By Anil Kumar Singh Roll No-23 Section A PGDIM

ERP in Pharmaceutical Industry

1.0 Introduction BIG Idea Competitive Advantage @ IT IT executives know that the right investments in technology can deliver a significant competitive advantage.

Over the past 50 years, companies such as American Airlines, Apple Computer, Frito-Lay, Google, and Wal-Mart Stores have changed the competitive rules in their respective sectors by introducing technology-enabled innovations1.

The Challenge Efficiency & Innovation Taking a leaf from the success stories in other industries the CIOs in the pharmaceutical industry have an opportunity to become true pioneers. That's the good newsand the bad news2. With the business model straining to operate at scale, pharma companies are asking their IT leaders to do two things at once: Dramatically improve the efficiency of IT and Use it to drive business innovation. Never before have CIOs in any industry had to face these challenges at the same time and to meet them so quickly. The Solution Enterprise Resource Planning Also the fact that the Pharmaceutical industry is highly regulated3 and innovation driven, the implementation of an ERP solution by the pharmaceutical firm potentially increases the effectiveness and improves the efficiency of the processes and streamlines internal operations.

Whether you need to increase your market share or be more profitable, ERP for pharmaceutical industry solution can help you achieve your goals and bring significant return on your investment.

2.0 The Changing face of Pharma

Much like the oil industry of the 1970s, the pharmaceutical industry is unraveling across the value chain and will create a new industry picture and different success factors than the traditional business model of big pharma The currently accepted model of vertical integration from the laboratory to the pharmacy is moving to a more fragmented model with various players active in each section of the value chain. An ever-increasing number of companies have entered the game by playing in very specific portions of the traditional value chain. The number of these activity specialists has exploded in the last decade, while the number of integrated pharmaceutical companies has steadily declined over the same period. Also, Innovation has always been a key factor for the growth of the pharmaceutical industry. There is usually a strong Government support for biotechnology and medical research in most of the countries, which is augmented by the increasing R&D expenditure of the pharmaceutical

industry. With such strong focus on R&D, a company is expected to play a more important role in the discovery and development of new drugs in the future.

3.0 Mapping the value chain to Tech requirements

At present, the majority of investments are concentrated on IT systems for operations, distribution, and sales functions of pharmaceutical companies. With the increasing focus on R&D, pharmaceutical companies are gradually shifting toward IT-based drug discovery. This transition is necessary to reduce the escalating costs of drug discovery and development. An increasing demand for solutions such as electronic data capture, clinical trials management, in-silico research is expected in the future. The generation of a large amount of data due to R&D initiatives is likely to require tools such as data warehousing and data mining.

4.0 Business Case for ERP implementation

The case for ERP systems ERP can be either a blessing or a curse7. Many companies find ERP systems to be extremely useful and help them make better-informed decisions. Others discover that their purchase has been based more on faith than good judgment, and run up tens or even hundreds of millions of dollars in extra costs and schedule delays. So some questions need to be answered before implementation of ERP package: How, then, can senior managers ensure that their companies build a sound business case for deploying ERP systems? What can they do to guarantee that the promised benefits are not eclipsed by the costs of integration, process redesign, and training? There can two approaches: To take a cost-based approach to the business case. To be aware of common pitfalls.
Cost-based approach

ERP systems have received much attention for their potential to help companies make more effective decisions. ERP can reduce the financial reporting, purchasing, and support expenses of management information systems (MIS), and lead to more timely analysis and reporting of sales, customer, and cost data. But for all the talk of opportunities waiting to be tapped, savings can prove elusive. Hard returns, such as reduced headcount resulting from streamlined operations, are simple to predict and control, but are only part of the picture. Soft returns, such as revenue or employee productivity gains, are neither easy to predict nor under a companys direct control. The problem is a common one in evaluating IT investments. In the case of ERP systems, the length of the payback period and the size of the investment neededin terms of both cash and human resourcesmake it unwise to assess a project on anything but a hard-returns basis. This is not to suggest that an ERP system cannot help company boost revenue but the difficulty and expense of deploying ERP mean that most companies should appraise such an investment purely in terms of its potential to cut costs. Building a sound, cost-based business case for ERP entails extracting the savings that depend on ERP alone from the total savings to be had from ERP together with other sources. This process consists of five steps:

1. Create a base case of year-by-year savings from cost cuts that could be made without the ERP system in place. 2. Create an ERP case of year-by-year savings that could be made with ERP. This should include savings that do not depend on ERP (the base case of step 1) as well as those that do. 3. Subtract the base-case savings (step 1) from the ERP-case savings (step 2) on a year-by-year basis, and calculate the net present value (NPV) of the residual cash flow. A positive NPV will indicate that you should probably proceed with the deployment of ERP. 4. If step 3 produces a positive NPV, conduct a sensitivity analysis to ensure that the business case is strong enough to withstand slippage and cost overruns. 5. Back-allocate all ERP system deployment costs to individual business units so that they can factor them into their planning. Ensure each unit is held responsible for producing the promised savings. 1. Developing the base case By taking the savings made and subtracting all the one-off investment costs needed to achieve them, you arrive at the net business benefits. Most of the branches on the benefits tree are selfexplanatory, with the exception of "avoided costs." These are the costs a business would have to incur if it were to grow at the rate forecast without using ERP. They include increases in the cost of maintaining old systems that an ERP system would have replaced and the cost of hiring extra staff to handle increased businessstaff that would not be needed if an ERP system was in use. 2. Developing the ERP case The ERP case can be generated by including the cost of ERP in the one-off costs of the base case. In this case, avoided costs are not incurred. 3. Calculating net present value After year-by-year net benefits for the base case have been subtracted from the ERP case, the next step is to calculate the NPV of the resulting benefit streams. In doing this, several broad assumptions may be made without damaging the business case: All cash flows are pre-tax (that is, there is no depreciation tax shelter). There is no residual value in hardware or software. Business benefit streams need to be captured only for the two years beyond the estimated completion date of the rollout. (This is because benefits are difficult to predict with any certainty beyond two years, and because cash flows get discounted rapidly and leave the impact of later years arguably small.) A pre-tax weighted average cost of capital can be obtained from the industrys or companys average pre-tax borrowing rate. If the NPV is positive, a sensitivity analysis will ascertain how robust the result is. 4. Allocating costs and reinforcing savings targets The final move is to back-allocate ERP costs to all business units and shared services. Unless units recognize at the outset how much they will have to pay to use the new system, they will be unlikely to appreciate how great a drain on cash and human resources it will inevitably be. This requires costs to be back-allocated according to the savings each unit or shared service expects ERP to generate. If one unit believes it can streamline operations and save more through ERP

than another can, then it pays more for its use. Allocating costs in proportion to forecast benefits also discourages business units from overstating potential savings.
Two common pitfalls

Companies ability to manage complex ERP installations varies widely, and cost overruns and slippage are common. The two main weak spots for this are: Lack of clear responsibility on the part of business units for realizing the benefits and helping manage the cost of implementation Lack of clear accountability to the business units on the part of managers responsible for ensuring a projects successful completion.
Mitigating the risks

