Bridging the Gap

Third party operations, says Kurt Reber, have created complexity in the management of overall performance at Novartis. In response to the challenge, the company has set up an organization that monitors the integration of any third party manufacturer into Novartis' global network.

With operations in over 140 countries, Novartis is a global company in every sense of the word. In the course of day-to-day business transactions, the Swiss-based company deals with a large network of own suppliers and other third parties worldwide.

“In the past, we worked with third parties in a fragmented manner, with no integrated strategy to manage them as business partners. As we made many improvements to our business processes over time, we did not take our third parties with us. This has created a gap in terms of performance in areas where we did not share our expertise with them,” says Kurt Reber, Head of Third Party Operations at Novartis Pharma.

To strategically manage third party relationships, Novartis Pharma created an organization within Technical Operations that controls the integration of any third party into the company’s global manufacturing network. As a result, performance levels can be monitored to ensure that they correspond to the standards of Novartis. “Now,” Reber states, “the task is to choose the optimal third party to join our network, engage them in such a way that they are aspiring to meet our performance levels, sharing our knowledge and expertise with them, thus giving them a further incentive to be part of our network.”

The reasons for having third parties as part of a supply network in any company can be manifold. Novartis is using third parties as a result of the production strategy, where the size and type of own sites with their technologies and capacities are defined. Since Novartis was created in 1996 from the merger of Ciba-Geigy and Sandoz, the company has focussed on the specialization of own facilities, divestment of non strategic sites and employment of technology and capacity providers as part of the overall supply network.

The in-licensing of products can lead to new third party manufacturers in the network that bring additional challenges in quality and technology management, as they are not typical contract manufacturers.

Different approaches
Different third parties need to be integrated at different levels in the supply chain. “Some of our third parties are what we call extended work bench. These are closely linked to our own sites and integrated in the production process at our plant level. So here, it is important that our plants realize that they are responsible end-to-end to include and manage the third party.”

In the company’s markets some Novartis affiliates that are responsible for selling and distributing finished products to local customers utilize re-packaging operations at third parties. These operations are also managed in strict accordance to GMP and regulatory compliance.

There are also third parties that produce directly for Novartis’ markets and are managed by the company’s headquarters offices. This key area was in the past neglected as the company had been focusing more on issue management. “Most of our efforts,” says Reber, “had gone into dealing with issues on a reactive basis. You resolve the problems but not their root causes if you are not proactive and forward-looking in managing your business partners’ performance. At Novartis Pharma, we have set up an organization called ‘virtual plant’ that integrates all of the key functions you find in one of our production sites, like quality, sourcing, supply chain and engineering. Operating those third parties like a virtual plant means that our teams work together with our third parties like they would be one of our own sites. This is a relatively new concept which seems to be the way forward according to an international benchmark by an external consulting company,” he points out.

Novartis is a multidivisional company with a pharmaceuticals division, a relatively new vaccines and diagnostics division and a consumer health arm, as well as Sandoz, the generics business. Most divisions may share the same third party but they don’t share the same approach. This is a very difficult hurdle to overcome because our internal divisions have, by definition, a different focus each,” Reber expresses.

Integrating third parties without interfering with differing divisional operational goals led Reber to come up with a concept he calls ‘alliance management’. “This way you increase the rate of success through a common deep understanding of each other’s route. The strategic alignment occurring at the board level of the third party then needs translating at the operational level.”

Risk Management
To improve productivity and performance, third party operations will become of increasing importance for Novartis because the pharmaceutical technologies that are surfacing are becoming more and more specialized. “We simply need to deal with third parties who are able to manage these non-standard technologies we may not have available in-house. This trend is likely to lead to a growing dependency on these specialized high-tech third parties,” Reber comments.

A critical factor is technology transfer, which concerns not only third party manufacturers but also in-house operations. Novartis Pharma set up the so called ‘launch office’, an internal group that manages the transition from development into commercial production at own sites and third parties.

Investment issues also play a role. Once an expanding factory has reached a critical size, it becomes more difficult to manage. Instead of investing in a new site, companies may look for opportunities to use third party capacities. “At some point, you may decide to in-source the whole production again. Depending on the internal investment rates in capacity, you may have to involve more third parties to meet growing market demands. In conclusion, we are changing the relationships with our third party manufacturers from a pure transactional relationship into a partnership management which is an integrated part of the overall manufacturing strategy of the company. Partnership management requires quite a different approach that has to be sustainable over time.”

Reber likes to call it a ‘marriage’. He explains: “In a marriage, you go through various stages of your relationship. And you will have the occasional crisis to go through. You will also have to deal with some of the ‘relatives’ in the extended family. But if you believe it is a long-term bond, you will put in place all measures and good intentions to manage it appropriately.”

Third party management, Reber is convinced, has to be treated as a multi-skilled profession. “Those companies that find ways to approach it professionally and strategically will be the most successful in the future,” he concludes.

Kurt Reber became Head of Third Party Operations at Novartis in March 2007. Prior to his current position, he was leading the global supply chain management operations. He has been with the company for 23 years.