Description
These trends are having the greatest impact on sales and marketing, channel management, and new product development and rollout. Ultimately, we believe these trends and implications are converging to create an environment in which price pressures are becoming so intense that a growing number of pharmaceutical companies will struggle to meet shareholder expectations.
UPS Supply Chain Solutions
SM
Building Supply Chain
Capabilities in the
Pharmaceutical Industry
Part 2: Winning supply chain capabilities
Our Insight.
A UPS Supply Chain Solutions
White Paper
Copyright © 2005 United Parcel Service of America, Inc. All Rights Reserved.
No part of this publication may be reproduced without the prior written permission of UPS Supply Chain Solutions.
In “Building Supply Chain Management Capabilities
in the Pharmaceutical Industry Part 1: Trends
Impacting the Supply Chain,” we explored the
business implications of major trends impacting
pharmaceutical supply chains.
These trends are having the greatest impact on sales and marketing, channel
management, and new product development and rollout. Ultimately, we believe
these trends and implications are converging to create an environment in which
price pressures are becoming so intense that a growing number of pharmaceutical
companies will struggle to meet shareholder expectations.
Unless pharmaceutical
companies begin taking action
now to create more business-
effective cost and process
structures, survival will be at
stake. We propose that
the winning pharmaceutical
companies will build
differentiating capability in
five supply chain areas:
• Production
• Fulfillment
• Customer Management
• Forecasting & Planning
• Procurement
Organizations that do so not
only will be able to meet
financial expectations despite
falling margins, but also will be
in a position of financial and
operational strength. The prize?
Attractive acquisition and in-
licensing deals possible because
pharmaceutical companies with
suboptimal supply chains will
be forced to divest or seek
business suitors.
UPS Supply Chain Solutions 2
Unless pharmaceutical
companies begin taking
action now to create more
business-effective cost and
process structures, survival
will be at stake.
AS THE MEGA MERGER WAVE CALMS, THE VALUE CHAIN
CONTINUES TO EXPERIENCE RESTRUCTURING
• Evolution of new channels as PBMs and disease
management programs (e.g., cancer service centers)
grow in popularity
• Disintermediation of wholesalers and distributors
as 3PLs increase service levels and accommodate
pharma regulations
• Growth in outsourcing extends into research and
development and sales and marketing in addition to
CRM/call center functions
• New genre of niche companies focused in biotech, bio
and genetic engineering
MARKET SHARE AND MARGIN EROSION
• Shorter periods of exclusivity for new drugs
• Increased competition from generics: faster adoption of
generics and faster product development
• Rising R&D costs due to increased sophistication and
complexity of research and collaboration required to
generate innovation
• Intense price pressure from employers, government
entities and consumer advocacy groups (e.g., AARP)
DESPITE INCREASING CONSUMER KNOWLEDGE OF DRUGS,
ACCESS TO NEW DRUGS IS SHRINKING
• Increased usage of closed formularies by managed care
organizations
• Higher HMO adoption of therapeutic interchange and
step-care therapy
• Potential shift in DUR (drug utilization review) from
efficacy to cost efficiency
Production
The pharmaceutical industry traditionally has been constrained by rigid global
manufacturing with specialized production equipment, long lead times for
materials and extensive regulatory requirements. This has led to inflexibility and
an inability to react quickly to changes and facilities that are either capacity
constrained or underutilized.
1,2
Additionally, competition and the race towards
gene profiling for therapeutic drugs may well push big pharmaceutical companies
into niche drugs and smaller-batch production. The sum total of these trends and
characteristics makes the drug manufacturing environment ripe for significant
improvement.
What will it take to turn production into a supply chain capability worthy of
future success? We believe the following three practices will be the defining
characteristics of tomorrow’s winners:
• Rationalized global production networks
• Changeover competence and smaller batch production
• Compliance management
Global Network Rationalization
As pharmaceutical companies gained global reach, production capability and the
subsequent network have become unwieldy. Questions that require immediate and
accurate answers include: which sites to continue operating and which to divest,
where to manufacture which products and how best to support long-term product
strategy. Tactical factors such as compliance, profitability, labor skill and costs, and
age of equipment are key factors in making strategic decisions. Agility in these
decisions directly affects growth and acquisition return on investment. Winning
pharmaceutical companies will recognize the need for competence in global siting
and production network rationalization. Furthermore, growth by acquisition
companies will seek to define a streamlined method to continuously evaluate the
production network as part of postmerger integration.
Changeovers and Smaller Batch Production
Today’s manufacturing plants were typically designed for a specific drug or
therapeutic class. Therefore, asset utilization and fulfilling high-demand products
are systemic problems. Additionally, future genomic innovation will allow
pharmaceutical companies to develop profile-specific drugs, and some market
analysts predict drug tailoring for custom batches of one. The pharmaceutical
environment is necessitating faster changeovers and smaller production runs.
Simplifying changeovers and gearing down batch sizes will likely require changes
to plant layout as well as material and inventory storage. Similar to forecasting
and planning, reconfiguring manufacturing processes and facilities to build
changeover competence and to run smaller batches will take time. Manufacturers
should begin addressing change overs and future shifts in demand since it could
take two to three years to rampup to consistent, reliable changeover performance.
1
Radjou, Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
2
Bhandari, Manish et al. “A Genetic Revolution in Healthcare” McKinsey Quarterly, 1999 Quarter 4.
UPS Supply Chain Solutions 3
Winning pharmaceutical
companies will recognize
the need for competence in
global siting and production
network rationalization.
Compliance Management
Compliance should be integrated into all manufacturing processes and touch
points. Compliance involves communicating regulatory changes, documenting
standard operating procedures, integrating into processes and on-going training.
