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1
by
Juraev Javohir To’lagan o’g’li
Submitted to the Graduate School of Economics Faculty of
Nagoya University
Scientific supervisor: Junior
Associate Professor/International
Student Advisor Graduate School of
Economics, Nagoya University.
Yoshihiko Kadoya _________________
Nagoya city – July 25, 2014
Graduate School of Economics
Nagoya University
Furo-cho, Chikusa, Nagoya 464-8601 JAPAN
2
ABSTRACT
As the competition intensifies in the pharmaceutical industry, the firms are facing
increased complexity and higher costs of the drug development. Consequently, the
whole value chain is under the evaluation to optimize the costs and the operations.
As an important part of this trend, logistics and distribution are on the focus.
Therefore, a number of logistics models from other industries are being investigated
and simulated in the supply chain.
The hub models are also one of such supply chain models that majority in the pharma
industry interested in. Therefore, this paper explores the advantages of the hub
models in the different industries and discusses the benefits of these models in the
pharmaceutical supply chain on the example of Boehringer Ingelheim.
Key words: supply chain, supply chain management, downstream supply chain,
logistics, distribution, pharmaceutical industry, pharmaceutical supply chain,
logistics hubs, complex hub models, hub-to-hub connection, control tower, Late
Stage Customization, demand and shipment consolidation.
3
ACKNOWLEDGEMENTS
First of all, I would like to take this opportunity to thank those who advised, provided
input, or helped me in one form or another on this project. Without your assistance,
guidance, recommendations, and time, this study would not have been possible.
I would like to express profound gratitude to my main thesis advisor, to my dedicated
supervisor Pr. KADOYA Yoshihiko in Nagoya University, for the guidance and time
he provided to help me with this project. I was able to accomplish a great deal in a
short period of time. His experience and input was very insightful, and I am thankful
for everything he has done to help guide me for its duration. It was a pleasure and an
honor to work with him on this project, and feel that I have learned a lot.
I also want to thank coordinators of NUPACE program: Pr. NOMIZU Tsutomu, Pr.
ISHIKAWA Claudia and Dr. OYAMA Seiko, that they give me a chance to finish
my research work in Nagoya University. I am extremely grateful for their support,
provided me with very valuable guidance and recommendations throughout the
course of this study.
Last, but not least, my huge appreciation goes to my parents and family, who are life-
long contributors behind all my success and achievements.
4
TABLE OF CONTENTS ABSTRACT ............................................................................................................................. 2 ACKNOWLEDGEMENTS ...................................................................................................... 3 TABLE OF CONTENTS ......................................................................................................... 4 LIST OF FIGURES ....................................................................................................................... 6 LIST OF TABLES ......................................................................................................................... 7 1. INTRODUCTION ................................................................................................................ 9
1.1. Background: Globalization and impact on MNCs ................................................... 9 1.2. Research Questions and Objectives ...................................................................... 11 1.3. Methods and Procedures ....................................................................................... 11 1.4. Justification ............................................................................................................ 12 1.5. Definitions .............................................................................................................. 12
2. PHARMACEUTICAL INDUSTRY OVERVIEW .................................................................... 15 3. REVIEW OF THE LITERATURE ......................................................................................... 19 3.1. Supply Chain ............................................................................................................... 19
3.2. Supply Chain Management (SCM) ......................................................................... 22 3.3. Pharmaceutical Supply Chain ................................................................................ 25
3.3.1. Pharma Supply Chain Specialties ................................................................... 25 3.3.2. Pharmaceuticals and Logistics ....................................................................... 27
3.4. Logistics Hubs ............................................................................................................. 30 3.4.1. Configurations ................................................................................................ 32 3.4.2. Location Selection .......................................................................................... 32 3.4.3. Hub Services and Benefits for Industries ...................................................... 33 3.4.3.1. Electronics Industry .................................................................................... 34 3.4.3.2. Automotive industry .................................................................................. 35 3.4.3.3. Integrated Circuit Industry: ........................................................................ 35 3.4.4. Relevance for pharmaceutical companies .................................................... 36
4. METHODOLOGY ............................................................................................................. 38 4.1. Development of the Interview .............................................................................. 38
4.1.1. Interview Location ......................................................................................... 39 4.1.2. Participants..................................................................................................... 39 4.1.2.1. PwC ............................................................................................................. 40 4.1.2.2. Kuehne & Nagel .......................................................................................... 41 4.1.2.3. Company XYZ .............................................................................................. 42 4.1.2.4. Groenewout ............................................................................................... 43 4.1.3. Data Collection ............................................................................................... 44 4.1.3.1. Format and Structure ................................................................................. 44 4.1.3.2. Validity, Reliability and Unbiasedness ...................................................... 45 4.1.3.3. Confidentiality and Anonymity.................................................................. 46
4.2. Interview results .................................................................................................... 47 4.2.1. Advantages ..................................................................................................... 47 4.2.2. Disadvantages ................................................................................................ 48 4.2.3. Prerequisites/Conditions for Establishment ................................................. 49 4.2.4. Product Suitability .......................................................................................... 50 4.2.5. Best Practices ................................................................................................. 50 4.2.6. Summary of Interview Results ....................................................................... 51
5. CASE STUDY: INTERDEPENDENCY OF THE REGIONAL LOGISTICS HUBS IN THE SUPPLY CHAIN OF BOEHRINGER INGELHEIM ..................................................................................... 52
5.2. Hub Projects in BI ................................................................................................... 57 5.2.1. EU Hub / Control Tower ................................................................................. 57 5.2.2. MENA Hub ...................................................................................................... 59 5.2.3. Asia Hub .......................................................................................................... 59
5.3. Scope Countries for the Thesis Analysis ................................................................ 61
5
5.3.1. Country Selection for Asia Hub ...................................................................... 62 5.3.2. Country Selection for MENA Hub .................................................................. 62 5.3.3. Role of EU Hub in Thesis Scope ..................................................................... 63
5.4. Scenario Development ........................................................................................... 64 5.5. Data Collection and Analysis ................................................................................. 65
5.5.1. Data Sources ................................................................................................... 65 5.5.2. Validity and unbiasedness ............................................................................. 66 5.5.3. Data Analysis .................................................................................................. 66 5.5.3.1. Calculation of Logistics Costs ..................................................................... 66 5.5.3.2. Soft Costs Analysis ..................................................................................... 71
5.6. Results and Limitations .......................................................................................... 71 6. CONCLUSIONS AND RECOMMENDATIONS ................................................................... 77 REFERENCES ....................................................................................................................... 79 APPENDIX ............................................................................................................................ 81
6
LIST OF FIGURES
Figure 1 Trend of New Drugs Approved Worldwide ................................................. 10
Figure 2 Drug Development Process .......................................................................... 15
Figure 3 Time frame of Drug Development ............................................................... 16
Figure 4 Patent Value Evolutions ............................................................................... 17
Figure 5 Demand Uncertainty explanation on the example of product types ........... 20
Figure 6 Supply Uncertainty explanation on the example of manufacturing processes
.................................................................................................................................... 20
Figure 7 Types of Supply Chain ................................................................................. 21
Figure 8 Suitable Products for Supply Chain Models ................................................ 22
Figure 9 general Pharmaceutical Supply Chain.......................................................... 25
Figure 10 Counterfeit Medicines: Global picture ....................................................... 28
Figure 11 Pharmaceutical Distribution Channel in China .......................................... 29
Figure 12 Integrated hub (Logistics and Business) .................................................... 31
Figure 13 Logistics Hub Configurations .................................................................... 32
Figure 14 DHL’s Regional Hub Concept ................................................................... 32
Figure 15 Hub Characteristics by Roles ..................................................................... 34
Figure 16 Hub Definition............................................................................................ 47
Figure 17 Hub-to-Hub Definition ............................................................................... 47
Figure 18 BI Net Sales by region ............................................................................... 53
Figure 19 Net Sales by Business Segments ................................................................ 54
Figure 20 Illustrative Supply Chain of BI .................................................................. 55
Figure 21 Conceptual ‘Information & Material Flow’ ............................................... 56
Figure 22 EU Control Tower Functions ..................................................................... 58
Figure 23 Control Tower in BI Supply Chain ............................................................ 58
Figure 24 Timeline of drugs with 24-month shelflife in MENA Region ................... 60
Figure 25 Benefits of Asia Hub as RDC .................................................................... 60
Figure 26 Late Stage Customization .......................................................................... 61
Figure 27 Asia Hub Model: RDC and LSC ................................................................ 61
Figure 28 Countries in Scope for Asia Hub............................................................... 62
Figure 29 Center of Gravity Analysis for Jeddah ....................................................... 63
Figure 30 Demand and Shipment Consolidation ........................................................ 65
Figure 31 Modality Ratio for Scope Region, 2013..................................................... 71
Figure 32 Transport Costs by Scenarios, 2013 ........................................................... 72
Figure 33 Sales by Business Segments in Asia & MENA Region, 2017 ................... 74
7
LIST OF TABLES
Table 1 Summary of Interview Results ...................................................................... 51
Table 2 BI Supply Chain Model based on Lee Parameters ........................................ 56
Table 3 Material Flow to BOPU Bahrain in pallet numbers, 2013 ............................ 67
Table 4 SKUs with High Volumes in Asia Hub Region ............................................ 68
Table 5 Separation of Pallets to Kuwait between Ocean and Air Freight, 2013 ........ 68
Table 6 Extract from Freight Rates ............................................................................ 69
Table 7 Shipment Costs Calculation to Qatar, 2013................................................... 70
Table 8 Destruction Costs for the Scope Countries, 2013 .......................................... 73
Table 9 Future Position of BI in Supply Chain Matrix .............................................. 75
Table 10 Summary of Results..................................................................................... 76
8
ABBREVIATIONS
9
1. INTRODUCTION
1.1. Background: Globalization and impact on MNCs
Since the 80s of the last century, trade has become more and more global1. In 2010
itself, $15 trillion worth of goods were purchased worldwide, while services rendered
almost $4 trillion.2 The continuous efforts by the World Trade Organization have led
to lower barriers for cross-border economic relations. As a result, this globalization
process has created huge opportunities for firms across the world in terms of access
to natural resources, cheap labor and innovation. Furthermore, recent advancements
in telecommunications and the development of transportation technology enabled
multinational companies to reach international markets even more easily and rapidly
(Hill, 2013).
Along with the positive changes, globalization has also brought substantial economic
hazards such as the financial and economic crisis. According to the World Bank
Annual report 2013, most developed countries still struggle with a sluggish economy
caused by the 2008/09 financial crisis, which has a negative influence on the
economic growth of developing countries as well.
Another important aspect of global trade is that it has brought huge competition
among both local and multinational enterprises. While positive for end-consumers,
the impact of tough competition has forced companies to review their conventional
business practices and seek for a competitive advantage in their operations. The rise
of small and medium-sized international companies, called ‘mini-multinationals’3,
have heated up the competition in the market and shown that big [s can no longer
hold their leading position without organizational restructuring and flexibility. Hill
(2013) provides a clear example of Avon facing difficulties due to the lack of
response to globalization trends.
As any other businesses, pharmaceutical companies have also been substantially
exposed to the globalization process. According to the ‘Pharma 2020’ report of PwC,
the productivity in the industry had not exhibited any increase in the last ten years.
Figure 1 shows the clear trend regarding the number of approved new medicaments
over the past decade.
The statement by the Australian Pharmaceuticals Industry Group gives even more
insight into the conventional structure of the industry and the problems it is facing.
1 Hill, 2013, p.4 2 WTO, 2011 3 Chetty, 2003, p. 5
10
Specifically, in their 2009 final report they described the pharmaceutical business
model as “vertically integrated MNCs” that have been putting all the focus on
“blockbuster” products with the help of “in-house resources” for almost three solid
decades. However, they claim the decline in productivity of R&D, the overwhelming
competition from smaller companies, and eventual cost pressure has forced those big
MNCs to reevaluate their traditional approach toward their value chain.
Another consulting group, ATKearney, has also identified major negative outcomes
for big pharmaceutical businesses. Namely, the revenue growth rate slowed down
and generic products from small companies have started to conquer the market.
