SUPPLY CHAIN MANAGEMENT-

LINKING IDEATION TO PROFITABILITY

AND

SECTORAL ANALYSIS OF THE

PHARMACEUTICAL SECTOR

By

Krishna Chaintanya

Nidhi Singh

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INTRODUCTION:

The increasingly flattening world is constantly evolving and impacting the way, the business is
being done. Supply Chains have become complex, global and dynamic. The success of a
company in this global era depends on developing innovative supply chain strategies that could
help improve profitability while drawing continuous improvements.

Supply chain Management enables world leading organizations to re-align their supply chains to
the flat world paradigm by providing standard solutions for the organizations needs in supply and
demand planning and forecasting, sourcing and procurement, supply chain execution, enterprise
asset management.

The role of supply chain has changed considerably over the last three decades. The benefits of
improving the performance of the supply chain initially included revenue growth and higher
profitability through greater market share and price premium. Traditionally the focus has been on
the flows within the organization or flows over which the organization has direct control.

But the things have changed now. At present, the successful supply chain management requires
the recognition that the firm is simply one player in the long chain that starts with suppliers and
includes transporters, distributors and customers. Close relationship between suppliers,
manufacturers, transporters, distributors and customers are going to be the key to success in the
times to come. Now companies are recognizing that supply chain innovations can be not only the
driver of cost reduction but importantly a catalyst for revenue growth by achieving greater levels
of customer satisfaction.

OBJECTIVE:

Understanding Supply chain management and how it assists in profitability considering the
pharmaceutical industry. Understanding and analyzing the transition of the global
pharmaceutical sector from being an imitator to an innovator.

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SUPPLY CHAIN STRATEGY

Demand flow 
strategy

Supply 
collaboration  chain  customer 
service 
strategy
strategy  strategy

framework

technology 
integration 
strategy

Collaborative strategy:

Opportunities for collaboration among business partners will vary depending upon the
organizations perspective role in the supply chain. Collaboration enables partners to jointly gain
a better understanding of future product demand and implement more realistic programs to
satisfy demand. The collaborative strategy includes three major types of relationship:

¾ Manufacturer/supplier collaboration
¾ Manufacturer/customer collaboration
¾ Collaboration with third party and fourth party logistics provider

Demand Flow Strategy:

Traditionally in supply chain management, the key focus has been in managing the flow of
materials and goods from suppliers through the manufacturing and distribution chain to the
customers. The key in demand management is the continuous flow of demand information from

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customer and end users through distribution and manufacturing to suppliers. The shared
objective of the chain is fulfilling customer demand.

Customer Service Strategy

Customer satisfaction level is directly proportional to the service provided by the company. The
customer service can be seen as a continuum between dissatisfied and delighted customers.
Organizations need to add value to customer’s time and trouble. Formulating a customer service
strategy involves:

¾ Customer segmentation
¾ Cost to serve
¾ Revenue management

Information Technology Strategy

A number of IT based supply chain information management tools are now available to provide
intelligent decision support and execution management. They can be TPS focused on day to day
operations or strategic planning tools used to redesign the supply chain infrastructure.

Consequently, there is an ever increasing need for fully integrated supply chain information
management solutions which incorporate all the functionality of network strategy/ supply chain
configuration, demand planning, transportation management and warehouse management.

LITERATURE REVIEW

As per UPS supply chain solutions, 2005; in order to incorporate supply chain into
pharmaceutical sector, the following three practices are mandatory:

¾ Rationalized global production networks

¾ Change over competence with smaller batch production.
¾ A compliant management system.

The two trends that dramatically affect the future of pharmaceutical fulfillment are

Smaller batch production led by genomics and customer demand

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The addition of retailer, provider and consumer direct to manufacturers customer base

Both these aspects signify towards an in-evitable shift in pattern from distributing larger pallet
quantities to wholesalers, to distributing smaller package to pallet quantities across a large
customer base. The benefits associated with drug makers include access to real-time demand and
to actual consumers.

Most importantly, the cost management based approach in the pharmaceutical sector has laid
emphasis on improvements in the supply chain management. This in-turn has led to a new
concept of supply chain event management.

The current sales model for many drug manufacturers is to release product data and samples to
sales forces that struggle to get a two-minute window of time with medical providers. In that
window, a sales representative may be introducing several new drugs and/or reinforcing current
products. Current sales efforts are becoming less effective and more costly as sales forces are
expected to cover more and more products. In the last five years, pharmaceutical sales forces
have grown 85 percent. In fact, behind R&D, sales representative costs are the second largest
category of expense for drug makers.