Manufacturing execution systems (MESs) allow plants to optimize production
runs and changeovers in a complicated environment with stringent rules and
regulations. Once a compliance strategy is put in place, an MES should be
considered a technology enabler. Successful compliance management involves an
oversight council and cross-functional teams that define an integration strategy,
evaluate enabling technology and instill performance measures supported by
periodic audits.
Fulfillment
High levels of inventory, low turns (industry average of 2.5) and late deliveries
have plagued many pharmaceutical manufacturers over the years. This
performance has been tolerated in the past on drugs with locked-in patents and
where only one source is available. With increasing competition, shorter
exclusivity periods and smaller batch production, pharmaceutical companies
need to reposition fulfillment capability to generate more accurate performance
and respond to changing customer demand.
Changing Customer Demand: From Pallets to Packages
As previously mentioned, two trends that will dramatically affect the future of
pharmaceutical fulfillment are:
1. Smaller batch production driven by genomics and customer demand
2. The addition of retailer, provider and consumer direct to manufacturers’
customer base
Both of these point toward an inevitable shift from distributing larger pallet
quantities to wholesalers to distributing smaller package-to-pallet quantities
across a more diverse customer base. Technology as well as demand has presented
opportunities for drug makers to sell direct to these new segments – segments in
search of lower cost, better service and better information. The benefits to drug
makers are golden: access to real-time demand and access to actual consumers.
Creating the ability to meet this emerging demand is not so golden. The order and
service needs of hospital systems, pharmacists and consumers are dramatically
different from those of large-scale wholesalers and GPOs. The one thing they
have in common is the need for accurate delivery. What they don’t have in
common are needs such as:
• More frequent delivery – perhaps daily or multiple times a week
• Smaller packaging/SKUs with lower quantities in each package
• Combinatory delivery – literature, complementary devices and/or
complementary drugs to provide complete treatment kits
• Smaller size pick/pack and delivery – including quantities of one
• Exponential delivery destinations – the numbers will explode quickly
UPS Supply Chain Solutions 4
Technology as well as
demand has presented
opportunities for drug
makers to sell direct to
these new segments –
segments in search of
lower cost, better service
and better information.
Building fulfillment capability to meet tomorrow’s demand will require
infrastructure investments in technology, packaging/SKU rationalization and
design, network optimization/3PL assessment and customer service. Logistics
capability will need to include merge-in-transit and management of noncompany
products. Drug makers will need to determine whether the golden egg of real-time
demand visibility is worth the investment. Even manufacturers that choose to stay
the existing course may find they have to deliver on some of these demands as
competition heightens and wholesalers begin demanding services.
Supply Chain Event Management
Separate supply chains with disparate systems have been the biggest impact from
the wave of M&A in the pharmaceutical industry. In most situations, two merging
parties have two different ERP systems and associated bolt-on supply chain
applications. Whether struggling with disparate systems in an M&A situation or
not, Supply Chain Event Management (SCEM) can provide tremendous benefits to
an enterprise and its partners.
The core elements of SCEM are gathering, monitoring, measuring, simulating,
notifying and managing across supply chain processes, internal organizations and
external trading communities. The objective is to create smooth-running
operations by seamlessly notifying the right people at the right time when action
or intervention may be necessary. For example, it is 5 p.m. on a Saturday and a
certain manufacturing lot has been quarantined. Product is not available for order
fulfillment of a critical order due at a hospital at 8 a.m. on Sunday. How do you
recognize the pending issue? How are you notified? What are your options? How
do you fulfill the order from another site? Which site? What are the modes and
cost options for delivery? Who do you notify? How do you track the order from
the new source? SCEM assists with all of these decisions and business processes.
Customer Management
The face of the customer is fundamentally changing for drug manufacturers.
First, the focus of decision power will shift from that of primarily medical
providers to a mix of medical providers, pharmacists, pharmacy benefits
managers, managed care providers and consumers. The evolution towards this
increasing mix of decision influencers and makers for pharmacological treatments
will not be a linear path. Regulatory bodies, policies of pharmacies and managed
care providers and the very stages of the product life cycle will affect who has the
greatest influence and who ultimately makes the buying decision.
Secondly, the customer base for drug makers is changing. Customer base
diversification from primarily wholesalers and GPOs to retailers, providers and
consumers presents opportunities for manufacturers to lower overall supply chain
costs and gain visibility to real-time demand.
UPS Consulting believes that these fundamental shifts in the customer base
warrant a fundamental shift in sales and marketing along two fronts:
• A cost-management-based sales approach by disease/indication
• Segment-based marketing and sales channel management
UPS Supply Chain Solutions 5
Changing face of
the customer:
• Change in decision-
making power
• More diversified customer
base beyond wholesalers
Cost-management-based Approach
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.
1
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.”
3
The government has
informed the industry that many of its sales and marketing practices may violate
federal fraud and abuse laws.
Given the new mix of influencers and decision makers, we anticipate that the
traditional sales approach will not be effective in the future. Sales and marketing
must change to discern the needs and expectations of each decision player and then
respond to those needs. For example, managed care providers are taking stronger
roles in approving acceptable treatments. Top of mind for managed care is total cost
of treatment. A 1996 study that evaluated formulary efficacy found that HMOs
with restrictive formularies experienced higher use of other medical services.
4
From a consumer standpoint, however, insurance coverage or point-of-use cost may
be primary in selecting or requesting a drug treatment and side effects and length of
treatment secondary. Consumer needs are different from that of managed care.
Now consider the pharmacist. While a doctor can prescribe a brand, the pharmacist
evaluates an insurance policy and often ultimately determines how a prescription is
filled – generic, competitor product based on the formulary or prescribed brand.
