LOGISTICS

Role of pre-wholesalers in generic pharmaceutical
manufacturers’ demand chain management strategy

Chris Tierney, DHL

In comparison to its branded pharmaceutical counterparts, the supply chain contributes more significantly to generic manufacturers COGS, making the demand chain challenges on these manufacturers more akin to those of the retail/FMCG environment. The velocity through these supply chains will undoubtedly be determined by those best able to grow through capitalising on this growing market demand.

The traditional pharmaceutical supply chain is naturally undifferentiated for generic or branded product; from manufacturer to wholesaler, pharmacist through to patient. Within Europe and the USA, manufacturers are striving to rationalise production and distribution costs. Although direct delivery to dispensing sites is an option it is not economically viable due to pharmacy space constraints coupled with availability of twice daily deliveries through the wholesale channel. Consequently, pharmaceutical manufacturers are increasingly recognising distribution as a non-core activity and outsourcing their regional distribution activities to a specialist pharmaceutical prewholesaler, such as DHL Exel Supply Chain, licensed to handle pharmaceutical product, with the ability to process and deliver orders throughout the supply chain. Two key aspects distinguish pre-wholesaling from the traditional wholesale channel:

Manufacturers retain title to goods through the distribution process, this sales visibility (without expensive repurchase of data from infomediaries) means production can be targeted to best satisfy demand. Crucial to winning and maintaining market share in the generics industry.
Importantly generics manufacturers are assured that product is stored and handled to comply with licensed GxP practices (primarily GDP and GMP).

Generic pharmaceutical supply chain challenges

The following outlines two major drivers, within the changing market of generic pharmaceuticals, and their implication for effective demand channel management. Potential pre-wholesale solutions to these issues are explored:

A. Shorter product lifecycles and cost focus strategies demand an efficient supply chain

Presently a defining feature of the generic pharmaceutical market is fierce pricing competition. While the market for a major branded drug may be huge, generic competition will quickly reduce prices and market share to a point where it will be difficult to generate large profits. Once a product has lost patent protection it is replaced almost entirely within six to 12 months by generics sold at 85 – 90% less than the original product!

This compression of the generics product lifecycle (when compared to the branded drug) and the extreme pricing sensitivities make supply chain costs a very real issue. As a solution to similar industry issues (largely within the FMCG industry vertical) DHL Exel Supply Chain pioneered the Campus approach to delivering supply chain value.

What is a ‘Campus’?

The term ‘campus’ is perhaps more readily associated with schools or universities, but to many at DHL Exel Supply Chain campus solutions are the ultimate in supply chain efficiency. In this context, the term applies to consolidation of distribution activities associated with common industry verticals.

Designed and implemented by DHL, the campus concept essentially matches distribution load and capacity among a group of manufacturers delivering into similar end-users ie hospitals, pharmacies and clinics. Such a logistical platform – or a network of regional distribution centres – serves multiple manufacturers, creating opportunities for resource sharing and capacity utilisation. It also provides infrastructure for new market penetration and expansion.

This outsourced solution offers a versatile, shared pool of fixed assets, skilled labour and warehouse and transport management systems – all available through a single-source provider – that can flex efficiently with demand. Campuses are strategically located to serve customer factories, distribution centres and major end-user concentrations.

Tangible benefits of the campus solution

Campus solutions provide manufacturers operating within similar industries an opportunity to share investment and gain performance benefits from a common supply chain infrastructure. Campus economies of scale include:

Flexible, customer-specific business solutions;
Limited impact of variability in activity, with the flexibility to expand or contract to meet customer-specific requirements, eg product launches (vital in the generics market);
Reduced labour costs through sharing a skilled resource pool;
Increased equipment usage through complementary shift structures and sharing of specialised equipment;
Greater precision in meeting facility size requirements.

Transport economies of scale include:

Reduced time to market;
Reliable, low-cost core carrier service, ensuring availability of high-quality equipment;
Savings and greater efficiency from coloading, while creating more frequent deliveries.

