CHAPTER V

RESULTS AND DISCUSSIONS

(I) GENERAL OBSERVATIONS & DISCUSSIONS.

5.1 CURRENT SITUATION OF INDIAN PHARMA INDUSTRY.

Indian Pharma Industry is now dominated by Indian Industries and not by MNCs as was the case

prior to 1970 patent act. For the last 20 years, MNCs market share in India is 27% & those of

Indian Pharma Companies is 73% and remaining constant year after year. The growth of Indian

Pharma Companies is mainly due to three reasons-(1) Increase in volume (2) Increase in prices

of “Non-DPCO drugs and (3) launching of new products.

As per “McKinsey” report, Indian Pharma Industry would grow further to $55 Billion by 2020

and $70 Billion by 2025. Hence clear growth is indicated.

There are excellent chances for export to many more countries and enhance quota of exports to

regulated market especially to US, EUROPE etc.

Golden opportunities lie further for contract manufacturing, R&D, clinical trials etc. & of course

new discovery of molecules &/or new drugs delivery.

5.2 CHALLENGES FOR INDIAN PHARMA INDUSTRY.

Since last decade, Indian Pharma Industry is going thru’ a little difficult period, where

expectations of shareholders are more, stringent regulators are becoming stricter in terms of

Quality, manufacturing facilities, and GMP norms. The numbers of patent expired products,

which are block buster, are available. There are increasing numbers of legal cases. The R & D

pipeline is drying up. DPCO is covering more and more drugs. The Pharma Industry needs to

concentrate on “cost reduction” and also think of new business model by creating “Outsourcing”

facility for R&D, Clinical Trials & manufacturing.

All these would require an appropriate investment in the infrastructure facilities.

On the “EXPORT” front, due to recession mainly in US and EUROPE, prices throw major

challenges, reflecting low profitability and lower stock prices. Hence Indian Pharma companies

need to transform themselves in order to sustain growth & retain profit margins.

Materials Management is crucial area, since; the department spends 35 to 50% of cost on

procurement of direct & indirect materials. Smaller % of saving makes an immense difference on

the bottom line. Hence, cost reduction in this area can contribute a lot and would help keeping

organization competitive and sustaining for a long duration.

5.3 OPPORTUNITY & GROWTH

* India’s production cost is 50% lower than developed countries.

* The overall R & D cost to develop new molecule or new drugs delivery system is only one-

eighth of those of developed countries.

* Clinical trials cost only one-tenth of those of developed countries.

* Indian companies are showing growth in domestic market year after year.

(GraphNo.5.G 1 Indian Pharma Domestic Market showing higher sales & growth)

Year To Year Sales Revenues and Growth of Pharma Domestic Market

(Table No. 5.T1: Source AIOCD/ AWACS MIR 2014)

Sr.No. Year Pharma Domestic Market

in India (Rs.Crs.)

Incremental

value Rs.Crs.

Growth %

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2012 2013 2014 0

Series 1

Series 2

Series 3

1 2012 70587 8625 13.9%

2 2013 75294 4707 6.7%

3 2014 83009 7715 10.2%

• Since more products are going off-patent, expansion in Generic products is lucrative

business.

• Focus more on R&D for discovery of new drugs.

• Opportunity to work as an “outsourcing” unit for MNCs, for manufacturing, R&D

& Clinical trials.

5. 4 REGULATORY REFORMS & QUALITY MANAGEMENT.

India’s exports to US market accounts nearly 40% of their Generic Drugs and OTC products &

10% of finished dosages (medicines) used in US market. Almost 200 manufacturing facilities in

India are US-FDA approved. India is second largest country next to US for maximum facilities

approval by US-FDA, other than US.

This emphasizes Quality Management in totality, right from inputs to outputs, including

manufacturing facilities etc. & observing “Standard Operating Procedures” (SOP). Appropriate

training to employees, change in culture and attitude would matter the most.

India cannot ignore lack in Quality & Regulatory management. This would affect Foreign

Exchange earnings, affecting overall business, reputation and trust.

Compliance does not end with approval.

US-FDA commissioner Ms. Margaret Hamburg during her visit to India in 2014-February,

addressed to FICCI & CEOs of Pharma Industry.

The crux of the matter was going beyond approval. She said, organizations have to continuously

maintain quality practices at every level to be able to supply to US market. Some of the

organizations are having “state of the art” facilities and meet current Good Manufacturing

Practices (CGMP); she observed. The main issues of non-approvals are in-adequate or very poor

Quality systems, non- implementation of SOPs, data integrity, inadequate validation in

manufacturing, quality testing, contamination & product adulteration.

5.5 COST OF NON-CONFORMANCE OF QUALITY.

1. Exports to US market are banned for almost 19 Indian companies in 2013.

2. Ranbaxy agreed to pay a fine of USD 500 million (Rs.3000 crs. approx.) to US-FDA.

Ranbaxy recalled finished products, paid for extra logistics cost.

3. Loss of business, reputation & opportunities, these are intangible issues.

4. India is targeting $55 Billion by 2020, which is unlikely to happen.

5. Since 2013 the FDA has banned around 30 Indian Drug Manufacturing units for various

violations. In 2014, the FDA has issued import alerts against 10 plants, including units of Sun

Pharma & Cadila Pharma in Gujarat.

Basically, it is mindset and culture which Indian companies need to change. Total Quality

Management needs to be implemented for which top management should necessarily get

involved and committed to Quality in totality.

• Robust system in place throughout organization.

• Bring change in behavior and attitude.

• Top management cannot sit in an ivory tower, must get involved and own a

responsibility.

• Exposure to operational people towards International Exhibition, Seminars, Market.

• Only one standard to be operative not two standards.

• Regular audit by auditors and by external agency.

• KAIZEN to be practiced seriously.

In any case there is an urgent need for improvement in Pharmaceutical manufacturing practices

across the country, irrespective of any regulators say. Indian practices are not up to the mark,

particularly smaller firms. DCGI along with state FDA need to undertake inspection regime.

