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The Current State of Pharmaceutical Logistics

DSV Market Monitors

Methodology

In cooperation with Supply Chain Media, DSV created a mindmap for pharmaceutical logistics with the aim of providing an integral overview of the issues currently relevant to this dynamic sector. The mindmap was distributed during the LogiPharma conference in Basel, Switzerland, on 8-10 April 2014.

With the objective of confirming the current state of the pharmaceutical industry in terms of the major supply chain issues as well as to prioritise its strategic requirements, 67 supply chain executives of large pharmaceutical companies were interviewed during the Basel conference. The results of the study were further interpreted, discussed and put into context by pharmaceutical supply chain experts.

Highlights

  • Supply chain visibility is considered the major challenge facing the industry. However, considering the remarkably low importance given to warehouse management systems and IT integration capabilities, the pharmaceutical industry is not (yet) looking to logistics service providers for solutions to this challenge.
  • In general, pharmaceutical supply chain professionals are satisfied with current logistics service levels. A clear exception to this is in the area of continuous improvement. Efficiency gains are not perceived to be passed on.
  • Packaging and labelling will be increasingly outsourced, as will invoicing and cash collection activities.
  • Loss of control and deteriorating service levels are the major fears when outsourcing or switching to a different logistics service provider.
  • Markets in Asia, the Middle East, Africa and Central & South America are expected to increasingly dominate the supply chain agenda.
  • When setting up logistics operations in new locations, the vast majority of respondents prefer an unknown local logistics provider with pharma expertise over a known logistics provider that has little or no local pharma operations. This relatively arm’s-length relationship with logistics service providers suggests that the pharmaceutical supply chain is complex but highly standardised.

Introduction

The volume of the global pharmaceutical market has more than doubled in the past ten years. By the end of 2016, the sales volume is forecasted to have risen to nearly € 942 billion. Despite increasing tendencies toward concentration the industry remains heavily segmented, a situation that is also clear from the high level of M&A activity in the sector. The patent rights for several widely used medicines are set to expire, meaning that a large portion of those manufacturers’ sales will shift to producers of generics.

As in most economic sectors, the pharmaceutical industry is also experiencing a geographic shift in its production locations and sales markets. Asia and South America in particular are becoming increasingly attractive markets. Not surprisingly, this survey reveals that those markets are regarded as the most challenging in supply-chain terms.

The current distribution structure in the European market leans heavily towards national warehouses, both centrally and regionally. Developing warehousing structures is a major focus area for the pharmaceutical industry and outsourcing to logistics service providers (LSPs) is on the increase. Cost reduction and greater visibility in the supply chain seem to be the main advantages of outsourcing logistics services.

Outsourcing is used more strategically as an ongoing part of a company’s overall business strategy. It allows pharmaceutical companies to establish consistency and efficiency across the international supply chain network. To maintain continuous growth in outsourced services from pharmaceutical companies, an LSP needs to safeguard the confidentiality of the proprietary knowledge, prove its reliability in services, offer continuous improvements and comply with the regulatory requirements. These elements are not only confirmed to be the main selection criteria for an LSP but also a consequence of the applicable GxP standards.

1. What do you expect to become the biggest challenges in your company’s supply chain in the coming 5 years?

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Visibility issues featured in almost three quarters of the respondents’ Top 3. For those companies that intensively deal with regulatory affairs, a proportionally large part expects this to become a serious challenge in the coming years. It is noteworthy that IT integration scores remarkably low considering the high score of supply chain visibility. Despite the fact that both issues are heavily interlinked, pharma supply chain professionals do not expect IT connectivity to pose a problem. Lastly, compared to similar studies in other industries, competitive pressure is ranked relatively low, being mentioned in only 21% of the Top 3 challenges.

There will be continual challenges and changes in patent-to-patient supply chains. Evolutions, together with the full effect of globalisation, have increased the vulnerability in the supply chain process, presenting suppliers, consumers and regulatory bodies with more risks and uncertainties.

Management’s ability to achieve a nearly risk-free environment is primarily enabled by visibility technology that introduces intelligence into every step of the healthcare supply chain. Insight into suppliers’ production rates and shipment lead times, in-house inventory, historical data and customer sales projections can drive efficiency benefits, reduce inventories and improve fulfilment rates. Furthermore, it facilitates decision-making and increases the awareness level to enable exceptions to be managed effectively.

2. Where do you foresee the biggest challenges in your supply chain in the coming 5 years?


Both Western Europe and the US are considered mature in terms of pharma logistics, with the least supply chain issues expected in the Nordic countries.

For growth, the pharmaceutical industry is looking to the emerging markets of China and Southeast Asia, the Middle East, South America and Eastern Europe. As these emerging nations become more affluent, demand is increasing for modern medical treatments and healthcare products. Life sciences companies who were previously reliant on the United States and Europe are moving into unfamiliar territories and cultures, and discovering the accompanying supply chain challenges.