Just recently, the Department of Health and Human Services issued new standards to drug
manufacturers’ sales approach, stating that “drug makers could not offer incentive payments or
other ‘tangible benefits’ to encourage or reward the prescribing or purchase of particular drugs
by doctors, health plans or companies that manage drug benefits for employers and insurers.”
The government has informed the industry that many of its sales and marketing practices may
violate federal fraud and abuse laws.

KEY TRENDS IN THE PHARMACEUTICAL INDUSTRY

Recent breakthroughs in genomics and proteomics may be mind-boggling to most. And,

although news reports remind us regularly of the strides pharmaceutical companies are making in
the fight against disease and pain, little is reported about the increasing struggles pharmaceutical
companies face in this fight.

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In fact, the pharmaceutical industry is experiencing unparalleled change and challenges. All of
the usual suspects that impact business today are at play: globalization, treatment and pricing
economics, government controls and technology.However, in an era of continuing consolidation,
innovation abounds not only in R&D, but also in business models.

INTRODUCTION TO THE PHARMACEUTICAL INDUSTRY

Pharmaceutical industry in India is playing a vital role in the healthcare area of the nation. With
the implementation of product patent from the year2005, there will be a tough competition for
the global market share. Pharmaceutical companies will have to focus more intensively on R&D
activity to survive the competition. As we are moving towards globalization, there is a need for
strategic planning to meet the challenges posed by the product patent era. In the present context
with the available expertise, manpower and skill, the Indian Pharmaceutical Industry will fight
successfully for the global market share .here we have reviewed the status of Indian
pharmaceutical industry vis-a-vis Global pharmaceutical industry. The strong opportunities lie
within this sector to grow as the condition of Indian health sector is discouraging. Some of the
factors signifying the same are:

India ranks very low in the global health scenario, both in terms of status and expenditure .Over
50% of young children in the country are malnourished. Only 35% of the country’s population
has access to essential drugs. Reason attributed to this is that India invests only 5.@% of its GDP
on health .Various reports published by WHO and other health organizations indicated that India
has the highest number of Tuberculosis and Hepatitis-B patients in the world. India also accounts
for most number of blind patients globally. Mortality in India, due to Malaria, Peaks highest
amount all the nations. Health indicators also show that there will be highest number of AIDS
patients in the country by 2020. Inspite of sustained efforts by the Government and NGOs, Polio
has not been completely eradicated and is still prevalent in certain pockets of the country
.Another Startling fact reveals that almost 80%of the country’s medical workforce is employed
in the private sector.

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A GLIMSE OF THE GLOBAL PHARMACEUTICAL INDUSTRY

The Pharmaceutical industry of the Western World is the leading manufacturers of medicines.
North America, Europe, Japan and Latin American countries account for 85% of the worldwide
pharmaceutical production. These countries control almost 77% of the global pharmaceutical
market (Figure1). The US invest 13.7% of its GDP on health .Annual drug expenditure (per
capita) for Japan amounts to $ 412, while for India it is a low $ 3(Figure 2).The US and The UK
had a combined 62%(46%+16% respectively) share of global pharmaceutical exports in 2005.
The US and the UK together sell 2 out of 3 pharmaceutical products in the world. According to
WHO survey, US pharmaceutical industry market was$ 512 billion in 2005. Of this, $ 318
billion came from products free from patent protection, Drug prices in Europe are about 60% of
the prices in US and yet European firms spend larger share of their revenues on R&D rather than
their American counterparts.

Data representing Pharmaceutical Drug Production Worldwide (2007):

REGION %SHARE OF DRUG % SHARE OF

PRODUCTION POPULATION

NORTH AMERICA 30.9 4

EUROPE 30.4 7

JAPAN 20.9 2

REST OF THE WORLD 17.8 87

This clearly shows that rest of the world needs to improve on their drug production ability
as they have tremendous potential for betterment of the situation. One of the step could be
working on the supply chain event management.
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INFORMATION TECHNOLOGY IN SUPPLY CHAIN MANAGEMENT-TO REDUCE COST