5.6 GOVERTMENT INTERVENTIONS & DPCO.

Government interventions will be continuously there in order to take the larger interest of the

public. Industry is never happy with price control. This reduces margins & leaves much less for

investment in research and development. There are of course no short term solutions to this.

Government, of whatever hue, will have to keep the prices of essential medicines low and a

highly fragmented industry that is in the commoditized generics end of the market cannot expect

to earn high margins.

Government is also having ambitious plan under the banner “JAN AUSHADHI”. To

commercialize the project, and make viable, Government is likely to rope in the private sector to

bulk procurement of Generic drugs from them. Currently many top companies have already

become part of this Government project. In coming 2-3 years 600 stores of “JAN AUSHADHI”

will be installed across the country. Price competition is going to be tougher. Tamilnadu state has

already implemented this project to a large extent & is successful.

Cost based pricing to Market based pricing

Government of India finally realized that keeping prices under strict control & artificially very

low will neither benefit the patients nor the industry in long term. Earlier policies were putting a

ceiling on prices of the most popular drugs on a “Lowest common denomination”. The National

Pharma Pricing Policy (NPPP) 2012 envisaged three key principles- (1) Essentiality of drugs,(2)

control only on formulations &(3) market based pricing. The paradigm shift from cost based

pricing to market based pricing, (DPCO-2013) is fairly well balanced with availability &

affordability being taken care of by ensuring that there is control on essential medicines.

5.7 R&D & FUTURE DRUGS

The discovery & development of new drugs in India will largely depend on a number of factors

such as investment, infrastructural facilities, scientific manpower etc. The need for R&D

potential would logically increase because of the need for self-reliance. In India most of the top

25 companies have already set up their R&D units. Many companies are working on cost

reduction thru’ R&D. Improvisation of processes, finding alternate materials, efficacy

enhancement all attribute to R&D efforts. However, top few companies are in BASIC

RESEARCH. Huge investments, patience, technology are few hurdles for Indian companies.

Top few organizations; Glenmark, CIPLA, Dr. Reddys, Ranbaxy, Sun Pharma are seriously

putting their efforts in that direction.

The strengths and weaknesses of present R&D environment in India can be stated as follow:

STRENGTHS-

1. Excellent Educational Institute.

2. Excellent Manpower highly educated & intellectuals.

3. Excellent growth of domestic market.

4. Excellent opportunity of exports.

5. Availability of variety of equipment.

6 Organized regulatory agencies.

7. Good support from Government of India.

WEAKNESSES-

1. Inadequate investment.

2. Current efforts for developing new drugs are not sufficient.

3. Inadequate supply of intermediates & chemicals required for the

Synthesis of new compounds.

4. Uneconomical scale of production of basic drugs and intermediates.

Indian top organizations are strategically working on basic research, trying to reinforce further

strengths and overcome weaknesses.

5.8 INNOVATION & INDIAN PHARMA

To sustain Global competition, Indian Pharma needs to focus on “Innovations” other than

various costs, price competition, regulatory restrictions. For long term sustainability &

competitiveness this could be the best strategy.

Every year there is a change in the market share of top companies, mainly due to brash new

companies, overtaking old established companies. The new fast track Indian companies are

Mankind, Macleods, Emcure, Micro lab etc.

These new brash companies are successful mainly due to being more innovative, have overcome

inertia, more creative and stayed ahead of other players. The old established companies are good

at managing incremental change but poor at dealing with radical change. To retain market share

as well as customers, established companies have developed concept of incremental innovation

& renovation.

For radical change organization needs entrepreneurial executives, experimental culture,

decentralized product structures, over & above this an enthusiasm!

Innovation is not invention. A successful innovation implies commercial success. In other words,

organization needs to tap opportunities. Organizations need to develop new products and launch

successfully in the market.

To quote few examples-(a) Pregnancy testing kit developed by Mankind.(b) “ i-Pill”

Launched by Piramal - an emergency pill to avoid pregnancy. (c) J&J launched “nicotine” patch

to slow down addiction of smoking. (d) Development of stem cells to take care of chronic

diseases. These are all innovations in Pharma Industry.

5.9 IN NUTSHELL

In nutshell, there are many challenges for Indian Pharma Industry. These challenges are going to

be part & parcel of the business of Pharma. However, when opportunities are seen, one requires

thinking of investments in terms of money, people, time, materials and infrastructure. Finally to

remain competitive one has to think of “COST REDUCTION”. Today’s market dictates price.

Thus, marketing to a certain extent is helpless to earn required profit margins. Hence,

competition dictates reduction of costs at all fronts. Materials management spends money of the

organization to an extent of 40 to 50% of revenue. Whatever cost reduction achieved would go

into the bottom line of the organization. Plenty of opportunities lie for Materials Department as

compare to other departments for achieving cost reduction. How organization structures it,

frames the policy, uses the tools/techniques & finally how employees are motivated, much

depends on the entire game plan for achieving success in long term.

(II) OBJECTIVES of THESIS, HYPOTHESIS, RESULTS & ANALYSIS.

1. The purpose of the study is to detect the relationship between tools, techniques used by

the organization & cost reduction achieved.

The researcher has formulated hypothesis for the research study for the above objectives are as

follow:

1. Use of tools and achievement of cost reduction are independent of each other.

2. Use of techniques and achievement of cost reduction are independent of each other.

The researcher now proceeds to prove or otherwise, individual points against each hypothesis

separately.

H1: Use of tools & achievement of cost reduction are independent of each other.

Tools: To carry out one’s occupation or profession, these are used. These are generally

used at individual level or at departmental level. Following could be examples of tools:

1. Cause and Effects (Well known as Ishikawa’s fish-bone)

2. Pareto law (Also popularly known as 80:20 rule)

3. Control charts (p or c charts to control variations in manufacturing)

4. Brainstorming. (Creating new ideas. No idea is rejected at first instance. A technique for idea

generations only.)

