partners in efficiency_ lessons in supply chain excellence for life sciences and healthcare...

7/27/2019 Partners in Efficiency_ Lessons in Supply Chain Excellence for Life Sciences and Healthcare Companies

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White paper

Partners in efficiency: Lessons in

suPPLy chain exceLLence for Life

sciences and heaLthcare comPanies


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Partners in Efciency2

3 Outsourcing the Supply Chain?

4 Competition and the pressure on

margins

5 The importance o fexibility in

logistics provision

7 Quality Assurance and Compliance

7 Lie Sciences and Healthcare

sub-sectors

8 Key logistics perormance

requirements or LSHC sub-sectors

8 Breaking down the supply chain

10 Future changes in outsourcing

practices

11 How to select an LSP

13 The drive to outsource

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The line between a companys internal operations and its external environment are becoming increasingly

blurred.

No area exemplifies this better than the Life Sciences and Healthcare (LSHC) supply chain, where manufactu-rers have to coordinate their own activities with those of partner organizations, healthcare providers, custo-

mers and patients. Without a clear understanding of the context surrounding the process of delivering a drug

to market (i.e. changes in the distribution models and channels, mergers and acquisitions, increased market

penetration of generic medicines) and changes to the market itself, the chain can soon become a tangled web.

This paper examines how to select a supply chain partner, showing the value of flexibility against increased

competition, investigating the mandatory aspect of Quality Assurance and Compliance and understanding

how cost effectiveness can help margins. Thanks to the segmentation of the LSHC sub-sectors and their

related characteristics and requirements of logistics, we suggest a method to select the best Logistics Service

Provider (LSP).

executive summary


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Partners in Efciency 3

Outsourcing the Supply Chain?

Many companies in sectors such as fast moving

consumer goods (FMCG), electronics, and automo-tive focus on core activities, while non-core logistics

activities are often outsourced to logistics service

providers (LSPs). It is estimated that about 50% of

global logistics are now outsourced in many sectors1.

However, in several industries, including the Life

Sciences and Healthcare (LSHC) industry, it is

generally a smaller proportion of non-core logistics

requirements that are outsourced. In relation to

other industries, the outsourcing of logistics activi-

ties in pharmaceuticals is limited.

The graph below2 shows that spend for outsourcing

logistics is smaller and more fragmented within

LSHC compared to other industries, suggesting thatoutsourcing acceptance within LSHC is lower.

But the outsourcing wind of change is blowing. Five

years ago, there were few examples of large LSHC

companies outsourcing distribution operations to

LSP partners. Manufacturers typically built large,

dedicated warehouse facilities to store their products

prior to shipping to their customers. But by August

2011, all top 10 global pharmaceutical manufactu-

rers2 had outsourced at least part of their distributi-

on operations across the globe, and there are more in

0%

10%

20%

30%

40%

50%

60%

70%

LSHC Hi-Tech Automotive Consumer Retail

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1DHL internal evaluation2Datamonitor 2011

Partners in efficiency: Lessons in suPPLy chain exceLLence forLife sciences and heaLthcare comPanies


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the process of evaluating potential partners. Further-

more, companies entering emerging markets are

increasingly looking to LSPs to support supply chain

operations from the outset.

Why the sudden change? Manufacturers are making

constant strategic evaluations of their risks and

challenges, and coming to a common conclusion on

how best to improve their supply chains in response

to various drivers, including increasing levels of

global competition, lower margins, complex regula-

tory requirements, the costs of bringing drugs to

market, generic competition, product and supply

chain complexity.

In addition, as a result of strong competition within

the warehousing and transportation sector, LSPs are

continuously looking for new markets. They consi-

der the LSHC industry a commercially interesting

playing field and are investing in capabilities to

exploit these opportunities.

Competition and the pressure on margins

Like many industries, global competition is driving

market consolidation in healthcare. In 1998, the

revenue of the top 10 pharmaceutical manufactu-rers was 25% of the global market. In 2010, it had

risen to 58% 3.

The continued pace of mergers and acquisitions has

dramatically increased the awareness of the need for

flexibility. Companies see the benefit of shifting

responsibility to a global LSP who is likely to have

access to more facilities and resources, and conse-

quently be able to quickly respond to changing

business needs. As an alternative to investing in

upgrades, more manufacturers see the benefits in

leveraging the existing asset and risk management

infrastructure of an LSP.

As global competition increases, LSHC manufactu-

rers are painfully aware of the pressures on profit

margins. At the same time, traditional strategies to

1998

25%

75%

2010

42%58%

Based on Total Global Industry RevenueTop 10 manufacturers

All other manufacturers

toP 10 PharmaceuticaL manufacturersmarket share3

fg 3

31998 figures from IMS Health, 2010 data from 12th Annual Pharma Exec 50


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boost revenue and profits are proving less effective:

public and private purchasers are increasingly

resistant to price increases. New blockbuster drugs,

which typically generate more than $1 billion ofrevenue for their owner each year, are fewer and

further apart.

