The Strategic Importance of Supply Chain Management in Asia Pacific

Historically, pharmaceutical companies have not considered supply chain management to be of strategic value and have focused more on world-class research and development (R&D), and sales and marketing. Therefore, the pharmaceutical industry is lagging most industries in terms of adoption of best practices related to supply chain management. Examples are the outsourcing of manufacturing activities to contract manufacturers and the outsourcing of logistics activities to third party logistics providers. It is also apparent in the slow rate of adoption of concepts such as sales and operations planning (S&OP) and collaborative planning and forecasting (CPFR). The only exception would be the adoption of RFID for tracking and tracking of products through the supply chain. Although it is still mostly in its early days of conceptual testing and running pilot studies, the developments in the pharmaceutical industry are ahead of many other industries. However, pharmaceutical companies are facing unprecedented challenges to their business models that place greater emphasis on the capabilities of their supply chains. Pharmaceutical companies that realize this change and become experts in the management of their supply chains would gain a competitive advantage.

Major Challenges

Many of the large pharmaceutical companies' biggest blockbusters will soon lose their patent protection. Deloitte, a consultancy, estimates that $55 billion worth of products will go off patent in 2009 and will then face competition. At the same time, pharmaceutical companies need to defend patents in costly legal battles against an increasingly confident generics industry.

As generics firms evolve from mere copycats into innovators in their own right, many such firms such as Israel's Teva, India's Ranbaxy and Dr Reddy's Laboratories are vigorously challenging patents. The traditional way out for the established players would be to invent a stream of new 'blockbusters' to replace the ones going off patent. But the new drugs pipelines at big firms have run dry. A report from Sanford Bernstein, a US investment firm, indicates that the global pharmaceutical industry saw 24 new drugs approved by the US Food and Drug Administration in 1998 on the back of $27 billion spent on research and development.

In 2007, the industry spent $64 billion, but only 13 new drugs were approved by the regulator.

Pharmaceutical companies are addressing these challenges with a number of strategic initiatives:

Expansion into production of generics

To hedge risks in prescription drugs, some companies have started to grow a generics division internally to compete head-on with the generics companies.

Convergence

Some pharmaceutical companies are acquiring companies that produce medical devices or diagnostics equipment, a move described as 'convergence'. Whether such deals go beyond hedging risks in their traditional businesses and lead to innovation and new opportunities for growth remains to be seen.

Collaboration with biotech companies with a view to increase new products in the R&D pipeline

A large number of big pharmaceutical companies are moving into biotechnology in order to try to fill their product pipelines with new products.



Companies are also looking for ways to reduce costs in all parts of the pharmaceutical supply chain. So far much of the focus has been on outsourcing drug manufacturing to lower cost countries, mainly in Asia. However, to see supply chain management purely as a tactical way to reduce cost is underutilizing the benefits and potential improvements a strategic approach to supply chain management could bring.

Implications for the Supply Chain

The pharmaceutical supply chain is currently geared to large-scale production of blockbusters in a few plants that cover the worldwide demand, with most of these plants located in the West. As the number of products that comes off patent continues to grow, future products are likely become more personalized and customized to certain segments of the population. Together with the trend of demand shifting from mature markets in the US and Europe to emerging markets in Asia Pacific, the economies of scale in these supply chains would diminish.

This means the supply chains would have to expand geographically. Pharmaceutical companies would have to learn how to manufacture an increasingly diverse range of products in an increasingly challenging environment, drawing on resources that are much more geographically scattered, and it would have to do so just as manufacturing costs come under much greater pressure. It would require a shift in supply chain configuration with a growing number of products being produced 'made-to-order' rather than 'made-to-stock', using lean manufacturing techniques learned from other industries such as the automotive industry.

However, since many pharmaceutical companies lack the skills required to manage such supply chain operations and perform specialist manufacturing, they may decide to outsource most of their production to contract manufacturers. That, in turn, would require much greater collaboration. Instead of treating such firms as 'toll manufacturers', they would need to treat them as strategic partners for the duration of the product lifecycle. They also need to work closely with their customers, suppliers and logistics service providers, to create supply chains that could be rapidly reconfigured as market conditions change.

The distribution process will undergo equally major changes. The industry has traditionally relied on wholesalers to distribute its products. However, the proliferation of inexpensive overnight courier services has made it feasible to ship medicines directly to pharmacies in certain markets, thereby enabling many companies to reduce their inventory, control product pilferage more effectively, and lower their distribution costs. The distribution channels that pharmaceutical companies use to reach the market are also beginning to fragment, as a growing number of companies start to provide the support services tailored to the needs of patients taking specific therapies. In the US for example, some firms now offer drug dispensing packages that include patient education, monitoring and counseling, drug administration training, nutritional advice, etc.

In the future, most pharmaceutical companies would use this model not just for distributing specialty medicines but also for distributing an increasingly wide range of products for common diseases, thereby creating a more intimate relationship with patients.

The role of the conventional 'middle man' would thus decline, although some wholesalers may decide to expand their scope by providing such support services as well. This means that in the future the supply chain would become responsible for commissioning those services and ensuring that they are delivered to standards that meet the manufacturer's specifications. Such a transition will ultimately enable the supply chain to become a means of revenue generation and competitive differentiation, rather than a cost center.

Achieving Supply Chain Excellence

The concept of supply chain management is now over a decade old. Pharmaceutical companies do not have to reinvent the wheel and can benefit from the lessons learned in other industries that have already adopted supply chain optimization techniques to great success. Some of the core principles to observe are:

Focusing on end-to-end processes rather than functions such as purchasing, logistics, etc,

Developing the right collaborative models with suppliers and customers, and

Using metrics and benchmarking to drive the performance of the supply chain.

In order to manage the complexities of a supply chain, many companies have found it beneficial to use a structured approach, for example, by using a standard framework such as the Supply Chain Operations Reference model (SCOR). SCOR has been developed and endorsed by the Supply-Chain Council (SCC), an independent not-for-profit corporation, as the cross-industry standard for supply-chain management. By providing a complete set of supply chain performance metrics, industry best practices, and a standard way of mapping supply chain processes, the SCOR model allows companies to perform very thorough fact-based analyses of all aspects of their current supply chain. As it has been evaluated and tested by dozens of companies, the SCOR model eliminates all of the challenges associated with obtaining consensus on the definition, scope, and configuration of a given supply chain, and therefore provides companies an excellent way to improve their supply chains.

Supply chain excellence has become a key driver of value and competitiveness in most industries worldwide. Although historically a laggard in terms of adoption of supply chain best practices, pharmaceutical companies would have to become better in supply chain management in order to thrive in the turbulent times their industry is facing. Companies that realize this change first and become experts in managing their supply chains will gain a competitive advantage.