5. Why? 5 times

Analysis-

a. All the above tools are not used /practiced by the organizations.

b. Some tools are preferred by almost all the organizations, like “Cause & Effect” & “Pareto

Law”.

c. Some tools are preferred by very few organizations.

d. However, cost reduction achieved and the tool for cost reduction followed are not having any

relationship and they are independent of each other.

e. There are 5 respondents using tool of cause & effect& some other tools, have achieved cost

reduction above Rs.15 crs. Whereas, only one respondent who used a tool of “Why? 5 times”

along with some other tools has achieved cost reduction of Rs.15 crs.

f. Two way table was constructed followed by Chi-square test, indicated that critical value is

greater than calculated value. Thus, hypothesis Ho is accepted. That concludes that “Use of tools

and achievement of cost reduction are independent of each other”.

In short, tools can be used for cost reduction; however, preference for each tool would depend

upon (a) circumstances (b) target kept for cost reduction (c) time available for analysis &

implementation (d) importance of the project (e) acceptability of the concerned

persons/stakeholders (f) applicability & appropriateness of the tool for the project & finally (g)

sustainability of cost reduction.

H2: Use of techniques & achievement of cost reduction are independent of each other.

Techniques: This is systematic procedure by which a complex or scientific task is

accomplished. Following examples are of techniques generally used in cost reduction at

organization level &/or departmental level.

1. PDSA (Plan-Do-Study-Act)

2. TQM (Total Quality Management)

3. TPM (Total Preventive Maintenance)

4. Six Sigma (No defective products produced)

5. Benchmarking (at levels of- departmental, intra-organizational, industry, national,

international.)

6. Kaizen. (Japanese technique, KAI means “change” and ZEN means “Better”) That means

change for the better--- continuous improvement.

Analysis:

a. All the techniques of cost reduction are not being used by the organizations practicing cost

reduction. It is not necessary that all techniques are required to be used for cost reduction. The

choice of technique to be used would depend upon importance of project, suitability of

technique, target, availability of time, culture and skills availability.

b. The techniques preferred by the respondents are KAIZEN and PDSA.

KAIZEN mainly changes the culture of the organization and bring small improvisations

through workers. PDSA (Plan-Do-Study-Act) brings improvisation by analyzing the current

situation, finding out opportunities, optimizing the solution, implementing, studying with

target/satisfaction and finally implementing in totality and reviewing for further improvisation.

c. Hardly any organizations have started TQM/TPM. In fact, for Pharma Industry there is a need

to start TQM/TPM, since it brings cultural change and change in mindset. Unfortunately,

extremely few organizations have implemented but the outcome is not at all worth mentioning,

since, those organizations are banned by US-FDA. This speaks of misuse or underuse of TQM

practices. TQM is implemented to bring in “cultural” change & if this has been sidelined with

focus only on “cost reduction”, with limited temporary gains, organization suffers in long term

and loose business, reputation & goodwill of the customers.

d. Cost reduction achieved by organizations is independent of techniques being used. This has

been proved by making two way table, followed by Chi-square test. Since calculated value is less

than critical value the hypothesis is accepted and thus concluded that use of techniques and

achievement of cost reduction are independent of each other.

Objective 2: To study the relationship between efforts of motivation put by the

management & motivated employees.

H3: Behavioral pattern of employees and efforts of motivation put by the management are

independent of each other.

This hypothesis needs to peep into motivation theory, a little bit. According to Fred Luthans,

motivation is “A process that starts with a physiological or psychological deficiency or need that

activates behavior or a drive that is aimed at a goal or incentive”. There are 3 key elements in the

above definition-Needs, Drives and Goals.

Need is the origin of any motivated behavior. Need is a felt deprivation of physiological or

psychological well-being Need exist in each individual in varying degrees.

When individual understands his needs, he is driven by a desire to fulfill the need. Drives

(motives) are directed at fulfillment of needs. Drives are action –oriented & provide energizing

thrust toward reaching goal. Incentives/Goals are the instruments to induce people to follow a

desired course of action. Once the goal is attained, the physiological or psychological balance is

restored.

As per Herzberg’s theory motivators are-

Responsibilities, Challenging work, Recognition, & Achievement. These correspond to higher

level of needs to “Esteem & Self-actualization” of Maslow’s needs hierarchy.

Management, in order to motivate people toward higher productivity and for better performance,

uses some major techniques which are generally as follow:

� Rewards: these could be in the form of money, perks, amenities, promotion,

recognition, status symbol, praise (letter of-appreciation) etc. However an individual also

prefers intrinsic awards such as satisfaction from performing challenging & interesting

jobs.

� Participation- The right kind of participation ensures an increase in the motivation.

� Job Enrichment- This builds a higher sense of challenge and achievement in jobs.

In spite of practicing the above motivational techniques, there are hidden factors which possibly

employees &/or management members do not express openly but affect the overall employees’

performance & especially in the area of “Cost Reduction”. Through the research, efforts are put

to reveal the hidden factors at Organizational level & also at Employees level affecting cost

reduction area and its achievement.

The responses received as indicated in Chapter No.4, reveal that at organizational level major

hidden factors are:

A. Absence of proper culture.

B. Appropriate policies are not in place.

C. Appropriate policies are in place but not implemented.

D. No “role models” in the organization.

Even if we look into these major factors which are opined by majority of respondents, it is

immensely felt that in many organizations “CULTURE” is absent. This has been highlighted in

speeches of Mrs. Margaret Hamburg- Commissioner, US-FDA, before FICCI & CEOs of Indian

Pharma Industry, during her visit in India, in February 2014,

Moreover, Mr. D G Shah, Secretary-general of the Indian Pharmaceutical Alliance has expressed

that, “Indian drug makers also need to work on a cultural change across the organization,

learning to better appreciate the FDA requirements & ridding themselves of the fear of

inspectors”. (Ref. Business Standard Dt. 23rd Nov, 2014).

Many a times, it is observed that appropriate policies are not made. Even if they are in place,

they are not observed strictly or implemented fully. The policies are overlooked &/or

manipulated depending upon convenience of the Management. This creates a solemn dilemma in

the minds of employees. A culture of “Management by Convenience” starts imbibing in the

entire organization which is atrocious. In long term, the culture gets buildup of convenience

creating perilous system in the organization & especially for Pharma Industry where the products

are made for human consumption.