Service advantages include:

Ability to match peak and low-volume levels to available trained labour;
Attractive pick-up point for retail fleet operations;
Proximity to consumer markets allows postponement of product customisation;
Vertical expertise to resolve day-to-day challenges.

Campus credentials

DHL pioneered the innovative campus approach in the Americas, where its extensive campus infrastructure today provides a one-day service to more than 75% of the US population.

B.The future will be those companies best able to rationalise acquisitions and integrate their distribution networks

While the immediate future of the generics market will see a high degree of organic growth from brand patent expiries mergers and acquisitions are likely to become increasingly prevalent. Over the last 15 years, this process has been seen within the branded pharmaceutical sector. Similarly generic manufacturers are developing scale, cost and new skill set advantages through an acquisition strategy

Consolidation and network rationalisation

In the last decade, the number of healthcare companies has demonstrably reduced across Europe. This has, in the main, been precipitated by an overall theme of rationalisation whereby m&a activity has reduced the number of key players within each sector.

For the supply chain, the impact of these movements is far-reaching. This acquisitonal trend has led to a raft of varied products, many of which are nearing obsolescence. Companies are increasingly operating with several systems and from multiple facilities across Europe, resulting in a lack of visibility in terms of where products are at any given time and a need to analyse the delivery of products to customers to avoid duplication of cost and resources.

Consequently, the more successful companies have or are undergoing, a strategic business evaluation that takes a fresh look at the existing network and provides a proposition that, in the main, moves away from the legacy-networks and introduces a strategic redesign that enables the creation of a supply chain for the new millennium.

Tangible benefits of network Redesign

The network redesign process can:

Reduce overall costs significantly;
Introduce new and fully integrated systems;
Provide better visibility of the supply chain across region ie Europe;
Improve management reporting efficiency through the creation of one system across the business, providing detailed information down to inventory level.

The management of inventory becomes key within this scenario. The deployment of inventory across this regional theatre ensures that individual country demand can be met. Enabling the stocking of product in line with country sales-team forecasting and providing agility of items across the supply chain, not only enhances customer service but also makes it possible to consolidate warehousing facilities down from circa 15 to just three or four. And the key benefits of this? Competitive advantage that provides speedy and accurate supply of products to customers, thus increasing loyalty.

The main considerations in this strategic review are the achievable benefits in terms of unit cost and efficiency. The rationalisation of multiple warehousing sites brings with it obvious savings by reducing costs in relation to:

Property (freehold and lease costs);
Servicing overheads management and infrastructure;
Labour costs – typically reduced by around 15%.

In addition to these fundamental savings, another result of rationalisation is that more volume can be handled through one facility bringing with it associated benefits in terms of throughput efficiencies, economies of scale and labour flexibility. Where traditionally three or four country warehouses have been shipping to one customer, now one warehouse dispatches one order to one customer. When considered as part of the bigger picture, transportation costs can be significantly reduced.

The Process

So, what is involved with network redesign? It requires a team of supply chain design experts to work as an extension of the customer’s business to engender a visible and open team-working process, gather information effectively about the healthcare company. In many instances, this will be the first time that much of this information has been collated and mapped and will allow a clear view of the organisation and its current practices, processes and areas for improvement.

The aim of the solution designers is to combine the legacy networks of the merged business and provide the right capacity and flexibility for future business growth, by introducing attributes that the current model could not cope with. A company such as DHL Exel Supply Chain, which has managed this area of redesign on many occasions across many business sectors around the globe, is able to transfer best practice and the critical operational input required.

Customer involvement is at the heart of this process. For many businesses it will be the first time a major project of this ilk has been undertaken and the conduit for yielding information is the customer’s ability to drive responsiveness from areas of the company traditionally outside the distribution activity.

