Human Capital Development Worksheet

GlaxoSmithKline: Supply Chain 1

Running head: GLAXOSMITHKLINE: SUPPLY CHAIN AND OPERATIONS

MANAGEMENT

GlaxoSmithKline: Supply Chain and Operations Management

Valerie M. Kramer

University of Phoenix GlaxoSmithKline: Supply Chain 2

GlaxoSmithKline: Supply Chain and Operations Management

This paper provides an overview of some of the supply chain and operations management issues faced by GlaxoSmithKline PLC (Glaxo). A review of the literature in the pharmaceutical industry, of which Glaxo is a key player, is presented first. This section includes an overview of the industry in recent years. An overview of Glaxo’s position within the industry and the company’s mission is addressed next. Although other issues are briefly mentioned, the main portion of the paper primarily addresses Glaxo’s practices related to vendor managed inventory, outsourcing, and ethics. Finally, a summary of operations changes in response to environmental conditions is provided. The scope of this paper prohibits an in-depth analysis of Glaxo, however, the overviews provided are sufficient to illustrate the caliber of this company and their quality of operations management and supply chain management.

Literature Review

The pharmaceutical industry develops and produces biological, medicinal and pharmaceutical products that are sold in pharmacies and distributed to hospitals (IBISWorld Inc.,

2008). Acquisitions and mergers have been quite popular in the pharmaceutical industry in recent years, totaling over $142 billion (Weintraub & Capell, 2008). This acquisition and merger activity coupled with stable demand has historically made pharmaceutical companies attractive investments (Tryphonides, 2008). The industry has faced the growth of managed care organizations and other healthcare changes during the past decade (IBISWorld Inc., 2008). Other challenges facing the industry include an increase in generic competition, a decline in new blockbuster drugs, and increasing costs (IBISWorld Inc., 2008). Globally, the market saw revenues of $615.1 billion in 2008 (Datamonitor, 2008). During an evaluation of industry financial performance for 2002, the pharmaceutical industry was ranked the most profitable, GlaxoSmithKline: Supply Chain 3 despite declining growth rates and provided twice the return on shareholder equity as the average

Fortune 500 Company (Trombetta, 2003). The 2002 assessment was Glaxo’s first time in the

“fab four” (Trombetta, 2003, para. 4) behind Mereck, Johnson and Johnson and Pfizer. Although pharmaceuticals are facing significant challenges, the industry can expect to be minimally impacted by the current economic downturn (IBISWorld Inc., 2009b).

Glaxo is one of the main players in the pharmaceutical industry, with approximately 6% of the global market, operating primarily in the United States, the United Kingdom, Japan,

France, Germany and Italy (IBISWorld Inc, 2008). Glaxo was formed in 2001 from the merger of Glaxo Wellcome Plc and SmithKline Beecham, themselves products of previous mergers

(IBISWorld Inc., 2008). Glaxo primarily manufactures products for the pharmaceuticals segment, but also produces products for the consumer healthcare segment. The company has almost $62 billion in total assets, with nearly 80 manufacturing plants spread across 38 countries, employing around 103,400 people. These figures include a recent investment of over one billion pound sterling, increasing vaccine capacity in five countries and furthering the company’s prominence in the supply of vaccines worldwide (IBISWorld Inc, 2008). The annual research and development budget is about $4 billion, with over 150 projects in development. Glaxo’s top selling drug, Seretide/Advair, is the world’s sixth largest pharmaceutical product, accounting for sales of 2.5 billion pounds sterling during 2005 (IBISWorld Inc, 2008). Glaxo claims to be a leader in respiratory products, which make up 22% of sales (IBISWorld Inc, 2008).

Glaxo’s mission is to “improve the quality of human life by enabling people to do more, feel better and live longer,” (GlaxoSmithKline, 2009a). Glaxo is researching medicines and vaccines to “tackle the World Health Organization’s three priority diseases: HIV/AIDES, tuberculosis and malaria,” (IBISWorld Inc, 2008, p. 34) as one way of fulfilling the company’s GlaxoSmithKline: Supply Chain 4 mission. Another manifestation of Glaxo’s mission in action is the company’s donation of medicine to disaster relief and lowering the price of medicine in developing countries, details of which are presented later in this paper.