During informal discussions, many respondents also traced upon absence of “Role Models” in

the organization. This implies either they are absent or have left the organization or employees

do not foresee good leaders in the organization having integrity, loyalty towards organization,

responsible in developing employees etc. All this reflects in the culture of the organization.

The hidden factors are also been studied at employees level which affect an accomplishment of

cost reduction. The major reasons respondents have traced upon are as follow:

1. No specific training given for cost reduction.(Lack of training in general).

2. No enough compensation.

3. No appreciation.

4. Discouraged for experimentation.

During discussions with respondents, many have shown displeasure in not having enough

training. Few management members at the top believe in not giving training to employees and

waste the resources of the organization with a narrow view, that, trained employees may not

remain with the organization. As it is, attrition rate in some organizations is very high! Pharma

Industry being highly regulated and expectations on Quality being high, training should become

part of the culture. Training is one of the important parts of TQM practices.

Independent attributes of hidden factors at “Organizational Level” affecting cost reduction and

hidden factors at “Employees Level” affecting cost reduction were tested using Chi-square test.

Since calculated value observed was less than critical value, hypothesis was accepted. Thus, it

was concluded that pattern of behavior of employees and efforts of motivation put by

management are independent of each other.

Objective 3: To study the hidden factors affecting cost reduction.

To study hidden factors affecting cost reduction, two parts were made separately in the

questionnaire : I Factors

motivating employees-(a) at Organizational Level & (b) at employees’ level II Factors

(hidden) affecting cost reduction –(a) at Organizational Level & (b) at employees’ level.

Few of the responses received are contradicting.

(Table No.5.T 2: Contradicting responses on ‘Motivation’ of the respondents.)

Motivating Part for cost

reduction

% of

respondents

Hidden factor affecting cost

reduction

% of

respondents

1.Employees are specially

trained to achieve cost

reduction

71% No specific training given to

employees for cost reduction

50%

2.Employees are encouraged to

generate new ideas

100% (a) Discouraged from

experimentation.

(b)No opportunity to learn

36% &

29%

3. Employees are being

empowered.

93% --------------do--------------- ---do--------

4.Employees feel organization

is “Risk Pruned”

71% -----------------do-------------- ----do----

5Employees feel there is

appropriate recognition.

100% No appreciation & no enough

compensation

36%

6. Employees feel there are

values for meritocracy.

86% a. Absence of proper culture

b .No proper policies.

c. Vague decisions

43%

50%

29%

The above table clearly implies much more than mere words. There are many hidden factors

which affect accomplishment of cost reduction. The absences of culture, vague decisions, no

appreciation, de-motivate employees. In fact there is “cognitive dissonance” in the minds of

employees. Thus, management not only to look for motivational part but needs to look for

negative part also(hidden factors).

In some organizations, especially MNCs, respondents have expressed other part of hidden

factors, such as- Heavy Documentation requirement, Implementation of change control & even

Resource Constraint (Mainly Human Resource). Even though decision for cost reduction is

crystallized, implementation takes longer time. This de-motivates employees. The system should

not be so clumsy that the spirit of cost reduction is taken over by the solemn system.

However, in Chapter 4, respondents’ choice for motivation & factors affecting are discussed at

length, with statistical data.

By and large, the above discussions prove that there are hidden factors in the organization, de-

motivating employees at both Organizational level & at Employees’ level. Appropriate

cognizance of the factors would ultimately help organizations to restrict the affecting factors

&/or limit them, to enhance an accomplishment of cost reduction.

Objective 4: To find out tools/ techniques used by other departments (other than Materials

Management) and departments accountable for cost reduction.

Respondents have opined Finance Department as their first choice, contributing to cost

reduction. The second choice is R&D department, which contributes maximum next to Finance

or at par with Finance.

It is obvious on the part of R&D to contribute for cost reduction of the organization by

improving efficacy of the products without hampering the Quality. This is a fact and Pharma

Industry expects maximum returns from R&D, next to Materials Management. No doubt, each &

every department tries to contribute to cost reduction, either this way or other.

The tools and techniques preferred by other departments are:

1. Cause & Effect

2. Pareto Law

3. Brainstorming.

4. PDSA (Plan-Do-Study-Act)

The first 3 are “Tools” which are preferred by practicing Management Professionals. The last

one PDSA is a technique. These are preferred since the time consumed in analyzing; diagnosis of

the problem becomes easy. Much of the resources are not required to be newly invested.

Experimentation becomes easy. Feedback is comparatively speedier and implementation is

faster.

5. Many organizations under study have opined that techniques like Six-Sigma, TQM, TPM,

BENCHMARKING are not preferred or preferred next to above four by the other departments,

contributing to cost reduction. The main reasons are-(a) requirement of resources, (Investments)

(b) Time consuming (c) less patience (d) feedback technique within, may not be easy (d)

Assessment of results takes longer time.

However most of the respondents agreed that, for long term and to develop appropriate culture

TQM, TPM, Six-Sigma, Benchmarking are the only techniques be implemented.

(III) OBSERVATIONS & INFERENCES DRAWN FROM QUESTIONNAIRE &

SUBSEQUENT FORMAL/INFORMAL DISCUSSIONS.

The observations and inferences drawn from the respondents’ responses to the questionnaire and

subsequent discussions researcher had with the professionals from Materials Management field.

The discussions were held with the respondents formally and even informally. There were

opportunities to discuss even with the junior staff of the respondent in few cases. These

discussions have thrown more light on the practices being followed, motivational factors, hidden

factors and other related issues affecting cost reduction etc.

PART A: ORGANIZATIONS IN PHARMA INDUSTRY.

A1. EMPLOYEES: Pharma organization would need more employees in time to come, since,

Industry is definitely growing in domestic market as well as in Global market. India has

fortunately more talented and more educated human resource availability. Only organizations

need to train these new employees to contribute more effectively as per industry needs.

