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Vision 2015 How Strategic Shifts within the Pharmaceutical Sector will Transform Supply Chain and Distribution Models White Paper Study carried out by Buck Consultants International January, 2013 Eelco Dijkstra Senior Strategy Consultant Johan Beukema Partner Healthcare Supply Chains

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Page 1: BCI Industry Report

Vision 2015 – How Strategic Shifts within the

Pharmaceutical Sector will Transform Supply

Chain and Distribution Models

White Paper Study carried out by

Buck Consultants International January, 2013

Eelco Dijkstra Senior Strategy Consultant

Johan Beukema

Partner Healthcare Supply Chains

Page 2: BCI Industry Report

Contents

Executive Summary 1

1 Cost Pressures on the Industry 3

2 Commercial Model Will Change 4

3 More Responsive Supply Chain Model 5

4 Information and Visibility 6

5 The Final Mile Delivery Component 8

6 Collaboration and Partnerships 10

7 Leadership and Change Management 12

8 The Role of e-Commerce 14

9 Business Model for the Future 16

Page 3: BCI Industry Report

Buck Consultants International 1

Executive Summary

The global Pharmaceutical Sector is embarking on a step change transformation journey in

which the supply chain will play a strategic change management role.

Healthcare reform, patent expiries and increased service requirements will require pharma-

ceutical companies to adapt their business models to accommodate market changes. The

coming years, reduced costs, greater agility and improved speed to market - whilst ensuring

the often complex regulatory legal framework in countries are being met - will form a chal-

lenging operating landscape for companies in the industry.

This white paper outlines a strategic agenda which Buck Consultants believes companies

within the industry need to address. Key to the strategic agenda is the changing commercial

business model pharmaceutical companies are starting to address. Relevant to the context

of this white paper is the role the supply chain will play as companies move forward to ad-

dress their key business challenges. This whitepaper will address the below points and the

step changes companies should consider as part of their strategic agenda.

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Buck Consultants International 2

Pharmaceutical companies will have to turn more towards direct sales channels to reduce

margins in their current business. Within other industries this is a trend observed already for

a much longer period of time. There will also be more focus on “selling” directly to pharma-

cies, hospitals, care institutions and patients.

The concept of online order and e-fulfillment tools will allow pharmaceutical companies to

take greater advantage of direct marketing and sales tools to manage the order manage-

ment and commercial process with the various sales channels. As a result, there will be a

clear tendencies towards more direct distribution routes and this will enable greater differen-

tiation per product/market segment.

The supply chain will need to play a more strategic role in the business model of many

pharmaceutical companies. In turn, this will require a more centrally driven supply chain

organization based on a clear mandate and with centralized budget responsibilities able to

make the required step changes in the supply chain and distribution model.

We believe that within the healthcare field itself pharmaceutical companies can also learn a

lot from how Bio-pharma companies have organized themselves in terms of more central-

ized control, more visibility and more streamlined supply chains.

As there is no “single size fits all” supply chain, pharmaceutical companies should also con-

sider developing more differentiated supply chains. For instance by type of product (generic,

patented, bio-pharma, narcotics, etc.) and/or by channel (wholesale, direct to pharmacy,

direct to patient, etc.). The value drivers for each of the product – market – channel combi-

nations will have significantly different levers. A much more focused alignment with the

business is key for success.

For many companies the key objective will be to first develop a more cost efficient supply

chain with the corresponding organization and infrastructure focusing on network and distri-

bution optimization. For some pharmaceutical companies, parts of their business model will

require a more agile and responsive distribution model. Here the key drivers will focus on

distribution solutions with CMO’s and postponement models to allow for greater flexibility

and scalability beyond costs alone.

Moving forward, it is essential that the supply chain is a critical part of the financially driven

business model of pharmaceutical companies. A cost effective supply chain should be inte-

grally linked to the order to cash cycle and will play a more important role in the pharmaceu-

tical business model of the future.

