Ensuring drugs deliveries are on time: TECHNOLOGY APPLICATIONS
Over the past decade, pharmaceutical companies have accelerated the development of new
products to achieve double-digit growth rates and heady stock market valuations.
But their success in discovering blockbuster drugs is rarely matched by similar zeal for new
manufacturing and supply chain techniques. "The pharmaceutical industry has been slow to
adopt state-of-the-art management processes in the manufacturing and supply chain areas,
preferring to focus on drug discovery and marketing," says Jim McKiernan, Pricewaterhouse
Coopers partner for pharma supply chain consulting in Europe.
To sustain growth rates, analysts say pharma companies will have to change their ways and
become adept at not just developing drugs but ensuring they can be delivered to the market in
a timely fashion - and in the quantities required. Surprising as it may seem, drug
manufacturers often have little way of knowing how well or badly their products are selling.
Pharmacia & Upjohn, a leading pharma company, has recently invested in a new supply chain
management system, from Aspen Technology, for a US manufacturing facility to try to solve
this problem. Some products require multiple processing steps that take up to a year to
complete, which puts great emphasis on supply chain planning. However, Pharmacia &
Upjohn realised that the plans used by the factory were based on sales forecasts that bore little
relation to actual demand.
The result was the factory would produce 10 to 15 per cent more of some products than was
needed to meet actual demand, leading to expensive inventory storage and financing costs.
Conversely, the company under produced other products, meeting only 80 to 90 per cent of
demand, which meant that customers turned to its competitors. This problem of visibility is
common to the whole industry. "Visibility is critical to make the right decisions yet there is a
lack of visibility and quality information throughout the supply chain," says Dr Peter
Laurence, supply chain project director at Serono, a large European biotechnology company.
The pharmaceutical sector is well-known for its very high inventory levels. This is partly due
to its strategic function - no chemist wants to risk running out of a potentially life-saving drug.
But there is another reason. Stockpiling owes much to inefficient distribution networks and
the desire of wholesalers to cushion themselves from future price rises. A big wholesaler may
decide to stock up on a product and the manufacturer, seeing this as increased demand, will
boost production. However, if the wholesaler then decides to run down stocks, the
manufacturer is left holding excess product that cannot be immediately sold. Inevitably, a
large part of the stockpiles has to be written off because it passes its expiry date.
"Inventory levels in pharma are very high, and stock write-off owing to shelf life expiry is
costly," says Phil Norris, marketing direc tor at Aspen Technology. It has been calculated that
the industry could save $1.3bn just on stock write-offs by better management of the supply
chain.
It is not just about cost savings, however. Pharma companies have now realised that supply chain
management can make an important contribution to top-line growth by maximising revenues. "If
our supply chain is not performing, we are not going to achieve growth," says Dr Laurence. The
benefits of a responsive supply chain are apparent with products such as vaccines. The speed with
which a manufacturer can release a new vaccine to counter a flu epidemic will influence overall
sales of the product. But many more products can benefit from responsive supply chains. The life
cycle of a drug goes through four distinct phases: introduction, growth, decline and a final postpatent phase. Each phase requires different supply chain strategies yet this is an area where
companies are weak.
"Planning the phase-in and phase-out of drugs is inefficient so we are often late to market with a
new drug and have to write off old products," says Dr Laurence. Similarly, when a drug reaches the
end of its life and loses patent protection, new competition from generics can drive down prices by
80 per cent within a year. A company must decide whether to continue selling the drug off patent
and how much manufacturing capacity to allocate to what is now a low-margin product.
Forecasting demand is one of the toughest tasks for drug companies and is made more difficult by
the wholesalers who are reluctant to share sales information with manufacturers. Serono offers
around 1,000 product lines but because of the lack of visibility of how well products are selling, its
forecasting accuracy is only around 50 to 55 per cent. The forecasting problem is likely to get
worse as Serono hopes to double the number of product lines to 2,000 in the next four years. All
drug companies want to expand the number of products they offer. As the number and type of
products to be managed increase, so too does the supply chain complexity.
Not surprisingly, the enterprise software industry has long sought to convince the pharma sector of
the benefits of new technology to improve forecasting and planning. Many pharmaceutical factories
are still running ageing manufacturing resource planning (MRP) systems that are out of tune with
today's era of collaborative planning and integrated supply chains. Nevertheless, pharmaceutical
companies take a lot of convincing before committing to new IT systems. Serono is poised to
upgrade its factory systems but only because its MRP systems are coming to the end of their life.
Meanwhile, it is also looking at using new supply chain software from Manugistics to improve the
rudimentary planning functions of its MRP software. Serono hopes to create a new integrated
supply chain capable of delivering savings of up to 30 per cent on distribution costs and up to 10
per cent on manufacturing costs.
Technology is just one item on the prescription, however. Serono is also looking at more timely
decision-making, a shake-up in its distribution channels and new techniques such as pack-to-order
to reduce inventory in the supply chain. "We cannot allow the supply chain to be a hindrance to
future growth," says Dr Laurence.
Ensuring drugs deliveries on time: TECHNOLOGY APPLICATIONS: PHARMACEUTICAL INDUSTRY: The sector has been relatively slow to adopt practices such as supply chain
management, but producers now realise this can be used to save costs and increase revenues
Financial Times; London; Dec 5, 2001; Nairn, Geoff;