Pharmaceuticals and Life Sciences
Frances Bruttin and Dr. Doug Dean
IBM
Business Consulting Services
Pharmaceutical Sector
Aeschenplatz 2
CH-4002 Basel
Switzerland
+41-58-333-7687 (tel)
+41-58-333-8117 (fax)
Managing the Cost of Compliance in Pharmaceutical
Operations1
Introduction
Recent studies have shown that the total cost of compliance with internal quality
systems and external regulations for a typical medium to large dosage form
manufacturing facility is as high as 25% of the total site operating budget (exclusive
of raw material costs) [1]. For a medium-large production facility this amounts to €40
million per year. There is potential to reduce this element of cost by as much as 50%,
but not by continuing with the current “cause no problems” attitude to manufacturing.
To reduce compliance costs, it is both necessary to understand the cost components in
some detail, and to appreciate why they occur. It is also necessary to balance
compliance costs against the incremental reduction to business risk that they deliver.
By understanding the nature of compliance-related risk, where it occurs, and how to
manage it, significant improvement opportunities may be identified that
systematically reduce gross risk and reduce the cost of managing residual risk.
Market realities in the 21st Century require manufacturing operations to be externally
supportive and to contribute directly to the competitive advantage of the
pharmaceutical enterprise. A significant contribution to improvement of operational
cost structures can be realised through a programme focused on reduction of
operational compliance costs.
This paper will explore how both quality and regulatory compliance costs can be
identified and quantified. The risks eliminated by undertaking quality and
compliance activities will be analysed in a similar manner. Finally, it will be shown
that the risk cost trade-off can become an objective decision-making process
contingent on the company’s product portfolio and its preferred risk profile.
The Pharmaceutical Context
Manufacturing has been traditionally regarded as a “Cinderella” function in the R&Dbased pharmaceutical sector, and has been managed with an internally neutral “cause
1
This article originally appeared as “A Risk-Based Approach to Dramatic Cost of Compliance
Reductions in Pharmaceutical Manufacturing“,Pharmaceutical Technology Europe, vol. 11, no. 5, pp.
36-44.
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no problems” mentality. This attitude has resulted in the growth of inefficiencies in
several areas, resulting in today’s unacceptably high costs of compliance. With
dosage form facilities spending 20-25% of annual operating budgets to ensure that no
compliance-related problems occur, this is an expensive insurance policy.
With such an expensive policy premium, it could be assumed that senior management
has clear visibility of the component costs and is able to state, based on objective
criteria, whether the company is over or under insured. One would also assume that
management should be in a position to state with confidence if incremental
investment in their compliance infrastructure to reduce risk still further made
economic sense. Evidence from the industry, however, indicates that this is seldom
the case.
Despite the significant spend on compliance the more frequently encountered
situation is instead one where business people searching for operational cost
reductions are informed by q.c. unit professionals that higher, not lower, levels of
compliance are required with associated increases, not decreases, in costs. This often
creates a sense of management dissatisfaction given the feeling that costs are high;
interpretation of GMP regulations is a black art; and the level of compliance problems
seems to remain constant anyhow, independent of the level of compliance-related
spend.
The Status Quo
It is our opinion that this discussion is frequently played out because:
•
Most pharmaceutical companies do not know what their total cost of compliance
is, or what cost components contribute significantly to the total;
•
Most pharmaceutical companies do not really understand what level of
compliance they are attaining, or failing to attain, with existing infrastructures;
•
Few pharmaceutical companies have visibility of the residual risks to which they
are exposed at the given level of compliance with which they operate;
•
Few pharmaceutical companies understand the capability of their compliance
infrastructure to deliver marginal reductions in compliance risk;
•
Few pharmaceutical companies understand the relationship between their level of
compliance risk exposure and the associated costs.
The Problem
As a consequence, management often has great difficulty objectively answering two
critical questions:
•
•
Is more investment in infrastructure warranted to reduce existing compliancerelated risk exposure?
Does the level of compliance currently being delivered by the infrastructure
represent good value given the cost required to achieve this level?
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These issues of excessive compliance costs and ineffective compliance infrastructures
have been a topic of discussion in the industry for some time [2-4].
In our experience, an integrated risk management approach to these questions of
quality and regulatory compliance is necessary to enable senior business management
gain visibility of compliance costs, and to manage them effectively.
Integrated Risk Management
Risk management is fundamentally concerned with:
•
•
•
•
•
Identifying gross risk
Quantifying gross risk
Deciding what to do about unacceptable risk
Implementing the decisions to modify risk
Managing the residual acceptable risk
Integrated risk management examines risk across functions and disciplines with the
knowledge that risk exposure may not always occur at the organisational location of
risk generation. Risk reduction efforts may lead to a zero sum improvement if efforts
are not consolidated and co-ordinated in this manner.
Applying a systematic and integrated framework to regulatory risk enables affiliate,
regional, and global manufacturing managers to objectively assess their unit’s
compliance exposure and communicate the performance of the risk controls in place
to mitigate that exposure.
The Approach to Regulatory Risk Management
Regulatory risk within pharmaceutical manufacturing is primarily concerned with
cGMP compliance. This involves product fitness for use and compliance with
regulatory controls. Product fitness for use is an attribute that most companies,
irrespective of industry, need to assure. Although product fitness for use comprises
more than product quality (safety and efficacy as well), we will identify this category
of cost and risk as “Quality”. Compliance with regulatory controls, however, may be
regarded as the incremental effort needed to satisfy the requirements of regulatory
agencies. This is the incremental cost of doing business in strongly regulated
industries such as health care product manufacturing and the aerospace sector. We
shall identify this category of cost and risk as “Regulatory Control”.
Compliance Risk = Quality Risk + Regulatory Control Risk
Figure 1. The components of Compliance Risk
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Risk Identification
The first step of risk identification requires profiling the state of the Quality and
Regulatory Control infrastructures as potential generators of compliance risk. Some
examples of problem areas and potential risk generators are shown in Table 1.
•
•
•
•
•
Quality
Raw materials
Equipment
Personnel
Processes
…and others
•
•
•
•
•
Regulatory Control
GMP documentation system
Master instructions
Computer-related systems
Validation
…and others
Table 1. Examples of potential risk generators
Risk Quantification
Risk quantification involves establishing the current levels of Quality and
Regulatory Control compliance in terms of process inputs, processes, process outputs,
and operational practices. A number of methods, some of which have only recently
been developed, exist to measure these levels:
•
•
•
Process capability indexing, and sigma profiling [5];
Regulatory compliance risk indexing [6];
Performance benchmarking against best practice maturity profiles.
Using the above quantification methods, managers gain insight into the current risk
exposure of their Quality and Regulatory Controls compliance infrastructure.
Visibility must be established of the cost to attain the current level of compliance, and
where those costs occur. One must also understand the potential risk reduction
resulting from an incremental investment in the compliance infrastructure.
Identification of Poor Quality Costs
Poor quality costs may be classified into four categories:
•
Internal Failure Costs:
Costs associated with defects found prior to the transfer of finished goods to
the customer.
•
External Failure Costs:
Costs associated with defects found after shipment of finished goods to the
customer.
•
Appraisal Costs:
Costs incurred in determining the degree of conformance to quality
requirements before shipment of finished goods to the customer.
•
Prevention Costs:
Costs incurred in seeking to minimise failure and appraisal costs before and
after shipment of finished goods to the customer.
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A detailed examination of these cost categories is beyond the scope of this paper, but
some category examples are listed in Table 2.
Internal Failure
Safety Stock
Destruction Costs
Over Fill Costs
Material Yield Costs
Efficiency Loss
External Failure
Appraisal
Distribution Service
errors
Product Insurance
Litigation expenses
Judgements
Incoming material
evaluation
Inspections
Evaluation of stock
Calibration Services
Defective Product
Replacement
Product Inspection
Downtime
Prevention
Quality System
Maintenance
Process Control
QA Audits
Supplier Quality
evaluation
Training
Preventative
Equipment
Maintenance
Complaint
Investigation
Downgrading
Table 2. Examples of the categories of poor quality cost
Identification of Regulatory Control Non-Compliance Costs
Non-Compliance costs may be categorised in a manner similar to poor quality costs.
These costs are related to the control element of compliance – alignment of process,
product and regulatory documentation [7].
•
Internal Failure Costs:
Costs associated with control document errors found prior to finished goods
release.
•
External Failure Costs:
Costs associated with report document errors found after shipment of finished
goods to the customer.
