The pharmaceutical industry is facing great challenges caused by an aging population, the increasing cost of healthcare, pressure from governments to lower the price of drugs, barriers to entry in emerging markets and the wider adoption of generic drugs. These are just some of the many challenges creating pressure on the profit margin of pharmaceutical firms. Increased costs of R&D and a decreased number of approved drugs also shows that the majority of medicine which is easy to discover has already been found.
Even though the pharmaceutical industry is expected to grow between 3 to 6% annually and reach $1 trillion in value by 2016, major changes have to be made to sustain and increase the growth in the sector. To survive and succeed in the changed environment of the pharmaceutical industry, drug makers need to acknowledge the vital role of supply chain management and focus on improving their supply chain processes.
Lack of attention
According to the Chief Supply Chain Officer Report conducted in 2014, only 39% of pharmaceutical respondents see the supply chain as an equally important part of business success as, for example, R&D, sales and marketing. In comparison, 68% of consumer packaged goods respondents understand the importance of supply chain management. According to McKinsey research, supply chain accounts for almost 25% of pharmaceutical costs. It amounts to about $230 billion annually, which means even the slightest improvement along the supply chain could free up capital needed for investment in R&D or other business areas.
Top ten challenges
According to a recent survey conducted by Privett and Gonsalvez, the ten main challenges faced by pharmaceutical supply chains are: inventory management, lack of coordination, human resource dependency, order management, absent demand information, expiration, temperature control, warehouse management and shipment visibility. According to the same study, lack of coordination in the global pharmaceutical delivery supply chains is the root problem affecting all other issues.
According to PwC, the pharmaceutical and biotech industries are under serious pressure as development timelines are growing, and consumers are becoming more aware of the available care options. Moreover, regulatory approval for new medicine has become stricter, which, as a result, creates a slowdown in the industry. According to Marcus Ehrhardt, Robert Hutchens, and Susan Higgins, another important factor to take into account is the fact that patent protection, which allowed companies to keep the prices and margins high, is about to expire. Out of 20 drugs which brought the most profit, 18 have already lost patent protection. In other words, drugs which brought their companies $400 billion in revenue are open to generic competition.
So what can be done?
The majority of pharmaceutical supply chains are known to be set up to produce high volumes of drugs in factories which lack agility. According to M. Ehrhardt, R. Hutchens, and S. Higgins, the aim of supply chains was to meet regulatory requirements and avoid stock-outs, even if that meant keeping high levels of stock and then writing-off a significant amount of expired inventory. In order to avoid such losses and ensure their revenue and profit growth, pharmaceutical companies have to transform and reinvent their supply chain. Some changes are already in progress. For example, efficiency is being increased through rationalization and outsourcing of non-core activities.
The future pharmaceutical supply chain will have to be redesigned to compete with low priced generic drugs, handle higher complexity of new sales channels, and take advantage of higher margins for critical drugs with low demand. To establish such a supply chain, a new set of capabilities will be needed. R&D, marketing and sales used to be the most important functions for pharmaceutical companies. However, currently, operational capabilities and efficient cost management are the critical skills needed to succeed. According to M. Ehrhardt, R. Hutchens, and S. Higgins, these five strategic steps can enable pharmaceutical companies to develop them:
- Improve planning capabilities. For example, prepare for the launch of a new product by forecasting the expected demand and plan the manufacturing capacity accordingly.
- Reconfigure the supply chain footprint. The average utilization level of assets is below 40%. This has to be increased by producing accurate forecasts of demand, production and logistics costs and lead time trade-offs.
- Make product design and packaging more flexible.
- Adopt tailored business streams. Eliminate the one-size-fits-all approach in supply chain management and design individual supply chains suited for each product, customer group and market.
- Create a network of third-party suppliers. By outsourcing their non-core activities and production of drugs which have low demand, companies are able to adjust to demand fluctuation without significant losses.
Where to start?
Almost all of the above mentioned strategic steps can be implemented significantly faster and much more cost effectively by utilizing advanced analytics software. A good illustration of this can be seen in the case of CPL Pharma Lager und Vertrieb GmbH, which provides customized logistics services for the healthcare and pharmaceutical industry. After implementing an advanced optimization software solution, the company was able to significantly increase its planning reliability due to precise demand forecasts. The responsiveness of CPL’s supply chain has also increased, as the decrease in planning efforts freed up time for other essential activities, like assortment management and data maintenance.
The challenges faced by the pharmaceutical industry cannot be ignored and significant changes have to be made in order to succeed in this changed environment. The importance of efficient and effective supply chain management must be acknowledged. After all, as Natalie Privett and David Gonsalvez once said: “heroes may win battles, but it is capable supply chains that win wars (against disease)”.
What do you think the future holds for the pharmaceutical supply chain?