Supply Chain Management: Combating Counterfeits

The pharmaceuticals drug supply chain from the manufacturer to the pharmacy usually includes several intermediaries such as wholesalers and distributors. This opens the supply chain to the risk of counterfeit drugs and encourages parallel trade, leading to lost sales for the manufacturer. The problem is more prevalent in developing countries with weak regulatory regimes. It is estimated that counterfeit drugs accounted for about 10 percent of the global pharmaceutical market in 2007.

Major Sources

A large proportion of the world’s counterfeit medicines originate in Asia, where the production of substandard and fake drugs is a vast and underreported problem. The US Food and Drug Administration (FDA) has estimated that in parts of Asia, fake drugs account for more than 50 percent of medicinal sales and kill several thousand people every year.

China is a production center of such drugs. In 2005, Chinese local industry and commerce administration departments uncovered a number of cases involving the production and selling of fake medicine. According to the survey studying 6,500 companies in twelve provinces across China, 33 business licenses were revoked and 67,000 boxes of fake medicine were seized.

According to World Health Organization (WHO) statistics, India accounts for one-third of counterfeit drugs produced worldwide. In Australia, 18 companies are facing legal actions for advertising false health-benefit products on the web, following a worldwide internet sweep by the Australian Competition and Consumer Commission in 2006, for false claims about health products.

Counterfeit drugs have been closely related to the global public health problem causing death, disability and injury. Factors leading to counterfeiting can be summarized in Figure 1. The drugs are locally manufactured by illegal manufacturers or have been illegally imported, and are subsequently distributed to illegal markets before reaching end consumers.

Therefore, pharmaceutical production and distribution are two main areas where national drug regulatory authorities need to focus their attention. Nevertheless, governments are often reluctant to publicize problems with the quality of the drug supply in their respective countries – reflected in the lack of action taken.

There are also other factors that contribute to the proliferation of counterfeiting. Firstly, the continuous deterioration of economic conditions makes pharmaceutical products unaffordable to certain consumers. Secondly, counterfeiting is worsened by the lack of compliance to regulations that prohibit the selling of drugs outside pharmacies and authorized outlets. For instance, the violation of regulations that require products to be sold with a prescription contributes to the proliferation of counterfeit drugs.

Third, the imposition of mild or inadequate penalties, the price differences in pharmaceutical products and the lack of public awareness all open the door to counterfeit products. Access to medicines through the internet has also increased cross-border trade and has presented another opportunity for counterfeits.

The Toxic Pipeline

A series of cases have been reported where poisonous pharmaceutical ingredients have flowed into the global market through traders and middlemen that formed a supply chain stretching from small factories in rural China to consumers around the world.

One such example involved the syrupy poison diethylene glycol which led to several hundred deaths in Panama. Forty-six barrels of the toxic syrup arrived via a poison pipeline stretching halfway around the world. Through shipping records and interviews with government officials, The New York Times traced this pipeline from the Panamanian port of Colón, back through trading companies in Barcelona, Spain, and Beijing, to its beginning near the Yangtze Delta.

The counterfeit glycerin passed through three trading companies on three continents, yet not one of them tested the syrup to confirm what was stated on the label. Along the way, a certificate falsely attesting to the purity of the shipment was repeatedly altered, eliminating the name of the manufacturer and previous owner. As a result, traders bought the syrup without knowing where it came from, or who manufactured it.

There are however, potential supply chain oriented solutions to deal with counterfeit drugs:

• National Coordination

In order to contain the global counterfeiting scourge, it is necessary to address those dynamics which encourage the manufacture and supply of counterfeit medicines. This requires both national and regional joint efforts, as well as the support from international organizations such as WHO.

• Strategic Collaboration

For major suspected drug markets within a region, a joint effort of the respective National Agency of Drug and Food Control (NADFC) and law enforcement authorities should strengthen the inspection and investigation on targeted operations to ensure compliance to FDA cGMP (current Good Manufacturing Practice). Key players in the pharmaceutical supply chain, such as manufacturers or importers, wholesalers and retailers, as well as health professionals, also hold critical roles and responsibilities.

Manufacturers or importers should develop measures such as the introduction of security systems including the use of security tags, securing stocks of medicines and packaging materials, regularly surveying drug distribution channels, and promoting drugs in a way that results in demands that can be met by their own supply system.

Wholesalers and retailers should purchase drugs from legitimate sources, employing suitably qualified persons – preferably pharmacists, and report to NADFC any suspected counterfeit drugs in the national distribution channels.

Leveraging on Technology

Several technologies have been adopted to combat the drug counterfeit problem. Radio Frequency Identification (RFID) uses electronic devices to track and identify pharmaceutical products by assigning individual serial numbers to the containers holding each product. The FDA is working towards an Electronic pedigree (ePedigree) system to track drugs from factory to pharmacy.