Figure 1 Trend of New Drugs Approved Worldwide
Source: Pwc Pharma 2020 Report, 2013
For example, the consulting group estimates that by 2016 70% of the volumes in the
pharmaceutical market will be supplied by small generic companies, which will gain
35% of total sales in the industry. Complexity will also increase as MNCs keep on
diversifying their product portfolio to respond to the tough competition.4
As part of their counter-action big MNCs saw the value chain components as the
focal point. The survey by PwC found out that the companies with their strong
emphasis on making their supply chain a “strategic asset” have started to show 70%
improvement in their overall performances.5 One of the leading consulting groups,
4 ATKearney, 2013, pp. 4-9 5 PwC Supply Chain Survey, 2013, p.4
11
BCG, declared the Supply Chain Management a “mission-critical element” and
referred to it as the “pivotal strategy component for growth and profitability in the
global economy”.
However, how have big pharmaceutical companies reacted toward the looming
problems in the supply chain? PwC found out that the majority are still extremely
slow and ineffective towards the business environment dynamics.6 According to their
report, the companies lack smooth production which is based on the optimization of
demand forecast and logistics activities. Thus, huge quantities of inventory should be
kept as the safety stock, indicating higher overhead and infrastructure costs.
Consequently, pharmaceutical companies’ interest in exploring new opportunities
regarding their supply chain is leading to the need of more and more research
activities. Particularly, using regional logistics hubs in the downstream supply chain
has received tremendous attention by those businesses (Fong, 2005). Therefore, this
master thesis discusses the possibilities of using regional logistics hubs in a
pharmaceutical supply chain.
1.2. Research Questions and Objectives
This thesis covers the logistics part in the supply chain of pharmaceutical companies
and aims to explore a number of aspects in their strategic plans. Specifically, the goal
of this paper will be to learn the relevance of logistics hub setup in the
pharmaceutical industry. In other words, the paper examines the benefits of using
several logistics hubs in sales regions and the synergy advantages from connecting
those hubs in the logistics operations of pharmaceutical enterprises.
In order to meet the objectives, the paper addresses the following questions. What
kind of advantages do other industries usually have by using logistics hub setup?
What features in the experience of other industries are applicable for pharmaceutical
companies? Which products better suit being routed via hubs? Does connecting hubs
give the potential of cost reduction in logistics activities?
1.3. Methods and Procedures
This paper addresses both qualitative and quantitative aspects of the topic. Therefore,
both data sources are used in combination. Particularly, open interview sessions are
6 PwC Pharma 2020, p.3
12
organized with the supply chain managers of different companies to collect the
primary qualitative data, and the quantitative data will be obtained from the internal
database of Boehringer Ingelheim.
Along with it, the textbooks, research papers, books and articles of scientific journals
are extensively used to review the existing theoretical basis for the logistics hub
concept. Additionally, relevant theories in the academic field are tested on the
pharmaceutical logistics operations in terms of hub setup relevance, but the paper
will not introduce any new theories or create any new models.
1.4. Justification
The hub model has been discussed in the academic world for a long time. Namely,
Barnes et al. (2006) have illustrated the benefit of using a hub model between
suppliers and manufacturers. Lemoin (2003) has conducted research on the hub-and-
spoke model and showed the examples of gains achieved through successful
application. Additionally, there has been a great amount of research on the
effectiveness of logistics activities in the supply chain of pharmaceutical businesses
(Rimling, 2003; Tiwari, 2007; Oynemeci 2010; and etc.). However, the logistics hub
concept was historically the topic of mainly logistics service providers, and no
research has been conducted on the application of regional logistics hubs in the
distribution step of the pharmaceutical companies. In that sense, this research paper
brings the new outlook into the relevance and the applicability of hub models to the
pharmaceutical industry.
1.5. Definitions
MNC - a type of company that has businesses in several countries, but is controlled
centrally from a single home country.7
Logistics Hub- a central warehouse which serves for transshipping, storing and
distributing supplies and finished products (Jorgensen (2007).
Outsourcing- the term refers to the transfer of certain responsibilities and execution
in the value chain of a company. In the phase of intense competition, it is hard to
develop core competences across the whole value chain. Therefore, companies
externalize part of their operations in order to achieve higher quality, lower costs and
7 Businessdictionary.com
13
better customer satisfaction (Mangan, Lalwani & Butcher, 2008). In the course of
this master thesis, the term refers to the externalization of logistics operations.
3PL- a service provider, which executes outsourced operations on behalf of another
company for the customer. 3PL companies use their own assets to provide services,
and organize the outbound transportation up to freight bill auditing and customs
clearance (Rushton, 2007). In the context of this thesis, 3PL refers to logistics service
providers.
4PL- a business party coordinating the systems and activities among other involving
parties using their know-how and capabilities to achieve the most optimal results.
4PLs in the supply chain interface between the manufacturers, customers and logistic
service providers, and their services do not involve any tangible assets.
OTC- “over-the-counter” drugs, which “are safe and effective for use by the general
public without seeking treatment by a health professional.”8 In other words, this type
of product does not require a special prescription to purchase it at drugstores or at
any other sales points.
Prescription drug/ ethical drug- a drug that “is [of] specific strength or potency of
a drug in final dosage form for which a human drug application has been approved
and which may be dispensed only by prescription”9.
Generic drug- The FDA handbook describes this as “a drug product that is
comparable to [a] brand/reference listed drug product in dosage form, strength, route
of administration, quality and performance characteristics, and intended use.”10
Despite sharing the same characteristics with the original branded product, generics
are sold at much lower prices due to minor R&D and marketing expenditures
(Tiwari, 2006).
Blockbuster drugs- Medicaments that bring more than $1 billion net sales (Li,
2014)
Late Stage Customization/Postponement- a customization of a product at a later
stage in the product supply chain (APICS, 2003). The concept aims to address the
issues of uncertainty costs of a product differentiation and high volume of inventory
stock in the receiving sites (Bucklin, 1965). Examples of LSC in the pharma industry
can be:11
8 Fda.gov 9 ibid 10 Fda.gov 11 Savage, Roberts & Wang (2005), p.5
14
Common cartons- attaching leaflets at the later stage instead of inserting inside
boxes.
White box printing technology- shipping medicaments in white unprinted (except
basic printing requisites) boxes, and alter the boxes at later stage.
Blister pack customization- partly printing the details on the blisters at the
manufacturing site, and printing the rest at the later stage.
Two stage packing- shipping to decoupling point bulk and organizing complete
packaging process close to destination countries.
(Supply Chain) Control Tower- a central virtual hub that is equipped with
respective technologies, interface, processes as well as the talent resources to provide
visibility and efficacy over the supply chain. It is an additional layer in the supply
chain that gathers information from manufacturing, transportation and distribution to
figure out looming risks and savings potential (Capgemini, 2011).
CMO- a contract manufacturing organization; a type of company that is hired by the
pharmaceutical companies to outsource a particular step, or several steps of the drug
manufacturing.12
Pharmaceutical Tender Business- a procedure where the public hospitals or related
associations buy the pharmaceutical products from the pharma companies,
wholesalers or agents on the basis of tendering in order to get the best price
(Leopold, Habl & Vogler, 2008).
Private Business – a purchase of goods to the wholesalers, agents or other customers
directly13
Cross-docking- a logistics model where the goods shipped are stored in the
intermediary warehouse less than 24 hours and forwarded together with other goods
going to the same destination (Bartholdi & Gue, 2004).
Compliance- a set of internal regulations by a pharmaceutical company in order to
comply with the safety and quality requirements of official healthcare authorities14
Chargeable weight- greater of the actual gross weight and the volumetric weight to
calculate the air transport costs by the airlines companies.15
Full Truck Load (FTL) - a dedicated truck is used to transport the specific goods
from origin to the destination without any stopovers on the way16
12 BI Internal Database 13 ibid 14 ibid 15 Malcolm Company Website
15
2. PHARMACEUTICAL INDUSTRY OVERVIEW
The Pharmaceutical industry distinguishes itself from other industries due to its
product complexity, tight control by regulatory bodies and the market dynamics.
(Singh, 2005) The industry consists of usually global MNCs that shape the course of
the market dynamics as well as small enterprises capturing their earnings from
focused differentiation or generic products (Rimling, 2003).
One of the noteworthy features of pharmaceuticals is the hyper-high capital
expenditures. In fact, according to Malik (2009), the development of a blockbuster
drug in today’s business environment requires around $1,3 billion into R&D
endeavors, which is 65% more compared to the Year 2000 Statistics. Additionally,
most of the new projects tend to end in failures. It is only the remaining 5-10% that
serves to cover all R&D expenses and fetch profits; notably, low marginal cost of
production also contributes to a faster recoup of investment outlays. In general, R&D
costs amount 15-18% of net sales of global pharma players. However, once a product
is launched successfully, it will boost net sales17. More importantly, pharmaceutical
regulations allow patent laws with long durations to protect the inventors and allow
them to recover their costs; patenting is extremely important, because in the pharma
industry the key product is basically the patented formula, which is prone to being
stolen and counterfeited (Lehman, 2003).
The development of a drug is an extremely complex process.
Figure 2 Drug Development Process
Source: Aaps.org
16 BI Internal Database 17 Rimley (2003), p.15
16
Figure 2 and Figure 3 show how the development process is difficult and time
consuming. To be specific, approximately 5 000 to 10 000 chemical substances are
reviewed for a potential end product and 250 are selected for further clinical testing.
At the latest stage lead compounds are tested for toxicity, and a drug formulation is
designed. Along with it a patent regarding the investigational new drug is filed to the
respective regulatory bodies.
Figure 3 Time frame of Drug Development
Source: Aasp.org
The complete description of drug development is provided in the Appendix.
While launching any branded product, pricing has quite a unique dimension as the
demand is very inelastic for the successful prescription drugs. To be specific, high
prices do not have a big impact on end-customers’ negative purchasing decisions,
and neither do low prices bring more sales (Rimling, 2003). Nonetheless, tough
competition is still prevalent among branded products (i.e. Pradaxa vs. Xarelto vs.
Eliquis).
In addition to high R&D costs and complexity issues, pharma companies also face
tighter drug approval regulations. Malik (2009) reiterated that the number of newly
approved drugs plummeted significantly due to stricter FDA approval procedures,
creating extra pressure on finding ways of refilling the pipelines as well as
maintaining profitability. Moreover, safety measures of companies are becoming the
center of regulatory bodies and hence, require additional capital to be invested for
compliance improvement.
Another important problem that the big industry players suffer from is the patent
expiry pressure (Wu&Wu, 2011). As seen from Figure 4, almost half of a 20-year
patent period is eaten by Discovery and Clinical Trial phases. As a result, companies
have less than 10 years to yield high financial results to cover their high R&D,
operational and administrative costs, and gain profit for further product development.
Thus, the patent owners apparently try to initiate launches of the product as soon as
possible in the global pharma market and maintain high sales as long as possible.
17
Figure 4 Patent Value Evolutions
Source: Wu&Wu (2011), p.799
Apart from being a commercial activity, pharmaceutics is one of the priority areas of
public policy. The report by PhRMA found out that within last 15 years of XX
century, global life expectancy had risen by two years, thanks to pharmaceutical
feats.18 As the pharmaceutical sector can dramatically improve public health and
reduce the health care burden of countries, many governments have adopted
business-oriented fiscal and macro-economic policies to stimulate R&D activities
(Kremer, 2002). Especially the world’s third largest pharmaceutical R&D spender,
China, has eased FDI terms for foreign corporations and bolstered patent regulations,
which led to the venture of Novo Nordisk, Roche and Pfizer into the country over the
years 2002-2004.19
As a result of continuous negotiations and financial incentives by the UN and other
supranational bodies, large pharmaceutical companies also offer their products at
lower prices in under-developed countries. For example, the Bill and Melinda Gates
Foundation has been a major financier of such subsidized vaccination projects (Bill
& Melinda Foundation Annual Report, 2012)20. However, due to political pressure
18 PhRMA, 2004 19 PWC, 2012. Available at < http://www.pwc.be/en/pharma/pharma-Investing-in-Chinas-
Pharmaceutica.pdf> 20 Available at
<http://www.gatesfoundation.org/~/media/GFO/Documents/Annual%20Reports/2012_Gates_Foundat
ion_Annual_Report.pdf>
18
and criticism from the US Congress about “artificially low –priced vaccines for
foreign countries”, large US manufacturers suspended their participation in
UNICEF’s projects to supply vaccine as foreign aid (Mitchell et al., 1993).
