Chain reaction

Market pressures are causing pharma companies to view the supply chain as a strategic tool, says Exel's Anthony Mitchell, and outsourcing can play a crucial role in increasing efficiency

Traditionally pharmaceutical manufacturers have invested significant resources on r&d activities, ultimately focused on delivering a pipeline of new blockbuster drugs for commercialisation. However, market pressures have forced manufacturers of both ethical and OTC products to look at the supply chain as a strategic tool. The answer is best achieved through the flexibility of outsourcing and this is reshaping pharmaceutical supply chains.

One of the key business drivers affecting manufacturers is the move towards conducting business on an increasingly international basis. The drive towards globalisation has been particularly prevalent over the last decade, with pharmaceutical manufacturers competing on an international basis with significant cost implications.

greater control

In addition, major retailers require deliveries 24 hours a day, seven days a week, scheduled to shorter lead times with stock ready to go straight onto the shelf or shop floor. This effectively pushes additional costs down the line onto suppliers.

Manufacturers are therefore attempting to retain control of their supply chains by distributing directly to end-users, while multiple retailers are also working to increase their own control to ensure they meet customers' expectations. In the middle, wholesalers' margins are being squeezed, driving industry consolidation.

A second key business driver within the pharmaceutical industry is a decrease in the number of new, high-revenue 'blockbuster' drugs in manufacturers' pipelines at the same time as many of the blockbuster drugs currently in the market are losing their patent protection. As a consequence, generic manufacturers are launching competitive products at vastly reduced prices, in many cases supported by governments seeking to reduce their healthcare costs.

By outsourcing, branded pharmaceutical companies and generics manufacturers can effectively streamline their supply chains to reduce time to market. Operating costs are lower and resources can be concentrated on core competencies.

A third business driver affecting the structure of pharmaceutical supply chains is the change in consumer buying attitudes that will result in more healthcare products being sold over the counter as awareness and the need to self-medicate increase. However, the strength of the retail multiples is such that they are well placed to take a large proportion of this OTC growth and to use their position to demand a sophisticated supply chain response from their suppliers.

The technology to meet this demand already exists, and is being used by some third party logistics (3PL) providers acting as pre-wholesalers, not just to help manage every stage of the journey from factory to shop floor but to capture customers' existing buying patterns and to anticipate their future buying decisions. Both manufacturers and pharmacies will increasingly need to look to supply chain providers to give information to help them retain market share.

regulatory pressures

A final pressure on the industry is the changing regulatory drivers streamlining logistics within the pharmaceutical industry. Companies' supply chains are increasingly required by manufacturers and multiple retailers to hold more stock and will need to be highly automated. There will also be more interest in pan-European distribution networks as Europe moves towards a single market in pharmaceutical products.

In tandem with this, legislation is likely to become more stringent and further investment in both specialist storage facilities and transport vehicles will be an absolute necessity, marginalising the non-specialist and less well-resourced supply chain providers.

To respond to these challenges, pharmaceutical manufacturers are looking to enhance supply chain efficiency by outsourcing to 3PL providers fulfilling a pre-wholesaling role. Leading 3PLs such as Exel, enable manufacturers to create more sophisticated, technology-enabled supply chains and are increasingly managing the supply chain between manufacturer and wholesaler or retailer.

3PLs already have the infrastructure and specialist teams in place to achieve supply chain efficiency on a national and international level. Companies such as Exel can provide state-of-the-art warehousing and transportation, advanced IT systems designed to ensure visibility of product within the supply chain for both manufacturer and retailer, integrated transport both within local geographies and across borders, and teams experienced in a range of traditional and value-added logistics services.

Importantly, the scale of resources at larger logistic companies means they can help manufacturers meet the retail multiples' increasing requirements and support distribution to dispersed independent retailers, cost effectively.

The increase in outsourcing has led to a growth in pharmaceutical supply chain management known as shared-user logistics. This approach, pioneered by Exel as a tailor-made solution for pharmaceuticals, means that companies with similar products and distribution targets can turn the fixed cost of logistics into a variable cost by sharing significant overheads, administration and IT required for sophisticated supply chain management.

peaks and troughs

The system is flexible to allow for business peaks and troughs or company expansion. It gives companies access to a wide range of services, including relabelling, co-packing and clinical trials logistics control on an Ôas requiredÕ basis. The logistics company makes the investment in advanced audited centres including MHRA Licensing and introduction of operational efficiencies for shared transport and backhaul to further control costs. Advanced IT systems help to drive this operational efficiency, ensuring there is minimal stock movement and lead times are reduced.

In the UK, logistics companies that specialise in the healthcare sector represent an important link between manufacturers and their customers. As manufacturers replace traditional one-year distribution contracts with longer term agreements, 3PLs can confidently make capital investments on their behalf, introducing the latest quality control and helping them respond more successfully to what customers actually want, which, of course, is what retailers want as well.

In this scenario, the case for sharing warehouses, vehicles and information systems will compel manufacturers to overcome concerns about loss of control and confidentiality, which have inhibited growth in outsourcing, to retain competitive supply chains.

The pace and, perhaps, the precise nature of these drivers shaping the industry may be open to debate, but one thing is sure, logistics and their contribution to profit will be moving higher up the healthcare sector's agenda in the near future.