AND SAVE TIME

Globally, innovation has been the key factor for the growth of the pharmaceutical industry. There
has been a strong support for biotechnology and medical research worldwide and this is being
augmented by research and development expenditure of the pharmaceutical industry. This has
been one of the reasons for the growth of the pharmaceutical industry in India, as the Indian
pharmaceutical industry started more as an imitator taking up outsourced research jobs rather
than an innovator. Globally, there is tremendous pressure on pharmaceutical companies to
develop new drugs. Carrying out R&D activities on a new drug can cost more than a billion
dollars and can take as long as 12-14 years. Hence the pharmaceutical companies’ worldwide
have been putting up efforts to reduce the rising cost in drug discovery. Hence application of
Information technology (IT) in the supply chain and the research process of pharmaceutical drug
making has become a key to success. IT solutions such as electronic data capture and clinical
trials management are likely to streamline the drug development process.

Drug  Distribution Sales and 

Drug discovery Manufacturing 
development marketing

Supply chain management

ERP production  Sales force 
In‐silico  Electronic data  Warehous 
planning and  automation 
research capture management
control CRM

Business Intelligence/data warehousing/Knowledge management integration/

Data mining

Fig: Application of IT (information technology) to speed up the drug research and production
process.

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ENSURING SECURITY IN THE SUPPLY CHAIN- ESSENTIAL FOR PROFOUND
PROFITABILITY

The responsibility of the security in the supply chain has to be a collaborative effort from all the
players in the pharmaceutical industry. Organizational design and the nature of the relationships
among the trading partners are crucial.

Three driving forces: globalization, developments in medicine and the growth in the economy of
the developing nations like India and china have resulted in the profound changes in the
pharmaceutical industry. Also in the other industries globalization, technology and the growth of
the developing nations does play a vital role in the bringing about changes in the supply chain
system. With the growth in demand and profound development, doing business the traditional
way, in the pharmaceutical industry is a disaster. Waste will not be tolerated, and failing to stem
the tide of counterfeits is wasteful. The pharmaceutical supply chain system must be more
focused on the customer experience: Think Wal-Mart, Procter & Gamble.

Three viable solutions can be taken up via the improvements in the supply chain to make a
difference in the competitive environment:

¾ Close off diversion entry points by minimizing excess inventory at the wholesaler and by
requiring wholesalers to source directly from drug manufacturers.
¾ Reduce the cost of cheating by implementing new security technologies and by strict
licensing and record-keeping requirements.
¾ Monitor the supply chain carefully using advanced technologies like track and trace
technology and also by having a better grip on the distribution channel.

Pharmaceutical wholesalers and manufacturers jointly are beginning to realize that their
approach to the supply chain must resemble that of the other FMCG production companies.
Three reasons:

¾ Inventory levels are too high

¾ Asset utilization at the plant level is not good

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¾ Stock outs are still common even though pharmaceutical manufacturers have high
inventory levels.

FUTURE PROSPECTIVE

The interconnected world we live in offers unprecedented opportunities to grow for today’s
organization. But these opportunities come with a whole host of challenges for those businesses’
supply chains through the constant change in internal and external environment. Some of these
are: rapid wage inflation, spikes in commodity prices, unpredictable currency rates.
Transportation costs alone can fluctuate by as much as 250% per year. it gets very important for
companies to manage cost volatility by building flexibility directly into supply chains, using
advanced business analytics and automation technology—interconnecting everything from
customers to suppliers to IT systems. Allowing businesses to shift workloads around the globe
,adjust inventory based on changing customer demand and respond to currency fluctuations by
realigning global partnerships. Some of these changes have already been adopted by several
firms to attain that flexibility which is helping companies in industries as diverse as healthcare,
retail and electronics adapt to market changes and cut costs. In fact, last year, 17 out of 25 well
known global supply chain companies adopted this. It is rightly quoted SMARTER BUSINESS
NEEDS SMARTER THINKING. This is what supply chain is giving to all businesses including
pharmaceutical sector.

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SALES AND MARKETING

SALES AND MARKETING 

Formularies 

Therapeutic interchange 

Step care therapy 

Increased generics competition 
CHANNEL MANAGEMENT  NEW PRODUCT DEVELOPMENT 
Shorter exclusivity period  AND ROLL OUT 
PBM’s 

Disease Management program  Rising R&D costs  

Wholesaler /distributor  Niche / specialist companies  
disintermediation  Outsourcing price pressure Shorter exclusivity periods  

Increased generics  competition 

The increased use of formularies, therapeutic interchange and step-care therapy by managed care
has ignited efforts to be put up in sales and marketing in order to cater to the root of these
programs: cost management in treatment programs. Moreover the time available to the marketing
and sales team in order to generate and influence demand is shrinking due to increased generics
competition and shortening exclusivity periods.

