1   

 

SUPPLY CHAIN MANAGEMENT-

LINKING IDEATION TO PROFITABILITY

AND

SECTORAL ANALYSIS OF THE

PHARMACEUTICAL SECTOR

By

Krishna Chaintanya

Nidhi Singh

  

2   

 

INTRODUCTION:

The increasingly flattening world is constantly evolving and impacting the way, the business is

being done. Supply Chains have become complex, global and dynamic. The success of a

company in this global era depends on developing innovative supply chain strategies that could

help improve profitability while drawing continuous improvements.

Supply chain Management enables world leading organizations to re-align their supply chains to

the flat world paradigm by providing standard solutions for the organizations needs in supply and

demand planning and forecasting, sourcing and procurement, supply chain execution, enterprise

asset management.

The role of supply chain has changed considerably over the last three decades. The benefits of

improving the performance of the supply chain initially included revenue growth and higher

profitability through greater market share and price premium. Traditionally the focus has been on

the flows within the organization or flows over which the organization has direct control.

But the things have changed now. At present, the successful supply chain management requires

the recognition that the firm is simply one player in the long chain that starts with suppliers and

includes transporters, distributors and customers. Close relationship between suppliers,

manufacturers, transporters, distributors and customers are going to be the key to success in the

times to come. Now companies are recognizing that supply chain innovations can be not only the

driver of cost reduction but importantly a catalyst for revenue growth by achieving greater levels

of customer satisfaction.

OBJECTIVE:

Understanding Supply chain management and how it assists in profitability considering the

pharmaceutical industry. Understanding and analyzing the transition of the global

pharmaceutical sector from being an imitator to an innovator.

  

3   

 

SUPPLY CHAIN STRATEGY

Collaborative strategy:

Opportunities for collaboration among business partners will vary depending upon the

organizations perspective role in the supply chain. Collaboration enables partners to jointly gain

a better understanding of future product demand and implement more realistic programs to

satisfy demand. The collaborative strategy includes three major types of relationship:

Manufacturer/supplier collaboration

Manufacturer/customer collaboration

Collaboration with third party and fourth party logistics provider

Demand Flow Strategy:

Traditionally in supply chain management, the key focus has been in managing the flow of

materials and goods from suppliers through the manufacturing and distribution chain to the

customers. The key in demand management is the continuous flow of demand information from

Supply chain 

strategy framework

Demand flow strategy

customer service strategy

technology integration strategy

collaboration strategy

  

4   

 

customer and end users through distribution and manufacturing to suppliers. The shared

objective of the chain is fulfilling customer demand.

Customer Service Strategy

Customer satisfaction level is directly proportional to the service provided by the company. The

customer service can be seen as a continuum between dissatisfied and delighted customers.

Organizations need to add value to customer’s time and trouble. Formulating a customer service

strategy involves:

Customer segmentation

Cost to serve

Revenue management

Information Technology Strategy

A number of IT based supply chain information management tools are now available to provide

intelligent decision support and execution management. They can be TPS focused on day to day

operations or strategic planning tools used to redesign the supply chain infrastructure.

Consequently, there is an ever increasing need for fully integrated supply chain information

management solutions which incorporate all the functionality of network strategy/ supply chain

configuration, demand planning, transportation management and warehouse management.

LITERATURE REVIEW

As per UPS supply chain solutions, 2005; in order to incorporate supply chain into

pharmaceutical sector, the following three practices are mandatory:

Rationalized global production networks

Change over competence with smaller batch production.

A compliant management system.

The two trends that dramatically affect the future of pharmaceutical fulfillment are

Smaller batch production led by genomics and customer demand

  

5   

 

The addition of retailer, provider and consumer direct to manufacturers customer base

Both these aspects signify towards an in-evitable shift in pattern from distributing larger pallet

quantities to wholesalers, to distributing smaller package to pallet quantities across a large

customer base. The benefits associated with drug makers include access to real-time demand and

to actual consumers.

Most importantly, the cost management based approach in the pharmaceutical sector has laid

emphasis on improvements in the supply chain management. This in-turn has led to a new

concept of supply chain event management.

The current sales model for many drug manufacturers is to release product data and samples to

sales forces that struggle to get a two-minute window of time with medical providers. In that

window, a sales representative may be introducing several new drugs and/or reinforcing current

products. Current sales efforts are becoming less effective and more costly as sales forces are

expected to cover more and more products. In the last five years, pharmaceutical sales forces

have grown 85 percent. In fact, behind R&D, sales representative costs are the second largest

category of expense for drug makers.