The company plans on achieving the mission through three strategic priorities labeled grow, deliver, and simplify (GlaxoSmithKline, 2009b). Grow refers to diversifying into vaccines, consumer healthcare and biopharmaceutical areas and expanding into India, Brazil, Russia, and

China. Deliver refers to delivering more products of value from increased growth in the core pharmaceutical business with a stronger pipeline of research and development to ensure a continuous flow of new products. Simplify is short for simplifying the business model to include reducing working capital, streamlining processes and evolving the commercial model

(GlaxoSmithKline, 2009a). Glaxo was ranked number three in the industry for having high earnings per share, high gross margins, good revenue from new products, the third best sales to assets ratio, good profit to sales ratio and significant brand power (Trombetta, 2003).

Operational Characteristics

Glaxo has been profiled in best practices studies in the several areas, including quality functions (Best Practices LLC, 2009a), supply base management (Best Practices LLC, 2009b), pharmaceutical alliances (Best Practices LLC, 2009c), manufacturing process ownership (Best

Practices LLC, 2009d), and quality in research and development (Best Practices LLC, 2009e).

Other studies citing Glaxo as an example of effective practices include IT purchasing (Avery,

2001) and organizational control mechanisms (Using Organizational Control Mechanisms,

2006). The company also received “best purchaser-supplier collaboration” in 2007 (VWR and

GSK Garner, 2007, para. 1). GlaxoSmithKline: Supply Chain 5

A significant issue for pharmaceutical companies that will be briefly summarized before embarking upon more detailed discussions of operational and supply chain issues is the threat of counterfeit drugs. Counterfeit pharmaceuticals are slipped into the supply chain at multiple links; the industry as a whole has banded together to combat this scourge (Lybecker, 2008). Counterfeit drugs, once found exclusively in underdeveloped countries, have arrived in Europe, Japan and the United States (Dvorak, 2007). Secondary seals and radio frequency identification tags have emerged as the primary technologies used to ensure the contents are authentic, although spectroscopic ink and full-color graphics also helps deter counterfeiters. Although each of the topics listed above are of considerable interest in the study of operations management and supply chain issues, the topics this paper will focus on are vendor managed inventory, outsourcing and ethics.

Vendor Managed Inventory

According to Danese, (2006), in typical Vendor Managed Inventory (VMI), the supplier decides on inventory levels of each product and inventory policies, monitors buyer’s inventory level, and replenishes buyers inventories according to sales forecasts using whatever quantities, shipping and timing the supplier considers appropriate. For some VMI arrangements, the supplier accepts the financial responsibility as well. In VMI, the goal is to eliminate buyer oversight, although the buyer often approves the supplier’s plans at the beginning of the arrangement. The focus in VMI is on sharing information, such as product sales, forecasts, and inventory levels, instead of on sharing orders (Danese, 2006). A common alternative to VMI is

Customer Managed Inventory (CMI). CMI is the traditional method in which suppliers receive orders from customers, then the supplier checks the availability of the product, may produce GlaxoSmithKline: Supply Chain 6 more product, and delivers the required goods. In CMI, the information exchanged is often only price, quantity, product mix, and due date (Danese, 2006).

Major requirements to implement VMI are an adequate information exchange between suppliers and buyers and a technique for the transfer of the information. Both Electronic Data

Interchange (EDI) and the internet are methods commonly used to reduce data transfer times, reduce entry mistakes and allow timely communication of information about stock levels.

Advantages to using a VMI system are primarily a reduction in the bullwhip effect (Danese,

2006). According to Chase, Jacobs and Aquilano (2005, p. 410), the bullwhip effect is a term used to describe the “phenomenon of variability magnification as we move from the customer to the producer.” The bullwhip effect creates exceedingly high peaks in demand and correspondingly low valleys at the manufacturer level from relatively minor variations in consumer demand. Companies using VMI frequently experience reductions in customer demand uncertainty, inventory levels, and intensity and frequency of stock outs (Danese, 2006).

