Challenges Facing a Pharmaceutical Supply Chain
The GCL Group recently invited several logistics experts active in the pharmaceutical industry to initiate discussions on trends, challenges and concerns of this rapidly changing industry beset by strict regulations.The participants in this focus group were:
Philippe Gautrin, partner, the GCL Group, presented this distinguished panel with recent results from the Canadian Association for Pharmacy Distribution Management (CAPDM) survey, and highlighted logistics trends related to the pharmaceutical industry. In this presentation to the focus group comparative analysis was made between the pharmaceutical industry and the overall industry regarding specific trends.
The Trends in the Pharmaceutical Industry
Here are some of the most salient trends that were presented to the focus group. Generally, trends in pharmaceutical logistics have remained consistent for several years. As such, third party distribution methods (clients served by wholesalers such as Medis and Kohl & Frisch) varied from 56 percent (1999) to 66 percent (2001) for prescribed medication (RX products) and 63 percent (1999) to 75 percent (2001) for Over-The-Counter products (OTC products). During this period, direct sales to customers (pharmacies, hospitals, etc.) decreased from 27 percent (1999) to 20 percent (2001). This is expected to reach 17 percent by 2005.
Even though the industry leans increasingly towards an indirect distribution mode (wholesalers and chain distribution centres), 13 percent of orders are shipped directly to chain stores. This can be explained by the fact that some large pharmacies meet the minimum purchase set by manufacturers as well as by the fact that some products can no longer be included on the insurance list (6-10 percent surcharge usually).
In 1999, 25 percent of organizations had no minimum-order standards and approximately 75 percent of them decided to exclusively adopt an indirect distribution strategy, whereas others have established a minimum order of $1,000 (with incremental potential).
On an international level (specifically in regard to United States, Europe and Japan), Canada distinguishes itself by the type of distribution methods it uses. However, not withstanding the fact that there is a trend towards indirect distribution, the fact remains that this type of indirect distribution only accounts for 50 percent of overall distribution systems used in Canada, according to 1998 data. Whereas in Europe, an estimated 80 percent of the distribution is indirect, compared to 60 percent in the United States and 89 percent in Japan. Such a phenomenon is due to stiff competition and relates to the birth of generic brands in Canada. Another explanation could be that certain markets in Canada are mature when it comes to outsourcing.
Changing the type of distribution method will force companies to re-think some of their processes such as ordering, storing and delivery methods. Such process overhauls will likely trigger significant efficiency improvements. Also, the establishment of new information technologies is increasing, forcing manufacturers to continue to be informed about logistics practices in regard to major wholesaler as well as large pharmaceutical chain stores (electronic catalogue, ASN, etc.)
In order to maintain strategic activities as their main focus (core competencies), companies are considering more outsourcing of their logistics functions. Firstly, management, design, printing and distribution of literature will be outsourced to specialized companies. This decision will allow organizations to salvage major storage areas for finished products.
Round Table Discussions
Following the presentation of logistics trends in the pharmaceutical industry, participants were encouraged to participate in a round-table discussion on pre-defined subjects. The results of these discussions are presented here in summary form:
Logistics Function Recognition
All participants agreed that the biggest challenge is the recognition of the logistics function within each company. This function is perceived as a necessary evil required to facilitate sales and management is not paying much attention because logistics has little impact on sales costs (in this industry). Although most guests mentioned the establishment of sales and operations (S&OP) meetings, a certain level of frustration was noted. Numerous speakers are booked one year in advance for these types of meetings only to find themselves in front of an empty room. Product managers often claim that their schedules do not allow them time to attend. Ratiopharm’s Luce Laporte mentioned that having a vice president of operations with a logistics background contributed to the establishment of these types of meeting for Ratiopharm. The fact remains, however, that the sales force has to be constantly reminded that production and logistics are two distinct functions, each with their own strengths and weaknesses. But it was agreed, such meeting can certainly improve communication between various departments.
Pfizer’s Oscar Mancini and Marie Girard also promoted the logistics function in their respective companies. Today, in upper-management meetings, the sales force and finance departments learn more about the logistics function and how logistics practices relate to their company’s success. Berlex’s Marie Girard explained that she has chosen a customer approach to emphasize the logistics function. While employed at GlaxoWelcome, Marcel Brunet was fortunate enough to participate in highly constructive S&OP meetings. These meetings were strongly encouraged by the Canadian division president who not only attended these meetings but would sometimes go as far as to recruit a product manager from their offices to be present.
The lack of recognition surrounding the logistics function is often due to a communication problem between the logistics manager and upper management, remarked GCL’s Albert Goodhue. Logisticians, passionate about their work, are often unable to justify the capital costs required to improve a project. Marcel Brunet, Sélim Toutounji and Patrick Munro all agreed that the recognition of the logistics function is greater in the United States, which translates into logisticians being involved in key decision making processes. One other noteworthy remark was made concerning the logistics function; a greater recognition is noticed in OTC divisions. Indeed, due to the lower margins and competitive nature of their products, logistics and customer service plays a greater role than for Rx products.
Direct Versus Indirect Distribution
Direct and indirect distribution is a subject that has been at the heart of numerous debates. A current trend towards indirect distribution or by way of large chain distribution centres has become quite obvious to all our guests. On several occasions Sélim Toutounji has had to justify Wyeth’s direct distribution network in Canada. Through an extensive activity-based costing (cost-to-serve) analysis, he was able to demonstrate the disadvantages behind changing such a distribution method. Several logistics, finance, sales and upper management representatives took part in this study.