Margin pressures are driving manufacturers to seek

cost reductions in commercial operations. When

healthcare companies examine their operations,

often they report finding inefficiencies and high cost

structures, driven by under-utilized facilities, high

labor costs and expensive fixed assets. At the same

time, supply chain budgets for high cost products are

a small percentage of the value of the inventories.

This explains why finding a strategic partner to

navigate the complexity, and to provide flexibility,

risk management, and best practice is an even more

important consideration than cost.

The importance of flexibility in logistics

provision

LSHC companies need flexibility, and the smartest

way to deliver it is to partner with a LSP who already

has it. The increasing complexity of supply chains, thereal and potential changes in products and customers,

and the myriad of local regulatory requirements in

each geography, require industry and local expertise.

It is typically quicker, easier and less risky to partner

with a provider that can create a customized solutionto address their companys unique business needs,

rather than building expertise in-house.

Fluctuation in demand for branded and generic

products, and changes in distribution channels are

driving the continued evolution of supply chain

models. For example, the loss of patent protection is

impacting the supply chains of manufacturers. 70%

of generic drugs are now delivered direct to retailers

in the United States; in Europe the Direct-to-Phar-

macy (DTP) model has become mandatory for

generics manufacturers and has been increased for

brand-name drugs by a double digits ratio.

Meanwhile, new direct-to-patient, high-cost specialist

therapies are also causing manufacturers to reconsider

how they take products to market in order to better

respond to consumer demand. Differences in supply

chain configurations between different products and

the likelihood of new supply chain models have

caused savvy, forward-looking manufacturers to seekout greater flexibility in their supply chains.


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sheet. Depending on the financial details of existing

leases or ownership, and the manufacturers fore-

casts, it can make sense to sell existing dedicated

facilities and leverage an LSPs shared-use supplychain solution. In this case, an outsourced facility

or transportation mode is shared between multiple

manufacturers. Benefits include lower costs,

flexibility and scalability.

Product characteristics, regulatory requirements, cost

considerations and the manufacturers prioritization

of flexibility and cost determine which warehousing

and transportation solution is the best fit for each

product in a manufacturers portfolio.

Quality Assurance and Compliance

Non-core logistics activities in many cases are still

operated by the LSHC companies themselves, to a

much greater degree than in other industries. This

is because the healthcare industry is a much more

conventional industry than some, with logistics

activities and regulations perceived as being very

complex. Transportation, storage, handling and

production activities are strictly regulated by

national governments. So its not hard to see whypharmaceutical companies have traditionally wanted

direct control over their end-to-end supply chain.

However, LSPs are experts in regulatory and

compliance knowledge. National, state and local

regulatory bodies create a bewildering range of

requirements that a manufacturers small supply

chain team can struggle to stay up-to-date with, let

alone learn when entering a new geographic market.

LSPs with experience in that market can leverage

knowledge across their customer bases.

As global competition increases, the need to focus

scarce resources on core capabilities and leverage the

expertise of others intensifies. The perspectives

gained from a few people working for one manufac-

turer are not as advantageous as drawing on the

collective knowledge of thousands working for many.

The potential to leverage expertise goes beyond

people and knowledge. Healthcare companies indica-

ted a wide variety of gaps in their existing operations

processes and infrastructure, including inadequate

controls, a lack of cold chain or controlled substance

capacity, and outdated facilities or technologyplatforms.

Life Sciences and Healthcare sub-sectors

In analyzing the logistics priorities and requirements

of LSHC companies it is helpful to divide them into

four main sub-sectors:

Patented drugs: An R&D intensive sub-industry,

dominated by multi-national companies, which

covers about 50% of the European market. New

product launches are extremely important, and the

time to market determines the ultimate competitive

advantage a company can create.

Non-patented drugs: Also known as generics and

over-the-counter (OTC). Dominated by companies

that are specialists in the sales of non-intensive

drugs and focus on local markets. These products

have significantly lower profit margins than paten-

ted products. Competition is strong and supply

chain efficiency determines competitive advantage.

Biopharmaceuticals: Expected to grow and deliver

significant advances in healthcare. Products include

vaccines, hormones and enzymes which often

require special transportation and storage condi-

tions that have to be maintained from the produc-

tion release up to the final distribution to the

customer (i.e. cold chain).

Medical devices: Often sold through B2B channels.

Growth is expected. This sub-sector covers a wide

range of medium and high-technology products

such as surgical and medical instruments, electronic

medical equipment, X-ray, CAT and MRI equip-

ment, dental equipment, diagnostic products and

medical disposables. Customer service is crucial, as

is production flexibility. Products are characterized

by their high value, density and stock policy, an

important factor to prevent extreme high working

capital in inventory.


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Key logistics performance requirements for

LSHC sub-sectors

According to the Supply Chains Operations Refe-

rence Model (SCOR) methodology, we can measureoverall supply chain performance through key

indicators in five categories (for specific key perfor-

mance indicators see box out):

Delivery Reliability: delivering the correct

product, to the correct place, at the correct time,

in the correct condition and packaging, in the

correct quantity, with the correct documentation,

to the correct customer.

Responsiveness: The speed at which a supply

chain provides products to the customer.

Flexibility: The agility of a supply chain in

responding to market changes to gain or

maintain competitive advantage.

Costs associated with operating the supply chain.

Asset management efficiency: the effectiveness of

an organization in managing all assets inclu-

ding fixed and working capital to support

demand satisfaction.

Companies in the patented drugs sectors need to

focus on flexibility, while also prioritizing reliabilityand responsiveness.

Producers of non-patented drugs need to pay

particular attention to costs and asset management

efficiency indicators as well as keeping an eye on

reliability.

Biopharmaceutical suppliers require reliability from

their supply chain above all else, with responsiveness

and flexibility only slightly less important.

For companies in the medical devices sub-sector

flexible logistics solutions are paramount, but

reliability and responsiveness indicators also need to

be satisfied.

Breaking down the supply chain

If we look at the range of supply chain activities,

day-to-day operational activities are seen as trans-

portation, warehousing, VAS (Value Added Services)

and assembly (postponed manufacturing). This is a

typical subset of activities that is generally outsour-

ced and operated by LSPs in sectors such as automo-

tive, FMCG and electronics.

The outsourcing of planning and administrative

activities on a tactical level (order entry, accountmanagement, after-sales up to Vendor Managed

k lg p (kPi)

Perormance attribute Typical KPIs

Supply chain delivery reliability Delivery perormance

Fill rates

Perect order ullment

Supply chain responsiveness Order ullment

Lead times

Supply chain exibility Supply chain response time

Production fexibility

Supply chain costs Cost o goods sold (CoG)

Total supply chain management costs

Value-added productivity

Warranty/returns processing costs

Supply chain asset management efciency Cash-to-cash cycle time

Inventory days o supply

Asset turns


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Inventory and Supply Chain Integration) is lagging

behind. Although numerous LSPs position them-

selves to take over these activities, many companies

are reluctant to outsource them.

The increasing dependency on the LSP and the

selling-out of the internal supply chain expertise are

the main decision drivers for this strategy.

The complexity in logistics determines if operating

according to the GDP (Good Distribution Practices)

or GMP (Good Manufacturing Practices) require-

ments is necessary. For transportation, storage, andhandling, operating according to the GDP require-

ments are generally sufficient. The requirements for

the VAS activities are a grey area where both GMP

and GDP could possibly be applicable (depending on

the complexity of the VAS activity). Production, the

most complex logistics activity, is always operated

according the GMP requirements.

The choice for a transportation modality (air, sea,

road and rail) is mainly determined on product value

density in relation to the working capital in (pipe-

line) stock. The inbound and intercompany trans-

portation for patented drugs and high value medical

devices are therefore mostly shipped by air. Low value

LSHC products are mostly shipped in full containers,

or in full truck loads. The outbound transportation

from the pharmaceutical companies to their custo-

mers (final distribution) is mostly carried out using

parcel services or less than full truck loads. High

flexibility, on time and safe delivery are important.

The storage and handlingactivities are in most

cases relatively complex compared to transportation.

LSHC industries are focused on reducing a health

risk and have comparable driving factors for the

storage and handling of their products. In theory,

the storage and handling activities within the

pharmaceutical industry need to comply with the

GDP regulations. Authorities often have no binding

restriction to comply with GMP regulations. In

practice however, the pharmaceutical companies are

acting according to GMP regulations (or FDA) for

storage and handling on their own initiative.

The influence of GMP and GDP requirements are

not limited to the physical warehouse alone, but on:

Logistics design and operation

Warehouse design and materials handling

Logistics information systems (tracking and

tracing, first expiry, first out, lot-numbering)

Stock level management

Handling of products

Value Added Services (VAS) is a combination of

logistics and light industrial activities that are

implemented to customize products for the custo-

mers or country in question. VAS can be divided into

two categories3:

High-end-value-added logistics activities

generally add considerable value to the product,

such as: sterilization of medical devices, testing,

repairs and assembly of kits (assembly can also be

a low-end-value-added service, depending on the

degree of difficulty).