Just recently, the Department of Health and Human Services issued new standards to drug

manufacturers’ sales approach, stating that “drug makers could not offer incentive payments or

other ‘tangible benefits’ to encourage or reward the prescribing or purchase of particular drugs

by doctors, health plans or companies that manage drug benefits for employers and insurers.”

The government has informed the industry that many of its sales and marketing practices may

violate federal fraud and abuse laws.

KEY TRENDS IN THE PHARMACEUTICAL INDUSTRY

Recent breakthroughs in genomics and proteomics may be mind-boggling to most. And,

although news reports remind us regularly of the strides pharmaceutical companies are making in

the fight against disease and pain, little is reported about the increasing struggles pharmaceutical

companies face in this fight.

  

6   

 

In fact, the pharmaceutical industry is experiencing unparalleled change and challenges. All of

the usual suspects that impact business today are at play: globalization, treatment and pricing

economics, government controls and technology.However, in an era of continuing consolidation,

innovation abounds not only in R&D, but also in business models.

INTRODUCTION TO THE PHARMACEUTICAL INDUSTRY

Pharmaceutical industry in India is playing a vital role in the healthcare area of the nation. With

the implementation of product patent from the year2005, there will be a tough competition for

the global market share. Pharmaceutical companies will have to focus more intensively on R&D

activity to survive the competition. As we are moving towards globalization, there is a need for

strategic planning to meet the challenges posed by the product patent era. In the present context

with the available expertise, manpower and skill, the Indian Pharmaceutical Industry will fight

successfully for the global market share .here we have reviewed the status of Indian

pharmaceutical industry vis-a-vis Global pharmaceutical industry. The strong opportunities lie

within this sector to grow as the condition of Indian health sector is discouraging. Some of the

factors signifying the same are:

India ranks very low in the global health scenario, both in terms of status and expenditure .Over

50% of young children in the country are malnourished. Only 35% of the country’s population

has access to essential drugs. Reason attributed to this is that India invests only 5.@% of its GDP

on health .Various reports published by WHO and other health organizations indicated that India

has the highest number of Tuberculosis and Hepatitis-B patients in the world. India also accounts

for most number of blind patients globally. Mortality in India, due to Malaria, Peaks highest

amount all the nations. Health indicators also show that there will be highest number of AIDS

patients in the country by 2020. Inspite of sustained efforts by the Government and NGOs, Polio

has not been completely eradicated and is still prevalent in certain pockets of the country

.Another Startling fact reveals that almost 80%of the country’s medical workforce is employed

in the private sector.

  

7   

 

A GLIMSE OF THE GLOBAL PHARMACEUTICAL INDUSTRY

The Pharmaceutical industry of the Western World is the leading manufacturers of medicines.

North America, Europe, Japan and Latin American countries account for 85% of the worldwide

pharmaceutical production. These countries control almost 77% of the global pharmaceutical

market (Figure1). The US invest 13.7% of its GDP on health .Annual drug expenditure (per

capita) for Japan amounts to $ 412, while for India it is a low $ 3(Figure 2).The US and The UK

had a combined 62%(46%+16% respectively) share of global pharmaceutical exports in 2005.

The US and the UK together sell 2 out of 3 pharmaceutical products in the world. According to

WHO survey, US pharmaceutical industry market was$ 512 billion in 2005. Of this, $ 318

billion came from products free from patent protection, Drug prices in Europe are about 60% of

the prices in US and yet European firms spend larger share of their revenues on R&D rather than

their American counterparts.

Data representing Pharmaceutical Drug Production Worldwide (2007):

REGION %SHARE OF DRUG

PRODUCTION

% SHARE OF

POPULATION

NORTH AMERICA

30.9 4

EUROPE 30.4 7

JAPAN 20.9 2

REST OF THE WORLD 17.8 87

This clearly shows that rest of the world needs to improve on their drug production ability

as they have tremendous potential for betterment of the situation. One of the step could be

working on the supply chain event management.