19
3. REVIEW OF THE LITERATURE
3.1. Supply Chain
Despite the existence of concepts about the relations between suppliers and
customers, the current state of supply chain concepts was introduced in the second
half of the twentieth century. According to Forrester’s bullwhip effect phenomenon,
supply chain pipelines came under the focus of scholars. Based on Porter’s value
chain framework, the supply chain concept further evolved in a broader scale.
Specifically, Blanchard (2007) described the supply chain as an umbrella of five
components:
Inbound Logistics- activities relating buying, storing and managing raw materials or
semi-finished products for further value creation. These activities include material
handling, warehousing and inbound transportation management.
Operations- the process of creating finished products for sales purposes. This
component encapsulates manufacturing, packaging and other value-creating
activities of a company.
Outbound Logistics- all delivery and distribution of finished products to an
intermediate customer or to an end-customer reflects this component. Collection,
consolidation, warehousing management and transportation optimization are
considered the main functions within outbound logistics.
Sales and Marketing- this component includes the purchasing activities of finished
products as well as market communication.
Services- last, but not least, this component of the supply chain serves to keep the
quality and sales volume of products.
Lee (2002) introduced four types of supply chains based on demand and supply
uncertainties. The clear examples of demand and supply uncertainties are given in
Figure 5 and Figure 6. According to his research, an efficient supply chain is a
special strategic model where the highest cost savings are expected by cutting any
value-added services and utilizing maximum capacity and resource optimization.
Requirements of this supply chain model are that information transparency should be
perfect and production and distribution flexibility should be achieved.
20
Figure 5 Demand Uncertainty explanation on the example of product types
Source: Lee (2002), p. 106
Figure 6 Supply Uncertainty explanation on the example of manufacturing
processes
Source: Lee (2002), p. 107
Risk-hedging supply chains distribute potential risks of supply and demand
disruptions across the whole supply chain. Typically, risk aversion activities refer to
the high level of safety stock in the inbound and outbound logistics part. The
companies applying this model also use common inventory pools in order to
decrease the costs of keeping safety stock. In those cases, intercompany information
exchange should be well organized.
21
Responsive Supply Chains refers to the model where companies put all their effort in
staying responsive to the requirements of their customers. In other words, they
provide a great deal of flexibility and build-to-order processes in order to meet the
demand of the clients. Therefore, they establish customization processes in the areas
close to the customers. The prerequisite of this model is the order accuracy, since the
lead time is usually quite short for the products under this category.
Agile Supply Chains encapsulate the set of strategies that address the quick product
supply to the customers after the order is made. This model covers the features of
responsive and agile supply chains by staying flexible as well as keeping inventory
pools.
Figure 7 Types of Supply Chain
Source: Lee (2002), p.114
The next figure shows the types of products in the respective supply chains (Figure
8). As it can be seen, companies in grocery and other fast moving consumer goods
businesses use the efficient supply chain to have better margins. Meanwhile, high-
tech and semiconductor manufacturers focus on the agility in terms of market
delivery.
22
Figure 8 Suitable Products for Supply Chain Models
Source: Lee (2002), p. 108
3.2. Supply Chain Management (SCM)
The supply chain is a network of retailers, distributors, transporters, storage facilities,
and suppliers that take part in the production, delivery, and sale of a product to the
end-users. Its underlying tenet is to minimize costs and maximize customer
satisfaction via a complex network of suppliers, distributors and warehouses
(National Transport Commission Australia, 2008). Over the last three decades the
SCM has gained prominence due to increased attention from corporations engaged in
international trade and the academia. Research by Rungtusanatham et al. (2003)
demonstrates that between 1980 and 2000 SCM-related articles rose significantly in
six major operations management journals. Due to the vast scope of SCM activities,
the existing literature is filled with numerous definitions of SCM. For example,
Ballou (2004) defines a supply chain as “all activities associated with the flow and
transformation of goods from the raw material stage, through to the end user as well
as the associated information flows”.
According to Awad and Nassar (2010), the primary utility of SCM is the concept of
integrating available resources and achieving higher customer satisfaction at lower
costs with ingenious inventory and transportation solutions. Here the integration
process incorporates a network of physical infrastructure and systems to procure raw
materials, process them into intermediary and final products, and deliver them to the
end-consumers via a distribution system (Lee and Corey, 1995). Towil, Naim and
Wikner (1992) further emphasize that SCM is more than just the physical preparation
23
and delivery of goods; in fact, it also encompasses the process of enhancing customer
satisfaction by facilitating a solid feedback loop between the manufacturers and end-
users.
Particularly the emergence of off-shoring and outsourcing practices has contributed
to the fast development of logistics worldwide. Off-shoring involves fully or partially
shifting certain services and processes to other countries with the cost advantage.
Mostly, low-cost, skilled labor is the primary driving force of off-shoring; the
popularization of Business Processing Units (BPOs) in India since the 1990s can be
explained by the existence of English-speaking, skilled workers in large Indian cities
(Rushton and Walker, 2007). Conversely, outsourcing conveys a totally different
meaning, i.e. hiring external third-party logistics service providers to undertake
certain non-core functions. According to Transport Intelligence (2006), $265 billion
out of a total of $972 billion in the logistics markets were attributable to outsourced
services. Note, that the 3PL firm is simply an external provider of logistics services,
whereby the client company outsources transportation and related services. Here
services may include basic transportation & warehousing as well as value-added
assistance with freight billing, customs brokerage and clearance.
Ongoing trends in SCM
Waters (2003) succinctly encapsulates the emerging trends in the SCM sphere.
Specifically, outsourcing, IT advancements, lean inventory systems and
environmental concerns have considerably changed the structure and business
conventions in corporate SCM practices worldwide.
Lean Supply Chain
Owing its genesis to Toyota’s just-in-time model, the lean supply chain has been an
icon of multiple business practices. According to Lamming (1996), the lean supply
chain is more than a mere partnership between supplier and manufacturer. In fact, it
requires the holistic system that enables real-time tracking of company stock,
relaying information to external suppliers and procuring needed stock in high quality
and in a cost-efficient manner (Ben-Daya et al., 2008). The globalized and
competitive market environment and rising raw material costs have automatically
mandated the companies to shift to leaner stocking practices.
Technological Advancements
Thanks to recent developments in ICT (information communication technologies),
SCM has entered a new era of the hyper-integrated realm of all chain participants
(Verduijn and Loo, 2003). The emergence of Enterprise Resource Planning (ERP),
24
Customer Relationship Management (CRM) and Warehouse Management System
(WMS) has tremendously increased new opportunities toward operational excellence
and faster processes, while maintaining low costs. For example, Vendor-managed
Systems (VMS), empowered by GPS tracking applications, urged progressive
companies to upgrade their inventory management systems and streamline them with
those of suppliers in order to achieve fast information sharing and shorter lead times
(Accenture, 2012). Accordingly, so-called infomediaries21 have assumed a larger role
in SCM processes by processing and relaying accurate information in a fast and
useable format to participants across the supply chain.
Close Cooperation
Globalized markets, cutthroat competition and regulatory hurdles have slimmed
profit margins; and companies have realized that the whole world has basically
become one big supply chain. Hence, parties throughout the supply chain have
started closely collaborating to streamline their operations and achieve cost-
advantage over external rivals. The paradigm example can be seen in the Compaq
and TNT Logistics collaboration agreement signed in the year 2000; as per the
contract, TNT Logistics developed a special logistics system for Compaq’s European
operations, which was fully compatible with Compaq’s internal procurement &
distribution system.22 The customized system would handle all phases of receiving
spare parts, storage in Rapid Fulfillment Centers (RFC), and pan-European
distribution within 2-4 hours’ notice.
Environmental Concerns
Traditionally, companies tend to externalize the damage and hazards ensued from
their logistics activities. For example, an initial study by the EU Report (EU, 1996)
disclosed that the annual external cost of logistics companies amount to colossal €32-
56 billion globally. Ever since the issue of the World Commission on Environment
and Development Report (1987) arose, the modus operandi of SCM has gradually
started ebbing into a more environmentally friendly direction. The traditional
approach of forward-oriented “manufacturer to end-user distribution” has been
altered into a loop form, whereby companies have become concerned about the
recycling and the disposal of their products as well (Byrne and Deeb, 1993). The
terms “reverse logistics” and “green logistics” have entered into the corporate lingua.
21 Coined from combination of “information and intermediaries” 22 Available at
<http://www.thefreelibrary.com/TNT+Logistics+North+America+to+Operate+Distribution+Centers+
for...-a089422148 >
25
According to Giuntini and Andel (1995), the carbon footprint of the products and
processes has alarm many manufacturers; for instance, BMW launched a project to
manufacture fully recyclable auto parts (BMW Group, 2013).
3.3. Pharmaceutical Supply Chain
3.3.1. Pharma Supply Chain Specialties
The pharmaceutical industry, like other manufacturing industries, needs a complex
supply chain to bridge customers and businesses (Heinmann & Klein, 2006). As
shown in Figure 9, it takes three production stages until the finished product is
delivered to the end-customer. Lead time increases even more if the production
plants of different stages are located far from each other (Thonemann & Klein, NA).
Papageorgiou, Rotstein and Shah (2001) divide the production process into two
categories. The first category, “primary manufacture”, consists of producing APIs
(Active Pharmaceutical Ingredient), a main substance in a drug that holds the main
value and quality. The second category, “secondary manufacture”, finalizes drugs for
end-usage.
Figure 9 general Pharmaceutical Supply Chain
Source: Savage, Roberts & Wang (2005), p.4
26
Papageorgiou, Rotstein and Shah (2001) emphasize that supply chains are designed
according to product portfolio management. In turn, this portfolio management
includes three important aspects: Product Management, Capacity Management, and
Trading Structure.
The essence of Production Management for supply chains derives from the fact that
it encapsulates demand forecasts, clinical trials supply, price profile and
manufacturing costs. Demand forecasts give a rough picture of the quantity of
products to be produced in the future, and where they should be delivered. In a
typical pharma company those forecasts are done by demand managers and
coordinators for the short- and long-term period. Clinical trials supply indicates the
type of products that should be provided for clinical trials and requires special
attention as future sales boosts depend on the results.
Capacity Management characterizes the resources needed for the seamless flow of
products. In other words, it shows where the products should be produced and where
they should be stored and kept.
A trading structure is designed due to tax implications by authorities and brings
considerable financial benefits to a company. As a consequence, it influences the
structure of legal entities, physical flow of goods, and in a general sense, the whole
supply chain network.
An analysis by Savage, Roberts & Wang (2005) clearly shows that the
pharmaceutical supply chain has a number of unique characteristics. Namely, the
overwhelming presence of regulations in each manufacturing and distribution step is
higher than in any other industry (GMP, GXP and GDP Standards). Even the
aeronautical industry faces fewer regulations than the pharma industry. Another
crucial factor is that the main customers of prescription drugs are governments and
other healthcare institutions although patients stay as end-users. Furthermore, supply
chain integrity, such as batch traceability and aggregation, adds additional effort,
investment and complexity to the supply chain.