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Buck Consultants International 3

1 Cost Pressures on the Industry

The global pharmaceutical industry is embarking on a step change program aimed to ad-

dress the enormous challenges it faces in the market place. Patent expiries and the rise of

generic brands is already being felt by many pharmaceutical companies. This is starting to

translate into lower sales revenue and reduced margins. Governments and insurance com-

panies will also continue to apply cost pressure on the healthcare sector as a whole whilst

channel customers such as hospitals, pharmacies and care institutions request improved

service levels. All of these factors are forcing companies within the sector to better scruti-

nize their operating costs, their service levels to customers and their current distribution

channels.

As governments in many countries seek to reduce healthcare expenditures to manageable

levels the mind-set of many CEO’s in pharmaceutical companies is already changing. The

traditional channel distribution is too expensive and too “margin” focused rather than “ser-

vice” focused. Today, the distribution landscape hosts too many players which collectively

absorb too much margin and add too little value to the delivery of reliable and quality

healthcare to customer channels and consumers requiring healthcare. The issues are struc-

tural and will need to be addressed by companies.

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2 Commercial Model Will Change

Historically, the industry - driven by relatively high margins - could afford to focus less on

the up- and down-stream costs of their supply chain. For many companies this has resulted

in a fragmented and expensive supply chain in which many internal organizations manage a

part of the total, leading to sub-optimization. On the downstream side of the supply chain,

an expensive distribution vehicle exists today: too many layers with (pre)wholesalers and

distributors who manage the channel sales to hospitals, pharmacies and care institutions.

Storage and transportation are often part of the total commercial service package offered by

wholesalers and distributors who themselves often play multiple roles in the commercial

model. As an example, some of these companies act in some countries as pre-wholesaler

in a warehousing and logistics capacity whilst they also act as commercial wholesaler and

in another commercial role act as distributor and retailer with retail pharmacy chains.

This has left many pharmaceutical companies dependent on wholesalers and distributors in

the commercial business relationship with their “end” customer channels and in the “final

mile” delivery model with their end-customers.

Therefore, Buck Consultants believes pharmaceutical companies would be wise to re-think

their business model based more on value creation to end customers including direct to

patient en direct to pharmacy concepts. This value creation needs to be translated into a

more cost effective delivery model tailored to the unique requirements of each channel cus-

tomer in which costs to serve, service lead times and ease of doing business play key roles.

In this changing landscape, wholesalers too, will need to re-think their traditional role where

“fee for service” structures will become more the norm than the traditional commercial “mar-

gin” model.

Figure 1 Business delivery model

Source: Buck Consultants International

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3 More Responsive Supply Chain Model

A good example of a global pharmaceutical company which has embarked on an intensive

change management program is Pfizer. It has recognised that it requires to make step

changes to remain a successful player within the industry. It also recognises that changes

to the supply chain are an integral part to its change management program to drive change

and improve its service model. As John Kelly - Vice-President of Strategy and Transitioning

Sites for Pfizer Global Supply - recently stated in the respected industry magazine

Pharmaceutical Technology: “Our mission is to have an integrated internal and

external supply network to provide a competitive advantage for Pfizer by offering

fast, flexible, and innovative supply solutions”.

The key challenge for any Pharmaceutical company will be to better understand the value

impact the supply chain has on their company in terms of costs and customer service

levels. The supply chain is not only about costs of transportation. It is about value creation

to the company’s business model in terms of commercial value, the customer delivery

experience, and the financial value. This requires a more responsive supply chain to be

deployed, a more smart and cost effective supply chain related to the many and complex

transportation flows from global API plants to global manufacturing plants to distribution

centres and downstream through the distribution channels to end customers. This not only

impacts the costs of transportation but also the warehousing costs and the often forgotten

real costs of holding inventory.

The key challenge will be to unlock this potential into a value proposition around the supply

chain organisation. This requires organisational and process redesign up and down the

value chain.

Figure 2 Process design Supply Chain

Source: Buck Consultants International

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Buck Consultants International 6

4 Information and Visibility

Key to understanding how the supply chain works is to have more information and visibility

in order to make informed management decisions. To be able to make step changes it is

important to first understand the current information flows around logistics and distribution.