  

8   

 

INFORMATION TECHNOLOGY IN SUPPLY CHAIN MANAGEMENT-TO REDUCE COST

AND SAVE TIME

Globally, innovation has been the key factor for the growth of the pharmaceutical industry. There

has been a strong support for biotechnology and medical research worldwide and this is being

augmented by research and development expenditure of the pharmaceutical industry. This has

been one of the reasons for the growth of the pharmaceutical industry in India, as the Indian

pharmaceutical industry started more as an imitator taking up outsourced research jobs rather

than an innovator. Globally, there is tremendous pressure on pharmaceutical companies to

develop new drugs. Carrying out R&D activities on a new drug can cost more than a billion

dollars and can take as long as 12-14 years. Hence the pharmaceutical companies’ worldwide

have been putting up efforts to reduce the rising cost in drug discovery. Hence application of

Information technology (IT) in the supply chain and the research process of pharmaceutical drug

making has become a key to success. IT solutions such as electronic data capture and clinical

trials management are likely to streamline the drug development process.

Supply chain management

Business Intelligence/data warehousing/Knowledge management integration/

Data mining

Fig: Application of IT (information technology) to speed up the drug research and production

process.

Drug discovery Drug development Manufacturing  Distribution Sales and 

marketing

In‐silico research

Electronic data capture

ERP production planning and 

control

Warehous management

Sales force automation 

CRM

  

9   

 

ENSURING SECURITY IN THE SUPPLY CHAIN- ESSENTIAL FOR PROFOUND

PROFITABILITY

The responsibility of the security in the supply chain has to be a collaborative effort from all the

players in the pharmaceutical industry. Organizational design and the nature of the relationships

among the trading partners are crucial.

Three driving forces: globalization, developments in medicine and the growth in the economy of

the developing nations like India and china have resulted in the profound changes in the

pharmaceutical industry. Also in the other industries globalization, technology and the growth of

the developing nations does play a vital role in the bringing about changes in the supply chain

system. With the growth in demand and profound development, doing business the traditional

way, in the pharmaceutical industry is a disaster. Waste will not be tolerated, and failing to stem

the tide of counterfeits is wasteful. The pharmaceutical supply chain system must be more

focused on the customer experience: Think Wal-Mart, Procter & Gamble.

Three viable solutions can be taken up via the improvements in the supply chain to make a

difference in the competitive environment:

Close off diversion entry points by minimizing excess inventory at the wholesaler and by

requiring wholesalers to source directly from drug manufacturers.

Reduce the cost of cheating by implementing new security technologies and by strict

licensing and record-keeping requirements.

Monitor the supply chain carefully using advanced technologies like track and trace

technology and also by having a better grip on the distribution channel.

Pharmaceutical wholesalers and manufacturers jointly are beginning to realize that their

approach to the supply chain must resemble that of the other FMCG production companies.

Three reasons:

Inventory levels are too high

Asset utilization at the plant level is not good

  

10   

 

Stock outs are still common even though pharmaceutical manufacturers have high

inventory levels.

FUTURE PROSPECTIVE

The interconnected world we live in offers unprecedented opportunities to grow for today’s

organization. But these opportunities come with a whole host of challenges for those businesses’

supply chains through the constant change in internal and external environment. Some of these

are: rapid wage inflation, spikes in commodity prices, unpredictable currency rates.

Transportation costs alone can fluctuate by as much as 250% per year. it gets very important for

companies to manage cost volatility by building flexibility directly into supply chains, using

advanced business analytics and automation technology—interconnecting everything from

customers to suppliers to IT systems. Allowing businesses to shift workloads around the globe

,adjust inventory based on changing customer demand and respond to currency fluctuations by

realigning global partnerships. Some of these changes have already been adopted by several

firms to attain that flexibility which is helping companies in industries as diverse as healthcare,

retail and electronics adapt to market changes and cut costs. In fact, last year, 17 out of 25 well

known global supply chain companies adopted this. It is rightly quoted SMARTER BUSINESS

NEEDS SMARTER THINKING. This is what supply chain is giving to all businesses including

pharmaceutical sector.

  

11   

 

SALES AND MARKETING

The increased use of formularies, therapeutic interchange and step-care therapy by managed care

has ignited efforts to be put up in sales and marketing in order to cater to the root of these

programs: cost management in treatment programs. Moreover the time available to the marketing

and sales team in order to generate and influence demand is shrinking due to increased generics

competition and shortening exclusivity periods.

These shrinking timeframes and price pressures require that new product marketing and sales

methods continuously address evolving sales channels. Pharmaceutical companies and their

partners must also be able to quickly build differentiating capability in marketing to such sales

channels.