One more unique characteristic of the pharma supply chain is the requirement of
100% temperature control. Drugs can be damaged if the temperature fluctuates
during the delivery and storage, and eventually, must be destroyed if damage is
proven.23 Products are assigned into four temperature classes and kept in the given
temperate corridors. Those classes include the temperature corridors24:
23 Boehringer Ingelheim (2012) : Shipping BI Products 24 ibid
27
I Class: +2°C - +8°C
II Class: +2°C - +25°C
III Class: +15°C - +25°C
IV Class: No temperature relevance
3.3.2. Pharmaceuticals and Logistics
Despite plethora of advanced expertise and technologies, the pharmaceutical industry
has embraced the modern SCM practices much later than pure logistics or retailing
companies. Similarly, the concepts such as hub systems and optimized network
solutions have only recently caught the attention of pharmaceutical managers
(Beerens, 2012). Notably, distribution activities constitute a leviathan part of SCM
endeavors of pharmaceutical companies; the fragile and perishable nature of
medicines combined with the existence of regulatory constraints create operational
and compliance challenges for companies in the distribution process (Meyer, 2012).
For instance, the EU mandated Good Distribution Practice (GDP) licensing for
potential drug distributors across the EU (EC Public Health, 2013)25. Equally
important, concerned with expiring patents and the need to discover the next
“blockbuster”, pharma majors usually strive to sell their previous stock with a smart
logistics infrastructure and gain access to cash for new R&D projects (AZN Annual
Report, 2012).
Pharmaceutical companies have also turned to logistics in order to organize fast and
effective reverse logistics processes. Tuenter et al. (2003) state that drug
manufacturing is a complex process which produces plenty of hazardous by-
products; in fact, up to 112 of 900 intermediate substances in production processes
may be by-products. Here reverse logistics can dramatically contribute to recycling
or neutralizing harmful by-products, which also improves company profitability
(Flapper et al., 2000).
Furthermore, players had soon realized that it had become imperative to effectively
internalize smart SCM practices into corporate policies in order to protect profit
margins and to compete with low-cost generic drug manufacturers from developing
countries, such as India. For instance, Delhi-based Cooper Pharma Ltd. is engaged in
providing a wide variety of generic medicines to Asian and African markets at low
25 Available at <http://ec.europa.eu/health/human-use/good_distribution_practice/index_en.htm>
28
costs.26 Regulatory constraints vis-à-vis high corporate taxes and shorter patent
periods have also affected many companies’ bottom-line and urged them to minimize
logistics expenses. Lastly, increasing concerns over channel security and instances of
counterfeit products have forced pharma companies to streamline their operations
with distributors and establish supply chain transparency to better control the whole
process.27 The FDA 2013 report states that annually millions of counterfeit cancer
medicines are illegally imported into the US alone.28
Figure 10 Counterfeit Medicines: Global picture
Source: <http://www.phrma.org/issues/counterfeit-drugs>
Dependence on wholesalers
Particularly, in smaller markets with a scattered market structure, pharmaceutical
giants are increasingly banking on wholesalers rather than direct marketing via
hospitals or clinics (Clement et al, 2005). In this manner, global companies can lay
their investment in their own distribution and warehousing facilities in markets with
less economies of scale. For example, in China wholesales assume an important role
in the distribution process in second and third their cities; they obtain medicines at
deep discounts from manufacturers and resell them to hospitals and pharmacies
(Figure 11). It must be noted that wholesalers are highly preferable due to their extra
competences and value-added services; the Schaffer Report (2013) clearly pinpoints
that modern pharmaceutical wholesales possess a huge technical capacity, confirm
26 Cooper Pharma, 2014. <http://www.cooperpharma.com/global_presence.htm> 27 FDA, 2012 28 Available at
<http://www.fda.gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/CounterfeitM
edicine/ucm338283.htm>
29
drug expiry dates, track sales records and obtain feedback for specific drugs.
However, wholesales add to price margins, inevitably affecting price competitiveness
of a particular medicine.
Figure 11 Pharmaceutical Distribution Channel in China
Source:<http://www.pwc.be/en/pharma/pharma-Investing-in-Chinas-
Pharmaceutica.pdf>
In Europe as well, the wholesalers’ role as the main orchestrator of pharmaceutical
logistics has considerably increased during the last decade. With advanced logistics
and warehousing facilities, wholesalers have started challenging not only logistics
giants such as DHL, but also drug manufacturers themselves: pharmaceutical
companies are losing profits due to “parallel importing” of their own products,
whereby an authorized wholesaler resorts to international trade due to price
differentials in other European countries (Maskus, 2001).29
As a pragmatic solution to aggressive strategies of wholesalers, pharmaceutical
companies have also started blurring the line between logistics and pharmaceutical
functions. In other words, they assumed the traditional functions of wholesalers and
commenced direct marketing of drugs to hospitals and pharmacies. In order to secure
margins previously claimed by wholesalers and keep distribution costs minimal,
pharma giants are also gradually turning to in-house logistics units; they are
employing ingenious SCM business models to serve wide market zones across the
EU with major centralized warehouse units and efficient distribution systems.
29 Available at <http://www.wipo.int/export/sites/www/about-ip/en/studies/pdf/ssa_maskus_pi.pdf>
30
Specifically, the “hub and spoke” model has become the favorite model due to its in-
built flexibilities, e.g. JIT options, and low-cost features (PWC, 2013).30
3.4. Logistics Hubs
The last two decades have seen a drastic popularization of the “hub and spoke”
format in supply chains by large corporations worldwide: here the hub is a central
structure that receives bulk goods and distributes to multiple second-tier destinations
via shorter connections to numerous nodes with higher efficiency and speed
(Rodrigue et al, 2001). Botha and Ittman (2008) emphasize that due to flexibility,
low-cost, speed and reliability advantages the logistics hubs have become the most
favorite configuration for large corporations from industries ranging from retail to
pharmaceuticals.
According to Jorgensen (2007), a logistics hub is essentially “an integrated center for
transshipment, storage, collection and distribution of goods”. A more specific
definition by Europlatforms (2004) cites that the hubs are special zones dedicated to
transportation and distribution activities with related services on both a national and
international level by multiple commercial operators. To perform the above
functions, hubs comprise integrated facilities such as large warehouses, transport
fleets, storage areas and IT-enabled inventory management systems. Galloni (1999)
even coined the term “freight village” for logistics hubs, as all its facilities and
activities are centralized in a single mega-unit. Similarly, Skowron-Grabowska
(2008) enumerated the benefits of logistics hubs structures under one roof such as
optimal operational and administrative flexibilities and location convenience (see
diagram Appendix). It must be noted that hubs may be structured differently for
different functions as per their application scope and industry (Raimbault et al,
2012). More detailed information will be provided in Paragraph 3.3.3
Trappey et al. (2010) divides hubs into logistics hubs, which are used for the routing
physical goods, and business hubs, which provide information about the stock level,
shipments and other supply chain related aspects. They also point out that the current
trend is moving towards the integration of both types in the operations (Figure 12).
More clearly, all hubs that the physical flow goes through are integrated into the IT
systems of enterprises. The functional aim of a firm from establishing hubs in their
supply chain is “to integrate supply chain resources, provide real-time material
30 Available at <http://www.pwc.com/en_gx/gx/pharma-life-sciences/pdf/internal_audit.pdf >
31
supplies, ensure information transparency, improve logistics efficiency, and increase
customer service quality”31. The authors claim that the logistics hubs are managed by
3PLs rather than companies themselves to provide more flexibility, higher quality
due to competitive advantage focus, and more return on assets. However, IT system
integration requiring some more efforts as well as the dependency on external parties
to a large extent can be considered the downsides of hub outsourcing.
DHL (2013) underscores that hubs are middle nodes between source and final
destinations, and incorporates multiple combinations of transportation modes (See
Appendix). For example, in transshipment mode, goods shipped from the original
site to the hub in the home country will be reshipped to a distant other hub via
airplane, truck or ship. From the hub in foreign lands, goods can be shipped directly
to final destinations. Alternatively, in consolidation mode, goods from multiple
sources will be shipped to a single hub, which will be reshipped to another central
hub in a foreign country in order to distribute them to multiple destinations in the
end. However, modern logistics companies utilize highly complex network systems
which involve multiple sources and hubs in both domestic and foreign lands.32
Figure 12 Integrated hub (Logistics and Business)
Source: Trappey et al. (2010), p.1224
31 Trappey et al. (2010), p. 1223 32 Ishfaq (2010). Hub Network Design Models for Intermodal Logistics
32
3.4.1. Configurations
The diagram below vividly illustrates the complex network system employed by
DHL in East and South-East Asia. Central terminals erected in major cities serve not
only to seamlessly connect logistics hubs but also allow super-wide enlargement of
service areas into remote areas. It must also be noted that the hub model is not solely
employed by logistics companies; in fact, giant retailer Wal-Mart is considered one
of the pioneers in the field (Hudson, 2003).
Figure 13 Logistics Hub Configurations
Source: Raimbault et al. (2011), p. 4
Figure 14 DHL’s Regional Hub Concept
Source: DHL (2013), p.5
3.4.2. Location Selection
33
Munoz and Rivera (2010) stipulate that companies assess various physical
considerations while choosing hub locations; specifically, infrastructure, availability
of supporting services, industrialization level and overall location of the place against
other major cities.33 Botha and Ittman (2008) state that the capacity to handle various
types of goods with flexible transport modes and storage units largely determines the
success of hubs. However, according to Hayes (2006) the single most important
factor is the regulatory environment and attitude of the local government, which has
a direct bearing on the performance of not only hub operators but also the wide array
of business clients. The World Bank’s Logistics Performance Indicator has also
confirmed that customer clearance speed and “logistics-friendliness” of the host
country is extremely important in determining the success of the hub. Moreover, the
availability of skilled labor force at competitive rates is another critical issue. In
brief, location selection for a hub involves phased analysis of essential and
supporting features available in a particular locality. In fact, favorable geographic
location, pro-business government and regulatory environment coupled with huge
pools of skilled workforce were behind the development of super-hubs in Singapore
and Hong Kong.34
3.4.3. Hub Services and Benefits for Industries
Traditionally, large all-round logistics companies furnish most physical services such
as the receipt/dispatch of goods, break-bulk, freight consolidation and customized
packaging (Rimiene and Grundey, 2007). However, technological advancements and
global market presence have added considerably to the service variety and depth of
logistics firms. As a result, hub operators can currently provide multiple value-added
services such as bar-coding and total logistics management. Notably, the emergence
of vendor-managed inventory systems paved the way for lean stock holding in local
warehouses; reports about the breach of safety stock levels are automatically
generated and notified to the main hub, and fresh dispatches can be arranged within
hours. Ingenious practices such as cross-docking allows virtually zero storage time in
actual go-downs, whereby goods mostly arrive at the hubs and simultaneously leave
for end destinations immediately from another exit point (Cheong et al., 2007)
33 Alam, 2013, p. 34 Robinson, 1998, p.
34
Raimbault, Douet & Fremont, (2011) categorize a hub by the roles it serves (Figure
15). To be specific, they define hubs in the role of either nodes or centers to provide
the seamless flow of goods from the shipping point to the destination. In that sense,
some hubs serve intermediaries between the whole transportation chain to achieve
economies of scale, and some hubs are used as the central point of several regions’
stock for better responsiveness to the market.
As mentioned earlier in 3.3.1, the services and benefits of hubs vary from one
industry to another. The research of Trappey et al. (2010) studies the role of hubs in
six industries in depth and draws very useful findings. In particular, they identify the
problems the industry is facing, and how the issues can be addressed by applying the
hub models. Below, the findings for notable industries are briefly described.
