Norvatis by team 5 final

Should it Outsource its US
Supply Chain?
Team 5
Peter Francis Cullen, Robin Koo, Tracy Tan, Isabella Tan Lai Yuen

IEMBA 2015 Team 5
Novartis
Global pharmaceutical leader with a “care and
cure” mission

IEMBA 2015 Team 5
Novartis
Novartis US
• Novartis Pharmaceuticals Corporation (NPC)
• R&D, manufacturing and marketing of patent-protected
medicines and treatments for helping patients and improving
patient care

IEMBA 2015 Team 5
Novartis
Agenda
• Brief Synopsis of the Case
- Current Situation & Issues
- Current Distribution Model
• The Problem Statement
• Case Analysis
• Recommendations
• Post Case-where are they today?
• Lessons Learned

IEMBA 2015 Team 5
Novartis
Current Situation (2007)
US Novartis manufactures 80% of their drugs in NY plant.
Trucks product (40miles) to NJ Warehouse & DC.
(Responsible for receiving, packing & preparing for shipping full
range of Novartis pharmaceuticals to Wholesalers~
US$12bn in sales)

IEMBA 2015 Team 5
Novartis
Current relationship with Wholesalers
3 National wholesalers handle 90% Novartis US
shipments
Wholesaler has a “buy-and-hold approach” –
speculative buying. Reduced opportunity to do so
leading to their discontent.
Wholesalers also face challenges on customer side
where powerful retail chains demanding higher price
concessations
Wholesalers response by imposing a distribution fee.

IEMBA 2015 Team 5
Novartis
Current Issues (2007)
Sustainability of
Wholesale
Distribution Model
NJ Warehouse/
DC starting to
deteriorate!
Costly location Competitive
Pressures
Reduced Profit
Margins
Facilities
Overcrowded
Risk of
single DC
Limited
Sophistication
(IT/ EDI)

IEMBA 2015 Team 5
Novartis
Current Supply Chain
Novartis Suffern Plant
East Hanover Centre
Novartis
Wholesaler
Novartis
Wholesaler
Novartis
Wholesaler
Pack, Prepare, Deliver
Receive & Store

IEMBA 2015 Team 5
Novartis
The Problem Statement
• A Decision needs to be taken on whether to
outsource supply chain to a 3rd Party Logistics
Partner (3PL)
• How do we convince the board, CEO and internal
management that outsourcing to Exel is the best
option.

IEMBA 2015 Team 5
Novartis
Shipment visibility and inventory control
important consideration for Norvatis

IEMBA 2015 Team 5
Novartis
Case Analysis: Why outsource to EXEL?
 They have a warehouse with an ideal combination of size,
layout and location.
 They can start distributing for Novartis immediately. Providing
distribution flexibility.
 Provide customer-centric initiatives which includes speciality
and expedited deliveries.
 Will add customer-specific electronic date interchange (EDI)
mapping and disaster recovery plans for Novartis.
 Exel optimizes warehouse and inventory management.
 Will provide a security driven infrastructure to support such a
large pharmaceutical company.

IEMBA 2015 Team 5
Novartis
Inventory reduction to improve working capital
Year Inventory T/O
ratio
Inventory no of
days
2007 2.22 164
2008 2.03 180
Source: Novartis Annual Report
Consolidated Group Ratios

IEMBA 2015 Team 5
Novartis
Recommendations for Exel-McLaury:
• A 3PL that specializes in warehousing and transportation that can
be extremely flexible.
• Supply chains are highly complex.
• Provide consolidation point/center near the Novartis HQ.
• Expertise in receiving, store, pack and prepare the pharmaceuticals
for shipment to the wholesalers.
• Good size company who’s size ensures that they will be able handle
the demand.
• Pricing structure will save Novartis millions of dollars.
• Understanding of the pharmaceutical business and could take an
even larger roles as needed.

IEMBA 2015 Team 5
Novartis
New Supply Chain
Novartis Suffern Plant
DC, Mechanicsburg
Novartis
Wholesaler
Novartis
Wholesaler
Novartis
Wholesaler
Pack, Prepare, Deliver
Receive & Store

IEMBA 2015 Team 5
Novartis
Additional Recommendations for 3PL-Team 5:
• Direct system integration (e.g. IT, cross functional)
• Transparency
• Business continuity plan (BCP)
• Inventory management and control
• Safety and security
• Proficient inventory management
• Hybrid distribution
• Product packaging
• Parallel run to ensure risks are minimized
• Change management

IEMBA 2015 Team 5
Novartis
Enhanced supply chain flexibility with Exel
• Enhanced disaster recovery & business continuity
• Improved security and tracking
• Leveraged IT, labor and global resources
• Improved working capital – reduced inventory
• Better efficiency with shipment consolidation
• Novartis earned “Supplier of the Year” award from McKesson
Source: Exel website

IEMBA 2015 Team 5
Novartis
During the next 5 years, we aim to
optimize our production network by
creating manufacturing centres of
excellence.
We are looking to improve our network
utilization to around 80% by 2015, from
approximately 50% today.
Also scaling up procurement organization,
and our target is to deliver sustainable
savings between 6% and 8% per year
2010 Annual Report
Joseph Jimenez
CEO

IEMBA 2015 Team 5
Novartis
Business strategy to be more focused, more
profitable and grow faster
Source: June 2014 Analyst Briefing

IEMBA 2015 Team 5
Novartis
Driving margin increase
and accelerating cash flow
Many SCM related initiatives
e.g. SRM, lean manufacturing,
offshoring, etc
Beyond
3PL

SCM initiatives – enablers for margin growth
IEMBA 2015 Team 5
Novartis

IEMBA 2015 Team 5
Novartis
Security concerns –
raw materials supplier
outside US
Managing portfolio
transformation :
more engineered products, cold
chain distribution, etc
Pressures
to be
more
Green
Changes in
distribution
model to hybrid
Future Challenges faced by Novartis
Increased
regulatory
scrutiny
(DFCSA
2013)

IEMBA 2015 Team 5
Novartis
Lessons Learned
• Focus on core strength - R&D and manufacturing
• SCM strategies – an important enabler for Novartis margin
growth
• Market forces amplify the impetus to consider outsourcing
• Pharma industry is facing an increasing list of challenges that
requires greater supply chain capabilities and flexibility
• Effective communication is essential for successful
implementation

Norvatis by team 5 final

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