Background and challenges
A leading biopharmaceutical company engaged L.E.K. Consulting to optimize its global manufacturing network. The client sought to reduce costs while maintaining business continuity and production flexibility so that it could adapt to varying demand. Facing a potential downturn in demand — particularly in a worst-case scenario for several key pipeline products — the company needed a blueprint for network rationalization. This entailed evaluating network configuration options, assessing the financial and strategic implications of potential scale-backs and third-party outsourcing, and weighing various operational risks, including business continuity, supply chain stability and regulatory requirements.
The biopharma required a strategy that balanced near-term cost savings with longer-term flexibility, ensuring the organization would remain competitive and resilient under changing market conditions.
Approach
Current-state network assessment
We began by examining the cost burden across the biopharma’s global manufacturing network under a downside demand scenario, establishing a baseline to measure rationalization opportunities. We identified a range of options to reallocate capacity, considering owned and third-party site capacity constraints, regulatory limitations, financial obligations, and capex associated with site capacity expansions. Our approach evaluated average cost per dose across the network under each reallocation option, incorporating the fixed and variable cost profiles of each site.
Identification of future-state network configurations
Our team analyzed the economics of internal and third-party sites under the baseline and downside demand scenario volume levels to identify breakpoints where external sites are more attractive than internal sites, including cost of goods sold (COGS), overhead, startup costs and existing financial commitments. We then developed five network configuration options, including divestment of owned site(s) to outsource more volume to third-party contract manufacturing organizations (CMOs) and replacement of higher-cost third-party CMOs with lower-cost blends of insourced production and other CMOs.
We evaluated the cumulative three-year cost savings associated with each of the five options relative to the current-state baseline, considering cash impacts in addition to run-rate cost savings (e.g., cash inflow from site divestment). These options provided savings upwards of 7% of total network cost ($80 million), in addition to material cash inflows.
Option evaluation and risk analysis
We weighted run-rate savings and cash impacts against the critical network risks of each option and the strategic implications of removing network nodes. Divesting owned sites ran increased risk of business continuity interruptions and higher rates of quality issues. However, a greater degree of insourcing would decrease flexibility to scale in higher-volume scenarios and jeopardize key partnerships.
Recommendations and roadmap
Based on our findings, we advised a demand-dependent approach. Should the downside scenario not materialize, we recommended preserving the current network and maximizing efficiency through reallocation of capacity. This would enable the biopharma to maintain critical redundancies, avoid network continuity disruptions and maintain control of key manufacturing stages. If the downside demand scenario materialized, we recommended divestment of the highest-cost site to unlock near-term cash flow and materially reduce fixed cost in the network. We also developed a high-level roadmap, identifying triggers for recommended choices and key execution milestones.
Results
Our team provided the biopharma a portfolio of network rationalization options to realize significant cost savings with varying degrees of production outsourcing. The portfolio of options enabled the biopharma to select a future state that best meets anticipated market demand, desired operational flexibility and risk appetite.
Cost reduction
The biopharma received actionable steps for cutting overhead and production costs, achieving meaningful near-term savings through focused consolidations and reallocation of capacity.
Informed decision-making
A comprehensive financial model and risk assessment empowered leadership to choose from rationalization strategies and select an option that effectively balanced cost efficiency with network resilience and business continuity.
Financial forecasting and flexibility
By anticipating multiple demand scenarios, the client can swiftly rebalance capacity across manufacturing activities as needed, safeguarding profitability and maintaining robust supply capabilities.
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