Cost is playing an increasingly
higher role for nearly all decision
players, which indicates a need
for a cost-efficacy approach to
sales and marketing. The
awareness and education that
takes place through sales and
marketing should take on a
feasibility flavor rather than pure
efficacy. The question of how a
drug is more feasible than other
treatments should be answered,
requiring strong analytic
capability and technology to
support life-of-treatment analysis
and modeling across a therapeutic class. In fact, such an approach has implications
even for product development and life-cycle management.
UPS Supply Chain Solutions 6
In the last five years,
pharmaceutical sales forces
have grown 85%. In fact,
behind R&D, sales
representative costs are the
second largest category of
expense for drug makers.
FEASIBILITY EXAMPLES:
PhRMA, 2001 Industry Profile
“A new drug is lowering the total cost of caring for
patients with migraine headaches. Although drug
expenditures increased, the total costs of treating
migraines declined 41% as a result of treatment with
the new drug.”
“A recent study sponsored by NIH found that treating
stroke patients promptly with a clot-busting drug not
only reduces disability but also saves health-care
costs. Use of the stroke treatment resulted in net
savings to the health system of more than $4 million
for every 1,000 patients treated.”
1
Radjou,Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
3
Pear, Robert. “Drug Industry is Told to Stop Gifts to Doctors” New York Times, 2002, October 1.
4
PhRMA, Pharmaceutical Research and Manufacturers of America. 2001 Industry Profile, PhRMA, Washington D.C., 2001.
Segment-based Marketing and Sales Channel Management
Most pharmaceutical companies segment markets or customers. We question the
validity of how segmenting takes place and what is done with segments –
essentially, what is the value of segmentation?
We believe that organizations should gain two benefits from segmentation:
1. The ability to measure segment and channel performance to provide
value-based service levels
There are good customers and bad customers. Do you know who your most
profitable customers are? Can you reliably provide differentiating service levels
to your most valuable customers? How will you maintain their loyalty and
how will you upgrade mediocre customers into more profitable customers? A
segmentation and channel management strategy should allow you to identify,
measure and manipulate customer profitability and cost to serve.
2. The ability to respond to specific segment needs to increase the effectiveness
of sales and marketing
Earlier, we discussed the shifting roles of decision players. These decision
players should be included in segmentation, based on information needs,
expectations and decision power. The interplay will change depending on a
product’s life cycle. A patented, new product for an indication with few
treatment alternatives may require less managed care marketing than an
existing drug with branded and generic competition.
Cost management and segment-based marketing and sales management may well
challenge existing skills and capabilities in the commercialization process.
Scenario modeling may be helpful in evaluating long-term treatments and
combinations of drug and medical treatments. Additionally, resources may need to
be shifted away from traditional sales channels to other channels, and new
departments may need to be created to focus on certain segments or channels.
Drug manufacturers that outsource commercialization will need to assess the
ability of contractors to take an analytical/cost-based approach as well as sales
and marketing approaches that anticipate and respond to shifts in decision power.
Forecasting and Planning
The longtime linchpin of meeting customer need has been inventory. In fact, in
2001 Forrester Research targeted pharmaceutical overproduction to be more than
double actual market needs.
1
It is no secret that pharmaceutical companies have
traditionally developed forecasts and replenishment plans to ensure ample stock
throughout distribution channels. However, in today’s environment of price and
margin pressure, the linchpin suddenly becomes a barrier to acceptable financial
performance. Yet, manufacturers still take pause at discussions of turning
forecasting and planning into a meaningful capability. Why is this?
The hurdles to accurate forecasting are numerous, including lack of or delayed
demand visibility, complex sales channels with established wholesalers, timely and
accurate distribution inherently complicated by global operations and compliance
with the FDA’s Current Good Manufacturing Practices (CGMP). When the right
forecasting methods are put into practice, it can be all for nothing if a wholesaler
acts contrary to one’s plans.
UPS Supply Chain Solutions 7
In 1996, a study that evaluated
formulary efficacy found
that HMOs with restrictive
formularies experience higher
use of other medical services.
1
Radjou,Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
UPS Supply Chain Solutions 8
The objective of forecasting and planning is clear: to minimize inventory while
meeting or exceeding customer needs. What isn’t clear is how. Successfully
achieving this objective requires consideration of four key components: Approach,
Quality Inputs, Methods and Tools , and Structure.
Approach
Understanding the dynamics of the
organization, how business functions
work together, leadership philosophies
and skill sets all factor into defining an
appropriate approach. Components of
the approach can be categorized as
building proficiency, leadership
support, rewards and incentives
(business and personal) and execution.
Quality Inputs
“Junk in, junk out” applies to forecasting and planning. A significantly high level
of input accuracy (a measure of precision) and reliability (a measure of
consistency) is required to ensure quality output. Organizations should consider a
mix of quantitative, qualitative, industry-specific and economic factors such as
climate and market conditions.
Methods and Tools
Before technology assessments can begin, the level of sophistication an
organization can reasonably and successfully execute should be determined. If the
current method utilizes spreadsheets with internal data, the likelihood of a
complex modeling tool being effective is low. This is not surprising. The speed at
which forecasting capability develops depends on skill level, aptitude for
advanced technology, readiness and availability of industry information such as
distributor and point-of-sale data.
Structure
An effective structure allows for the highest levels of forecast accuracy and easy
identification of dependencies among markets and products. Key components in
defining a structure for forecasting and planning require organizational and
tactical decisions like:
• Which business functions will be held accountable for forecast accuracy?
• Which business functions will be responsible for replenishment planning?
• Will planning time horizons need to change?
• At what levels will the organization generate forecasts?