A2 MATERIALS CONSUMED: Generally Pharma Industry’s materials are classified as under:

1. Active Ingredients (Local &/or Imported)

2. Excipients

3. Flavors and Essences

4. Colors.

5. Waxes

6. Solvents

7. Primary packing materials.

8. Secondary packing materials (Tertiary packing materials)

The combinations and needs of these would change depending upon the “Product-Mix” and

therapeutic segments of the organization & over and above the business segments they are in.

Nevertheless materials cost consumption to the sales revenue is generally in the range of 35% to

45%. Hence, lot of scope for Materials Department to achieve cost reduction. The cost reduction

will improve Profitability, & reduction in inventory would improve Assets turnover ratio. The

data indicates that materials consumed by the organizations under study, is in the range of 35%

to 45%. Barring few MNCs, this data is true for almost all Indian Pharma Companies. As

discussed earlier, MNCs cost of materials is more, mainly due to more traded items being

purchased , rather than their own manufacturing. Obviously, cost of traded items includes

manufacturing cost.

A3 BUSINESS OPERATIONS:

Almost all organizations are in formulations business. Most of the organizations are also in Bulk

Drugs (API-Active Pharma Ingredient).Very few are exclusively in specialty chemicals &/or

intermediates. Top Pharma organizations are generally in three business segments –

Formulations, API and Intermediates.

Mostly organizations prefer to be in formulations and with backward integration enter into API

as well as with further backward, enter into Intermediates &/or specialty chemicals. Backward

integration always helps organizations to build-up integration, gives competitive advantage and

benefits in framing strategy in domestic as well as in Global Market.

Organizations structure their business models on the vision they have and strategy for long term

survival, competitive advantage, & sustainability.

A4: APPROVALS RECEIVED:

All the organizations have received GMP (Good Manufacturing Practices). This is the minimum

requirement in Pharma Industry. One cannot continue without the GMP certification.

ISO 9000 is received by only 6 organizations out of 14, under the study. This implies many

organizations are not yet ready for compliance to a Quality system. The improvement needed in

processes or systems and a desire for global deployment of products and services. For exports,

few countries are demanding ISO standard. ISO 9000 standard demonstrates its ability to provide

a product that meets regulatory & customer requirements and achieves customer satisfaction.

The purpose is accomplished by evaluating and continually improving the system, rather than the

product.

The effect of not having ISO9000 certification can be observed for Indian Pharma Industry in

banning exports to US by US-FDA. Even if few organizations have been certified, they too have

been banned. This reflects on the culture of Indian Pharma Industry. This is very unfortunate and

would affect more in business terms, reputation and non-accomplishment of dream to stand in

Global Market.

ISO 14000 is another serious issue. Out of 14 organizations under study, only 5 organizations are

approved for ISO 14000. It is for developing environmental management standards. It

encompasses three categories- EMS (Environmental Management System), EA (Environmental

Auditing), EPE (Environmental Performance Evaluation). The entire requirements are based on

the processes and not on the product. Environmental aspects are not taken seriously by the Indian

Industry as a whole and Indian Pharma Industry is unfortunately not an exception to that. The

rules regulations for Environment are not stricter and many organizations take benefits of the

lapses.

A5: THERAPEUTIC SEGMENTS:

Almost all organizations are in anti-biotic sector. The highest growth is seen in two main

segments- CARDIAC and DIABETIC. This is followed by CNS (Central Nervous System),

Gynecology and Pain /Analgesics.

It is heartening to note that all top organizations are in these high growth segments and lots of

efforts are being put in R&D to improve drugs delivery &/or discover new drugs.

A6: TECHNOLOGY

(i) Procurement is viewed differently by different respondents. However there is mix-reaction to

the question. Mainly it depends upon approach of the management. However, it is no more seen

as only “Cost center”. This reflects on the thinking of an Industry, that Materials Department is

not cost center any more. Some respondents look at it as part of “Strategic Team”. Few

respondents also look as “a resource to save cost” and few look at it as “an innovator that

impacts all areas of business”.

Hence, Materials Department is seen as ‘Strategic Source’ of cost reduction, and an ‘innovator’

impacting business. This approach itself would give an edge to the Pharma industry in long term

and matching to the expectations for sustainability and competitive edge.

(ii) Very progressive organizations are using latest technology, and almost all are having

integration of all the other functions with that to Materials. ERP, SAP or Customized version of

ERP is being used.

Few other organizations are still in older kind of versions of IT and needs improvement.

This observation is further strengthened by respondents. 80% have opined their comfort level

with the IT technology adapted by the organizations. 20% have shown their displeasure.

PART B: COST TEDUCTION

B1: Cost reduction as Goal.

It can be easily construed that all the organizations under study do take goal of cost reduction at

corporate level (100%) and assign specific goals of cost reduction to Materials Department every

year.

This reflects on seriousness of the subject matter, need of the organizations and ultimately need

of an Industry. Also, cost reductions’ importance is attributed by the management while

assigning responsibility to Materials Management.

Many respondents have indicated that cost reduction is viewed as “Strategic” more i.e. long term

than “short term”. This is more co-related to the intrinsic requirements of Pharma industry. Any

type of “change” is taken seriously in Pharma Industry, since more of validations are required to

be done and results are checked, validated at all stages of the materials flow, right from incoming

to outgoing.

The respondents are also of the view that approach towards cost reduction is “Top down” and

“Down top”. This two way communications is healthy & good for the culture development.

The cost reduction target is taken at corporate level, operation level or at business level.

During discussions with Materials professionals from Pharma Industry, the following points

were felt noteworthy:

• Cost reduction projects often lack cohesive approach at top management level.

• Many a time clearly defined goals in terms of planning, assessing success of cost

reduction, time-limit for achievement & moreover sustainability of such cost reduction

project are lacking in totality.

• Generally there is a siloes approach of top management. The responsibility is vested on

Materials department without involving other departments. Hence lack of cohesiveness

and integration.