Additionally, VMI often increases flexibility in production planning and distribution and allows for improved customer service. Challenges to overcome in implementing VMI are contrasting goals among members of the supply network, companies’ reluctance to share confidential information, and the need to involve supply network in an incentive program to “avoid opportunistic behaviors” (Danese, 2006, p. 889).

Glaxo has taken VMI a step further by using VMI both upstream and downstream, rather than with a single supplier or buyer. The key element to VMI, information flow, is a central support to Glaxo’s relationships within the supply network. Glaxo has set up a central system via an intranet to allow real-time access to 18 months of sales forecasts, actual and forecasted stock level at distribution centers and plants, minimum and maximum stock levels, production plans, GlaxoSmithKline: Supply Chain 7 purchasing plans, and deliveries in transit (Danese, 2006). Each supply network member can also access necessary information about other members in the network both vertically, upstream/downstream, and horizontally, within the same tier in the network.

The supply network has a performance monitoring system built into the intranet.

Managers at Glaxo consider the performance monitoring system to be a key aspect in the success of the supply network (Danese, 2006). Criteria by which the supply network members are evaluated include the percentage of items managed with VMI versus CMI, the days within the minimum/maximum range, days over maximum, days under minimum, and any problematic areas with cause, duration and comments (Danese, 2006). The most striking aspect of the performance monitoring system is the publication of supply network members’ performance on the central intranet. Members’ benefits of publishing this potentially sensitive information include: members can clearly understand what level of performance they have guaranteed and what level of performance other members/suppliers have guaranteed, and members can see how the network satisfied end customer requirements. Other benefits of publishing the information include the ability to review the causes of certain events, the stimulation of the supply network members’ commitment, and the stimulation of suppliers and plants to improve performances

(Danese, 2006).

Outsourcing

Glaxo procurement has set up cross-functional teams in a Sourcing Group Management process, with a separate team established for each of the major commodities (Avery, 2001). The team is responsible for identifying short and long-term procurement and operational opportunities, developing a sourcing strategy, and communicating to end users the supply base conditions that will satisfy requirements. Chase, Jacobs and Aquilano (2005) provide several GlaxoSmithKline: Supply Chain 8 conditions upon which to base a decision to outsource or to perform functions in-house. Of these examples, Glaxo decided to outsource the IT function for several reasons including to enhance efficiency by focusing on the core competencies, increasing flexibility to meet changing needs and obtaining expertise and skills not available in-house (Avery, 2001).

Glaxo’s IT procurement, which acquires over $500 million annually in computer-related equipment and services, gathered IT suppliers together for a forum shortly after the company’s most recent merger (Avery, 2001). During the forum, the IT procurement department discussed

Glaxo’s strategy with the suppliers and challenged them to help the company consolidate the IT purchases and meet new cost and efficiency targets. Glaxo sent several high-level procurement managers and IT managers to the forum and requested suppliers send senior level executives and global account managers, effectively gathering the appropriate decision makers together (Avery,

2001). During the forum, Glaxo overviewed the business conditions in the industry and the company before discussing strategy and expectations of the supplier base. Breakout sessions followed with discussions for improving efficiencies and innovation (Avery, 2001).

Ethics

Glaxo’s spends about 8.4 billion pounds sterling among 90,000 suppliers, primarily in

Europe and the United States (GlaxoSmithKline, 2009d). Potential new suppliers are audited against Glaxo’s standards, those companies that do not meet the standards may be provided opportunities for training in order to meet the standards and join the supply network. Although the audit includes questions related to human rights and potential suppliers’ practices for employee age limits, discrimination, prevention of abuse, wages meeting the local minimums, these questions are not scored, however, inappropriate responses may disqualify a potential supplier from joining the supply network (GlaxoSmithKline, 2009e). Glaxo provides the human GlaxoSmithKline: Supply Chain 9 rights clause on their external website, the contents of which is based on the UN’s Universal

Declaration of Human Rights and the International Labour Organizations conventions

(GlaxoSmithKline, 2009e).