Following steps can help mitigate the risks of ERP deployment, ensure that business units take ownership of the project, and guarantee that project managers are accountable to business units: Ensure backing by appointing a business unit leader (and not an IT department head) to take charge of the rollout. This individual should be offered incentives tied to the projects success. He or she should have the backing of other business unit heads as well as being directly accountable to them. All technical implementation staff, including external system integrators, should report to this individual. Phase in the funding by having predetermined checkpoints for managing savings targets during the rollout. Defining these checkpoints at the outset helps maintain tight control over costs on projects of this magnitude. Build tracking metrics into the rollout plan to enable business unit heads to monitor progress toward savings and staff-reduction targets. These targets should be incorporated into unit budgets, as should any metrics used by senior managers to monitor progress. Develop a contingency plan to protect against dependence on a single individual, and make sure everyone knows about it. If the company has a strategy for retaining key staff, the ERP project leaders should be included in it. Ensure that the rollout is integrated into business units project planning, even if it does not affect their budgets immediately. After all, costs will be allocated to the business units eventually, and managers will have to make efforts to change processes. Implementing ERP systems successfully is fraught with risk. It calls for strong leadership, a clear implementation plan, a constant watch on the budget, and an explicit stake in the project for business units. The ability to manage operations of this complexity can be lacking, and cost overruns and slippage are all too common. Ensuring from the outset that a company has a strong business case and recognizes the most common pitfalls will go a long way toward reducing the risks.

5.0 ERP Implementation (Methodology & Challenges)

Implementation Phases The implementation of ERP in a pharmaceutical industry follows a generic approach. In this approach there are 6 phases, which are

Planning Requirements analysis Design Detailed design Implementation Maintenance

Planning: This step includes need assessment and business justification. The business justification for ERP includes both tangible and intangible benefits, including inventory reduction, operating cost reduction etc. Requirement analysis: Requirement analysis includes Analyzing business process Specifying the processes to be supported by the ERP. Since the company is buying into the vendors view of best practices, it is important to select a system which fits with the organisations goal and business practices. The process of selecting the best ERP systems entails working through a check list of activities. Aside from the business issues, there are a number of technology factors to consider in the selecting an ERP vendor and an ERP system. Design: The fundamental decision in ERP systems design is re-engineering versus customization. In the re-engineering approach, the team selects a commercial off the shelf ERP and re-engineers business processes to fit the package. In the customization approach, the team selects a commercial ERP and customizes the ERP to meet unique requirements. Detailed Design: Here the team selects the models, processes, and information to be supported ( MAPs models, artifacts and processes).Best practices methodology provides models supporting the business processes of each functional area. The process for using the best practices involve the following steps Select applicable business processes Discard inapplicable processes Those processes that do not match the system will serve as foundation for re-engineering Identify any areas not covered by the best practices as candidates for customization It also involves interactive prototyping and extensive user involvement in determining systems design elements. Implementation: ERP implementation could include issues like Configuration, Migration of Data, Building Interfaces, Implementing Reports, Pilot testing, Going Live, and Training. Many companies contract with a technical support specialist from the software supplier to assist in

implementation. Also following issues in Configuration should be taken care off. These issues range from Data Ownership, Distribution of procedures and transactions to Data Management. Some of the implementation strategies followed are Big Bang Approach, Phased Approach and a mixed approach. Challenges & Issues There are many challenges faced by a company implementing an ERP package. The problems start arising when a company decides to implement ERP and continues till during the whole life cycle of ERP. The issues faced by a company can be enlisted as follows:

At its simplest level, ERP is a set of best practices for performing different duties in your company, including finance, manufacturing and the warehouse. To get the most from the software, you have to get people inside your company to adopt the work methods outlined in the software. If the people in the different departments that will use ERP don't agree that the work methods embedded in the software are better than the ones they currently use, they will resist using the software or will want IT to change the software to match the ways they currently do things. This is where ERP projects break down. ERP undergoes changes regularly due to changes in the business environment. These include regulatory, legal and political changes. Users should be trained to know these changes and keep the system in optimum condition. Post implementation problems start the moment a particular user quits. It takes time to re-train another user and all the procedures are not clear at the onset. Customizations make the software more unstable and harder to maintain when it finally does come to life. ERP covers so much of what a business does; a failure in the software can bring a company to a halt, literally. The mistake companies make is assuming that changing people's habits will be easier than customizing the software. It's not. Getting people inside your company to use the software to improve the ways they do their jobs is by far the harder challenge. If your company is resistant to change, then your ERP project is more likely to fail.