An analysis of the key drivers, decision making and strategic issues with respect to outsourcing in the SA pharmaceutical manufacturing industry

Abstract

“Outsourcing has been touted as the ideal way for organisations to reduce cost, focus on core business processes, improve services, enhance skills, reduce time-to-market and increase overall competitive advantage,” (Power, Bonifazi and Desouza, 2004). A pertinent question is therefore ‘Can South African companies in the pharmaceutical industry remain competitive by outsourcing, what is driving these companies to outsource and how effective has the initiative been?’ The purpose of the study is to identify the extent to which various key factors play an influential role in motivating pharmaceutical companies in SA to outsource. South African pharmaceutical companies as part of the global arena, have to continually assess the feasibility of manufacturing their products in-house or allowing contract manufacturers to manufacturer and or pack on their behalf. The research questions posed in this research were: why are companies outsourcing, what is outsourcing and what is happening amongst the South African pharmaceutical companies? The results of this qualitative rich study have shown that outsourcing in SA is not just about cost savings or reduction in product costs but that this process is able to afford the contract giver the ability to tap into additional capabilities (facilities, technology and skill) of their outsourcing partner. Outsourcing has enabled the contract manufacturers in SA to assist the contract givers in numerous areas such as cost reduction, cost saving, reduction in capital investment, increased flexibility and allowed the contract givers to focus on their core competencies. The implementation of off shoring may result in South African contract givers incurring additional ‘hidden costs’ which may be attributed to quality problems, reduced flexibility of transport, product write-offs (due to large volumes ordered), currency fluctuations and additional resources that may required (technology transfer, documentation review, and validation). The responses from the research questionnaires indicate that the key drivers of outsourcing in South African are aligned with those identified in global ii marketplace by Jiang and Qureshi; Copestake and Lau and Zhang (2006). The main drivers being profitability increase (cost reduction, cost saving and capital reduction), strategic considerations (focus on core competence, increased flexibility and to facilitate market penetration) and access to knowledge and skills. The key for the South African outsourcing service providers lies in ensuring that their clients are kept satisfied so that they can minimise the threat of offshore providers. The results of the study are line with Momme and Hvolby (2001) suggestions in which they advocate that organisations only outsource when suppliers have a comparative advantage and that an organisation proactively have a stronger focus on its internal core business areas. In SA governmental changes in regulations/ laws such as those addressing parallel importation, patents, foreign investors and trade would impact on the countries national competitive advantage. However although outsourcing is highly beneficial, organisations need to carefully manage the process, identify hidden costs, risks and initiate preventative measures to ensure success. This study was the first step towards conceptualising the impact of the key drivers, decision making and strategic issues on the South African pharmaceutical manufacturing industry.