• It is also observed that, Materials Department strives hard in a dedicated manner to

achieve cost reduction targets, whereas, other departments falter on the overall cost

reduction efficiency, since, either they have not been asked to take such measures or they

are not involved.

Most of the respondents are of an opinion that the process of cost reduction is well structured.

That means, process, accountability, reviews, effects are considered. There could be unstructured

process also, but, by & large it could be condoned as it is for business exigencies.

However, cost reduction is never done by keeping before the eyes only “profit & loss” at the

business level, as a short term policy. This has been supported by all the respondents. This is in

good terms with the intrinsic requirements of Pharma Industry.

B2: Cost reduction achieved.

At the outset, being confidential information, no respondent was able to quote very specific

figure. In fact, while designing the “questionnaire”, one of the conditions of respondents was, the

figures would not be specific but we can quote the range of cost reduction achieved. Other

observations were as follow:

• Many respondents were themselves not aware of exact figures, leave apart confidentiality

part.

• Many indicated range but were of the opinion, that, 80 to 90% is achieved.

• Most of the junior professionals were not at all aware of actual cost reduction.

This indicates a lack of ownership and transparency in realizing benefits. In most of the cases,

the indications were that the resources assigned to the initiative lack necessary skill sets or are

diverted into other assignments.

The entire organization is not involved in totality to a common goal. Tits-bits and part

involvement cause this problem. Many cost reduction programs do not run through entire chain.

B3: REVIEW METHODS:

All the organizations review either monthly or quarterly & annually. For any cost reduction

program, it is imperative that targets set are reviewed on a periodic basis. This system will bring

success to achieve cost reduction as set &/or implicate any remedial measures required to be

taken and removal of hurdles if any.

The indications are that the managements are serious. The goal and its accomplishments are

taken seriously.

B4: VALIDATION OF COST REDUCTION ACHIEVED:

Achievement of cost reduction is compared and validated either with –Target or previous year’s

figure &/or benchmarking but there is no exclusive method followed by any organization. This is

done in 2-3 combinations, depending upon tool/technique used and requirements of organization.

• Cost reduction is not done for the sake of system or for deceptiveness. It is validated.

This speaks of the seriousness of management towards the entire process.

• As discussed earlier, the structured approach is very much necessary for cost reduction

and for Pharma Industry it is very much essential. Almost all the organizations follow

this and is as per the needs of the industry.

B5: MAJOR CAUSES TO PRACTICE COST REDUCTION:

There are many reasons to practice cost reduction. However, most prominent reasons underlined

during the survey are as follow:

1. Recent changes in Market dynamics. Very keen competition, mergers and acquisitions in the

Global Market, MNCs’ acquiring Indian Pharma Companies, inflation at international level- all

these factors are definitely compelling organizations in Pharma industry to go for cost reduction.

2. Competition from Generic drugs. More and more drugs are “patent-off” and competition is

very heavy to introduce at appropriate time and place the “Generic” version of the same. This

also gives benefit in earning a market share.

3. DPCO. This was discussed in length in earlier chapters.

4. Introduction of new and cheaper drugs.

5. Outsourcing.

“Outsourcing” has attracted many MNCs and top Indian Pharma Companies. Most of the MNCs

are losing their share in the Indian Market. (It is 27% as per AIOCD for the year 2014).

Outsourcing is one tool to bring down the cost. Top Pharma Companies follow the same. In

order to focus on core business, share the risks, outsourcing has become attractive thing.

However, it is an obligatory on the part of the Principal Partner to ensure that, quality is

maintained throughout the chain.

B6: Tools/ Techniques used by Materials Department:

The following table would give clarity on preferences of respondents for tools/ techniques used

in “Cost Reduction” in Pharma Industry.

(Table No. 5.T 3: Tools/Techniques preferred by materials department)

Preferred by 100% Preferred by 93% Preferred by 86% Preferred by 79%

1.Alternative

materials

1.Cost price analysis 1. Credit

improvisation.

1.Brainstorming

2 Inventory control 2.Packaging

economics

2.Innovativeness 2.Change in design

or bill of materials

3.Negotiations 3. Wastage control 3. Creativity

4.New vendors

development

4. Yield

Improvement

4. Cutting costs on

transport modes.

5.Outsourcing 5. Import

substitution

6 .Standardization &

variety reduction.

Whereas following tools/techniques are comparatively preferred by less respondents.

(Table No. 5.T4: Tools/Techniques not so preferred by materials department)

Preferred by 71% Preferred by 64% Preferred by 50% Preferred by 43%

1. Inventory

reduction

1. Cutting costs on

storage space

1.ERP 1.Tendering

2. Value analysis

2. Lead time

analysis

3. Materials

handling

4. Early

involvement of

vendors.

Preferred by 31%

1. Just-In-Time

Preferred by 29%

1.Reverse auction

2.Scrap recovery

It could be easily inferred from above two tables that preferences for tools for cost reduction are

given to 17 major and more practiced tools, based on easiness, practicality, easy to control and

review and ease in implementing. These tools are incidental to Materials Management’s

functions, activities and hence more employees’ friendly.

Just-In-Time technique is not being preferred by many respondents due to constraints of FDA

laws. Like any other industry, raw materials cannot be brought directly on the shop-floor.

Moreover, in Pharma industry on Quality issue customer cannot rely upon vendor and has to test

in one’s organization, validate and then use the materials for converting it to finish-goods.

However, this practice can be used for certain packaging materials whose lead time for QC-

analysis is less and reliable suppliers are available in the near vicinity.

“Reverse Auction” is also being used by very few organizations. The commodity items or those

types of items are being used very less in quantity by the organizations and hence the chances are

less for practicing.

B7: USE OF CREATIVITY:

From responses, it has been observed that, no organization has claimed that it is non-creative.

This is matching with the growth factor of Indian Pharma Industry. Without creativity, it is

impossible to progress.50% respondents have claimed strong creativity and 36% have claimed

modest creativity.