Figure 15 Hub Characteristics by Roles
Source: Raimbault, Douet & Fremont (2011), p.4
3.4.3.1. Electronics Industry
Problems:
Long procurement lead times created more complexity
Lack of communication between upstream and downstream players caused
poor transparency for manufacturers
Huge manual data processing and poor workforce capability resulted in
inefficient logistics operations
Hub services:
35
Enable shipment consolidation and seamless physical flow
Switch hub IT systems to main ERP system and provide real time shipment
and stock level data
Benefits:
Up-to-date logistics information
Lower safety stock level
Shorter lead time due to the synergy between production planning and
shipment scheduling
3.4.3.2. Automotive industry
Problems:
Redundant resource utilization due to the high number of brand dealers from
multiple locations
Frequent finished goods damages in the transportation legs
Long lead times
Space scarcity in the warehouses due to high safety stock of other car
components
Manual shipment tracking using fax or telephone services
Hub Services:
Assign logistics operations of after-market parts, import of goods, export of
goods and knock-down parts to centralized hubs and apply RFID technology
Organize postponement activities for brands with volatile demand
Establish a quality checkpoint
Benefits:
Shorter lead times
Fewer damaged finished goods due to the quality checkpoints
More visibility in raw materials flow and finished goods distribution
3.4.3.3. Integrated Circuit Industry:
36
Problems:
Overloaded logistics operation with little automatized systems for emergency
orders
Management of VMI services for customers
High inventory stock and long lead times due to poor transparency
Hub Services:
Crossdocking
Shipment consolidation
VMI services for foreign customers
Supply chain visibility plarform
Benefits:
Lower logistics costs due to outsourcing
Better service quality and improved competitive advantage
Transparent order and shipment processing
3.4.4. Relevance for pharmaceutical companies
So far, there is little literature on the application of hub models in the pharmaceutical
industry. Naturally, the question is why businesses in this sphere want to use hubs in
their supply chain. The Accenture Life Sciences Report (2013) highlights that fewer
new blockbusters in the pipeline, stiffer competition from generic drug
manufacturers and tighter regulations in the post global crisis era have forced
pharmaceutical companies to focus more on the excellence in logistics. Advanced
distribution networks with high efficiency and responsiveness to demand/supply
shocks have become an imperative to meet stricter customer expectations and
compliance regulations. Accordingly, pharma companies have turned to the hub
model of distribution systems, which facilitates a smooth cascading environment for
the timely global, regional and local reach of their drugs. The use of advanced
37
technologies here allows real-time controlling of inventory levels in wholesaler
warehouses; once stock levels touch critically low levels, regional hubs can
immediately engage in replenishment endeavors, which can be tracked real-time
through GPS systems.
To have a better view of hub models in the pharma world, interviews were conducted
with experts. The details of this study will be provided in the next chapter.
38
4. METHODOLOGY
In the course of this master thesis, it was discerned that the literature relating to the
hub concept application in a pharmaceutical industry was not enough to draw a
sufficient evaluation tool for the case study. Therefore, face-to-face interviews were
conducted with experts working within or across the industry. Below, the
development and process of the interview, and its other aspects will be discussed in
detail.
4.1. Development of the Interview
According to Remenyi (2011), an interview is a type of academic data collecting
technique from knowledgeable sources, or so-called ‘informants’, to have a more in-
depth view or additional supporting evidence.
Quinlan (2011) categorizes five interview types and describes them in the following
way:
The one-to-one interview is the technique where the researcher conducts an interview
with the respondent face-to-face and has a detailed discussion over the respective
topics.
The group interview involves a number of people being questioned as a group at the
same time, but still is different from focused groups.
The telephone interview is the one where a researcher uses a phone to collect data
from the interviewee.
The online interview is an interview conducted using web applications.
The photo-elicitation interview involves a researcher engaging in a conversation with
respondents by showing images and photos, and building up the findings based on
the discussion, interpretations and reactions to the pieces of art presented.
Each type of interview has its own advantages and disadvantages. For example, the
one-to-one interview enables a researcher to observe the reactions of the interviewee
and manage the process as smoothly as possible due to the real-time eye contact.
Furthermore, the confidence of the respondent to respond more completely, honestly
and proactively tends to be higher. More importantly, there is a greater chance of
elaborating questions and probing the given answers by a researcher. As a result, the
overall information obtained can give sufficient details and can reflect the
experiences and perspectives of an informant. One-to-one interviews are usually
39
conducted in the office of an informant, somewhere, where he or she feels
comfortable. Those areas might be business centers or other types of official meeting
areas close to the respondent’s working place. It can cause mobility issues for a
researcher if the distance is long and the number of interviewees is large. Moreover,
the respondent might be guided by the researcher in a specific way and end results
might contain bias (Quinlan, 2011).
Other interview techniques, such as telephone interviews and online interviews,
provide the respondent with a great deal of privacy and anonymity, but are awkward
tools for highly sensitive questions (ibid).
Since the research area of this thesis involves the strategic part of the businesses, the
experts were rather reluctant to share their knowledge. Additionally, there were some
questions that could be perceived as extremely sensitive by respondents. In this
regard, the one-to-one interview method was selected to collect data from the experts
within or across the pharma industry.
4.1.1. Interview Location
As described in the previous sub-chapter, the location of an interview tends to be
arranged according to the convenience of an interviewee. Likewise, all the interviews
took place in the offices of the respondents. The offices were free from any noise and
no interruption was observed during the whole process. The dress code for all
interview sessions was formal and the author remained neutral. Additionally, no
electronic devices were used to record the answers but only notes were taken.
4.1.2. Participants
Carrying out the interview is a challenging process, but finding right interviewees is
even more challenging (Remenyi, 2011). In order to collect reliable and valid data,
the quality of the interviews should be good, and the respondents should have a deep
knowledge about the pharmaceutical industry, supply chain and hub concepts.
Therefore, the pharmaceutical supply chain was screened and possible links with
external links from external companies were evaluated by the author. As a result, the
following spheres were considered relevant to conduct an interview with:
Pharmaceutical Companies
40
Consulting Companies in Supply Chain
Freight Forwarders
FMCG Companies relating partly to health products
Research Institutes specialized in material flow
Since most of the pharma businesses keep their information highly confidential, the
likelihood of obtaining consent for the process was quite low. Therefore, companies
that directly or indirectly compete with Boehringer Ingelheim were considered out of
scope for the face-to-face interview. Then the companies which potentially use a hub
concept in their operations or were involved in designing a hub concept along with
Boehringer Ingelheim were identified. This identification was implemented by
communicating to the supply chain experts in the company. As the next step, a letter
was sent to the responsible associates in the respective companies. The letter
contained information on the topic and the objectives of the research, as well as the
question concerning their willingness to be interviewed. The standard text of the
letter can be found in the Appendix. In total, six companies were contacted: two
freight forwarding companies, two consulting companies, one FMCG firm and one
research institute in the supply chain.
Within the timeline of the research, four companies responded immediately and
showed their interest. At a later stage, a fifth company also agreed on conducting the
interview, but due to scheduling, it was not possible to carry it out.
Following, there is information on the companies that participated as interviewees.
4.1.2.1. PwC
Founded by a merger of the two consulting giants Price Waterhouse and Coopers &
Lybrand in 1998, PricewaterhouseCoopers (thereby PwC) is a global business
consultancy firm with official presence in over 159 countries. As of the fiscal year
2013 PwC grossed $32,1 billion from assurance, advisory and tax services on the
backs of 184,235 employees worldwide (PwC, 2013). Despite established business
activities in all five continents, the company derived 75% of its revenue from US and
European operations. The PwC mission is to deliver a fair and clarified auditing
service, in order to improve the presentation of financial information based on
triangular core values of integrity, intelligence and innovation.
41
In the wake of financial & audit scams such as Enron and Worldcom in the early
2000s, PwC, along with other major rivals, was challenged to restrain its
Management Consulting Services due to conflicting interests. Particularly the
Sarbanes-Oxley Act severed the chain between auditing and management consulting
services. As a result, the firm had to spin off most of its valuable management
consultancy services assets such as the Canadian Omnilogic Systems specialized in
SAP-based architectures. Ultimately, in October 2002 PwC sold its whole
consultancy division to IBM.
Subsequently, PwC re-chalked the direction for its management consultancy services
from traditional tax/actuarial consultancy toward more customer oriented systems
such as customer relationship management and media strategy development. As of
2013, over 28% of PwC’s total revenue was derived from advisory services.
Particularly, due to the hyper-competitive and convoluted global business
environment PwC clients started demanding more pragmatic SCM consulting
services which would substantially reduce their operating expenses and improve their
bottom-line. Environmental Leader (2012) further emphasizes that well-streamlined
SCM and enterprise resource planning (ERP) systems have become a necessity for
modern businesses challenged by regulatory & environmental laws to reduce their
environmental impact. In fact, many corporations are currently using their supply
chain systems, efficient and low-carbon operations as unique selling points (USPs) to
differentiate themselves from rivals.
Committed to highest customer services yet challenged by scattered worldwide
operations, PwC itself strives to streamline its supply chain management with
integrated network solutions. Besides, as part of responsible corporate citizenship
and CSR agenda, the company tries to keep its carbon footprint below mandatory
standards with smart SCM technologies (PwC, 2013). In fact, thanks to the advent of
Internet and information communication technologies, such as teleconferencing,
most inefficient physical/spatial movements are effectively eliminated within office
and global networks.35
4.1.2.2. Kuehne & Nagel
Kuehne and Nagel is a global logistics firm based in Switzerland. It was initially
founded in Germany in 1890 by F. Nagel and was overtaken by other global
35 PwC, (2013): Facts and Figures
42
companies in the 80s. Nowadays, Kuehne and Nagel is accountable for almost 10%
of the world’s ocean and air transportation in terms of sales. In the current business
arena, the company conducts its business in over 100 countries with more than 60
000 employees.
The firm is certified with “Global Cargo 2000 Phase 2” and leads in ocean freight
forwarding. According to the company’s website, it offers the following services:
Sea freight
Airfreight
Road & Rail Logistics
Contract Logistics
Integrated Logistics / Lead Logistics
Real Estate
Insurance Brokers
Along with other global companies, Kuehne and Nagel also provides Logistics
Control Tower Services across the world. The group website of the firm describes
the concept as the tool that “oversee[s] networks that use a multitude of service
providers and require complex transport organization, such as border crossing,
multiple regions, multiple modes, merge-in-transit or divert-in-transit. If not well
organized, such complex transport requirements could result in high cost, high
inventory or low on-time levels.”36
4.1.2.3. Company XYZ37
Founded in 1919, the company is famous for its dairy and water products. In the late
70s the company started to merge with other food producers and introduced branded
products in brewery and yogurts.
After some acquisitions, it moved its strategy toward globalization and launched in
Western Europe and the United States. In the early 90s, it was recognized as one of
the biggest diversified European multinational enterprises in food and nutrition.
At the beginning of the XXI century, the company shifted its focus on creating a
unique competitive advantage and sold its divisions. Consecutively, it has built its
36 K&N corporate website 37 Due to the conditions of anonymity by the company, the real name will not be disclosed
43
strength around healthy food and medical nutrition. Simultaneously, the firm has
penetrated into emerging markets, namely Russia and other CIS countries, and has
gained a considerable market share.
It currently has over 100 000 employees worldwide operating in almost 200 plants.
After finalizing the product, it places finished goods in the shelves of retailers.
Accordingly, the firm has developed two distribution models. The first model is
designed to supply major retail chains and the other one to provide small traditional
retailers with finished goods. In some continents like Asia, Latin America and
Eastern Europe, most of the sales originate from small shops. Therefore, small but
frequent shipments are required in these areas.
In developed countries, their main customers are big retail chains. In that sense, the
speed and responsiveness play a crucial role in the distribution model of ABCD.
To address the issues, the company has been using a hub structure in the supply
chain systems.
4.1.2.4. Groenewout
Groenewout is a consulting company, which deals in logistics and supply chain
optimization. It was founded in 1966 as a technical installation and consulting firm
and evolved through the years from construction to architecture, design and in the
late 90s to the logistics and supply chain solutions. The brief description of the
company’s attributes, capabilities and functions is given in the Appendix.
In the past, the firm has developed several logistics optimization tools and its Quality
Management System was certified by Lloyd’s.
According to the company website, the firm “consists of highly qualified and
experienced business consultants specialized in either logistics or supply chains
management” and the team integrates “business and operational processes for
enhancing supply chains performance, logistics cost reductions and service
improvements.”
44
4.1.3. Data Collection
4.1.3.1. Format and Structure
The objectives of the interview were to collect data casting a light on the practices
and expertise of hub applications in the business world, and to discover additional
points that have not yet been mentioned in literature.
In order to gather the required information, a semi-structured interview format was
selected. Barriball & While (2006) write that this format has a number of advantages.
Firstly, it does not prevent the respondent from adding their personal experiences and
is well suited for cases where the question is about complex or sensitive aspects.