These shrinking timeframes and price pressures require that new product marketing and sales
methods continuously address evolving sales channels. Pharmaceutical companies and their
partners must also be able to quickly build differentiating capability in marketing to such sales
channels.

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Lastly, the information needs of the consumer are dramatically different from those of managed
care and provider organizations. CRM and consumer support expansion is required in-order to
cater to the new growing needs.

CHANNEL MANAGEMENT

Distribution channels have fast assumed a role of strategic importance for most sectors including
pharmaceuticals. As the current market is witnessing deflated margins and intense competitions
like never before, the efficient utilization of these channels become very crucial. In the case of
the pharmaceutical sector, issue of channel conflicts is very frequent. In pharmaceuticals the
nature of mixture of goods being delivered by various companies and varied nature of market
segments lead to conflicts in distribution channel. Change in trends should be incorporated by
using parallel channels where the modification in each channel are specific to the customers
segment served and the product mix on offer. Besides, explicit and latent channels lead to an
inefficient deployment of resources, but also have the ability to dilute brand image and corporate
positioning. In order to cope up with these problems, pharmaceuticals should build up
transparent strategic planning process. It should remove market delineation ambiguities and steps
to enhance supplier power vis-a-viz channel members should be made.
Effective implementation of supply chain management in pharmaceuticals should also include a
more cohesive functioning with the channel than a structure based on rigid control and
conventional incentives.
The pharmaceutical channels needs to be re-evaluated as the new channels are emerging in the
world market. Pharmaceutical companies can investigate the value of alternative distribution for
samples and literature. For example, distributing direct to disease management programs or
leveraging the role of retail pharmacies may provide opportunities to strengthen retail
relationships and gather more accurate demand information. On the revenue side, shifting to
cost- and performance-based channel management can lead to cost savings, more reliable
distribution and improved demand visibility. Drug makers can now sell direct to retailers and
providers through e-marketplaces such as the Worldwide Retail Exchange and Global Healthcare
Exchange.

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NEW PRODUCT DEVELOPMENT

In new product development, highly specialized niche companies are demonstrating that they can
bring innovation faster. With escalating R&D costs, we believe drug manufacturers that leverage
the intellectual property of such companies, as well as facilitate collaborative efforts through
alliances and partnerships, can better manage risk and portfolio profitability. As more parties
participate in the race for innovation, integrating research, development and design efforts will
become a source for competitive advantage. Technology, information sharing and process
integration will become paramount to lowering costs and optimizing intellectual property.
Additionally, once a new product has been developed, the cycle for commercializing that product
and rolling it out must become tighter. With exclusivity periods shortening and generics gaining
higher market share, the time it takes to get product commercialized and demand generated will
directly affect the profitability and life of that product.

Regulations and compliance also affect the transition from development to rollout. The FDA
allows new drugs to be marketed in the United States immediately following approval, but
Europe often experiences delays of up to 12 months between drug approval and market
availability.2 Tighter and more intelligent synchronization between production, fulfillment,
marketing and channel networks will enable faster rollouts.

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CONCLUSION:

The winning pharmaceutical companies will be those organizations that can:

1. Maintain profitability despite falling margins
2. Generate and conserve cash flow for future acquisitions and licensing arrangements
3. Resiliently merge and integrate supply chains to enable M&A, licensing and collaborative
R&D strategies

What does it take to become a winner? Pharmaceutical companies that want to be well
positioned for the future, despite the growing hardships and complexity of the industry, should
achieve excellence by focusing on these five supply chain areas:
• Production
• Fulfillment
• Customer Management
• Forecasting & Planning
• Procurement

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REFERENCES:

¾ Larry Koester-United Parcel Service of America

¾ House Of commons Health committee-the influence of the pharmaceutical industry,

fourth report, session 2004-05

¾ “The Link between Gross Profitability and Pharmaceutical R&D Spending,” Health

Affairs, vol. 20, no. 5 (September/October 2001), pp. 216-220.

¾ “The Pharmaceutical Industry—Prices and Progress,” New England Journal of Medicine,

vol. 351, no. 9 (August 26, 2004), pp. 927-932.

¾ Purchasing And supply, John.A.Woods

¾ Supply Chain Management in the 21st century, B.S.Saha

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