Swiss fine chemicals consultant Peter Pollak says the character of pharmaceutical custom manufacturing contracts changed dramatically in 2000, favoring customers and squeezing suppliers. Among the key changes he points out are the following:
Contract duration. The average contract period before 2000 was five years. After 2000, it became one year.
Capital guarantee. This refers to a guarantee by the customer to pay all or part of the supplier's investment costs to make the customer's product in case the customer does not purchase the product or takes only part of the contracted quantities. After 2000, customers no longer offered capital guarantees.
Take-or-pay clause. According to this clause, the customer pays for the contracted quantities of product regardless of whether the customer orders the amounts. This practice was standard before 2000. Now, customers don't even recognize the term.
Number of suppliers. Before 2000, customers invited bids from very few suppliers. Now, many more suppliers are invited to bid.
Volume forecasts. Contracts concluded before 2000 typically contained the following clause: "In quarter 3 of each calendar year, a forecast for the monthly requirements of the following year will be given. Specific orders will be placed at least 90 days prior to shipment." Now, suppliers are not informed in advance about the next year's requirements. They must wait for spot orders.
Price adaptation. Before 2000, prices were adjusted upward every year on the basis of increases in costs of materials, etcetera. Now, customers require a yearly cost reduction of 5 to 10%.
Penalties for delays. Before 2000, if delays were caused by the customer or regulatory agencies, the supplier was fully compensated. After 2000, this risk was passed on to the supplier.
R&D expenditures. Before 2000, these were charged to the customer. Now they are being charged to the supplier.
Process improvements. Before 2000, suppliers by and large could raise profits through economies resulting from process improvements. Now customers are enjoying those benefits by demanding lower prices.