No doubt you have seen the push by software vendors and independent market
research firms touting the value of technology in forecasting and planning. Do not
be swept away by the software bandwagon – there is no such thing as a quick fix
when it comes to accurate, reliable forecasting. The initial primary focus must be
on establishing the right process, organizational support and relevant proficiency
before technology can be successfully leveraged.
In today’s environment of
price and margin pressure,
(inventory) suddenly becomes
a barrier to acceptable
financial performance.
There is no such thing as
a quick fix when it comes to
accurate, reliable forecasting.
Quality Inputs
Methods & Tools
Forecast Structure
APPROACH
UPS Supply Chain Solutions 9
Procurement
Over the past decade, improving the purchasing function has become an
important and strategic part of the goals of most organizations – primarily
because of the recognition that increased profitability can be equally
accomplished by spending less. A dollar saved in operating expense may have
the same effect on profit as a $10 gain in sales. In the pharmaceutical industry,
e-procurement has been heavily embraced because of its association with lower
transaction costs, lower unit price and a drive toward contract compliance.
Often these concessions were achieved with little regard to quality, total cost
and productivity and resulted in modest to minimal gains in cost savings.
There are significantly greater benefits to be gained in the area of procurement.
We will focus on two:
• Strategic Sourcing
• Supplier Management
Both position an organization to more adeptly respond to changes in demand and
to more strategically manage overall costs throughout the supply chain. While
e-procurement may lower the costs within the four walls of procurement, it is most
effective when led or supported by strategic sourcing or supplier management so
that cost structures and productivity are also enhanced downstream.
Strategic Sourcing
Are you looking for ways to reduce working capital or lead times or make
market-changing improvements to service levels? Strategic sourcing is the
aggregating of goods and service needs to devise and execute a procurement
strategy that optimizes and balances total cost of acquisition, working capital,
productivity and service. Benefits often include reduced total costs for buyer and
supplier, higher quality, ongoing reduction in working capital and lead times, and
strategic supplier partnerships. The focus in supplier partnerships shifts from one
of price reduction to relationship value and total cost management.
Strategic sourcing inherently focuses on both direct and indirect material items
that make up the lion’s share of costs and productivity problems. The more
strategic aspects include in-sourcing/outsourcing and the management of contract
manufacturing. Total cost management evaluates unit price, logistics and freight
costs, import/export fees, taxes, service models and the cost of poor quality. A
pharmaceutical manufacturer’s approach to strategic sourcing and speed of
adoption should be based on the organization complexity and current level of
process standardization.
Supplier Management
Supplier management programs proactively manage supplier relationships
and performance to ensure supply objectives are achieved. Proactive supplier
management typically yields 10 to 15 percent savings for the purchasing
categories addressed and then additional year-over-year savings of 3 to 5 percent.
Moreover, the goals of a supplier management program may be critical to
operations and sales. The pharmaceutical industry has been plagued with FDA
penalties, fines and subsequent negative publicity – some of which could be
resolved with a compliance-focused supplier management program.
A dollar saved in operating
expense may have the same
effect on profit as a $10
gain in sales.
UPS Supply Chain Solutions 10
The success of supplier management programs is highly dependent upon executive
sponsorship, cross-functional input, measurable performance metrics and process
enablement. Many of today’s supply chain management and e-procurement
applications offer supplier management functionality.
Organizations that effectively codify the FDA’s CGMP will extend compliance
and validation back into their supply base. By defining quality and performance
criteria, segmenting suppliers into tiers through performance level or value to the
organization, and establishing and measuring against metrics, suppliers can
actually foster compliance and achieve other operational goals. Goals often
include lowering overall costs, decreasing lead time and shortening product
development cycles.
In Summary
Successful pharmaceutical companies will actively seek to
position their organizations for future profitability by
anticipating increased competition and the demise of high
margins.
In this paper, we have highlighted five supply chain capabilities that winning
pharmaceuticals should build to maintain competitive advantage:
• Production
• Fulfillment
• Customer management
• Forecasting and Planning
• Procurement
UPS Supply Chain Solutions believes that pharmaceutical companies that take
action now to implement optimized cost and business infrastructure will be best
positioned to continue strong financial performance. Each of these areas presents
opportunities to generate real value and financial benefit in four to six months.
Benefits will continue to be realized as proficiency and capability develop.
Building competitive capability in some of these areas may take several years, but
the earlier the start, the greater the lead against the competition.
The focus in supplier
partnerships shifts from
one of price reduction to
relationship value and
total cost management.
UPS Supply Chain Solutions 11
About the Authors
Larry Koester is a principal at UPS Supply Chain Solutions focused primarily on
healthcare/life sciences and pharmaceutical companies. Larry is based in
Cleveland, OH and can be reached at [email protected].
Kim Rash is a principal at UPS Supply Chain Solutions focused primarily on
healthcare/life sciences and pharmaceutical companies. Kim is based in Atlanta,
GA and can be reached at [email protected].
To learn more about how our experience in supply chains and consulting can help
your business, please contact us:
1.800.742.5727 U.S.
678.746.4365 International
Visit us at ups-scs.com
About UPS Supply Chain Solutions
By aligning a client’s business strategies with its operating processes, UPS Supply
Chain Solutions can create high-performance supply chains that from inception to
implementation generate real, hard-number values and quick benefit realization.
This distinguishing capability, our experience in solving real-world challenges, and
the resources of UPS enable us to set strategies, design and build solutions as well
as implement, operate, manage and synchronize your world of commerce.