The shift in pharmaceutical growth away from the established drivers towards high-potential ‘pharmerging‘ markets offers tremendous opportunities for pharmaceutical manufacturers who face pressures in more mature markets. However, pharma companies who target those new growth markets are also confronted with the challenge of a more unstable regulatory environment and a less developed logistics infrastructure.

3. When choosing a logistics service provider, which criteria do you find most important?


Consistent, reliable service levels are clearly paramount when selecting a logistics service provider. The runners-up, namely industry experience and safety & security, go hand-in-hand in the highly GxP-regulated pharmaceutical supply chain. There does not seem to be an outspoken preference for the other service attributes during the 3PL selection process. In the context of the substantial challenges expected in terms of supply chain visibility, the importance attributed to the warehouse management system seems disproportionally low.

Outsourcing is being used more strategically as an ongoing part of a company’s overall business strategy. It allows pharmaceutical companies to establish consistency and efficiency across the international supply chain network. To maintain momentum in outsourced services from pharmaceutical companies, an LSP needs to safeguard the confidentiality of the proprietary knowledge, prove its reliability in services, offer continuous improvements and comply with the regulatory requirements.

4. How satisfied are you currently with the above-mentioned service features?


The selection attributes are almost perfectly correlated with the level of satisfaction on each respective aspect. This suggests that, in general, pharmaceutical supply chain managers are quite capable of selecting and managing logistics service providers. The only exception to this is in the area of continuous improvement. Despite scoring just above average on selection criteria importance, satisfaction on cooperation with incumbent logistics service providers to achieve continuous improvement is remarkably low. This indicates a noticeable perception among supply chain professionals that logistics service providers are not passing on efficiency gains.

Innovation is the engine that improves efficiency, reduces costs and generates competitive advantage. Lowering costs is one of the main reasons for outsourcing and therefore pharmaceutical companies require LSPs to have a continuous focus on improvements. The risk is that, without innovation, LSPs will see their service offerings become commodities and will lose the ability to maintain long-term, profitable relationships.

LSPs that want to achieve growth and profitability typically rely on gaining market share via new pharmaceutical entrants in the outsourcing arena, or strengthening existing relationships with customers. Innovation and specialisation are key success factors for ambitious LSP’s in the pharmaceutical logistics market.

5. What do you consider the biggest advantage of outsourcing logistics services?


The three top-ranked reasons for outsourcing logistics predominantly featured cost motives. Outsourced transportation is perceived to represent more potential cost reductions than an outsourced warehousing operation. Viewed against the background of the high scores on supply chain visibility in the previous questions, its relatively low ranking here is surprising and might suggest pharmaceutical supply chain visibility is only being marginally facilitated by logistics service providers’ systems.

Several factors are at play in terms of the pressure on pharmaceutical companies to reduce costs: the rise of generics, the fall of the blockbuster model and a sharp increase in research and development (R&D) costs. Outsourced logistics can be used to balance some of these challenges. Utilising a partner who provides expertise in logistic processes can result in sustainable lower cost levels, faster time-to-market. Lastly the potential for optimization through supply chain visibility is enormous but pharmaceutical companies should increasingly turn to LSP’s to provide this visibility.

6. When starting up a new logistics operation or replacing a current one, which 3PL would you prefer?

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An overwhelming majority of respondents would trade in an existing relationship with a logistics service provider for an unfamiliar pharmaceutical specialist if the existing LSP partner did not have local pharma experience.

The relative ease with which respondents would opt for an unknown supplier suggests that, despite the complexity of regulation and quality procedures, pharma logistics processes are considered relatively standardised.

7. Which of the following activities do you foresee being outsourced or increasingly outsourced in the near future?

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In the projection of the type of services that will increasingly be outsourced, invoicing & cash collection scores notably high alongside the ‘usual’ services of packaging and labelling, which is interesting considering the purely administrative and financial nature of the process. It also scores significantly higher than product assembly and product release, although that might be a consequence of companies preferring to remain in control of the release process and product assembly due to the risks accompanied with those services.

8. What are, or what would be, reasons for you to insource your logistics activities?

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This last question provides insight into the main concerns when outsourcing a logistics operation. A loss of control over the process and deteriorating service levels are major perceived hurdles when starting with a logistics service provider or switching to a different one. Only a relatively small group considers logistics a core competence or believes it can do a better job than logistics service providers, which suggests that the majority of pharmaceutical companies benefit from logistics outsourcing.

Several reasons can be applicable for in-sourcing, although security risks and service level commitments not being realised are the most common ones. Although diminishing control due to supply-chain security risk in an outsourced environment is a very legitimate reason for in-sourcing, LSPs are expected to improve their performance in this respect, driven both by customer requirements and by regulations.

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