VMI Practices in the Pharmaceutical and Life Science Industry Market Intelligence

Industry Outlook & Drivers

Global Market Information on VMI Practices in the Pharmaceutical and Life Science Industry

Industries which have higher adoption of VMI usually are manufacturing intensive industries, which have high cost of goods sold. Pharmaceutical industry has lower total cost of goods sold compared to other industry, which drives the pharmaceutical companies to focus more on their sales, R&D, and other core areas of expertise

Benefits of  VMI

• Increased operational efficiency–Pharmaceutical companies can focus more on their critical material sourcing, exceptions handling, research and development, and marketing activities rather than on managing inventory
• Cost reduction–Inventory handling and management costs are reduced drastically. With increased efficiency in inventory turnover, their balance sheet looks positive and thus, greater confidence in the financial position
• Lower risk associated–Risk associated with the raw materials is the ownership of the supplier

Adoption Level of VMI

• Adoption of VMI in the pharmaceutical industry is lower compared to other Industries, however, many pharmaceutical companies have adopted VMI to manage their non-critical raw materials, such as basic chemicals, packaging materials etc.,
• VMI adoption changes for different categories based on their value, volume, replenishment time, criticality of the material, supplier availability and willingness, etc.
• FMCG, automotive, and other industries, which follow VMI, have around 50–70 percent cost of the goods sold. Pharmaceutical companies have lesser than 30 percent cost of the goods sold, hence, they have lesser value of goods to handle compared to other industries
• GSK, Sanofi, Bayer, Novartis, etc., have implemented VMI to manage some of their products in their supply chain

Supplier Readiness and Willingness

• A few pharmaceutical companies, like Recipharm and Bayer, among others, are sourcing APIs by engaging with their suppliers on a VMI model
• Suppliers expect higher volume and total value for the product, higher transparency between the buyer and supplier, long-term relationship, longer contract duration, etc., to supply under VMI

Adoption of VMI in the Pharmaceutical Industry

Adoption of VMI in the pharmaceutical industry is lower compared to other industries, such as FMCG, engineering goods, automobiles, etc., as there are not much mutual benefits for the vendor and the client in implementing VMI. Pharmaceutical R&D has taken a lead in implementing VMI, as there is a need for continuous replenishment of the materials in need.

• The pharmaceutical industry has always been slow in implementing any new innovations in the supply chain and it applies to VMI adoption also. The rate of adoption is low at an industry level
• The industries which have higher adoption of VMI have higher cost of the goods sold. The pharmaceutical industry has lower total cost of goods sold compared to other industries, which drive the pharmaceutical companies to focus more on their sales, R&D, and other core areas of expertise
• The pharmaceutical industry has always been slow in implementing any new innovations in the supply chain and it applies to VMI adoption also. The rate of adoption is low at an industry level
• The industries which have higher adoption of VMI have higher cost of the goods sold. The pharmaceutical industry has lower total cost of goods sold compared to other industries, which drive the pharmaceutical companies to focus more on their sales, R&D, and other core areas of expertise

Benefits for a Pharmaceutical Manufacturer when Implementing VMI

Improved Operational Efficiency

The overall operational efficiency in the procurement process is greatly reduced by the implementation of VMI

• Reduced paper work and communication with improved VMI platform
• Shorter order fulfilment time
• Lesser man power for inventory management
• More focus on core competency

Lower Risk Associated

Risk associated with the supply chain is reduced drastically, as the ownership of inventory and delivery is completely transferred to the supplier

• Stock outs are reduced significantly
• Inventory management and delivery is transferred to the supplier
• Supplier's risk is reduced as there is more transparent and strategic collaborations

Cost Reductions

Total cost reduction is an additional benefit as a result of increased operational efficiency

• Reduced inventory carrying and management cost
• Reduced operating cost
• Reduction in the overall cost associated with communication
• Inventory management and warehouse cost reduction

Supplier Readiness for VMI in the Pharma Industry

• Suppliers of core raw materials, like active ingredients, are still reluctant to supply materials under VMI, as the volume is low and also the number of replenishments is less
• Very few suppliers for pharmaceutical raw materials, such as active ingredients, are successfully managing their supply through vendor managed inventory. For example, Recipharm is managing almost 80 percent of its supply from its Stockholm facility through VMI
• Common chemicals, packaging materials, etc., are readily and easily supplied and managed by vendor managed inventory