Creativity is the function of knowledge, imagination & evaluation. Greater the knowledge, the

more ideas patterns or combinations one can achieve. Fostering creativity and out-of-the-box

thinking among individuals requires thought and concerted efforts from the organization. This is

true in a sense that general tendency in any workplace is to conform and follow rules rather than

break free and take the road less traveled. Creativity requires motivated individuals at the

workplace as well as the correct atmosphere to facilitate creativity.

Most of the emerging brash organizations are very creative and are progressing faster than the

old stable organizations viz; Glenmark, Mankind, Elder Pharma, & Macleods etc. The sales

revenues of these organizations speak for themselves. In fact these organizations have taken over

the non-aggressive organizations.

This is very satisfying area and enhances the confidence on the performance of Pharma

organizations.

B8: INNOVATIVENESS IN PHARMA:

From the respondents claim, it can be easily inferred that all the organizations under study are

innovative. 65% organizations are in the range of “modest to strong” innovative. Innovation is

not by chance. Organizations need to look out & tap new opportunities, evaluate, develop new

products & launch successfully. Innovation is not invention. A successful innovation implies

commercial success.

There is a strong linkage between innovation & entrepreneurship. People who hate uncertainty

are unlikely to be good entrepreneurs. They see “CHANGE” as normal & healthy. They take

calculated risks and also have ability to see opportunity in adversity.

Most of our Indian Pharma Organizations have been started by new entrepreneurs and thus,

Indian Pharma could grow faster than any other industry! No doubt, industry being innovative

could bring lots of good products, services and at low cost.

For bringing innovativeness, Pharma industry requires to build strong R&D, develop new

products, including diagnostics and work towards competitiveness and sustainability.

PART C: SERVICES

C1: PRACTICE OF PROCUREMENT OF SERVICES

• In most of the organizations procurement of services is a neglected area. Only 29%

respondents are using Materials Department exclusively. Others are using in

combinations as per convenience—sometimes concerned department, sometimes

administration department or sometimes services are being outsourced.

• In fact, many of the respondents have no clear idea of how much organization is spending

on procurement of services. There is no involvement of Materials department while

preparing the budget for procurement of services or in framing the policies of

procurement of services. In fact, many MNCs have different heads- one for DIRECT

MATERIALS and other for INDIRECT MATERIALS (which include all services).

• Most of the organizations are spending between Rs.100 crs. to Rs.500 crs.

• An expertise in negotiations, market knowledge of Materials Department, cost savings

are not realized by the organizations due to different approach of procurement of

services.

• Even though cost reduction goals are taken for services at Corporate or Business level,

the doubts are raised by the respondents on targets, their validation and review process.

• Outsourcing for services need to be used due to complexities, expertise in the field and

capital investments required to be done. However “Materials department” would be more

competent to decide on these rather than any other department.

• Outsourcing “Transport”, “Clearing & Forwarding” and “Canteen Facilities” etc. would

be more prudent and advisable due to market conditions. Negotiations competency of

Materials Department can be used immensely.

In short, Pharma Industry is observed to be not as conspicuous about procurement of services

as being done in direct materials procured for consumption. This area remains as Grey Area.

There is lot of scope for cost reduction. MNCs have realized this very well. All MNCs are

procuring thru’ Materials Department. Some have exclusivity for service procurement at

Global level. This gives tremendous opportunity for savings. Even though Indian Pharma

Organizations are realizing or have realized, there are hardly any constructive actions being

taken. The procurement of INDIRECT (Services) materials requires to be centralized at

Materials department. Appropriate policies, rules, regulations are required to be made just

like Direct Materials. Once this is done, organizations can bear the fruits to their advantage.

PART D: MOTIVATION

D1: All the respondents rate the efforts taken by the management to motivate employees for

cost reduction as Excellent, Very Good or Good. No respondent has rated as poor.

Hence it can be construed that organizations put serious efforts to motivate employees.

D2: For achieving cost reduction target, employees are motivated good enough.

D3: The major reasons at Management Level for motivating employees are:

(a) Employees are encouraged to generate new ideas.

(b) Employees are encouraged to learn from the problems.

(c) Employees are encouraged to collaborate rather than compete.

(d) Employees are being empowered.

(e) Employees’ participation is encouraged.

(f) Employees are trained to achieve cost reduction.

D4: The major reasons at Employees Level for getting motivated are:

(a) Employees feel organization is “risk pruned”.

(b) Employees feel they are recognized.

(c) Employees feel “Trusted”.

(d) Employees feel “Respected”

(e) Employees feel management has sincere concern for them.

(f) Employees feel a challenging task and highly involved,

(g) Employees feel value for meritocracy.

These are good enough reasons for motivation for employees at their level &/or at management

level to keep them motivated.

Indian Pharma Organizations are serious enough in framing long term strategy towards

Employees motivation, growth, their participation, helping them to achieve their personal goals

and ultimately organizational goals.

D5: COST REDUCTION AND PERFORMANCE APPRAISAL.

Majority of the respondents have said that performance of an achievement of cost reduction does

not get reflected in their annual performance appraisal. Performance is neither validated in terms

of Actual v/s Target nor in terms of reduction per unit cost. 78% respondents on an average are

of the above opinion very strongly.

One of the ways of ensuring sustainability in cost reduction programs is to link them to an

individual’s performance and review it on a monthly basis at department level and quarterly and

finally annually at management level.

The cost reduction achieved is not linked with “performance appraisal” demotivates the

employees and their managers. This does not incentivize performers and top management fails to

build a strong performance management team and the culture.

Barring few MNCs, many Indian Pharma Organizations have failed to link performance of cost

reduction with that of annual appraisal. The major reasons are – (a) validation of cost reduction

is not done in totality. (b) managers are of the opinion that it would become a right of employees

to ask for appropriate compensation after achieving cost reduction.(c) top management feels this

may not be a good culture overall and would create problem in long term. Some managers

expressed this view of management, even though it is not practiced in totality.

However, the facts remain that sincerity and good performers are not being appreciated and

employees get de-motivated. The problem does not stop here but gets percolated downwards and

that becomes a culture! Even though there is good atmosphere to work with, hidden factors play

a major role and an achievement falls apart from the target.

