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Cost Engineering

From High Margins to Cost Optimization: The Pharmaceutical Industry's Turn to Cost Engineering

The pharmaceutical industry is experiencing a shift towards cost engineering as profit margins tighten and industry challenges increase. This blog post explores why the industry has been slow to adopt cost engineering practices and how the growing need for cost optimization is reshaping the pharmaceutical landscape.

In recent years, the pharmaceutical industry has faced significant market changes and increasingly tight profit margins, forcing companies to rethink their operations. Understanding costs and their elements has become a higher priority, and medical manufacturers turn to cost engineering solutions to help optimize expenses while maintaining quality and compliance.

Why Has the Pharmaceutical Field Been Slow to Adopt Cost Engineering?

Cost engineering has traditionally been an essential function in industries like automotive manufacturing, where tight profit margins necessitate strict cost control. However, the pharmaceutical sector has been slower in embracing this discipline. Let's explore the reasons behind this trend and why it's changing.

Traditionally, the pharmaceutical and medical device industries have enjoyed substantial profit margins. The high-value nature of medical products, coupled with strict regulatory barriers, has allowed companies to maintain premium pricing. This financial cushion meant that the pressure to optimize costs was less intense compared to other manufacturing sectors.

Unlike the automotive industry, where cost engineers have long been essential for maintaining competitiveness, medical technology companies could afford to focus more on innovation and regulatory compliance than on cost optimization.

Now, we can see the industry landscape is shifting. Increasing competition, pricing pressures, and supply chain disruptions are pushing pharmaceutical manufacturers to reconsider their approach to costs.

The Growing Need for Cost Engineering

As profit margins begin to tighten, the expertise of cost engineers - long valued in other industries - is becoming increasingly relevant in the medical field. As a result, cost engineering is becoming an essential tool for maintaining competitiveness and profitability. Why is this happening?

Bar graph showing the revenue of the worldwide pharmaceutical market from 2016 to 2023, measured in billions of U.S. dollars. The graph demonstrates a steady increase in revenue over the years.

The global pharmaceutical market has experienced significant growth, with revenues increasing by 26% from 2019 to 2023.

However, this growth has brought new cost-related challenges that require urgent attention. The pharmaceutical industry is facing a complex landscape of global disruptions and financial pressures. The COVID-19 pandemic, geopolitical tensions, and inflation are all forcing companies to reassess their sourcing, manufacturing, and supply chain strategies. Simultaneously, rising costs across various sectors, from raw materials to labor, are putting significant pressure on profit margins. 

Since the newly increased costs cannot be fully passed on to customers, pharmaceutical profit margins are under pressure. To navigate these challenges, companies should adopt more sophisticated cost management approaches.

“Cost management is moving up the agenda, and it needs to come with bigger ambitions." - PwC, 2024

Cost Engineering Applications in Medical Manufacturing

While the production of the medicine itself falls outside the scope of cost engineering solutions, there are two key areas in medical manufacturing where it can be effectively implemented.

  • Medical Consumables: High-volume production of single-use items such as syringes, surgical gloves, catheters, and disposable medical sensors. These products often incorporate specialized materials or basic electronic components and are manufactured in large quantities to meet high market demand.
  • Medical Devices: Specialized equipment manufacturing, ranging from portable devices like glucose monitors and infusion pumps to complex machines such as MRI scanners and robotic surgical systems. While produced in smaller volumes, these devices involve intricate assemblies, and advanced technologies, and often require customization.

Medical manufacturing processes closely resemble traditional manufacturing, employing similar assemblies and components. The core technologies used in medical device production, such as electronics production, injection molding, and die casting, are widely used in other manufacturing sectors. This parallel demonstrates the potential for applying well-established cost engineering methods to the medical industry. 

A man in gloved hands adjusting a machine in a medical glove manufacturing facility, with various tubes and gauges visible.

Why is Tset the right solution?

Tset, a cost and carbon analysis software, offers valuable expertise to pharmaceutical companies — whether they're just beginning their cost calculation journey or looking to enhance existing processes.

  • Support in Cost Engineering Department Implementation: Tset offers expert guidance in establishing cost engineering departments, from initial planning to full rollout, ensuring your team is equipped to execute efficient cost management practices.
  • Comprehensive Library of Technologies: Tset's software covers all key technologies for medical device production, providing precise cost and carbon footprint data for informed decision-making.
  • Diverse Industry Knowledge Application: Tset's experience in the automotive, consumer electronics, and machine manufacturing sectors makes us the application of proven cost-saving strategies to pharmaceutical manufacturing.

Conclusion

The pharmaceutical industry is undergoing a significant shift, one that can go smoothly by embracing cost engineering to navigate challenges such as evolving product landscapes, global disruptions, and financial pressures.

By leveraging Tset's comprehensive cost engineering solutions, pharmaceutical companies can navigate the evolving landscape of medical device manufacturing, thereby optimizing costs without compromising quality or regulatory compliance.

Would you like to know more?

For more information about the challenges and trends around future-oriented cost engineering can be found in this whitepaper "The future of cost engineering".

Read now

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Author

Gina Gocza
Solution Consultant

18.10.2024

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