Therefore, it is key to find and correctly interpreted data related to shipment and order flows,

warehouse capacities, inventory levels and service contracts across the supply chain.

Information, quantified through real logistics and transportation data extracted from an ERP

system is key and often a challenging process to extract for pharmaceutical companies as

they embark on this journey. Today, many companies in the pharmaceutical sector have

only limited access to operational shipment related information. This information is neces-

sary to manage the supply chain with regards to scheduling of transportation, on time deliv-

ery performance, exception management and carrier management. It also helps the cus-

tomer services department better manage customer expectations, work more efficiently and

more pro-actively.

Figure 3 Supply Chain Control Tower

Source: Buck Consultants International

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Buck Consultants International 7

Not only is it important to have data related to physical flows but also to the financial infor-

mation related to these flows. Having carrier rates and contracts loaded into transport man-

agement systems and automatically linked to service level options such as costs, lead

times, delivery requirements (ambient or cold chain) and geographies allows orders to be

routed to the selected carrier for a given service and/or trade-lane. An IT driven Transporta-

tion Management system will route for example parcel shipment A with cold chain require-

ments going to France to carrier X, whilst a pallet shipment B with ambient requirements

going to Italy will be routed to carrier Y. Apart from automatically printing out the required

shipment information, the regulatory documentation part of the shipment and the ability to

track the on time delivery status against the required lead-times, such a Transport Man-

agement system also knows exactly what the costs per shipment are. This information can

in turn be used for invoicing and auditing purposes with each carrier making the whole fi-

nancial shipping process transparent and accurate.

Such Transport Management systems also allow companies to make more informed tacti-

cal and strategic decisions. Tactical decisions relate typically to on-going cost improvement

and optimization programs around transport flows and inventory levels. Strategic decisions

relate to choices around distribution models and the required network design per product

group and or market.

Figure 4 Decision making model

Source: Buck Consultants International

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Buck Consultants International 8

5 The Final Mile Delivery Component

As the industry re-invents itself, Buck Consultants predicts it will present opportunities for

logistics service providers to step into this sector with more comprehensive and better end-

to-end supply chain solutions than currently the case. The message to logistics service pro-

viders is to step up and embrace this unique opportunity to invest in solutions tailored to the

pharmaceutical sector and its customers.

In Europe and to a lesser extent Asia, the direction will clearly be from having local in-

country warehouse and distribution points to regional warehousing and distribution points

linked to direct ship solutions where possible.

From domestic networks To regional DC networks

As a rule of thumb, distribution costs per unit increase as goods travel down the value

stream to end customer channels. In the future, cost pressures, reduced inventory levels

and faster lead times to market will require more responsive direct ship type distribution

solutions from regional distribution centers directly to hospitals, pharmacies, care institu-

tions and possibly directly to patients’ homes. In a next step this could even mean direct

shipment concepts from manufacturing locations to market channels. This presents more

opportunities for network based logistics service providers.

Historically, a lot has been said about the need to deliver consolidated shipments to channel

customers such as hospitals. This by itself is an important service requirement which makes

sense. Parcel and transportation providers by default consolidate deliveries through their

delivery network and are thus ideally positioned to manage this requirement. A number of

courier companies already conduct hospital shipments and some operate in-hospital deliv-

ery solutions which sees them distribute shipments inside a hospital to the correct depart-

ment and collect returns at the same time.

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Buck Consultants International 9

Already today, many parcel operators serve as subcontractors to wholesalers and distribu-

tors to deliver orders to the hospitals, pharmacies and care institutions. Increased invest-

ments into temperature controlled storage and network capabilities provide an opportunity

for parcel companies to increase their market share in the final delivery mile – a trend al-

ready underway.

Scalable investments into the “final mile” are crucial which includes improved service solu-

tions such as in-hospital deliveries, returns management and hospital logistics. However,

key will be for logistics service providers to provide scalable solutions which not only ad-

dress the physical delivery requirements but in which information flows and visibility will play

an ever increasing role. This is also linked to the clear trend of outsourcing pan-European

customer service such as order-taking and order-to-cash processes (e.g. invoicing, cash

collection, dunning). Pharmaceutical companies are searching for solutions to bring also

these processes from a domestic scale to a pan-European level. Logistics Service Provid-

ers who build this capability will have a clear opportunity to increase their market share in

this industry.

