikes-prices-of-key-drug-ingredients/articleshow/78242710.cms
viii) https://www.expresspharma.in/api-manufacturing-finally-getting-the-attention-it-deserves/
ix) https://www.intouch-quality.com/blog/manufacturing-in-india-vs-china
x) https://www.cnbctv18.com/healthcare/why-china-has-an-edge-over-india-in-api-manufacturing-6331911.html