Copyright © 2005 United Parcel Service of America, Inc. All Rights Reserved. WP.SCS.HC.642
No part of this publication may be reproduced without the prior written permission of UPS Supply Chain Solutions.
doc_246119107.pdf
These trends are having the greatest impact on sales and marketing, channel management, and new product development and rollout. Ultimately, we believe these trends and implications are converging to create an environment in which price pressures are becoming so intense that a growing number of pharmaceutical companies will struggle to meet shareholder expectations.
UPS Supply Chain Solutions
SM
Building Supply Chain
Capabilities in the
Pharmaceutical Industry
Part 2: Winning supply chain capabilities
Our Insight.
A UPS Supply Chain Solutions
White Paper
Copyright © 2005 United Parcel Service of America, Inc. All Rights Reserved.
No part of this publication may be reproduced without the prior written permission of UPS Supply Chain Solutions.
In “Building Supply Chain Management Capabilities
in the Pharmaceutical Industry Part 1: Trends
Impacting the Supply Chain,” we explored the
business implications of major trends impacting
pharmaceutical supply chains.
These trends are having the greatest impact on sales and marketing, channel
management, and new product development and rollout. Ultimately, we believe
these trends and implications are converging to create an environment in which
price pressures are becoming so intense that a growing number of pharmaceutical
companies will struggle to meet shareholder expectations.
Unless pharmaceutical
companies begin taking action
now to create more business-
effective cost and process
structures, survival will be at
stake. We propose that
the winning pharmaceutical
companies will build
differentiating capability in
five supply chain areas:
• Production
• Fulfillment
• Customer Management
• Forecasting & Planning
• Procurement
Organizations that do so not
only will be able to meet
financial expectations despite
falling margins, but also will be
in a position of financial and
operational strength. The prize?
Attractive acquisition and in-
licensing deals possible because
pharmaceutical companies with
suboptimal supply chains will
be forced to divest or seek
business suitors.
UPS Supply Chain Solutions 2
Unless pharmaceutical
companies begin taking
action now to create more
business-effective cost and
process structures, survival
will be at stake.
AS THE MEGA MERGER WAVE CALMS, THE VALUE CHAIN
CONTINUES TO EXPERIENCE RESTRUCTURING
• Evolution of new channels as PBMs and disease
management programs (e.g., cancer service centers)
grow in popularity
• Disintermediation of wholesalers and distributors
as 3PLs increase service levels and accommodate
pharma regulations
• Growth in outsourcing extends into research and
development and sales and marketing in addition to
CRM/call center functions
• New genre of niche companies focused in biotech, bio
and genetic engineering
MARKET SHARE AND MARGIN EROSION
• Shorter periods of exclusivity for new drugs
• Increased competition from generics: faster adoption of
generics and faster product development
• Rising R&D costs due to increased sophistication and
complexity of research and collaboration required to
generate innovation
• Intense price pressure from employers, government
entities and consumer advocacy groups (e.g., AARP)
DESPITE INCREASING CONSUMER KNOWLEDGE OF DRUGS,
ACCESS TO NEW DRUGS IS SHRINKING
• Increased usage of closed formularies by managed care
organizations
• Higher HMO adoption of therapeutic interchange and
step-care therapy
• Potential shift in DUR (drug utilization review) from
efficacy to cost efficiency
Production
The pharmaceutical industry traditionally has been constrained by rigid global
manufacturing with specialized production equipment, long lead times for
materials and extensive regulatory requirements. This has led to inflexibility and
an inability to react quickly to changes and facilities that are either capacity
constrained or underutilized.
1,2
Additionally, competition and the race towards
gene profiling for therapeutic drugs may well push big pharmaceutical companies
into niche drugs and smaller-batch production. The sum total of these trends and
characteristics makes the drug manufacturing environment ripe for significant
improvement.
What will it take to turn production into a supply chain capability worthy of
future success? We believe the following three practices will be the defining
characteristics of tomorrow’s winners:
• Rationalized global production networks
• Changeover competence and smaller batch production
• Compliance management
Global Network Rationalization
As pharmaceutical companies gained global reach, production capability and the
subsequent network have become unwieldy. Questions that require immediate and
accurate answers include: which sites to continue operating and which to divest,
where to manufacture which products and how best to support long-term product
strategy. Tactical factors such as compliance, profitability, labor skill and costs, and
age of equipment are key factors in making strategic decisions. Agility in these
decisions directly affects growth and acquisition return on investment. Winning
pharmaceutical companies will recognize the need for competence in global siting
and production network rationalization. Furthermore, growth by acquisition
companies will seek to define a streamlined method to continuously evaluate the
production network as part of postmerger integration.
Changeovers and Smaller Batch Production
Today’s manufacturing plants were typically designed for a specific drug or
therapeutic class. Therefore, asset utilization and fulfilling high-demand products
are systemic problems. Additionally, future genomic innovation will allow
pharmaceutical companies to develop profile-specific drugs, and some market
analysts predict drug tailoring for custom batches of one. The pharmaceutical
environment is necessitating faster changeovers and smaller production runs.
Simplifying changeovers and gearing down batch sizes will likely require changes
to plant layout as well as material and inventory storage. Similar to forecasting
and planning, reconfiguring manufacturing processes and facilities to build
changeover competence and to run smaller batches will take time. Manufacturers
should begin addressing change overs and future shifts in demand since it could
take two to three years to rampup to consistent, reliable changeover performance.
1
Radjou, Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
2
Bhandari, Manish et al. “A Genetic Revolution in Healthcare” McKinsey Quarterly, 1999 Quarter 4.
UPS Supply Chain Solutions 3
Winning pharmaceutical
companies will recognize
the need for competence in
global siting and production
network rationalization.
Compliance Management
Compliance should be integrated into all manufacturing processes and touch
points. Compliance involves communicating regulatory changes, documenting
standard operating procedures, integrating into processes and on-going training.