Cold Chain Logistics Solutions

As mentioned before in this report, more investments

will need to go into scalable GDP certified cold chain

transportation solutions in which the combination be-

tween technology and cooling plays a critical role. It is

expected that the “new GDP” Guidelines, to be

launched in 2013, will give a further push to this. At

the same time pharmaceutical companies must also

challenge their own “interpretation” of GDP requirements related to the real transportation

requirements of their products across the various markets. There are many industry exam-

ples where “ambient” products have been shipped as “cold chain” when the legal product

requirement to do so is not there. Passive packaging has also become more cost effective

making it easier to ship products with normal courier companies rather than with more ex-

pensive Cold Chain transportation specialists using active cooling.

A clear interpretation based on the intended regulations can often provide further opportuni-

ties to reduce costs to serve and help simplify the logistics delivery service solution.

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6 Collaboration and Partnerships

The industry can learn from other industries with regards to how companies work together

to utilize and optimize distribution to for instance “common” market channels. Buck Consult-

ants sees increasing collaboration between companies to deliver more cost efficient solu-

tions. For example, in the retail sector a number of multinationals are starting to work to-

gether to deliver their products consolidated to supermarkets and retail chains. This means

improved loading of trucks and for the consignee it means fewer trucks from fewer suppliers

to manage the delivery process with. The same efficiencies would apply for example to the

delivery process into hospitals and pharmacies.

An industry example closer to home is a collaboration between UCB and Baxter to opti-

mize loading capacities in their distribution from regional distribution sites and manufactur-

ing locations located in close proximity to each other to replenish local stocks in specific

countries. These types of logistics collaboration models optimize loading capacity as well as

simplify offloading at the other end.

Buck Consultants observes that many pharmaceutical companies are interested in this type

of collaboration model allowing them to utilize common storage and transportation solutions

provided my logistics service providers and thus reducing their costs and simplifying their

distribution. However, the key obstacle is the ability to connect with other companies within

the industry to start such discussions. Logistics service providers can play a valuable role in

providing smart and scalable collaboration solutions based on partnership rather than on

Figure 5 Supply Chain network collaboration

Source: Buck Consultants International

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Buck Consultants International 11

transactional relationships. Industry platforms such as the Healthcare Logistics Forum

(HLF) in which a number of pharmaceutical and medical device companies discuss com-

mon supply chain challenges. These types of industry initiatives can play a constructive role

in fostering collaboration between companies around key industry challenges.

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Buck Consultants International 12

7 Leadership and Change Management

Buck Consultants observes that there is a need to first have the required organizational

structure in place related to budgets and responsibilities. There must be an understanding

at Board level that a fundamental change management program is needed to identify, im-

plement and manage the steps required to make step changes in the up and downstream

logistics activities. This includes the recognition to build a more centralized globally driven

supply chain organization empowered to fully map out the current supply chain in terms of

costs and service contracts and manage the transition across the supply chain in full align-

ment with operational and commercial processes.

The strategic advantages the supply chain offers companies in other industries have in the

past been overlooked. It is the supply chain which presents a unique opportunity to help

pharmaceutical companies in their commercial model to drive down operating costs and

improve service levels to customer channels. Today, the supply chain is often still sub-

optimized and fragmented in terms of management responsibility, cost budgets and data

visibility. It’s a sub-optimized supply chain in which the various components such as inven-

tory levels, warehousing and transportation responsibilities are split across the business

between manufacturing operations, local country affiliates, regional organizations and global

teams.

Based on a number of client studies it is clear to Buck Consultants that the opportunity to

improve operating costs in the supply chain whilst improving service levels to customers is

real and significant. However, key to making this possible in large and complex organiza-

tions is through a centralized global supply chain organization with a clear mandate to move

forward and carry out a strategy of change aligned fully with the company’s changing busi-

ness model and business objectives.

