Open vs Closed books contracting? An expert guide

In the complex landscape of the pharmaceutical industry's supply chain, the choice between open book and closed book contracting can significantly impact efficiency, transparency, and risk management. As Supply Chainer, understanding the nuances of these contracting approaches is crucial. In this article, we will delve into the advantages, disadvantages, and risks associated with open and closed book contracting.

For which activities/services?

The pharmaceutical Supply Chain is a finely tuned system involving various stakeholders such as Contract Research Organizations (CROs), Contract Manufacturing Organizations (CMOs), Contract Packaging Organizations (CPOs), third-party logistics providers (3PLs), and more. When it comes to contracting, two primary models come into play: open book and closed book.

Open Book Contracting: Unveiling Transparency

Advantages: One of the key benefits of open book contracting is transparency. This model allows for a detailed view of cost breakdowns, providing a clear understanding of where each penny is spent. This transparency can foster a stronger partnership between your company and its service providers.

Disadvantages: However, this level of transparency comes with its challenges. Overreliance on open book models may lead to information overload and complicate decision-making processes. Additionally, the negotiation of fair and competitive pricing can become intricate while leading to complex budgeting in your organization. 

Risks: The major risk comes from the loss of incentives to ensure efficiencies in the operations.  It is also of upmost importance to carefully evaluate the risk of exposure related sensitive information. Pharmaceutical companies must carefully evaluate and manage the confidentiality of their data throughout their supplier network.

Closed Book Contracting: Mitigating Risk

Advantages: Closed book contracting, on the other hand, offers a more straightforward approach. The pricing structure is predetermined, providing stability and predictability in financial planning. This model is often favored for its simplicity and reduced administrative burden.

Disadvantages: The lack of transparency, however, can be a drawback. Understanding the true cost structure may become challenging, making it harder to identify areas for cost optimization.

Risks: While closed book contracting mitigates certain risks, it can introduce others, such as potential disputes over pricing and service scope. This model requires a high level of trust between the pharmaceutical company and its service providers.

Choosing the Right Path: Considerations for Supply Chainers

When deciding between open and closed book contracting in the pharmaceutical Supply Chain, you must carefully consider several factors. These include the nature of the services required, the level of transparency desired, the sensitivity of the information involved, and the long-term partnership goals.

Alternative mechanisms to bring transparency and incentive are worth to be explored. Those include Bonus and Malus scheme, often more effective when applied across both sides of the partnerhsip.

Conclusion

In conclusion, both open and closed book contracting models have their merits and challenges within the pharmaceutical Supply Chain. As Supply Chainer, evaluating the specific needs of your organization is paramount. Striking the right balance between transparency and risk management is the key to a successful contracting strategy.

For a deeper understanding of how open and closed book contracting can impact your network, feel free to contact us.