Manufacturing execution systems (MESs) allow plants to optimize production
runs and changeovers in a complicated environment with stringent rules and
regulations. Once a compliance strategy is put in place, an MES should be
considered a technology enabler. Successful compliance management involves an
oversight council and cross-functional teams that define an integration strategy,
evaluate enabling technology and instill performance measures supported by
periodic audits.
Fulfillment
High levels of inventory, low turns (industry average of 2.5) and late deliveries
have plagued many pharmaceutical manufacturers over the years. This
performance has been tolerated in the past on drugs with locked-in patents and
where only one source is available. With increasing competition, shorter
exclusivity periods and smaller batch production, pharmaceutical companies
need to reposition fulfillment capability to generate more accurate performance
and respond to changing customer demand.
Changing Customer Demand: From Pallets to Packages
As previously mentioned, two trends that will dramatically affect the future of
pharmaceutical fulfillment are:
1. Smaller batch production driven by genomics and customer demand
2. The addition of retailer, provider and consumer direct to manufacturers’
customer base
Both of these point toward an inevitable shift from distributing larger pallet
quantities to wholesalers to distributing smaller package-to-pallet quantities
across a more diverse customer base. Technology as well as demand has presented
opportunities for drug makers to sell direct to these new segments – segments in
search of lower cost, better service and better information. The benefits to drug
makers are golden: access to real-time demand and access to actual consumers.
Creating the ability to meet this emerging demand is not so golden. The order and
service needs of hospital systems, pharmacists and consumers are dramatically
different from those of large-scale wholesalers and GPOs. The one thing they
have in common is the need for accurate delivery. What they don’t have in
common are needs such as:
• More frequent delivery – perhaps daily or multiple times a week
• Smaller packaging/SKUs with lower quantities in each package
• Combinatory delivery – literature, complementary devices and/or
complementary drugs to provide complete treatment kits
• Smaller size pick/pack and delivery – including quantities of one
• Exponential delivery destinations – the numbers will explode quickly
UPS Supply Chain Solutions 4
Technology as well as
demand has presented
opportunities for drug
makers to sell direct to
these new segments –
segments in search of
lower cost, better service
and better information.
Building fulfillment capability to meet tomorrow’s demand will require
infrastructure investments in technology, packaging/SKU rationalization and
design, network optimization/3PL assessment and customer service. Logistics
capability will need to include merge-in-transit and management of noncompany
products. Drug makers will need to determine whether the golden egg of real-time
demand visibility is worth the investment. Even manufacturers that choose to stay
the existing course may find they have to deliver on some of these demands as
competition heightens and wholesalers begin demanding services.
Supply Chain Event Management
Separate supply chains with disparate systems have been the biggest impact from
the wave of M&A in the pharmaceutical industry. In most situations, two merging
parties have two different ERP systems and associated bolt-on supply chain
applications. Whether struggling with disparate systems in an M&A situation or
not, Supply Chain Event Management (SCEM) can provide tremendous benefits to
an enterprise and its partners.
The core elements of SCEM are gathering, monitoring, measuring, simulating,
notifying and managing across supply chain processes, internal organizations and
external trading communities. The objective is to create smooth-running
operations by seamlessly notifying the right people at the right time when action
or intervention may be necessary. For example, it is 5 p.m. on a Saturday and a
certain manufacturing lot has been quarantined. Product is not available for order
fulfillment of a critical order due at a hospital at 8 a.m. on Sunday. How do you
recognize the pending issue? How are you notified? What are your options? How
do you fulfill the order from another site? Which site? What are the modes and
cost options for delivery? Who do you notify? How do you track the order from
the new source? SCEM assists with all of these decisions and business processes.
Customer Management
The face of the customer is fundamentally changing for drug manufacturers.
First, the focus of decision power will shift from that of primarily medical
providers to a mix of medical providers, pharmacists, pharmacy benefits
managers, managed care providers and consumers. The evolution towards this
increasing mix of decision influencers and makers for pharmacological treatments
will not be a linear path. Regulatory bodies, policies of pharmacies and managed
care providers and the very stages of the product life cycle will affect who has the
greatest influence and who ultimately makes the buying decision.
Secondly, the customer base for drug makers is changing. Customer base
diversification from primarily wholesalers and GPOs to retailers, providers and
consumers presents opportunities for manufacturers to lower overall supply chain
costs and gain visibility to real-time demand.
UPS Consulting believes that these fundamental shifts in the customer base
warrant a fundamental shift in sales and marketing along two fronts:
• A cost-management-based sales approach by disease/indication
• Segment-based marketing and sales channel management
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Changing face of
the customer:
• Change in decision-
making power
• More diversified customer
base beyond wholesalers
Cost-management-based Approach
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.
1
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.”
3
The government has
informed the industry that many of its sales and marketing practices may violate
federal fraud and abuse laws.
Given the new mix of influencers and decision makers, we anticipate that the
traditional sales approach will not be effective in the future. Sales and marketing
must change to discern the needs and expectations of each decision player and then
respond to those needs. For example, managed care providers are taking stronger
roles in approving acceptable treatments. Top of mind for managed care is total cost
of treatment. A 1996 study that evaluated formulary efficacy found that HMOs
with restrictive formularies experienced higher use of other medical services.
4
From a consumer standpoint, however, insurance coverage or point-of-use cost may
be primary in selecting or requesting a drug treatment and side effects and length of
treatment secondary. Consumer needs are different from that of managed care.
Now consider the pharmacist. While a doctor can prescribe a brand, the pharmacist
evaluates an insurance policy and often ultimately determines how a prescription is
filled – generic, competitor product based on the formulary or prescribed brand.