Furthermore, it enables a researcher to dive deeper into answers and to probe for the
purpose of validity and reliability. At the same time, a pre-defined structure prevents
informants from talking about irrelevant topics.
The planned questions of the interview were the following:
How do you perceive a Hub Setup? Hub-to-Hub?
What benefits does (would) it bring to a company?
o To a pharmaceutical company?
What disadvantages do you see in a Hub-to-Hub setup?
What operational prerequisites (barriers) should be met (addressed) to design
the Hub-to-Hub network? (IT requirements/financial/location/…)
What products, in your opinion, should be routed via hubs? (large
volumes/launch/mature/close to obsolete/fast-movers/slow-movers/shelf-life
related…)
In which industries is a Hub-to-Hub setup common? Which examples can
you provide from your experience?
Any further comments?
Alongside with working the content, the potential questions were also tested on
whether the interviewees understand the questions in the way the author intended as
well as to what extent questions might be seen as sensitive. First of all, several
supply chain experts in Boehringer Ingelheim with the experience of hub related or
supply-chain-network-design related projects were given the questions, and their
interpretations were evaluated. Secondly, their opinions on which questions would
make the informant reluctant to answer were also noted. Consequently, the wording
45
of the questions was refined and in some cases, the sense of the questions was
directed toward more generic terms rather than specific examples.
The questions were sent to the interviewees in advance and another supplementary
document of a hub concept explanation (see Appendix) was also attached to the
email (Quinlan, 2011). The main aim of this approach is to provide all the
respondents with the same level of understanding of hubs in the supply chain.
4.1.3.2. Validity, Reliability and Unbiasedness
Quinlan (2011) defined validity in her book as “the honesty and the truthfulness” of
an academic work. In other words, validity indicates to what extent the data collected
represents the true picture of the scope, and how well it matches the whole logical
thread of the research. Barriball & While (2006) emphasize that “interviewer
friendliness, approach and manner towards respondent” are the key factors to obtain
valid and reliable data. They add that creating convenience for the interviewee also
increases the chance of having credible information.
Based on the preceding instructions, the convenience for the respondents was created
to the most possible degree. Also, the author displayed a friendly and honest manner
throughout all interview sessions. For questioning and note-taking, neutrality was
kept and no emotions were shown. Another success factor that secured the
authenticity of answers was probing (Barriball & While, 2006). By applying this
tool, focal and relevant points were clarified and sensitive questions were
successfully communicated. Overall, validity issues were addressed properly for data
collection.
Reliability of research refers to the technique that gives the same level of consistent
results when it is applied to a different data pool. This term is mainly relevant for
quantitative analysis and cannot be completely relevant for qualitative research. For
the latter research type, the term ‘dependability is better suited and the tool provides
the research with “soundness” (Quinlan, 2011).
There are two basic ways of maintaining reliability. The first approach, so-called
auditing, requires a researcher to “document, explain and justify” every single step of
the project process to the stakeholders. The stakeholders usually involve supervisors,
advisors, experts and other readers (ibid).
46
The second approach is to keep a research diary and describe the daily progress of
work over the period of the research timeline. Later, this will be attached to the
academic work as an appendix (ibid).
For this thesis, the first approach was used to ensure reliability, or in more proper
terms, dependability of an interview. First of all, the timeline was discussed with the
academic supervisor from the FH Mainz as well as the operational supervisors from
BI (Appendix). Secondly, a number of interview and discussion sessions were
carried out with the operational supervisors in terms of streamlining the strategy of
the research, selecting correct tactics, finding right respondents and ensuring an
effective communication with them, as well as other important aspects. Attachments
are provided in the Appendix in terms of documenting the process.
It was also very important for the author to rid the results of bias. Thus, the Delphi
analysis tools were used for the face-to-face interviews. The interview duration was
approximately one hour. As instructed, some iterative questions linked to the
previous feedback other sessions were given to the informants (Dalkey & Helmer,
1963). Furthermore, at the end of the sessions, a short summary was made in which
they were asked to evaluate and confirm the given answers. At the next stage,
conflicting ideas were identified and compared with the aggregated results. Then it
was discussed with the panel of experts from BI and any biased information was
eliminated.
4.1.3.3. Confidentiality and Anonymity
Quinlan (2011) describes confidentiality as “the guarantee” that the indicated
information given by respondents will not be publicly disclosed and the access is
allowed to only the researchers themselves, and possibly to supervisors. Anonymity
refers to the guarantee that the identity of participants, companies, or organizations
will not be shown or mentioned in the final paper.
This paper also addresses the preceding points by securing the confidentiality and the
anonymity of the informants and their companies. In order to ensure that, the names
of companies that would like to remain anonymous were altered with ‘Company+
alphabetic letters’. Additionally, no direct information that might lead to the
identification of the company was included in the content of this thesis. Last, but not
least, all data collected was not shared with any party.
47
4.2. Interview results
This paragraph illustrates the results of the one-to-one interviews with the experts
from the Supply Chain World and discusses the possible applicability of the
outcomes obtained for Boehringer Ingelheim’s case.
In the first place it was determined what ‘hub’ stands for, and what ‘Hub-to-Hub’
indicates.
Figure 16 Hub Definition
Created and Derived from BI Internal Database (2013)
Figure 17 Hub-to-Hub Definition
Created and Derived from BI Internal Database (2013)
4.2.1. Advantages
After the alignment of definitions, experts were asked about the advantages of hubs,
and the gain from switching hubs.
Experts approached this question broadly and stated that there are mainly the
following aspects. Firstly, owning a hub in the system enables the consolidation
48
activities, and switching several hubs boosts this opportunity even more. Secondly, it
helps businesses react better to demand fluctuations in the market and keep service
levels. Deriving from this core, it addresses the issues of parallel trade in some
industries.
Transparency is the next positive value that hubs add. In other words, several hubs
in the system serve the information source once the safety stock of receiving
countries is kept. In its turn, the transparent data is used to fight against
counterfeiting, which is a major topic in the pharmaceutical industry. Furthermore, it
reduces the operational complexity because of the lower number of shipments, and
gives a positive impact on carbon emission rates. One more notable feature of a Hub-
to-Hub design is that the level of short-term forecasting improves due to a decreased
lead time to the consignee.
As other benefits of using several hubs in the downstream supply chain, high value
shipment control and security were mentioned. To be specific, the design enables the
value of goods to be distributed to several containers thanks to the mass and to keep
the maximum allowed shipment value below the limit. It enables companies to select
a logistics service provider from a wider range of 3PLs. Also, the products encounter
minimal external touch due to the closed containers from the shipped hub to another.
All experts agreed that the Late Stage Customization operations in regions and the
tax benefits achieved via the hub model were among the positive aspects of hubs. In
other words, an effective utilization of hubs brings a substantial amount of savings in
tax and customs, which offset any costs and investments required for such a supply
chain design. Additionally, Late Stage Customization operations serve as a bonus
once the responsiveness in regions should increase.
4.2.2. Disadvantages
Along with the advantages, hubs bring some disadvantages as well. According to the
experts, the overall lead time increases and the products with shorter lead time
cannot be purchased due to expiration. Furthermore, it adds some complexity in
planning the managing downstream supply chain.
Another argument revealed was the risk exposure of sales countries to the incidents
of the regional distribution centers. In particular, any unexpected accident in the hub
model influences not one, but several of these sales branches.
49
Last but not least, the scarcity of skilled workers in some regions hinders successful
hub operations and might cause serious problems in the distribution part of the
supply chain.
4.2.3. Prerequisites/Conditions for Establishment
Based on the elaborated information from experts, it was noted that the following
characteristics are considered the ultimate hub model prerequisites if:
Shipments with extremely low volumes are highly frequent to a specific area
The distribution to an end-user is implemented in hourly windows
Products are dangerous goods or possess special dimensions and thus cannot
be shipped together with other products
When experts were asked about the conditions and the prerequisites to use several
connected hubs in the region, almost all of them reiterated that the harmonized and
unified IT systems should be considered first. They claimed that a generalized
common IT system in all business units and corporate units serve as the success
factor of switching hubs. Master data and information flow feed the cycle of product
sales, and any disruption or mismatch in the system might create tense situations.
Secondly, the location of hubs plays a crucial role in connecting them, and the center
of gravity analysis should be conducted to determine whether they could be in-line or
not. In some cases, the close distances from receiving sites to production sites make
routing goods via several hubs inefficient.
Thirdly, the infrastructure in the respective region must meet high standards to
supply other receiving sites efficiently and on-time. Also, hubs should be established
in free trade zones and areas with other tax and customs incentives so that the
internal price-transferring model is not disturbed.
Fourthly, the company must have a proper distribution risk management for hubs, as
several receiving countries are dependent on the route.
Fifthly, the volume of sea shipments should be higher than 80% of the total volumes
shipped.
Lastly, the places where hubs are located should contain sufficient skilled labor force
to ensure smooth operations in hubs.
50
4.2.4. Product Suitability
According to the respondents’ statements, there are some products that should be
directly shipped rather than routed via hubs. Such products include goods with a
short shelf-life, since the long lead time eats up their purchasability. Also, products
with high volumes should be shipped directly, as they already meet the critical mass
requirement. The experts also stated that launch products should not be routed via
hubs, but their justification derived from the common practices of the companies in
today’s business.
Hubs were recommended by respondents if sales of a product are slow, and shelf-life
is irrelevant to consideration. Moreover, hubs are of best use if products are close to
the phase of obsolescence and the demand fluctuation is obviously prevalent.
4.2.5. Best Practices
Interview results showed that there are some companies in pharmaceutical and
FMCG industries that are effectively using the Hub-to-Hub structure in their supply
chain systems. Particularly three distinct MNCs have exploited the opportunities
from the setup regarding the tax and customs savings, responsiveness and keeping
the service level with the less safety stock.
The first company, operating in the pharma industry, used hubs as the strategy for the
market penetration. Namely, the firm opened a regional hub in the Netherlands to
supply Belgium, France and other European countries and consolidated the finished
goods from Latin and North America in the US. By this way, it kept the service
levels high and reacted to demand fluctuations quite efficiently.
The second company, also dealing in pharma products, opened its intermediate hub
in Switzerland and built regional hubs for groups of countries. As a result, the firm
gained considerable savings from tax and customs incentives.
The third company, one of the biggest players in the FMCG industry, also used a hub
setup for tax reasons. To be specific, it built the intermediate hub in a country where
the VAT rates are lower and routed all the products via the hub. This setup enabled
the MNC to transfer the cost of goods to the hub at the highest possible rate and then
sell to other countries with little further margins. Similar to the previous example,
there was one more hub established in order to gather finished goods from various
production facilities.
51
4.2.6. Summary of Interview Results
To sum up the important aspects from the interviews, Table 1 displayed below and
the points are shortly illustrated.
Table 1 Summary of Interview Results
Category Hub-to-Hub
Model
Implications
Consolidation
Logistics Cost savings
Responsiveness
Way to Market; Tender Business; better
management of products close to
obsolescence; Parallel Trade
Tax and Customs
Savings
Financial gain
Security
Product safety
Shipment Value Control
Financial gain; flexibility in Logistics
Service Provider Selection
Transparency
Anticounterfeiting; better information
Distribution Risk Higher risk to receiving business units
Overall Lead Time Shelf-life limitations; higher
replenishment stock
- Positive Impact
-Negative
Impact
Overall, the switching hubs can bring a significant synergy effect if designed
correctly.
52
5. CASE STUDY: INTERDEPENDENCY OF THE REGIONAL LOGISTICS
HUBS IN THE SUPPLY CHAIN OF BOEHRINGER INGELHEIM
5.1. Company Overview
Boehringer Ingelheim is one of the world's leading pharmaceutical companies in
research, development, and manufacturing of medicines of high therapeutic value for
human and veterinary health. In 2012, the company earned more than €14 billion in
net sales, constituting a 12% increase compared to the previous financial year.
On the international level Boehringer Ingelheim ranks 17th in the Top 20 world’s
largest pharmaceutical corporations (Miebach Consulting, 2012). In Germany, the
company ranks under Johnson & Johnson GmbH, STADA AG and Novartis AG
(Annual General Meeting, 2012).