•
Appraisal Costs:
Costs incurred in determining the degree of conformance to Regulatory
Control requirements before shipment of finished goods to the customer.
•
Prevention Costs:
Costs incurred in keeping failure and appraisal costs to a minimum before and
after shipment of finished goods to the customer.
Again, detailed examination of all possible categories of non-compliance costs is
beyond the scope of this paper. Table 3 illustrates some examples of categories of
these cost elements.
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Internal Failure
External Failure
Appraisal
Prevention
Re-processing semifinished goods due to
batch record errors
and omissions
Recall processing
Document review &
approval
Supplier Certification
Scrap due to batch
record errors and
omissions
Citation and Warning
letter processing
QC release
certificate processing
Validation
Deviation Processing
NDA delay
Batch Record
processing
SOP development &
maintenance
Change Control
Shareholder Value
Batch record rework
Business Income
Reputation
Investigation Reports
Complaint
Processing
Table 3. Examples of non-compliance cost categories
Quantifying Costs
Considering that costs are generated due to the consumption of either time or
materials, it makes sense to categorise further the costs under headings of “Activity”
and “Material”. Consolidating in this manner produces a “Compliance Cost Matrix”
as illustrated in Table 4.
System Compliance
Quality
Activity
Internal Failure
•
•
•
External Failure
•
Material
Downtime
Complaint
investigation
Rework
•
•
•
•
Overfill
Material yield
Downgrading
Scrap
Compliant
investigation
•
Defect product
replacement
Product insurance
Litigation
•
•
Prevention
•
•
•
Appraisal
•
•
•
•
Regulatory Control
Activity
•
•
•
•
•
Rework (BR errors)
Deviation
processing
Change Control
BR rework
Recall processing
Citation & warning
letter processing
Material
•
Scrap (BR
errors)
•
•
NDA delay
Shareholder
value
Reputation
Business
income
•
•
Quality System
Maintenance
QA Audits
Training
•
•
Inspections
Incoming material
evaluation
Calibration services
Evaluation of stock
•
•
•
•
Validation
SOP development
& maintenance
Master Batch
record
development
Document review
and approval
QC release
certificate
processing
Batch record
processing
Table 4. Compliance cost matrix.
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Using techniques such as Activity Based Costing (ABC) and Material Failure Cost
Analysis, it is possible to populate the Compliance Cost Matrix in a manner which
promotes transparency and inter-departmental responsibility.
A detailed and complete discussion of ABC is outside the scope of this paper.
Briefly, however, the technique assesses costs based on completion of an inventory of
activities performed by each employee in a given time period. Further, each activity
has a result, or output, and may consume additional resources that are also identified.
Using ABC techniques, one can be certain of creating a comprehensive and very
revealing map of costs. ABC cost maps tend to be much more indicative of where
actual costs are being accrued. They provide a level of detail that is missing in a
traditional roll-up of departmentally allocated costs. For example it becomes obvious
that quality costs occur not only in the quality department, but also in production (rework) and customer relations (compliant investigation).
Another advantage of such a matrix is that it highlights sources of potentially large
financial risk related to Regulatory Control non-compliance – for example loss of
shareholder value and reputation. With a clear view of the cost structure, executives
are now in a position to determine the performance level of Quality and Regulatory
Control compliance infrastructures, and decide if they are under or over-exposed to
regulatory risk.
Performance Level
Following Juran [8] it is possible to develop a total compliance curve – summing the
costs of appraisal and prevention with failure costs.
Total compliance costs
Cost of Appraisal &
Prevention
Cost of Compliance
Failure costs
Level of Compliance
Figure 2. Total cost of compliance as a function of compliance level.
Optimising the level of compliance in correspondence with the economic minimum is
generally not a concept acceptable in the pharmaceutical industry. Companies need to
know what their compliance cost curve actually is, and where on it they are currently
operating, so as to their current compliance and quality gross risk exposure.
Deciding what to do about that gross risk depends on the company’s preferred risk
profile, its capital structure, its future trading paradigm and its product portfolio.
Some companies are risk seeking and are prepared to accept a level of risk higher that
the industry average. Privately held companies may not be worried about shareholder
value. Companies considering significant contract manufacturing in the future may
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need to greatly reduce their gross risk. Factors such as dosage forms, technology and
complexity of processes, influence where a company can sensibly operate on its'
compliance curve.
