Boosting Life Science Profit Margins via Vendor Consolidation

6/17/2024

As life science companies evaluate their business, one aspect to consider is how consolidating suppliers would benefit the operation. With competition remaining intense throughout the industry, and consumer expectations on the rise, companies need to explore all options at their disposal to drive value for customers and stakeholders. By streamlining their supplier relationships and consolidating procurement processes, life science companies can unlock a range of benefits — including increasing gross profit margins.

Here, we’ll examine three specific ways that life science companies can benefit from vendor consolidation:

Adapt to changing needs — by streamlining the overall supply chain, the company can more quickly adapt to fluctuating market conditions

Reduce costs of goods sold (COGS) — providing strategies to produce economies of scale

Improve quality control — working with a smaller pool of trusted suppliers makes it easier to ensure quality and compliance

Streamlining for stronger supplier relationships 

As they consolidate vendors, life science companies can begin forging stronger relationships with their newly focused group of key suppliers. They’ll be able to cultivate deeper relationships with this smaller supplier group, building on trust and collaboration. Suppliers, in turn, will now be able to better align their efforts with the partner company’s objectives — providing customized solutions to meet their specific needs and requirements. 

Streamlining will be beneficial in other ways as well, including:

• Companies will be able to more effectively leverage the expertise and resources of their suppliers — further driving advances in products and services
• As a result of rostering a smaller, more focused team, companies will be able to react more quickly to market conditions
• Quicker evaluation of supplier performance across a focused group will enable companies to systematically assess and review relationships

Reducing COGS

The direct cost of producing goods — or cost of goods sold (COGS) —  is subtracted from a company’s revenue to calculate gross profits. Hence, a company can be made more profitable if it’s able to reduce its COGS. Companies can seek to reduce their COGS in a number of ways, including:

• Analyzing direct materials and direct labor costs to discover if it’s possible to reduce waste and/or rework 
• Negotiating more favorable terms with existing suppliers 
• Looking for ways to ensure a more efficient supply chain, which can lead to shorter lead times and more flexibility when it comes to shifting market demands
• Determining if certain production components can be executed in-house rather than outsourced
• Improving current manufacturing efficiencies 

Another critical step that life science companies can take in reducing COGS is to pursue automation. Automating manual processes and utilizing automation tools and systems can boost productivity and efficiency while also greatly reducing the possibility of errors and client miscommunication. 

To be able to support ever-increasing automation efficiency in life sciences manufacturing, organizations are: changing their internal processes; adding more automation; and reducing human intervention in their day-to-day operations. As reported by the Association for Advancing Automation, the number of robot orders for life sciences, pharmaceutical, and biomedical companies increased by 72% between Q1 2023 and Q1 2024. By choosing a supplier partner with automation systems experience, companies can ensure they are in a position to make the most of their current and future technology.

If it’s not feasible for a company to pursue automation to replace certain processes, but people resources are still required, another option is to consider offshoring or nearshoring as a way to reduce COGS. 

Improving quality control

Consolidating vendors enables life science companies to strengthen their quality control. Working closely with a smaller, more focused pool of trusted suppliers reduces the risks associated with supply chain disruptions, quality issues, and compliance issues. By utilizing this approach, companies can implement strict quality standards, conduct audits, and enforce performance metrics across the breadth of their supply chain. As a result, they can minimize disruptions to their operation, deliver superior products and services, and better safeguard their reputation. 

Companies can also streamline their internal processes by consolidating vendors, enhancing operational agility. Centralizing procurement activities and standardizing vendor management procedures allows companies to: minimize and control redundancies, reduce administrative overhead, and improve cross-functional collaboration. Companies can then make faster, data-driven decisions, adapt to market changes, and so take advantage of emerging opportunities. 

An imperative for gross margin improvement

Life science companies should ensure that they’re evaluating their supply chain on a regular basis, and that communication with their suppliers is continual and transparent. Companies need to be systematic and objective as they weigh the pros and cons when evaluating supplier consolidation. 

In summary, consolidating vendors yields:

• More control
• Reduced COGS
• More value, by freeing up resources and talent
• Better overall expertise across all areas
• Brand integrity

By formulating the right supply chain now, the proactive life science company can realize a gross margin improvement in the present — while also preparing for what the future might bring.

Frank Costello is the Market Development Leader for RRD Life Sciences.