5.1.1. Company Profile
Boehringer Ingelheim was founded as a family-owned business in 1885 in Ingelheim
am Rhein, Germany, where headquarters are still located today. The diverse and
highly skilled global workforce consists of more than 44 000 employees in 145
affiliates (organized in Business Operating Units), seven research and development
facilities and twenty Production Operating Units worldwide. The 127 years of history
are reflected by the company’s guiding principle: Value through Innovation. As
shown in Chapter 3, in the fast-changing world the uniqueness of a product or service
is no long-lasting situation. Boehringer Ingelheim responds to this challenge with a
strong core business focus on R&D of innovative medicines. The company’s
products are particularly successful in the treatment of respiratory, cardiovascular,
central nervous system illnesses as well as infectious disorders and diseases. In 2010,
Boehringer Ingelheim launched two new and innovative products in thrombo-
embolic and metabolic diseases (“Pradaxa” and “Trajenta”) (Boehringer Ingelheim,
2011: Business year, p. 5).
The company has established several Production Operating Units (POPUs) across the
world. Most POPUs are located in Europe along with some in the US, Mexico, China
and Indonesia. Furthermore, some CMOs also provide BI with semi-finished goods
in huge volumes from developed European countries.
Some of 145 Boehringer Ingelheim affiliates (BOPUs) are managed independently,
some are administrated by regional offices. The BI affiliate in South Korea
53
represents an example of the first case; the BI affiliates in Hong Kong, Australia and
New Zealand are exemplary for the second case. They are administrated by the
offices in Australia or China. In several cases Boehringer Ingelheim combines
BOPUs of a geographical region with small markets into Regional Operative Units
(ROPUs). This business model enables a delegation of responsibility from
headquarter to the regional management. One of this Regional Operative Units is the
ROPU Southeast Asia (ROPU SEA) which consists of affiliates in the following
eight countries: Singapore, Malaysia, Thailand, Vietnam, Cambodia, Indonesia,
Philippines, and Taiwan. They are managed from the Boehringer Ingelheim office in
Singapore. More information is provided in the Appendix.
Though the US is the biggest market of the business, other regions also generate
considerable amounts of sales. Figure 18 illustrates the distribution of net sales
across the regions.
Figure 18 BI Net Sales by region
Source: BI Corporate website
The business of the company is divided into Human Pharmaceuticals and Animal
Healthcare. In turn, the division of Human Pharmaceuticals is also segmented into
Prescription Medicine (PM), Consumer Health Care (CHC), Biopharmaceuticals and
Chemical Production.
54
PM business- this segment produces prescription drugs and accounts for almost 80%
of total net sales. According to the firm’s website, the following areas are on the
focus:
Chronic Obstructive Pulmonary Disease (COPD)
Diabetes
HIV/AIDS
Hypertension
Myocardial Infarction
Oncology
Parkinson's Disease
Restless Legs Syndrome
Stroke Prevention in AF
Stroke
Venous Thromboembolism
CHC business- this part of the Human Pharmaceuticals division deals with sales of
OTC drugs in the market. In 2012, this segment generated nearly 10% of net sales.
Animal Health- the sales of products manufactured for domestic animals such as
cattle, horses and pigs sustain this division. It contributes around €1 billion anually to
the total revenue.The summary of each segments’ contribution to net sales is shown
in Figure 19.
Figure 19 Net Sales by Business Segments
Source: BI Annual Report (2012), p.58
55
5.1.2. BI Supply Chain
The Supply Chain of BI, like other manufacturing companies, consists of several
players (Figure 20). After the supply of raw products, APIs are produced internally
and transferred as bulk to the blistering and packaging in order to form finished
goods. This step of manufacturing can be executed by either internal production sites
or by contract manufacturers (CMOs). Then the finished goods are transported in
temperature-controlled conditions to either hubs, or directly to BOPUs. The color
code in Figure 20 indicates the ownership of goods by the legal entitiy. To be
specific, the light green color refers to the ownership of BI International, a legal
entity designed for the taxation aspects of international operations. From the yellow
area, the ownership is transferred to the local BOPUs.
All the activities described above are managed by the Supply Chain Management
team of BI. The important point here is the smooth flow of information and material.
Conceptually, the information flow starts at the order of the customers in the regions.
Based on the orders, demand managers in BOPUs create short- and long-term
forecasts and plans. Then the information is entered into the international ERP
system and transferred to the manufacturing level. Drug manufacturing is planned in
two steps and then APIs are made available as the start of the material flow. Usually,
the dates of the products are clearly indicated by regional demand managers and
shipment dates are planned by local logistics departments accordingly. The carriers
and logistic services providers are selected by the sourcing department based on the
governance of Global Logistics Department.
Figure 20 Illustrative Supply Chain of BI
Source: BI Internal Database
56
Figure 21 Conceptual ‘Information & Material Flow’
Source: BI Internal Database
The supply chain model of BI can be also analysed using the parameters of Lee
(2002). According to the criteria, demand uncertainty of BI is less uncertain
compared with other industries. However, the supply of the pharma products can be
disrupted due to the quality aspects or any regulatory actions by authorities. In that
sense, the BI’s supply chain strategy can be defined as a risk hedging supply chain in
the matrix(Table 2).
Table 2 BI Supply Chain Model based on Lee Parameters
Demand Uncertainty
LOW HIGH
Supp
ly U
nce
rtai
nty
HIG
H
L
OW
Efficient SC Responsive SC
Risk hedging SC Agile SC
Source: Analyzed and derived from Lee (2002) and BI Internal Database (2014)
57
However, responsiveness and flexibilty come to the surface as the patent of the
blockbuster drugs are about to expire, or the portion of the tender business increase
in the portfolio of the in the region, the position of the company changes. This
aspect will be discussed in Ошибка! Источник ссылки не найден.
5.2. Hub Projects in BI
As explained in the previous chapters, BI has realized the importance of hubs in the
business and tried to introduce the model in various locations. As a pilot, Panama
Hub was established in the supply chain. However, it was a purely marketing backed
project and the involvement of the Logistics Department was entirely operational.
During the last financial crisis period, the firm has started several hub projects led by
the company’s supply chain community. These projects included MENA Hub,
Nordics, Asia Hub, and EU Control Tower. The following sub-chapters provide brief
information on some of the hub projects in detail. Also, the relevance and scope for
the research will be discussed.
5.2.1. EU Hub / Control Tower
The project was initiated about two years ago in order to enable shipment
consolidation and further improve the compliance aspects of product delivery from
manufacturing sites to sales countries. In other words, most of BI POPUs are located
in Europe and the majority of sales countries are supplied from this region. In some
cases, goods are shipped to the same BOPUs in small volumes several times within a
short time frame, and mainly with air transportation mode. As a result, the capacity
utilization rate is lowered and transportation costs increase. Moreover, air mode is
considered less reliable than ocean transportation mode, since the quality of drugs is
affected due to more human contact with the drugs as well as uncontrollable
temperature situations in the tarmacs of airports. In this case, the EU Hub
consolidates finished goods from POPUs in Europe and creates critical mass to shift
from air transportation mode to the sea freight (Figure 22). To execute the
operations, a suitable 4PL company is hired and attached to the systems. This
external firm serves as an additional layer to the existing supply chain setup and
identifies possible consolidation opportunities across all POPUs in Europe.
58
Figure 22 EU Control Tower Functions
Source: BI Internal Database (2014)
Then, it collects BI drugs from manufacturing sites and ships to the respective
countries by using either cross-docking via EU hub, or in some cases, storing them
some days until the volume reaches the critical mass. The visualization is given in
Figure 23 and the actions described above are labelled with numbers in red.
The location of the EU Hub/Control Tower has not been identified yet as the project
will shortly enter its RfQ phase.
Figure 23 Control Tower in BI Supply Chain
BI Internal Database
59
5.2.2. MENA Hub
Originally established to supply 13 sales countries in Middle East and North Africa
from the central warehouse in Dubai, this hub currently serves only four BOPUs in
the region. The main objectives from building MENA Hub were to increase
responsiveness in the region, to decrease destruction costs by shifting modality from
air to ocean which would require critical mass to ship in the sea container.
Furthermore, it would cut the CO2 emission level by the firm due to the lower
number of shipments and less use of the air mode.
However, the question arises as to why this hub only serves four sales countries
instead of thirteen. There are mainly three critical roadblocks for the successful
implementation of MENA Hub. Firstly, Dubai’s location is not ideal in terms of
center of gravity. In other words, Dubai is geographically not in the best place to
supply other BOPUs in the region.
Second main obstacle is the political relations among the member states. For many,
years, Kingdom of Saudi Arabia and United Arab Emirates are fighting for the
leadership in the region, and it creates various legal barriers for mutual trade. The
same tension exists between UAE and some other states in Middle East.
Consequently, those factors limited the effectiveness of BI central hub in the free
trade zone of Dubai.
Thirdly, the wholesalers in the region require minimum remaining shelf-life of 70 %.
It means that the products with 24-month expiration period cannot be routed via hub.
The illustration is given in Figure 24.
5.2.3. Asia Hub
The project Asia Hub was also initiated some years ago as the innovative solution to
the increasing distribution pressure from market dynamics. Specifically, this project
encapsulated two main functions. Firstly, it was projected to serve as the Regional
Distribution Center (RDC) for the sales in countries in South East Asia. The
expected benefits of BI from opening RDC in Asia were also similar to those of
MENA Hub (Figure 25). Namely, consolidated shipments, lower destruction cost,
and improved responsiveness were the objectives on the table.
60
Figure 24 Timeline of drugs with 24-month shelflife in MENA Region
Source: Analyzed and derived from BI Internal Database (2013).
Figure 25 Benefits of Asia Hub as RDC
Source: BI Internal Database (2013)
Along with RDC, the hub was also foreseen for the establishment of Late Stage
Customization operations for South-East Asian BOPUs. The expected benefits from
Late stage Customization were boosted responsiveness, less destruction costs from
version changes, less safety stock, and shorter lead time to the market by transferring
secondary packaging step to the region (Figure 26).
The project included in its scope 10 South East Asian countries as well as Australia
and New Zealand. The Central Distribution Center was planned to be in Singapore
and both finished and semi-finished goods were supposed to route via this hub.
61
Figure 26 Late Stage Customization
Source: BI Internal Database (2013)
At the same time, ready products with big volumes were planned to ship directly
(Figure 27).
Figure 27 Asia Hub Model: RDC and LSC
Created based on BI Internal Database (2013)
Asia Hub project was investigated in an extensive way and a number of cross-
functional departments like Quality, Finance, Taxation and Area Management were
actively involved. Due to the probable negative net present value over the period, the
project was put on hold to identify other beneficial factors from the industry’s other
pharma players.
5.3. Scope Countries for the Thesis Analysis
After highlighting the scope of existing hubs in the firm, the separate country
selection was performed. One of the main reasons is that the shortcoming identified
during the analysis. Secondly, some hub projects covered a wider range of sales
62
countries which is out of thesis scope. The following sub-chapters illustrate the
countries in Scope more in detail.
5.3.1. Country Selection for Asia Hub
The original project included 12 countries in the South East Asian Region. The
complete list of countries is given in Figure 28.
Figure 28 Countries in Scope for Asia Hub
Source: BI Internal Database (2013)
Previous thesis findings showed that the countries with large volumes should be
supplied directly from POPUs. Additionally, the countries to be served should be
located close to the central hub. In that matter, Australia, New Zealand and South
Korea were excluded from the scope of the thesis for Asia Hub. In the next chapters,
Asia Hub will refer to the remaining 9 countries of the original Asia Hub scope. The
hub is assumed to be in Singapore.
5.3.2. Country Selection for MENA Hub
MENA Hub is currently serving to UAE, Qatar, Bahrain and Oman. According to the
project charter, the scope countries initially consisted of (BI Internal Database,
2010):
Bahrain
Egypt
Iraq
Jordan
Kuwait
Lebanon
Oman
Qatar
K.S.A
Sudan
Syria
U.A.E.