This technology may prevent the diversion or counterfeiting of drugs by allowing wholesalers and pharmacists to determine the identity and dosage of individual products. Moreover, techniques such as Raman spectroscopy and Energy Dispersive X-Ray Diffraction (EDXRD) can be used to discover counterfeit drugs that are inside their packaging.

According to the Singapore National RFID Centre, label manufacturing and RFID converting technology has reached another frontier with the development of an RFID Label Converting machine. The machine targets typical applications in supply chain, consumer packaging, pharmaceuticals and baggage tracking. It provides a low cost method of converting a RFID tag for embedding into a paper label.

While technology can be used to identify and track authentic products, the larger threat to the pharmaceutical supply chain is the secondary market – small, loosely regulated wholesalers and suppliers whose products occasionally enter the mass market. These drugs are sometimes used to fill in the gaps during an inventory shortage and can be priced significantly lower.

Many counterfeit drugs have come through these distributors, which are typically statelicensed entities that are supposed have been inspected by the pharmacy board. Nevertheless, a proper screening and business relationship building process is usually lacking between these distributors and their respective manufacturers, which has led to questions being raised about product legitimacy.

Verification Through Screening In the white paper “The New Step by Step Approach to Client Screening”, Rupert de Ruig, MD of Dow Jones Risk & Compliance, examines how anti-money laundering and compliance officers and industry vendors must embrace a “one step at a time” philosophy as a practical solution to the challenges posed by commercial watch list screening. Anti-money laundering (AML) screening involves the systematic examination of existing and prospective client identity details against a commercial database of persons and entities.

This paper proposes how a risk-based single step approach can be the key to managing costs whilst enhancing effectiveness. By applying this approach to their client and transaction screening, regulated firms can reduce costs while increasing the effectiveness of the process. In a similar manner, targeted risk-based screening can be applied to and beneficial in dealing with the counterfeit drug problem. The case on McKesson illustrates that a secure and healthy relationship between pharmaceutical wholesalers and manufacturers is critical. Since 2001, the company only buys drugs directly from pharmaceutical manufacturers. Of the several hundred million products that go through its system every day, less than one percent is from the secondary market.

The company has an active business relationship with 10 alternative-source vendors. It initiates a rigorous due diligence process, including background and security checks as well as site visits, before it will purchase products from these vendors.

In the face of the drug counterfeit problem in the global supply chain, it may be feasible to adopt Supply Chain Management (SCM) tools and best practices, such as the Supply-Chain Operations Reference (SCOR) model. The model allows an organization to manage its supply chain with integrated planning and lean management. This is to improve global operations by reducing waste vertically and horizontally throughout the supply network.

This model allows companies to measure the supply chain network horizontally, from suppliers’ suppliers to customers’ customers. It also allows vertical measurement with cascading techniques from organizational strategic level to implementation level at the bottom.

In the white paper “The New Step by Step Approach to Client Screening”, Rupert de Ruig, MD of Dow Jones Risk & Compliance, examines how anti-money laundering and compliance officers and industry vendors must embrace a “one step at a time” philosophy as a practical solution to the challenges posed by commercial watch list screening. Anti-money laundering (AML) screening involves the systematic examination of existing and prospective client identity details against a commercial database of persons and entities.

This paper proposes how a risk-based single step approach can be the key to managing costs whilst enhancing effectiveness. By applying this approach to their client and transaction screening, regulated firms can reduce costs while increasing the effectiveness of the process. In a similar manner, targeted risk-based screening can be applied to and beneficial in dealing with the counterfeit drug problem. The case on McKesson illustrates that a secure and healthy relationship between pharmaceutical wholesalers and manufacturers is critical. Since 2001, the company only buys drugs directly from pharmaceutical manufacturers. Of the several hundred million products that go through its system every day, less than one percent is from the secondary market.

The company has an active business relationship with 10 alternative-source vendors. It initiates a rigorous due diligence process, including background and security checks as well as site visits, before it will purchase products from these vendors.

In the face of the drug counterfeit problem in the global supply chain, it may be feasible to adopt Supply Chain Management (SCM) tools and best practices, such as the Supply-Chain Operations Reference (SCOR) model. The model allows an organization to manage its supply chain with integrated planning and lean management. This is to improve global operations by reducing waste vertically and horizontally throughout the supply network.

This model allows companies to measure the supply chain network horizontally, from suppliers’ suppliers to customers’ customers. It also allows vertical measurement with cascading techniques from organizational strategic level to implementation level at the bottom.

Supporting Decision Making

SCOR is structured around five core processes of Plan, Source, Make, Delivery and Return. The model outlines the process for establishing, maintaining, and enforcing decision support criteria for supply chain planning which then translates into rules for conducting business, ie, developing and maintaining customer and channel performance standards of an entire supply chain. For example, determining service levels based on requirements by supply chain stakeholders/trading partners or particular regulations in that industry.

Business rules align Plan process policies with business strategy, goals, and objectives of the organization, making sure that they are compliant with related regulations, such as FDA cGMP for pharmaceutical products.