SALES AND MARKETING 

Formularies 

Therapeutic interchange 

Step care therapy 

Increased generics competition 

Shorter exclusivity period 

Outsourcing price pressure

NEW PRODUCT DEVELOPMENT AND ROLL OUT 

Rising R&D costs  

Niche / specialist companies  

Shorter exclusivity periods  

Increased generics  competition 

CHANNEL MANAGEMENT 

PBM’s 

Disease Management program 

Wholesaler /distributor disintermediation 

  

12   

 

Lastly, the information needs of the consumer are dramatically different from those of managed

care and provider organizations. CRM and consumer support expansion is required in-order to

cater to the new growing needs.

CHANNEL MANAGEMENT

Distribution channels have fast assumed a role of strategic importance for most sectors including

pharmaceuticals. As the current market is witnessing deflated margins and intense competitions

like never before, the efficient utilization of these channels become very crucial. In the case of

the pharmaceutical sector, issue of channel conflicts is very frequent. In pharmaceuticals the

nature of mixture of goods being delivered by various companies and varied nature of market

segments lead to conflicts in distribution channel. Change in trends should be incorporated by

using parallel channels where the modification in each channel are specific to the customers

segment served and the product mix on offer. Besides, explicit and latent channels lead to an

inefficient deployment of resources, but also have the ability to dilute brand image and corporate

positioning. In order to cope up with these problems, pharmaceuticals should build up

transparent strategic planning process. It should remove market delineation ambiguities and steps

to enhance supplier power vis-a-viz channel members should be made.

Effective implementation of supply chain management in pharmaceuticals should also include a

more cohesive functioning with the channel than a structure based on rigid control and

conventional incentives.

The pharmaceutical channels needs to be re-evaluated as the new channels are emerging in the

world market. Pharmaceutical companies can investigate the value of alternative distribution for

samples and literature. For example, distributing direct to disease management programs or

leveraging the role of retail pharmacies may provide opportunities to strengthen retail

relationships and gather more accurate demand information. On the revenue side, shifting to

cost- and performance-based channel management can lead to cost savings, more reliable

distribution and improved demand visibility. Drug makers can now sell direct to retailers and

providers through e-marketplaces such as the Worldwide Retail Exchange and Global Healthcare

Exchange.

  

13   

 

NEW PRODUCT DEVELOPMENT

In new product development, highly specialized niche companies are demonstrating that they can

bring innovation faster. With escalating R&D costs, we believe drug manufacturers that leverage

the intellectual property of such companies, as well as facilitate collaborative efforts through

alliances and partnerships, can better manage risk and portfolio profitability. As more parties

participate in the race for innovation, integrating research, development and design efforts will

become a source for competitive advantage. Technology, information sharing and process

integration will become paramount to lowering costs and optimizing intellectual property.

Additionally, once a new product has been developed, the cycle for commercializing that product

and rolling it out must become tighter. With exclusivity periods shortening and generics gaining

higher market share, the time it takes to get product commercialized and demand generated will

directly affect the profitability and life of that product.

Regulations and compliance also affect the transition from development to rollout. The FDA

allows new drugs to be marketed in the United States immediately following approval, but

Europe often experiences delays of up to 12 months between drug approval and market

availability.2 Tighter and more intelligent synchronization between production, fulfillment,

marketing and channel networks will enable faster rollouts.

  

14   

 

CONCLUSION:

The winning pharmaceutical companies will be those organizations that can:

1. Maintain profitability despite falling margins

2. Generate and conserve cash flow for future acquisitions and licensing arrangements

3. Resiliently merge and integrate supply chains to enable M&A, licensing and collaborative

R&D strategies

What does it take to become a winner? Pharmaceutical companies that want to be well

positioned for the future, despite the growing hardships and complexity of the industry, should

achieve excellence by focusing on these five supply chain areas:

• Production

• Fulfillment

• Customer Management

• Forecasting & Planning

• Procurement

  

15   

 

REFERENCES:

Larry Koester-United Parcel Service of America

House Of commons Health committee-the influence of the pharmaceutical industry,

fourth report, session 2004-05

“The Link between Gross Profitability and Pharmaceutical R&D Spending,” Health

Affairs, vol. 20, no. 5 (September/October 2001), pp. 216-220.

“The Pharmaceutical Industry—Prices and Progress,” New England Journal of Medicine,

vol. 351, no. 9 (August 26, 2004), pp. 927-932.

Purchasing And supply, John.A.Woods

Supply Chain Management in the 21st century, B.S.Saha