Schering’s recent decision to introduce a minimal-order value, intended to steer the company towards an indirect distribution method, was announced by Marcel Brunet. Such change could have a direct impact on the new distribution centre’s efficiency given the initial intention was to maintain a direct distribution system. A debate on whether to transfer packaging activities or re-packing to distribution centres is currently taking place.
Sélim Toutounji and Luce Laporte acknowledged that an indirect network did not completely eliminate unit picking. Indeed, when it comes to high value products, retailers such as COSTCO and hospitals, as well as doctors, still demand to order at the unit level regardless of the evolution behind indirect distribution. According to Sélim Toutounji, the trend could change as high value products would be shipped directly from manufacturers in order to insure that these products remain covered by the Medicare system.
Outsourcing Operations
None of the companies present at this meeting have elected to outsource their logistics operations. Pfizer is the only company resorting to a specialized firm to handle returns. Schering, Pfizer & Berlex are considering outsourcing management and storage of their printed material (literature).
Outsourcing should be the first choice when starting up operations in a new country, according to Sélim Toutounji. However, today, companies have established infrastructures making it difficult at times to outsource some of their operations. According to Luce Laporte, companies consider this as an option when faced with the inability to invest in order to maintain their logistics functions (new site, information systems, automation, etc.)
Also, companies that have performed an operational benchmarking exercise using a logistics provider have been disappointed with installations and the competency of the outsourcing company. Often a lack of confidence and knowledge about the complexity surrounding the pharmaceutical industry makes it difficult for firms to continue this exercise.
Customer Logistics Practices
Everyone admitted to having access to their customers as well as their logistics counterparts. Customers must still be reminded about best practices regardless of their sourcing network. Indeed, although wholesalers and chain stores have agreed to weekly large orders, they continue placing small orders on a daily basis which automatically generate inefficiencies encountered by distribution centres;
In 1999, Philippe Gautrin fulfilled a mandate for Bristol Myers Squibb, which consisted of a cost-to-serve analysis for each customer related to Clairol’s division. The results of the analysis influenced logistics practices as they related to their most important customer. (In 1999 Warner-Lambert conducted similar studies in the United-States.) Philippe Gautrin’s analysis signaled the need for pharmaceutical companies to perform a detailed analysis of their current case formats in order to increase full-case picking. Packaging cost increases could easily be compensated by significant productivity gains.
Logistics Competencies
A lack of qualified resources in logistics is certainly very noticeable as far as everyone is concerned. Albert Goodhue is working closely with governments and Canadian universities to develop training courses specializing in logistics. Finding qualified teachers is a challenge in itself. Marcel Brunet and Sélim Toutounji are equally surprised by the lack of qualified resources in this field. In this context, companies are compelled to invest time and energy to train employees in their logistics practices and are frequently disappointed to find these employees recruited elsewhere.
Sélim Toutounji mentioned that good manufacturing practice guidelines for therapeutic goods (GMP) procedures force Wyeth to train its distribution centre employees for a period of 10 to 15 days before allowing them to handle products. Patrick Munro is concerned about the inevitable culture shock between logistics graduates and logistics professionals whose knowledge is mostly derived from a hands-on learning environment.
2005 Vision
Another of Sélim Toutounji’s concerns is the future of the logistics function in Canada, specifically for those pharmaceutical companies with head quarters in United States. He fears that some companies may envision centralizing North American distribution in the United States to sell directly to Canadian distributors. This would mean the closure of current Canadian distribution structures.
Strict control of product volume sold to wholesalers and chain stores to ensure local sales can be achieved by using Vendor Managed Inventory (VMI) is essential. Wholesalers and chain stores, however, are not receptive to this approach, as they perceive it involves a loss of control of their logistics flow. According to Sélim, the threat is real and he believes that some Canadian entities may be dismantled in the upcoming years. He expects that by 2005, several organizations will adopt this type of strategy. Marcel Brunet suggested a way to counter this effect by developing centres of excellence whether it be for production or for logistics purposes to gain internal recognition.
External Elements
Marcel Brunet and Sélim Toutounji agreed that the biggest external element influencing operations concerns all the issues surrounding the validation process. In Wyeth’s case, there is no room for change when it comes to its logistics process due to its manufacturing function and structure. Sélim pointed out that in regard to the 2002 GMP version, pharmaceutical companies must now proceed to validate their supply chain as a whole. Therefore, transportation must be validated as well as third party operations. Sélim expects, over the next few months, sporadic inspections, which could have a paralyzing effect for companies that have yet to validate their process.
Conclusion
The Canadian pharmaceutical industry faces major challenges when it comes to the logistics function. As a first concern, the industry must secure itself in Canada especially in a North American free trade market. Logisticians must keep trying to increase their internal recognition through a communication process highlighting the value of logistics for an organization. This recognition will be called upon when numerous companies outsource some, if not all their logistics functions.
Over the last few years, the noticeable trend towards network consolidation and indirect distribution stabilized, in other words it appears to have reached its limits. Focus will now be on reducing inventory to lower operational costs while tackling back-order inefficiencies. While doing so, the pharmaceutical industry, as any other industry, will struggle to keep the best available logistics resources, which are hard to find in today’s market.
The following chart compares Canada’s pharmaceutical industry position with the current logistic trend:
