When cost is king

Competitive market segments such as generics, OTC, and late-stage products are characterized by lowering price expectations, high rebates and fierce competition. For manufacturers, these factors create ongoing cost pressures. In the generics industry, those pressures are exacerbated by frequent use of tender-based ‘winner-takes-all’ bidding systems.

Executive Summary

Cost leadership is key in generic, OTC, and mature product segments as it can offer a huge competitive advantage. One of the most significant opportunities lies in reducing the cost of goods sold (COGS).

In generics companies, the competitiveness of their COGS determines whether tenders are won. Won tenders mean more volume, which translates into greater scale efficiencies. Greater scale efficiencies in turn, mean lower costs and potentially even more sales volume.

For manufacturers of mature products about to lose their patent rights and exclusivity, reducing COGS and pricing can also help to maintain sales volumes longer in the face of competition. In addition, the value of the mature products considered for divestment significantly increases when margins are healthy upon exit.

Many COGS reduction projects, however, are typically one-off or ad-hoc initiatives driven by a single function. To maximize the opportunity a longer-term, more strategic and cross-functional approach is needed.

This paper sets out a proven approach to help companies create sustainable competitive advantage through the creation of a strategic COGS optimization capability – a largely untapped opportunity.

In our experience, businesses applying this approach can typically identify COGS savings of  5-15% - which translate into significant bottom-line benefits.

Strategic Approach

Our approach has three phases:

1. Setup: establish the right governance structures, cross-functional team, and data sources required for the program to succeed
2. Analyze: a structured, repeatable framework to select the most promising molecules, analyze their savings potential, and identify the best options for delivering savings (this framework is outlined in detail in the whitepaper)
3. Capture: capture long term value by establishing a strategic capability for continuous COGS review and optimization

Adopting a more strategic approach can help companies:

• Identify and deliver COGS reduction initiatives that translate into higher sales volumes and increased market share and higher profit margins.
• Identify improvements that can be scaled across the whole molecule portfolio and into different markets.
• Embed a process of continuous COGS improvement that is difficult to imitate and delivers long-term competitive advantage.