COVER STORY SUPPLY CHAIN EFFECTIVENESS: KEY TO PHARMA PROFITABILITY To survive and stay profitable, pharma companies will need to restructure their supply chain design, build innovation and stability into the organisation’s culture BY PALLAB DE, ARJOON ROY, ABHISEK KUMAR 1 present the pharma market in India is ap- | the 12 months ending July 2010 However, this proximately US$2266 billion and expected to __p’sture is now changing, grow by 14.4 per cent to reach USS 27 billion Generics aregoingto dominate themarket while in2016:Thetop 10companiesmakeupformore | patent-products are likely to constitute 10 per cent than a third of the market. The Indian pharma in- | of the pie til 2015. PricewaterhouseCoopers and dustry ishighly fragmented withabout24,000 play- | Evaluate Pharma estimate that from 2012 to 2018, ers (820 in the organised sector. Globally, the In- | nearly $150 billion of profit will be lost to generic dian pharma market (IPM) is ranked 3rd largest in drugs. With this impending loss of revenue, phar- volume terms and 10th largest in value terms. ‘maceutical companies face a challenge. Not only ‘The pharmaceutical industry had enjoyed high | must supply chain leaders make their supply chains gross margin and patent protection for years to- | more effective, they must also improve the effec ESERIES gether and there had been little need to balance | tiveness of research and development (RED) spend. falabDsbeweuve costs, inventory and customer service. Henceless ing, With fewer new products successfully navigat torogrnentnaet focus was given to improve operational efficiency | ingthe drug approval process, and more drugs leav Kumars _and supply chain effectiveness. Most of thetop 10 | ing'patent protection’, the pharmaceutical compa cn players had growth rates of over 18 per cent for | nies’ market is becoming more competitive. Effec:COVER STORY tive RED spending has always been a critical part ‘of a successful pharmaceutical company. ‘The first decade of the pharmaceutical supply chain was based on molecule discovery. The his- toric focus of the pharmaceutical supply chain was building a strong personalised relationship with the doctor and improving time to market. for new drugs. Over the last decade, the requirements and restrictions for the pharmaceutical supply chain have become @ more complex system of hospital, provider and physician networks. As a result, the channel through which pharmaceutical sales occur has become more complex with an increasing need to develop improved supply chain capabilities. Pharmaceutical production is getting more complex as companies expand their portfolios in [0 suescmae 10 WOIAN MANAGEMENT StS WN 70 87007 REVENUE ($ bn) S a s » 8 8 o ‘ 5 ° 705 m2 ie INDIAN MANAGEMENT. AUGUST 2014 | 19COVER STORY 12-month growth rate ending July’ 2010 REVENUE IVUS 4M) i A 1% 276.9 Ranbaxy meaeae 155% (112545) 5k ha 19% (44587) Piramal Healthcare | 18.6% (631.18) Son Phar: ET 25.7% (600.5) Tydus cada 28.1% (436.40) ‘kon Labs 233% (27648) fe ini 236% (19259) 37.20% ‘Maniind Pharma fae) Abbott 25% (189.07) order to align to rapidly changing markets. The in- dustry’s current supply chain model will not beable ‘to meet these challenges forever. There is an ur- ‘gent need to develop new capabilities and ways of working to transform the entire value chain on every front from speed, efficiency, flexibility to re- liability. To survive and earn profit. moving for- ‘ward, companies will need to reconsider their sup. ply chain design and build both innovation and sta. bility into the company culture. ‘The pharma industry can learn much from FMCG ‘and other industries that have developed efficient and effective supply chains. Inventory holding for a pharma company is about 258 days whereas it is | about 72 days fora FMCG company. A typical phar maceutical manufacturer has a lead time of about | 150 days to deliver to distribution centers out of a formulation and packaging plant whereas the lead | time is about 5 days for a FMCG company. Product obsolescence is 3 per cent in pharma but itis only 0.5 per cent in FMCG. FMCG companies linked their supply chain strat- egy to their business strategy. They have developed strong and responsive supply chain. Their capabil- ities in these areas have become sustainable source of competitive advantage, delivering superior ser- vice and flexibility at dramatically lower cost. Pharmaceutical companies have historically high cash-to-cash (C2C) values in the range of 200 0.250 days. Despite large investments in Enterprise Resource Planning (ERP) and Advanced Planning | Systems (ARP), cash-to-cash values have gone up, not down, over the past decade. The pharmaceuti cal industry has long been a laggard in the use of new techniques and technologies to manage in | ventories. In the world of high gross margins and ‘global expansions, thas just not mattered as much, Although, inventory is only one of the three com- ponents of C2¢; along with Payables and Receiv- | ables, each of the three levers plays a large role in || the overall movement of the C2C value. Companies in FMCG, metal, mining, automotive, So tive in manufacturing areas of the Supply Chain quite some time back and achieved phenomenal re- sults to reduce the conversion costand all wastages. With continuous drive on operations excellence, these companies were successful in bringing down their OEE (Overall Equipment Effectiveness) to 70 ‘to 80 per cent range. These were achioved through reduction of downtime, setup time and improve- ‘ment of performance rate, Pharma companies