D6: ACKNOWLEDGING EMPLOYEES:

In most of the organizations, employees are acknowledged by giving monetary benefits, special

bonus or certificates of appreciation and also by corporate communication to all employees of

such an achievement. These “extrinsic” motivation factors are good. However, management

needs to take care of “intrinsic” factors (emotional) of employees. If these are left without taking

care, organization face high rate of attrition in spite of putting all sincere efforts.

D7: DOES EVERY EMPLOYEE CONTRIBUTE?

50% respondents are affirmative and 50% are not. It means every employee does not contribute

voluntarily. This reflects more on a culture. This has been discussed many times in previous

chapters.

The reasons generally could be as follow, which are expressed by the respondents during formal

and informal discussions with various Pharma professionals at different levels.

1. Cost reduction program is not projected itself as a vision by the top management, aligning

with its corporate strategy.

2. Many a times vague decisions.

3. All the required constitution is not involved and hence required support does not exist.

4. Performance is not linked with that of appraisal. Employees feel “appraisal” as part of HR

ritual and not taken seriously. Employees feel that extra achievements are not being reciprocated.

5. Clearly defined goals for cost reduction are lacking. Definition of success of cost reduction is

not defined.

6. Cost reduction program does not give a ‘feel’ of significant benefit potential.

In nutshell, employees are not motivated intrinsically and that’s the great failure on the part of

management, a failure to develop a good culture.

D8: HIDDEN FACTORS AFFECTING COST REDUCTION

The hidden factors at ‘organizational level’ or at ‘employees’ level’ affecting an achievement of

cost reduction &/or cost reduction target are discussed in length in earlier chapter. Other than

those common reasons like- absence of culture, absence of policies, no role-models in the

organization, no specific training given for cost reduction, no appreciation, no enough

compensation, discouraged for experimentation, researcher could gather few other reasons which

are expressed during formal/informal discussions and of course are of much ‘concern’ need to be

addressed.

A. Lack of ‘transparency’ in realizing benefits. The process owners of cost reduction are not

communicated exact benefits, especially related to financial.

B. Cost reduction program is driven by top management, provides necessary fillip to the

initiative. However, it is short lived. Employees feel that it is being thrust upon them rather than

an initiative that they believe in.

C. Low value cost reduction is not given importance due to ‘change control’ documentation,

which is a part of stringent ‘Quality Assurance’ department in Pharma Industry and mainly

experienced in MNCs. The reason is Global location of corporate offices & Head of Quality

offices.

D. In few organizations, competency is not given due importance. There is a lack in self-

motivation. Employees are having less exposure to the global business and culture.

E. Few professionals have expressed their views who are working for MNCs at top level,

heading materials department. According to them since last couple of years, cost reduction has

been given immense importance in India’s Operation. This is mainly due to de-growth and

decline in profitability. New ideas, sincere efforts are duly acknowledged by the management.

Transparency, good culture, collaborative approach, motivates employees to achieve cost

reduction. Business process is seen ‘strategically’ now!

F. Some organizations are doing very well. High margins, good product-mix do not instigate to

go for cost reduction culture. ‘Cost reduction’ has yet to become culture in these organizations.

However, after appointing foreign consultant, management has started ‘cross functional teams’

and slowly imbibing cost reduction culture.

G. In few organizations, good old people are not much enthusiastic, causing unnecessary hurdles

in such programs, de-motivating performers and promising employees.

H. Few respondents are of opinion that even though top management is highly qualified and

professional, the actual practices are non-professional. One of the reasons is they are in family

business and do not like to go out of their comfort zone. Hence no training, no reviews, no

conducive atmosphere, no appreciation, no openness, absence of culture etc. However ‘cost

reduction’ is one of the rituals in the organization.

While going thru’ these opinions/expressions, it can be concluded that hidden factors are many,

perhaps beyond one’s imagination. These hidden factors are actually hurdles in achieving cost

reduction. Even though, organization limits itself by taking cost reduction goals year after year,

there are hidden areas which employees could know better where the cost can be reduced further.

To tap these benefits potential, motivation to employees is important, but more so an openness,

transparency in totality, culture, aligning appraisal with performance and compensation are more

important.

PART E: OTHER DEPARTMENTS

Materials management can contribute a lot to cost reduction. There is no doubt about it.

However, this is not the only department contributes to cost reduction. Each & every department

has potentials to contribute. Ultimately, any cost reduction contributes to the bottom line of an

organization. To keep organization competitive, one of the strategic decisions is cost reduction.

To peep in, researcher has addressed couple of questions on this area, in the final part of the

questionnaire.

E1. Other departments involved:

All the respondents are unanimously of the opinion that Finance, R&D, Production, Product

development are having more scope for cost reduction due to their inherent functions. Then it is

followed by other departments, viz. Process development, Distribution, HR, Administration etc.

Management could take cohesive approach towards all these departments’ functions and can

build an experienced team equipped with supporting tools to drive the execution, along with a

robust benefit tracking process ensuring accountability and realization of the benefits.

E2. PREFERRED TECHNIQUES FOR COST REDUCTIONS BY OTHER

DEPARTMENTS.

As per respondents’ survey, ‘Cause & effect’, ‘Pareto Law’, ‘PDSA’, ‘Brainstorming’ are

preferred techniques.

The other techniques like SIX SIGMA, TQM, TPM, ANOVA, BENCHMARKING are not

preferred or been used with low priority.

Some of the organizations in Pharma industry have started TQM /TPM sometime back; however,

the culture of the organization is not changed. This is clearly revealed from the banned exports to

US, Canada etc. The fundamental objective of TQM is to change a culture and bring in new

paradigms. If TQM is practiced only from the cost reduction point of view, then, culture would

never change. This reflects in manipulation of results, hiding the facts, sub-standard

performance, cognitive dissonance etc.

In any case, Pharma Industry needs to change their culture. Current phase can be called as

‘transition phase’. The future growth, keen competition, global aspects, and aspiration to emerge

as number one in the global competition would compel to change the current culture and values

and emerge with new paradigms.