Figure 6 Scope related cost saving potential

Source: Buck Consultants International

Page 15: BCI Industry Report

Buck Consultants International 13

Based on Buck Consultants’ own consultancy experience, centrally driven cost improve-

ment programs typically offer pharmaceutical companies double digit cost savings as a per-

centage of current logistics and supply chain costs. However, a cost improvement program

has to be well managed and today many pharmaceutical companies lack the organizational

framework and tools to do so successfully.

Widening the scope of a supply chain review increases the number of alternative solutions

and therefore the potential savings. But there is more. Complexity and risks are factors that

increase as well when widening the scope.

When developing the value chain it is important to look strategically at all the elements of

your supply chain including the wider business model and in how this can be best supported

with a more effective supply chain organization.

Figure 7 Value Mapping Opportunity Matrix

Source: Buck Consultants International

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Buck Consultants International 14

8 The Role of e-Commerce

Online retailing is the fastest growing retail channel in most industry sectors around the

world. The diagram below illustrates the growth of online retailing the coming years.

Sources: JP Morgan, 2011, Centre for Retail Research, 2012

Another interesting trend is that moving forward many retail analysts believe the combina-

tion of offline and online channeling – the so called cross channel – will be the commercial

retail model of the future. In this model sales are achieved where both types of marketing

and sales management concepts are used in combination to manage relationships and sell

products.

Source: ABNAmro & CBW-Mitex , 2011

Why could these trends be interesting to pharmaceutical companies? The pharmaceutical

industry seems to be one of the few industry sectors which has not yet embraced online

retailing. The main reasons used are that the strict regulations related to pharmaceutical

sales make it difficult to move towards e-commerce. Sometimes this is even clearly forbid-

den by law. However, there are also examples in for instance The Netherlands and Ger-

many where pharmaceutical e-commerce has been implemented successfully. And even

within current regulatory boundaries Buck Consultants International sees opportunities to

Figure 8 Online sales in Bln US$, 2010-2013

Figure 9 Future Retail Models

Page 17: BCI Industry Report

Buck Consultants International 15

make greater use of online channels and technologies to improve the efficiency and effec-

tiveness of the pharmaceutical chain. Today the order process within the industry is a very

manual one in which the order to cash process is often outsourced to a wholesaler or other

third party service provider who manages the order intake from customers manually via fax

and/or telephone. Orders are commonly manually processed into the pharmaceutical com-

pany’s order system. Instead, an online order tool would allow this whole process to be

more automated. At the same time such an automated online order management tool is an

opportunity to develop more direct commercial relationships with hospitals, doctors and care

institutions. It is also an opportunity to develop e-pharmacy type models with direct sales to

pharmacies. Or for instance directly to patients for repeat recipes which in some countries

do not require a doctor’s visit but can be ordered through a telephone consult and subse-

quently ordered online.

Apple Computers ten years ago developed the Apple Store, an online e-commerce platform

whilst retaining its traditional channel distribution through wholesalers and distributors. Ten

years on, all sales channels have seen their business increase related to their own custom-

er base. Why can’t such a model work in parts of the healthcare sector to help improve the

customer experience, for instance home deliveries to sick patients through a home delivery

program whilst at the same time reducing healthcare costs in the commercial model?

In an e-commerce model, organizations in many industry sectors have moved from a sales

“push” strategy to a sales “pull” strategy. A push strategy means that a company pushes

products onto the market and into market channels and uses forecasting and category

management techniques to “determine” demand. In a pull strategy, an order is distributed

after an order has been made. Key advantage to the seller in a pull model is that in the cash

to cash order cycle lead times are shortened and less inventory is needed. This has a posi-

tive impact on the company financial model through improved cash flow and is one reason

for the success of Apple Computers. However, this type of model requires a fundamentally

redesigned operational process model.

Making the jump from online retailing to a full e-fulfillment model. Below four critical success

factors such a model offers:

Ability to develop a direct commercial model with customer channels.