had | litte focus in these areas and their OEE hovered Inventory (days) Manufacturing Obsolescence mee lead time (days) (% of sales) 20 4 au 150, | 3 z | 08 e 100 z | = * a : 0 + 0 — oe _ Pharma FMCG Pharma FMCG Parma FMCG | DIAN MANAGEMENT — AUGUST 2014around 40 1050 per cent. High downtime, setup time and low performance rate leads to many other prob. lems across the supply chain such as high inven- ‘tory of raw materials, finished goods, low utilisa- ‘tion of manpower late delivery product obsolescence. ‘Manpower cost fora typical pharma company s about 1B per cent of their total cost which is very high as compared to other manufacturing industries where it is 8to 10 per cent. By focusing on operations ef- ficiency improvement, pharma companies can be- ‘come lean and agile to respond to changing de- ‘mands of market. FMCG manufacturers build their production plans on the basis of point of sale information from their retail customers. So far the healthcare sector hhas only managed it in pockets. In order to scale in 4 cost-effective way, these pockets must. he con- nected. In fact, because these efforts are not con- sistent or global, they may actually raise the cost ‘and complexity ofthe global healthcare supply chain by spawning incompatible requirements and sys~ tems.To build cost-effective global interconnected: ness, the healthcare industry could align around a single set of global standards that support data in: ‘terchange, processes and capabilities required to cost effectively achieve the kinds of benefits. Pharma companies have to design supply chain suitable for its own product, market, and customer groups with appropriate segmentation like high vol- ‘ume, high margin, genfericand patented drugs. Post- ponement strategies will reduce overall inventory lev ls and SKU complexity and will add flexibility to product design and packaging. Manufacturing plants need to be restructured into most efficient and eco nomical configuration for deliv. xing mature products and in- novative drugs more efficiently and with high responsiveness. AMS ‘Understanding the supply chain trade-offs and striking Aufomote therightbalance between them Chemical is critical for managing the Consumer products performance of supply chain. Food andbeverage Key performance indicators Harddisk dives ‘mustbe identified and aligned —_ Hitechand electronics ‘with the business strategy.Tar- Retail Ret setting has to be done —_Phamaceatcal against industry benchmarks. | Understanding waste in all its forms, identifying | ‘them and implementing actions toeliminatethem | will give an edge in performance management. | On technology front, pharma market leaders | have started using new technologies to track and COVER STORY Cash-to-cash cycle (days) for pharma MNCs a Das of cehales Ds o ntoy dap of aes 207 Gy EH Ully Co. Merck Ca, Inc Pe Inc soo | so | 400 300 | 2» 100 o Abott Lab ‘Amgen ic. 500 2005; 2102011 200 300 | mbt Lab m Amgen nc. ME Lily & Co Mer Co, ne Cash-to-Cash Cycle (days) for other industries Cs ce trace product movement, to check counterfeiting and analyse demand. Technologies that are widely used for fore- casting and replenishment are 2D Bar Codes, Radio Frequency 5 Identification (RFID), Digital B ‘Mass Serialization (DMSIDig- 179 ital Mass Encryption (DME) and Data analytics. Disciplined business planning processes have to be deployed to support the company's portfo- lio management strategy and product transition, plans. Daily management team involving sales, marketing, and finance functions is required to gen- INDIAN MANAGEMENT AUGUST 2014 2COVER STORY Supply chain optimisation — framework for pharma companies Environment, employees and communities ‘erate a forecast for individual drugs and family of drugs. Quarterly, monthly and daily plan has to be prepared as per business plan for the year us- ing a mix of forecast based (for mature products) and replenishment based model (for newly devel- oped drugs). Pharma companies may adopt collaborative a proach to logistics management by engaging with specialised pharmaceutical LSPs (Logistics Service Provider). Suitable logistics network according to product categories thigh volume/low margin ver- sus low volume/high margin) can be developed. In- novation in IT may help in a great way to ensure Cost structure of a pharma company 6% coe 51% 31% 15% om ie Raw-material Power & Fuel Manpowercost Other costs supply chain integrity and OTIF (On‘Time Delivery in Full. Pharma companies are required to adopt operations improvement initiatives such as Lean, ‘TPM and Six Sigma with the common goal of achiev- {ngexcellence across all functions. To make this ini- tative successful companies have to develop a core team supported by Pharma companies multiple cross func may adopt tional teams and collaborative Saipan approach to logistics Se aime, management by ment. Training on engaging with problem solving specialised Sil an tsa pharmaceutical LSPs now. -how haveto be ‘major focus area to build intemal capability. Business goals tobe aligned with departmental and functional goals and to be linked individual goals till floor level managers. Improvement in supply chain performance will ‘enable the pharma companies to overcome the prob- | lems they are facing today and will add huge strate- gic benefits to them. Multifold benefits will be achieved in reduction of lead times, inventory lev- «ls across the value chain and cutting product ob- solescence.Itwill reduce drug shortage and provide affordable healthcare to thousands of people. Views expressed are personal