Whatever the assumptions and limitations involved, senior management, knowing
with clarity their operating position, are now able to compare options which will
allow them to eliminate, transfer, or modify, gross compliance risk. Implementing the
options will additionally allow containment of the cost of managing the residual
compliance risks.
Reducing Gross Risk and Improving Compliance Effectiveness
Best-in-class companies that have systematically reduced their compliance risk, have
noticed that, surprisingly, as the level of compliance improved, the cost of compliance
actually decreased.
Although it is completely counter intuitive given the current mentality and track
record of quality and compliance professionals in the pharma sector, this phenomenon
that has been observed in other industries.
16
14
12
Cost
10
8
6
4
Cost Saving
X
40-50%
2
0
0%
0%
10%
20%
30%
40%
50%
60%
70%
Degree of Compliance
80%
90%
100%
100%
Figure 3. Reducing the cost of compliance
This approach has been shown to allow recovery of 40-50% of existing compliance
costs. Alternatively, operation at significantly increased levels of compliance with
concomitant reduction in risk is also an option to executive management.
Compliance cost and risk reduction methods are individually effective, and each is
certainly of stand-alone benefit. However, such methods combined to form an overall
program they can move the compliance capabilities of manufacturing from being at
best internally neutral, to becoming externally supportive, and hence a source of
competitive advantage.
Conclusions
An integrated risk management approach to management of compliance within the
pharmaceutical sector should look at Quality and Regulatory Controls in terms of
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their compliance infrastructures. Identifying and quantifying the level and cost of
these infrastructures makes the sources and consequences of regulatory risk visible.
Obtaining transparency of the aggregate compliance level and associated costs allows
management to make knowledge-based, rather than subjective, decisions on the
optimal degree of compliance. The steps taken to modify the cost-risk profile will be
contingent on a company’s target risk profile and product portfolio. Innovative
methods to reduce gross risk have led to a fundamental change in the compliance
curve – enabling leading companies to benefit from cost savings of 40-50%.
A focused program to reduce gross risk and contain the cost of managing residual risk
may move manufacturing from being internally neutral, to being externally
supportive, thereby contributing to competitive advantage.
References
1.
2.
3.
4.
5.
6.
7.
8.
Dean, D., and Bruttin, F., Profiling Costs in the Hidden Factory of Pharmaceutical Production,
PricewaterhouseCoopers, Pharma Sector Study and Report, Uxbridge, UK, 1998.
Anisfeld, M.H., Validation – How Much Can the World Afford? Are We Getting Value for
Money?, PDA Journal of Pharmaceutical Science & Technology, Vol. 48, No. 1, pp. 45-48, Jan.Feb. 1994.
Bruttin, F., and Dean, D., Exposing a Cost Black Hole While Improving Quality and Compliance
Through Integrated Risk Management, Proceedings, WorldPharm98, Philadelphia, USA, 22-24
September, 1998.
Kieffer, R.G., Global Trends, Needs, Issues, PDA Journal of Pharmaceutical Science &
Technology, Vol. 52, No. 4, pp. 151-153, Jul.-Aug. 1998.
Dean, D., Bruttin, F., and McCracken, P., Applying Best Practices in Production of Large and
Small Volume Parenterals to Achieve a 2:1 Cost and Performance Advantage, Proceedings, PDA
1998 International Congress - Advances in Pharmaceutical Manufacturing, pp. 253-258, Basel,
23-25 February, 1998
Chapman, K.G., Bruttin, F., and Dean, D., Gaining Management Visibility of Potential
Compliance Risks by Regulatory Compliance Indexing, PricewaterhouseCoopers, Pharma Sector
Study and Report, Uxbridge, UK, 1998.
Tetzlaf, R.F., GMP Documentation Requirements for Automated Systems: Parts I, II, and III,
Pharmaceutical Technology, Vol. 16, No. 3, pp 112-124, 1992, Vol. 16, No. 4, pp. 60-72, 1992,
Vol. 16, No. 5, pp. 70-83, 1992
Juran, J.M, and Gryna, F., “Quality Planning and Analysis”, 3rd edition, McGraw-Hill, New York,
1993, pp15-39.
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