Offering the best customer experience.

Scalability: size, portfolio, geography.

Online technology: full value chain.

Page 18: BCI Industry Report

Buck Consultants International 16

9 Business Model for the Future

Buck Consultants International observes that the current business model within pharmaceu-

tical companies is in a transformation process which will require the step changes outlined

in this report.

For sure, pharmaceutical companies will have to turn more towards direct sales channels to

reduce margins in their current business. This is a trend observed already for a much longer

period of time in other industries. There will be more focus on “selling” directly to pharma-

cies, hospitals and patients as the diagram below illustrates.

The concept of online order and e-fulfillment tools will allow pharmaceutical companies to

take greater advantage of direct marketing and sales tools to manage the order manage-

ment and commercial process with the various sales channels. As a result, there will be a

clear tendencies towards more direct distribution routes and this will enable greater differen-

tiation per product/market segment.

In turn, this will require the supply chain to play a more strategic role in the business model

of many companies. In turn, this will require a more centrally driven supply chain organiza-

tion based on a clear mandate and with centralized budget responsibilities able to make the

required step changes in the supply chain and distribution model.

Source: Buck Consultants International

Figure 10 Future Business Model Pharmaceutical industry

Page 19: BCI Industry Report

Buck Consultants International 17

Within the healthcare field itself we believe pharmaceutical companies can also learn a lot

from how Biopharma companies have organized themselves in terms of more centralized

control, more visibility and more streamlined supply chains.

As there is no “single size fits all” supply chain, pharmaceutical companies should also con-

sider developing more differentiated supply chains. For instance by type of product (generic,

patented, biopharma, narcotics, etc.) and/or by channel (wholesale, direct to pharmacy,

direct to patient, etc). The value drivers for each of the product – market – channel combi-

nations will have significantly different levers. A much more focused alignment with the

business is key for success.

For many companies the key objective will be to first develop a more cost efficient supply

chain with the corresponding organization and infrastructure focusing on network and distri-

bution optimization. For some pharmaceutical companies, parts of their business model will

require a more agile and responsive distribution model. Here the key drivers will focus on

distribution solutions with CMO’s and postponement models to allow for greater flexibility

and scalability beyond costs alone.

Much can also be learned from other industries. The global automotive industry went

through a massive change management process during the early nineties in which business

processes, supplier management and marketing channels were redefined. The consumer

retail market has also gone through major changes over the past 10 years. The internet has

created a whole new retail channel and online order management framework exploited by

many industries but which has yet to be fully embraced by the pharmaceutical industry.

Moving forward, it is essential that the supply chain is a critical part of the financially driven

business model of pharmaceutical companies. A cost effective supply chain should be inte-

grally linked to the order to cash cycle and will play a more important role in the pharmaceu-

tical business model of the future.

Page 20: BCI Industry Report

Buck Consultants International 18

Buck Consultants International carries out supply chain research, consultancy and imple-

mentation in the areas of business strategy, supply chain network design, optimization and

location selection. Buck Consultants has an international team of 65 consultants, multidisci-

plinary professionals and an extensive network of international offices. Clients are typically

multinational companies on both the demand and supply side of the supply chain.

Buck Consultants International offers supply chain strategy consultancy to the Pharmaceu-

tical, Medical Device and BioMed sector. Pharmaceutical and Medical Device clients in-

clude: Amgen, Abbott, Takeda, UCB Pharma, Celgene, Lundbeck, Wyeth, Ferring Pharma-

ceuticals, Baxter, Medtronic, Edwards Lifesciences, Stryker, Haemonetics, Becton Dickin-

son, American Medical Systems, Carefusion, etc.

Authors Eelco Dijkstra, Senior Strategy Consultant Johan Beukema, Partner Healthcare

Eelco Dijkstra Johan Beukema Senior Strategy Consultant Partner Healthcare Supply Chains Buck Consultants International Buck Consultants International The Netherlands The Netherlands

Phone +31 24 3790 222 Phone +31 24 3790222 E-mail [email protected] Email [email protected]

Website http://cs.bciglobal.com/