It also provides the company with information that may not, up to now, have been readily available and collated in one place. This form of strategic review can be tailored or adapted to meet exacting customer demands. Significant investment is obviously required. Intelligent systems, such as Computer Aided Strategy and Tactics (CAST), highlight fundamental opportunities to enhance existing networks. By plotting scenarios from the ground up and working within an agreed budget, a model can be developed that reconciles with the required network. However, this, at the outset, does not necessarily provide all the budget savings that can be expected, although it can build specific fixed costs such as local land and labour expenditure into the picture.

It has already been highlighted that the market is acquisitional in nature and hence it is difficult to predict five years down the line any changes that may need to be factored into the model. In addition, the pace of change within the generic pharmaceutical market means that it becomes hard to reconcile anything more than general efficiencies created via inventory management within a business. However, the process can cope with complexity by allowing a number of dynamic scenarios to be mapped to changing business drivers.

The final network redesign provides a workable solution that can drive strategy. This may be through splitting the product portfolio, potentially by dividing high and low cost products. By identifying a different strategy for each business need and product demand, viable solutions can be arrived at that are cost favourable, good from a service standpoint and consistently deliver customer expectation.

So what are the benefits for the generics company? Primarily, it enhances the building of strong relationships with key customers and suppliers, providing major cost savings across the business. As an indication of the magnitude of this, average total savings for a project can be in the order of 8 % of total budget. These savings can be identified via the disposal of property-based assets, improved labour efficiency, network rationalisation (often accounting for up to 15% total savings) and, of course, a major reduction in transport operating costs through enhanced asset management.

This process is not without its pitfalls. As with any programme of change management, the final refining and rationalisation may take years to be achieved and many companies struggle to get there at all. The speed with which the benefits in terms of cost savings from any change programme are realised is crucial to gaining competitive advantage. However, DHL Exel Supply Chain can point to a number of examples where having created a strategy, “vision” has been turned into “reality”.

Conclusion

The generics pharmaceutical industry stands poised to further capitalise on the significant potential that has seen it outstripping its branded counterpart in terms of volume growth over the last few years. Within the generics pharmaceutical industry there is significant opportunity to unlock value, within the supply chain, through outsourcing. Strategically demand chain management will be leveraged to meet the changing requirements of the generics industry over the next few years. Two periods that have defined the generics market of the future are:

Pre 2005 – Capitalisation of the opportunities presented by the tranche of branded blockbuster patent expiries. Leveraging shared assets and the global infrastructure solutions of the prewholesale channel to quickly capture vital market share, speed to market and gain first mover advantage.
Post 2005 – As opportunities for organic growth slows, consolidation of an acquired network and rationalisation of multiple inventory holdings will move up the strategic agenda.

About DHL

DHL is the largest global logistics provider offering services to healthcare and life sciences companies. DHL has a range of services within global forwarding, supply chain, express parcel shipments and air, ocean and road freight.

DHL Exel Supply Chain’s Healthcare sector encompasses dedicated and shared-user solutions for the pharmaceutical, medical device and hospital supplies industries, with significant operations across the globe. Working with, amongst others, 19 of the top 20 global pharmaceutical companies, our healthcare services are integrated with DHL’s global freight management and load consolidation capabilities, allowing our customers to benefit from end-to-end supply chain management through a single point of contact.

DHL Exel Supply Chain has been involved in the logistics of clinical trial materials (ranging from medication and ancillaries to central lab services) for over 15 years and has built up a network of facilities to provide a truly global clinical trials logistics service.

DHL Exel Supply Chain
Solstice House
251 Midsummer Boulevard
Milton Keynes MK9 1EQ
Tel: +44 (0)1908 244000
Fax: +44 (0)1908 244100

Chris Tierney

Chris Tierney graduated in 1995 with a BSc in Medical Biochemistry and shortly after joined Exel’s International management training scheme. Chris has worked in operations, strategic marketing and product development. More recently Chris completed his MBA in 2003. Chris’s current role is Business Development Manager and has responsibility for global sales and strategic development of the clinical trials logistics offerings.

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