Glaxo has taken several steps to providing greater access to medicines in developing countries where the healthcare system is not as well developed or as widespread. The primary ways of increasing the access to medicine in these areas are 1) provide preferential pricing for commonly used drugs in these areas, 2) research and development initiatives that target diseases prevalent in developing countries, 3) community investment activities that promote effective healthcare and 4) innovative partnerships. Preferential pricing on HIV/AIDS and anti-malarial drugs, which covers costs but does not include any profit, is available in 80 countries

(GlaxoSmithKline, 2009g). The preferential pricing has been reported to be a discount of around

35% (GSK cuts price for poor, 2002). In 50 economically disadvantaged countries in early 2009,

Glaxo will reduce prices on all patented medicines to a maximum of 25% of the price in the developed world (Big Pharma has a heart after all, 2009). In 2007, Glaxo donated “50 million doses of pre-pandemic flu vaccine to the WHO’s stockpile for distribution to the world’s poorest countries at short notice,” (GlaxoSmithKline, 2009g, p. 2). Additionally, Glaxo has donated antibiotics and other drugs to disaster relief efforts (GlaxoSmithKline, 2009h). These actions are in alignment with the mission “To improve the quality of human life by enabling people to do more, feel better and live longer” (GlaxoSmithKline, 2009a, para. 2) and are valued by shareholders and other stakeholders as morally the right thing to do and as sound business decisions.

Recommendations/Summary GlaxoSmithKline: Supply Chain 10

Glaxo has few areas for improvement in the area of operational management or supply chain management, in fact, the company has been singled out for having the best practices in several areas. From the literature review, Glaxo appears to be on the leading edge in several aspects of supply chain management and operations management. As previously reviewed, Best

Practices LLC has used Glaxo as an example to emulate in each of the following reports: quality functions, supply base management, pharmaceutical alliances, manufacturing process ownership, quality in research and development. Several other case studies have been performed using

Glaxo’s effective practices in other areas. Shortly after the merger that provided Glaxo with the current company name, an IT supplier forum was held. At this forum, IT suppliers were informed of the new strategic direction Glaxo was planning and the suppliers were enticed to participate in developing solutions to achieve the mission. Vendor managed inventory in the form of a supply network uses an intranet to which all the supply chain members have access, going beyond a simplistic form and elevating the supply chain to an integrated network. The procurement function of the company has become team based to better serve the end user of the procurement and appears to be a practice to benchmark in the industry. Having a mission of improving the quality of human life leads the company to provide reduced price and donated drugs to areas in dire need of those drugs. Altogether, Glaxo appears to be a well-run organization, despite the challenges a company of this magnitude must surely face.

Conclusion

This paper attempted to provide an overview of Glaxo and the company’s place within the pharmaceutical industry before delving briefly into some of the supply chain management and operations management issues faced by Glaxo. Glaxo appears to be on the leading edge in operations management and supply chain management with several case studies and best GlaxoSmithKline: Supply Chain 11 practices articles published about how the company has handled these issues. Glaxo has developed a robust supply chain network with a central data location as a key factor in facilitating the transfer of information among the network members. Outsourcing and the procurement function has been revised to establish multifunction teams to better serve the internal customers. Finally, two areas of the company’s ethics were explored and found to be consistent with the company’s mission. The paper’s primary purpose of describing some of the company’s response to these supply chain and operational challenges has been met. GlaxoSmithKline: Supply Chain 12

References

Avery, S. (2001, July 19). GlaxoSmithKline issues challenges to IT suppliers. Purchasing, 130

(14), 26 (3).

Best Practices, LLC. (2009a). Quality Function: structure, staffing, and execution. Retrieved

March 21, 2009 from Best-In-Class Benchmarking Reports database.

Best Practices, LLC. (2009b). Best Practices in Supply Base Management. Retrieved March 21,

2009 from Best-In-Class Benchmarking Reports database.