TransportationStorage and

HandlingVAS Production

HIGHComplexity in LogisticsLOW

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31998 figures from IMS Health, 2010 data from 12th Annual Pharma Exec 50


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Low-end-value-added logistics activities which

generally add little value to the product, such as:

printing and labelling, packaging and repacking,

adding manuals, bundling of promotion materi-al, sealing, quality checking (quality checking can

also be a high end-value-added service, depen-

ding on the degree of difficulty see Figure 5).

Future changes in outsourcing practices

For each of the four pharmaceutical sub-industries

(patented drugs, non-patented drugs, biopharma-

ceuticals and medical devices), the complexity inlogistics will determine the outsourcing focus for

the future.

Sterilization

Bundlingof promomaterials

Printingof text andlabelling

Sealing

Qualitychecking

Packagingand

repacking

Testing

Finalassembly

Repairs

Addingparts andmaterials

HighEnd

LowEnd

ValueAdded

Services

Complexity of Logistics Activities

tp l lg

TransportationStorage &Handling

VAS Production

Patented drugs

Biopharmaceuticals

Medical devices

Non-patented drugsLSHCs

ub-sectors

No focusPartly focusFocus

HIGHComplexity in LogisticsLOW

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The more advanced LSPs are investing to become

GMP/GDP compliant for storage and handling. So

there is not only demand for outsourcing, but also

supply. Therefore, the overall expectation is that out-sourcing of the storage and handling activities will

continue to grow, and will certainly increase within

the biopharmaceutical, medical devices and the non-

patented drugs sub-industries in the coming years.

Leading LSPs are currently equipped to sterilize,

repair and assemble medical devices. The outsour-

cing of VAS activities within the non-patented drugs

sub-industry is also a rising star. It is not expected

that the same will apply for the patented drugs

companies. The pharmaceutical manufacturers of

patented drugs still elect to maintain their direct

control over their VAS activities (particularly

high-end-value). But adoption of outsourcing is

increasing here too.

How to select an LSP

For manufacturers considering supply chain out-

sourcing, both the selection and management of LSP

partners are critical to initial and ongoing success.Manufacturers should carefully evaluate not just

current requirements, but the range of potential

future scenarios, to ensure the necessary flexibility is

part of the assessment process. It is worth taking the

time to ensure the selection process gathers useful

and distinguishing data. For example, to assess global

size, ask LSPs for the number of their healthcare

facilities globally, the total square footage of ware-

house space, and the transportation modes under

management, rather than just how many countries

they operate in.

A fully loaded costing study should be performed on

existing facilities, labor and transportation capabilities

to create an accurate baseline, which can then be used


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to compare LSP proposals and anticipated benefits.

Consideration should also be given to LSPs who

can bring value from local, state and country tax

considerations, and any economic incentives thatcan be secured from governing bodies (see Figure 6).

One key recommendation, shared by manufacturers

who have outsourced already, is the importance of

performing an outcome-based evaluation, rather

than being prescriptive about how LSPs should

operate. This is to avoid the mistake of paying the

LSP to continue running the operation in the same

way as before, rather than leveraging its expertise

to gain best practice improvements.

For most manufacturers, the cost and functional

capability are only part of the evaluation criteria.

Existing knowledge and experience in the relevant

healthcare sectors are critical for success. A good LSP

understands global and local forces impacting the

life sciences and healthcare industry, including

areas of specialization, and what they mean for

the business and supply chain specifically.

Business, cultural and strategic fit are also seen as

important by LSHC companies. Manufacturers

share the belief that an LSP who takes the time to

understand their business during the evaluation

process, and tailor its solution accordingly will

deliver more value and satisfaction in the long run,

versus one that focuses solely on offering the lowest

cost per activity with off-the shelf products. LSPs

should demonstrate a commitment to operational

and service excellence, as well as continuous impro-

vement against key metrics. The most successful

outsourcing relationships are characterized by a

forward-looking, proactive approach that jointly

asks not Where is your business?, but Where

is it going, and what can we do to make it more

successful?.


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The drive to outsource

None of the driving forces for outsourcing outlined

in this document are expected to diminish in the

next five years. If anything, the pace of change,competition and complexity will only continue to

increase. It is clear that the tide has turned, and an

increasing number of LSHC manufacturers have

shifted their preference from in-house supply chains

to outsourced ones. In a high-pressure environment,

where senior management expects lower operational

costs and sustained service levels, these companies

who have outsourced consistently realize benefits,

including improved flexibility, service levels, compli-ance and security, as well as lower costs. For these

reasons, we expect LSHC manufacturers across the

globe to continue to evaluate and select LSPs that can

offer supply chain and industry knowledge, and

ultimately simplify their lives.


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