Cost is playing an increasingly
higher role for nearly all decision
players, which indicates a need
for a cost-efficacy approach to
sales and marketing. The
awareness and education that
takes place through sales and
marketing should take on a
feasibility flavor rather than pure
efficacy. The question of how a
drug is more feasible than other
treatments should be answered,
requiring strong analytic
capability and technology to
support life-of-treatment analysis
and modeling across a therapeutic class. In fact, such an approach has implications
even for product development and life-cycle management.
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In the last five years,
pharmaceutical sales forces
have grown 85%. In fact,
behind R&D, sales
representative costs are the
second largest category of
expense for drug makers.
FEASIBILITY EXAMPLES:
PhRMA, 2001 Industry Profile
“A new drug is lowering the total cost of caring for
patients with migraine headaches. Although drug
expenditures increased, the total costs of treating
migraines declined 41% as a result of treatment with
the new drug.”
“A recent study sponsored by NIH found that treating
stroke patients promptly with a clot-busting drug not
only reduces disability but also saves health-care
costs. Use of the stroke treatment resulted in net
savings to the health system of more than $4 million
for every 1,000 patients treated.”
1
Radjou,Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
3
Pear, Robert. “Drug Industry is Told to Stop Gifts to Doctors” New York Times, 2002, October 1.
4
PhRMA, Pharmaceutical Research and Manufacturers of America. 2001 Industry Profile, PhRMA, Washington D.C., 2001.
Segment-based Marketing and Sales Channel Management
Most pharmaceutical companies segment markets or customers. We question the
validity of how segmenting takes place and what is done with segments –
essentially, what is the value of segmentation?
We believe that organizations should gain two benefits from segmentation:
1. The ability to measure segment and channel performance to provide
value-based service levels
There are good customers and bad customers. Do you know who your most
profitable customers are? Can you reliably provide differentiating service levels
to your most valuable customers? How will you maintain their loyalty and
how will you upgrade mediocre customers into more profitable customers? A
segmentation and channel management strategy should allow you to identify,
measure and manipulate customer profitability and cost to serve.
2. The ability to respond to specific segment needs to increase the effectiveness
of sales and marketing
Earlier, we discussed the shifting roles of decision players. These decision
players should be included in segmentation, based on information needs,
expectations and decision power. The interplay will change depending on a
product’s life cycle. A patented, new product for an indication with few
treatment alternatives may require less managed care marketing than an
existing drug with branded and generic competition.
Cost management and segment-based marketing and sales management may well
challenge existing skills and capabilities in the commercialization process.
Scenario modeling may be helpful in evaluating long-term treatments and
combinations of drug and medical treatments. Additionally, resources may need to
be shifted away from traditional sales channels to other channels, and new
departments may need to be created to focus on certain segments or channels.
Drug manufacturers that outsource commercialization will need to assess the
ability of contractors to take an analytical/cost-based approach as well as sales
and marketing approaches that anticipate and respond to shifts in decision power.
Forecasting and Planning
The longtime linchpin of meeting customer need has been inventory. In fact, in
2001 Forrester Research targeted pharmaceutical overproduction to be more than
double actual market needs.
1
It is no secret that pharmaceutical companies have
traditionally developed forecasts and replenishment plans to ensure ample stock
throughout distribution channels. However, in today’s environment of price and
margin pressure, the linchpin suddenly becomes a barrier to acceptable financial
performance. Yet, manufacturers still take pause at discussions of turning
forecasting and planning into a meaningful capability. Why is this?
The hurdles to accurate forecasting are numerous, including lack of or delayed
demand visibility, complex sales channels with established wholesalers, timely and
accurate distribution inherently complicated by global operations and compliance
with the FDA’s Current Good Manufacturing Practices (CGMP). When the right
forecasting methods are put into practice, it can be all for nothing if a wholesaler
acts contrary to one’s plans.
UPS Supply Chain Solutions 7
In 1996, a study that evaluated
formulary efficacy found
that HMOs with restrictive
formularies experience higher
use of other medical services.
1
Radjou,Navi. “The Pharma Apps Prescription” Forrester Report, 2001 Feb.
UPS Supply Chain Solutions 8
The objective of forecasting and planning is clear: to minimize inventory while
meeting or exceeding customer needs. What isn’t clear is how. Successfully
achieving this objective requires consideration of four key components: Approach,
Quality Inputs, Methods and Tools , and Structure.
Approach
Understanding the dynamics of the
organization, how business functions
work together, leadership philosophies
and skill sets all factor into defining an
appropriate approach. Components of
the approach can be categorized as
building proficiency, leadership
support, rewards and incentives
(business and personal) and execution.
Quality Inputs
“Junk in, junk out” applies to forecasting and planning. A significantly high level
of input accuracy (a measure of precision) and reliability (a measure of
consistency) is required to ensure quality output. Organizations should consider a
mix of quantitative, qualitative, industry-specific and economic factors such as
climate and market conditions.
Methods and Tools
Before technology assessments can begin, the level of sophistication an
organization can reasonably and successfully execute should be determined. If the
current method utilizes spreadsheets with internal data, the likelihood of a
complex modeling tool being effective is low. This is not surprising. The speed at
which forecasting capability develops depends on skill level, aptitude for
advanced technology, readiness and availability of industry information such as
distributor and point-of-sale data.
Structure
An effective structure allows for the highest levels of forecast accuracy and easy
identification of dependencies among markets and products. Key components in
defining a structure for forecasting and planning require organizational and
tactical decisions like:
• Which business functions will be held accountable for forecast accuracy?
• Which business functions will be responsible for replenishment planning?
• Will planning time horizons need to change?