Best Practices, LLC. (2009c). Best Practices in Pharmaceutical Alliances and Co-Promotions.

Retrieved March 21, 2009 from Best-In-Class Benchmarking Reports database.

Best Practices, LLC. (2009d). Pharmaceutical Manufacturing: Cost, Staffing & Utilization

Metrics. Retrieved March 21, 2009 from Best-In-Class Benchmarking Reports database.

Best Practices, LLC. (2009e). Optimizing the R&D Quality Organization. Retrieved March 21,

2009 from Best-In-Class Benchmarking Reports database.

Big Pharma has a heart after all. (2009, February 21). New Scientist.

Chase, Jacobs, & Aquilano. (2005). Operations Management for Competitive Advantage. New

York: The McGraw-Hill Companies.

Danese. P. (2006). The extended VMI for coordinating the whole supply network. Journal of

Manufacturing Technology Management 17(7), 888-907.

Datamonitor. (2008, November). Pharmaceuticals Industry Profile: Global.

Dvorak P. (2007, September). Fighting counterfeit drugs with secondary seals and RFID.

Medical Design News, 7(7), 24.

GlaxoSmithKline. (2009a).Our company. Retrieved March 14, 2009 from

http://www.gsk.com/mission-strategy/index.htm GlaxoSmithKline: Supply Chain 13

GlaxoSmithKline. (2009b). Grow deliver simplify: annual report 2008. Retrieved March 14,

2009 from http://www.gsk.com/investors/reps08/GSK-Report-2008-full.pdf

GlaxoSmithKline. (2009c). Press release: GSK delivers EPS of 104.7p before major

restructureing, dividend increased 8% to 57p. Retrieved March 14, 2007 from

http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10088.htm

GlaxoSmithKline. (2009d). Our Responsibility: Supply Chain. Retrieved April 6, 2009 from

http://www.gsk.com/responsibility/supply-chain.htm

GlaxoSmithKline. (2009e). Our responsibility: Choosing suppliers. Retrieved April 6, 2009 from

http://www.gsk.com/responsibility/choosing-suppliers.htm

GlaxoSmithKline. (2009f). Our responsibility: Access to medicines. Retrieved April 6, 2009

from http://www.gsk.com/responsibility/access-to-medicines.htm

GlaxoSmithKline. (2009g). GlaxoSmithKline’s contribution to fighting HIV/AIDS & improving

healthcare in the developing world. Retrieved April 6, 2009 from

http://www.gsk.com/responsibility/downloads/GSK-contribution-to-ddw.pdf

GlaxoSmithKline. (2009h). Corporate responsibility report 2005: case study. The gift of life –

GSK product donations. Retrieved April 6, 2009 from

http://www.gsk.com/responsibility/cr_report_2005/case-studies/community.htm

GSK cuts price for poor. (News in Brief). (Sept 16, 2002). Chemistry and Industry, p.7(1).

IBISWorld Inc. (2008, November 19). IBISWorld Industry Report: Pharmaceutical & Medicine

Manufacturing in the US: 32541.

IBISWorld Inc. (2009a). IBISWorld Company Report: GlaxoSmithKline PLC.

IBISWorld Inc. (2009b). 32541 – Pharmaceutical & medicine manufacturing in the US –

industry report - recession update. GlaxoSmithKline: Supply Chain 14

Lybecker, K. M. (2008). Keeping it real: anticounterfeiting strategies in the pharmaceutical

industry. Managerial and Decision Economics, 29(5), 389.

Trombetta, B. (2003, September). Industry Audit &Amp; Fab Four Companies of the Year.

Pharmaceutical Executive, 23(9), 38.

Using organizational control mechanisms to enhance procurement efficiency: how

GlaxosmithKline improved the effectiveness of e-procurement. (2006, May) Interfaces,

36 (3), 209.

VWR and GSK Garner 2007 Best Purchaser-Supplier Collaboration. (2007, December 26)

Wireless News, p. NA. Retrieved March 22, 2009 from Gale PowerSearch.