Price – Raw Materials, Safety Stocks and Excessive Stocks
The price of biopharmaceutical manufacturing services in CDMO is determined by complex formula. Main criteria for the pricing formula is mainly based on i) project plan, ii) services and changes in the services, iii) raw materials and safety stocks, iv) batches/products and consumables, v) other fees.
Cost of raw materials and safety stocks are one of the main factors in pricing which client has larger responsibilities but less control over it.
1. Raw materials
- Procurement of raw materials is typically handled and managed by CDMO company based on client’s forecast and production schedule.
- The cost of these materials is passed through to the client.
2. Safety stocks
- CDMO company maintains safety stocks to ensure continuous production and mitigate/against supply chain disruptions.
- The level of safety stock is typically agreed upon with the client and can be adjusted based on production needs.
3. Inventory (stock) management
- Based on client’s forecast and production schedule, raw materials and safety stocks are secured in advance of the production schedule.
- Manufacturers require clients to provide detailed forecasts typically on a quarterly basis. These forecasts must include specific details on production volumes, batch requirements, and timing.
- Inventory and safety stock levels are also reviewed and adjusted quarterly based on updated forecasts.
- Depending on CDMO companies ability, the level of inventory analysis and inventory management is varied.
- Most manufacturers are offering standard inventory reports with item details such as quantities, batch sizes and timelines.
- Some advanced manufacturers are taking more proactive approaches offering comprehensive inventory reports and even propose joint project for the improvements/suggestions.
- The proposal can be based on ability to analyse/manage changes of environments, supply chain networks and in-depth analyses on usage patterns to be adapted in production schedules.
- These approaches create added value and differentiate among other CDMO companies.
4. Excessive and remaining stocks
- If CDMO orders or maintains materials in excess of the required quantities due to the client’s instructions, demand changes or cancellations, the client is responsible for these costs.
- The client may request to transfer the excessive stocks unless future production is scheduled in the same facility within valid schedule. Storage fees will be occurred.
- It can also be requested to dispose at the client’s costs which is typically falling on the client’s expenses as an additional fees.
5. Procurement and Quality
- Each CDMO employs a strategic sourcing approach, working closely with qualified suppliers to ensure a stable supply of high-quality raw materials.
- These strategies are focusing on risk management, stable supply of high quality materials, consistency (in both quantity and price) and reliability.
- Each CDMO, therefore, establishes unique protocols for their sourcing strategy such as diversified sourcing from multiple suppliers, long-term contract, centralising procurement functions, etc.
- Supplier quality is one of the critical function to ensure only qualified suppliers can supply of high-quality raw materials.
- QC on supplier qualification, audits, performance reviews and continuous monitoring must be conducted at highest level before procurement process at all times.
Each CDMO has tailored strategies to ensure the availability and quality of raw materials and efficient management practices.
If you would like to know more about pricing and sourcing strategies in biopharmaceutical CDMO, feel free to contact me.
About the author
Juha Kim is a CDMO business consultant and business operations strategist. Equipped with latest studies and business practices, he is building frameworks in the world’s renowned CDMO companies based on his experiences leading various projects in Lonza as a Director, Operations Finance and Business Development Korea roles during the time.
He is also a founder of Korea-Switzerland BioPharma Network (KSBPN) and Korea Pharma Biotech Directory (KPBD) to help establishing business opportunity leads in both directions.