• At what levels will the organization generate forecasts?
No doubt you have seen the push by software vendors and independent market
research firms touting the value of technology in forecasting and planning. Do not
be swept away by the software bandwagon – there is no such thing as a quick fix
when it comes to accurate, reliable forecasting. The initial primary focus must be
on establishing the right process, organizational support and relevant proficiency
before technology can be successfully leveraged.
In today’s environment of
price and margin pressure,
(inventory) suddenly becomes
a barrier to acceptable
financial performance.
There is no such thing as
a quick fix when it comes to
accurate, reliable forecasting.
Quality Inputs
Methods & Tools
Forecast Structure
APPROACH
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Procurement
Over the past decade, improving the purchasing function has become an
important and strategic part of the goals of most organizations – primarily
because of the recognition that increased profitability can be equally
accomplished by spending less. A dollar saved in operating expense may have
the same effect on profit as a $10 gain in sales. In the pharmaceutical industry,
e-procurement has been heavily embraced because of its association with lower
transaction costs, lower unit price and a drive toward contract compliance.
Often these concessions were achieved with little regard to quality, total cost
and productivity and resulted in modest to minimal gains in cost savings.
There are significantly greater benefits to be gained in the area of procurement.
We will focus on two:
• Strategic Sourcing
• Supplier Management
Both position an organization to more adeptly respond to changes in demand and
to more strategically manage overall costs throughout the supply chain. While
e-procurement may lower the costs within the four walls of procurement, it is most
effective when led or supported by strategic sourcing or supplier management so
that cost structures and productivity are also enhanced downstream.
Strategic Sourcing
Are you looking for ways to reduce working capital or lead times or make
market-changing improvements to service levels? Strategic sourcing is the
aggregating of goods and service needs to devise and execute a procurement
strategy that optimizes and balances total cost of acquisition, working capital,
productivity and service. Benefits often include reduced total costs for buyer and
supplier, higher quality, ongoing reduction in working capital and lead times, and
strategic supplier partnerships. The focus in supplier partnerships shifts from one
of price reduction to relationship value and total cost management.
Strategic sourcing inherently focuses on both direct and indirect material items
that make up the lion’s share of costs and productivity problems. The more
strategic aspects include in-sourcing/outsourcing and the management of contract
manufacturing. Total cost management evaluates unit price, logistics and freight
costs, import/export fees, taxes, service models and the cost of poor quality. A
pharmaceutical manufacturer’s approach to strategic sourcing and speed of
adoption should be based on the organization complexity and current level of
process standardization.
Supplier Management
Supplier management programs proactively manage supplier relationships
and performance to ensure supply objectives are achieved. Proactive supplier
management typically yields 10 to 15 percent savings for the purchasing
categories addressed and then additional year-over-year savings of 3 to 5 percent.
Moreover, the goals of a supplier management program may be critical to
operations and sales. The pharmaceutical industry has been plagued with FDA
penalties, fines and subsequent negative publicity – some of which could be
resolved with a compliance-focused supplier management program.
A dollar saved in operating
expense may have the same
effect on profit as a $10
gain in sales.
UPS Supply Chain Solutions 10
The success of supplier management programs is highly dependent upon executive
sponsorship, cross-functional input, measurable performance metrics and process
enablement. Many of today’s supply chain management and e-procurement
applications offer supplier management functionality.
Organizations that effectively codify the FDA’s CGMP will extend compliance
and validation back into their supply base. By defining quality and performance
criteria, segmenting suppliers into tiers through performance level or value to the
organization, and establishing and measuring against metrics, suppliers can
actually foster compliance and achieve other operational goals. Goals often
include lowering overall costs, decreasing lead time and shortening product
development cycles.
In Summary
Successful pharmaceutical companies will actively seek to
position their organizations for future profitability by
anticipating increased competition and the demise of high
margins.
In this paper, we have highlighted five supply chain capabilities that winning
pharmaceuticals should build to maintain competitive advantage:
• Production
• Fulfillment
• Customer management
• Forecasting and Planning
• Procurement
UPS Supply Chain Solutions believes that pharmaceutical companies that take
action now to implement optimized cost and business infrastructure will be best
positioned to continue strong financial performance. Each of these areas presents
opportunities to generate real value and financial benefit in four to six months.
Benefits will continue to be realized as proficiency and capability develop.
Building competitive capability in some of these areas may take several years, but
the earlier the start, the greater the lead against the competition.
The focus in supplier
partnerships shifts from
one of price reduction to
relationship value and
total cost management.
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About the Authors
Larry Koester is a principal at UPS Supply Chain Solutions focused primarily on
healthcare/life sciences and pharmaceutical companies. Larry is based in
Cleveland, OH and can be reached at [email protected].
Kim Rash is a principal at UPS Supply Chain Solutions focused primarily on
healthcare/life sciences and pharmaceutical companies. Kim is based in Atlanta,
GA and can be reached at [email protected].
To learn more about how our experience in supply chains and consulting can help
your business, please contact us:
1.800.742.5727 U.S.
678.746.4365 International
Visit us at ups-scs.com
About UPS Supply Chain Solutions
By aligning a client’s business strategies with its operating processes, UPS Supply
Chain Solutions can create high-performance supply chains that from inception to
implementation generate real, hard-number values and quick benefit realization.
This distinguishing capability, our experience in solving real-world challenges, and
the resources of UPS enable us to set strategies, design and build solutions as well
as implement, operate, manage and synchronize your world of commerce.
Copyright © 2005 United Parcel Service of America, Inc. All Rights Reserved. WP.SCS.HC.642
No part of this publication may be reproduced without the prior written permission of UPS Supply Chain Solutions.
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