The model also specifies metrics and best practices to monitor and maximize the efficiency of such enabler processes. For example, it measures the cost and cycle time required to manage business rules for Plan processes and suggests best practices to integrate business and supply-chain planning processes.

Security and Collaboration

Figure 2 presents the five performance attributes with ten metrics at Level 1 of the model. Security is closely associated with each metric. As an enabler, security contains good practices that protect continuity of supply, increase supply chain reliability, and protect assets from miscellaneous risk.

However, if its integration is not designed and implemented efficiently, it may result in the delay of supply and an increase of lead time and cost. Hence, it is important to adopt wellestablished supply chain management methodologies to help in systematic security design. The model facilitates the design and deployment of security management through topdown mappings on activities at all levels of a supply chain. As illustrated in Figure 3, it starts with Geographic Mapping, Level 1 & 2 Mapping at the strategic and configuration level, followed by Level 3 & 4 Mapping at process element and implementation levels. Through systematic mappings, the model aids in:

• Identification of vulnerable locations or processes or elements

• Better integration between supply chain processes and security processes

• Ease of responsibility and resource allocation

In addition, the model provides the foundation and tool for secure collaboration as it sets a common language for communication across companies and industries and requests clear understanding of processes from suppliers and customers (Figure 4). Having laid out the strategic measures to integrate security into supply chain performance, the model also links security initiatives with bottom line operations at the shop floor (Figure 5).

Supply Chain Risk Management (SCRM) is defined as the systematic identification, assessment and mitigation of potential disruptions in supply chain networks with the objective to reduce their negative impact on the supply chain network’s performance. Figure 6 illustrates a three-phase approach for SCRM, containing steps to identify, assess and mitigate potential risks.

Risk Management

In general, different kinds of risks in the supply chain network can be categorized in Figure 7. Multiple risks may be embedded in the core processes Source, Make and Deliver, as well as global risks caused by terrorism or economic crises, etc.

SCOR recommends tools such as Geographic Mapping to identify the geographical location for the origin of risks and potential methods to investigate the root causes. With respect to risk assessment, companies are usually concerned about the frequency of risk occurrence, the impact of risks, and where the greatest risk may exist. The assessment grid shown in Figure 8 is a helpful tool for decision making on such issues. The vertical axis of the grid measures the probability that the event will occur, while the horizontal axis measures the consequences on the organization if the event occurs.

To estimate the frequency of the event occurring, historical data may be used if available. Alternatively an organization can use a subjective likelihood, or degree of belief based on the opinions of experts. Impact can be measured directly, for example in terms of dollars; or on a scale from zero to one with zero representing little consequence, 0.5 indicating moderate consequence, and one signifying a negative consequence. Methods for measuring impact include “what-if” simulations, financial models, opinions from a team of experts, or other metrics.

The model recommends that risks should first be controlled and monitored, and followed up with mitigation plans to decrease the likelihood or impact of the risks. In addition to strategic recommendations, the model also proposes statistical analysis for risk monitoring. For example, box plots are effective in monitoring suppliers’ risks, by plotting delivery performance of various suppliers, as displayed in Figure 9.

Similar to the evaluation and implementation of other SCOR processes, performance metrics and best practices have been established for SCRM. Metrics are designed to measure the probability, physical and monetary impact of risk events, the total cost of executing the mitigation plan, as well as the degree of residual risk that might exist after mitigation. Two examples of best practices for SCRM are:

• Configuring the supply chain network

This practice guides the design of the supply chain network based on a comprehensive risk evaluation pertaining to factors such as node locations, transportation routes, etc. This practice relies on the information collected through risk identification and risk assessment processes to determine nodes that are at a high risk due to the location of the node. Location specific risks can include tactical strike risks, single point of failure risks, etc. In regard to counterfeit drugs, a thorough understanding of manufacturing sites and distribution paths of its supply chain network is vital to address the problem at an international level.

• Configuring supply chain information

The second practice involves information sharing with partners as well as internal locations. This helps all parties to be quickly informed of a real or potential problem and to respond appropriately to minimize the impact. Indeed, information and communication are of paramount importance in combating counterfeit drugs. As shown in the Panama case, the toxic syrup traveled across borders with several nations and cities involved. Although the lack of reliable information was the root cause of this case, the tragedy should also be attributed to insufficient information being disseminated to educate consumers and health professionals.

FDA plans to increase dissemination of the public service announcements (PSAs) and counterfeit drug messages through updates and postings of relevant information on the counterfeit drug webpage. The organization will continue to work with the National Health Council (NHC) and pharmaceutical organizations to finalize educational messages and develop a dissemination strategy for pharmacists as well as the general public. Effectiveness in combating counterfeit medicine requires collaboration and coordination among stakeholders in each country, as well as between member countries and partner organizations.

At the same time, efficient tools for global supply chain management and monitoring are needed. The SCOR model provides a systematic framework, detailed guidelines on procedures, performance measurements and best practices to manage the global pharmaceutical supply chains. It aims to achieve end-to-end visibility and mitigate potential risks within the supply network.