Yemen
Scope countries
Australia New ZealandMalaysiaIndonesiaCambodia Hong Kong
Philippines Singapore VietnamThailandTaiwanSouth Korea
63
In 2012, the total volume routed via hub is less than 20 % of originally planned.38
Similar to Asia Hub, the same principles were applied. Consequently, the BOPUs in
scope were kept for the thesis analysis, but it was noted that the hub location was not
appropriate for the further analysis. Therefore, the location of the Regional
Distribution Center was changed to Jeddah, KSA based on the center of gravity
calculation (Figure 29 Center of Gravity Analysis for Jeddah).
Figure 29 Center of Gravity Analysis for Jeddah
Source: Google Maps
5.3.3. Role of EU Hub in Thesis Scope
As described earlier, the scope area of EU Hub covers all BOPUs in the globe.
However, this research paper involves some parts of EU Hub’s complete
functionality. Specifically, this hub will be seen as the intermediate hub for Asia and
MENA hubs. To define with the categories of Raimbault, Douet & Fremont (2011),
the hubs are differentiated in the following way:
EU Hub- Node; it serves a central location for both Asia and MENA hubs
and the goods are transited for the purpose of logistics efficiency
38 BI Warehousing Statistics (2012)
64
Asia Hub & MENA Hub- Centers; located centrally for the respective
BOPUs, they are used to supply the sales countries to increase
responsiveness.
Even though the location of EU Hub is not clear, it has been assumed that the central
warehouse will be located in Germany. This decision features the regulatory aspects
of the material flow from European POPUs to Middle East BOPUs. The details will
be provided in the sub-chapter 5.5.3.1
To summarize, the scope countries for this thesis will include the countries
mentioned above and referred as ‘thesis scope countries’ further in the paper.
5.4. Scenario Development
Parallel to the hub projects, the firm has also invested resources on analyzing the
consolidation potential using internal systems. In that sense Demand and Shipment
Consolidation Project was initiated. The project’s main objective was to create GRP
tool to consolidate both demand requests so that the shipments BOPUs receive would
be automatically consolidated. For example, BOPU Australia can put demand
request in the system only on the 22nd day of the month for one specific POPU, and
all the shipments going from this POPU will be consolidated to the respective
shipping day (Figure 30). To sum up, each POPU usually produces up to 30-40
SKUs per BOPU on average, and those 30 or 40 SKUs are consolidated into one
shipment in certain weekly or monthly buckets. In this case the relation is one-to-one
between each BOPU and POPU.
As there is an overlap between the Demand and Shipment Consolidation Project and
Hub Projects, it was decided to analyze and compare the cost effectiveness of the
former as well. Therefore, 3 basic scenarios were developed and compared with the
AS-IS situation.
AS-IS situation reflected the existing situation of BI in 2013 in terms of the logistics
costs spent and all other factors that already occurred within the year indicated.
SCENARIO 1 represented the Demand and Shipment Consolidation and it was
analyzed how much it would cost BI to ship goods from manufacturing sites to sales
countries in the thesis scope using the developed systems
SCENARIO 2 referred to the analysis where only EU Hub is to supply the BOPUs of
scope countries.
65
Figure 30 Demand and Shipment Consolidation
Source: Analyzed and derived from BI Internal Database (2014)
SCENARIO 3 encapsulated the utilization of all hubs referred in the BI supply chain
to distribute the finished products to the scope regions. In the further context, it will
be called as Hub-to-Hub Scenario.
5.5. Data Collection and Analysis
5.5.1. Data Sources
For the analysis part of the case study, the data was obtained from the internal
database of Boehringer Ingelheim. In its turn, this internal database also contained
several database sources. In the center of the database, BIX@ system is coordinated.
It is the ERP tool of the firm and considered as the heart of the business systems. All
the orders are processed through it and another 24-month demand planning is
included.
Next important database source is DaCs, which consists of long term demand
forecasts for coming 10 years. The figures in the database are conservatively
forecasted and reflect minimum sales and volumes expected.
Additionally, there are Warehousing Statistics, which stores the historic shipment
data such as shipment numbers, production origin of goods shipped, volumes, weight
and SKU numbers. However, this doesn’t include the shipment costs and cost of
drugs shipped.
66
Along with the sources mentioned, the database includes internally created
presentations, supply chain online knowledge database, charters and reports.
Validated freight rates by sourcing department complete the list of database sources.
The data used in the forthcoming analysis is obtained from the sources mentioned
above and comply with confidentiality requirements.
5.5.2. Validity and unbiasedness
In course of the data extraction, all the facts and figures were generated either by the
experts responsible for the data, or under their supervision. By this way, the data
validity and reliability were insured.
Secondly, the plausibility check was conducted on the date. Namely, there were
some mismatches in terms of the volumes versus weight. Normally, the
corresponding weight with 1 cubic meter is on average 220 kg39. It might differ
according to the substance of the products. However, when the corresponding weight
is more than 800 kg, it is mainly due to the error in the systems. In the first place,
those types of errors were eradicated and validated by the supervisors.
Thirdly, there were some dimensional errors occurring in the database. For example,
some measures were given in grams instead of kilograms. Also, they were brought to
the common unified measure types. In this way, unbiasedness was avoided for the
analysis of the data.
5.5.3. Data Analysis
Data analysis was divided into two parts. Firstly, the costs for outbound logistics
were calculated in order to find out the savings from the consolidation activities.
Secondly, ‘soft’ costs were discussed in detail.
5.5.3.1. Calculation of Logistics Costs
In order to have the complete picture, first the actual logistics costs in 2013 were
generated by Controlling Department for thesis scope countries.
As the next step, material flow was designed for each scenario. Particularly, the
number of pallets from each POPU to each BOPU was calculated in monthly buckets
39 BI Internal Database
67
for the financial year of 2013 as the starting point of Scenario 1 (Table 3). It is worth
noting that the number of pallets derived from the volumes based on the assumption
of 1 cubic meter corresponds with 1 pallet.40
The same procedure followed for the Asia Hub and MENA Hub countries, but the
difference was that the number of pallets was consolidated. Additionally, SKUs with
big volumes were identified to exclude them for the further analysis. The rule for the
exclusion is the monthly volume of SKUs should exceed the standard volume size of
the 40-feet sea container. According to the internally accepted measures in BI, each
container contains 33 pallets of finished goods.
Table 3 Material Flow to BOPU Bahrain in pallet numbers, 2013
In that sense, each SKU should have more than 396 pallets (33 pallets x 12 months)
in a yearly basis. It is important to mention that the high-volume SKUs will be
excluded for only Asia Hub scope countries. All the SKUs to be shipped to MENA
Region must be routed via Germany according to the regulatory requirements. It
means that all the goods to MENA region are routed via EU Hub regardless the cost
factors. Analysis results are reflected in Table 4. As seen from the table, only three
countries should be supplied directly with 4 respective SKUs. Those SKUs were
eventually excluded from the database for the hub calculations, but the direct
logistics costs were added to the respective scenario results. One more action
executed was to assign goods of original MENA Hub Project as direct shipments to
the respective sales countries.
After the material flow was clearly identified, it was distinguished between air mode
and ocean mode. In other words, the pallet numbers were divided into the ones to be
40 BI Internal Database
POPU Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
POPU 1 3
1
1
1
POPU 2 55
5
4 16 1
13
16
POPU 3 35
9 2 8
8
8
POPU 4 19 1 2 2 2
2 2 2 1 2 1 2
POPU 5 30 3
1 2 3
3 10
2
6
Source: Analyzed and derived from BI Warehousing Statistics (2013)
68
shipped by air and the other by sea (Table 5). The main criteria for this separation is
the BI internal regulation stating that the goods less than 10 pallets cannot be shipped
by ocean freight due to the safety reasons.41
Table 4 SKUs with High Volumes in Asia Hub Region
COUNTRY/SKU NUMBER OF PALLETS
Indonesia
****62 477
Philippines
****57 504
Vietnam
****07 876
****53 3002
Source: Analyzed and derived from BI Warehousing Statistics (2013)
Table 5 Separation of Pallets to Kuwait between Ocean and Air Freight, 2013
41 BI OSP 241
OCEAN
POPU Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
POPU 1
POPU 2
POPU 3
37
25
23
16
POPU 4
21
14
28
POPU 5 22 21
20 28
10
16 28
POPU 6
89
10
130 15
119
AIR
POPU Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
POPU 1 0 0 0 1 0 0 0 0 0 0 0 0
POPU 2 1 1 2 1 1 1 0 0 0 1 1 0
POPU 3 9
6 0
0
0
8 6 0
POPU 4 0 8 0
0 0
0
0 0 0
POPU 5
5
7
5 4
1
POPU 6 0
3
0 0
0 7 0
POPU 7 0 0 0 0 0 0 0 1 0 0 2 0
Source: Calculated and Derived from BI Warehousing Statistics, 2013
69
Additional to the criteria, the assumption of 90% ocean freight to 10% air freight was
kept. The meaning behind the assumption is that there are sometimes emergency
shipments required to the sales countries, and thus air must be used to transport
finished goods.
As the next step, the freight rates were used to identify the cost of transportation. The
extract from the freight rates provided by Sourcing Department is shown in Table 6.
Table 6 Extract from Freight Rates
Destinatio
n
Car
rier
Port of
origin
Country
Code (ISO)
Port of
destination
Country
Code (ISO)
FCL 20 ft
Pharma Grade
FR -**-->
AE-** **** LEH FR Jebel Ali AE ***
FR -**-->
BH-** **** LEH FR Bahrain BH ***
FR -**--
>HK-** **** LEH FR Hong Kong HK ***
FR -**-->
KH-** **** LEH FR PNH KH ***
FR -**-->
LB-** **** LEH FR
BEIRUT
PORT LB ***
Source: BI Internal Database
The rates were given for multiple countries for sea, air and road transportation. Each
lane contained different categories such as whether it is 20-feet container or 40-feet
container, pre-carriage, on-carriage, temperature controlled or dry and etc. From the
categories, the ones suitable for the pharmaceutical product transportation were
selected. Namely, for ocean freight, only ‘pharma grade’ (temperature controlled)
20-feet and 40-feet container rates were used. Additionally, fuel surcharge, pre-
carriage costs and all the respective costs in that type of categories were summed up
to the total freight cost per container. For the air freight, the same procedure was
performed, but the differentiation was made not on the size of containers, but the
chargeable weight of the shipments. In other words, if the product to be shipped is
70
less than 100 kilogram, one rate applies, if it is between 100 and 500 kilogram,
another rate applies. The further categories were between 500 kg and 1000kg, and
more than 1000 kg. For the road freight the same logic as the sea freight was used. In
all cases, the rates were considered only for full truck load (FTL).
Once, the rates were standardized and organized for the further analysis, the cost of
each shipment was calculated for each scenario (Table 7). The important
assumptions used for the calculation was that if the number of pallets were between
10 and 16, the rate of 20-feet container was selected. If the number exceeds 16, 40-
feet container was allotted. For the air shipments, it was assumed that each pallet
corresponds with 220 kg and rates in scale ware selected accordingly. Last, but not
least, if the rates for the destination country were not provided, then the rates of the
next closest country existing in the list were used. The assumptions were cross
validated by the logistics experts and operational supervisors in course of the
calculation.
Table 7 Shipment Costs Calculation to Qatar, 2013
SEA
POPU Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
POPU 2 3.932 € 3.502 € 3.502 €
POPU 3 3.502 € 3.502 € 3.502 € 3.502 €
AIR
POPU Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
POPU 1 1.358 € 1.358 € 1.358 € 1.358 €
POPU 2 1.321 € 3.187 € 1.321 € 4.587 €
POPU 3
POPU 4 2.355 € 6.089 € 2.977 € 1.111 € 1.733 € 5.467 € 1.111 € 2.977 € 2.977 € 3.600 €
POPU 5 2.254 €
POPU 6 855 €
Source: BI Internal Warehousing Statistics, 2013
The last action for the logistics cost calculation was to sum up the results for the
shipments according to the scenario types. The results will be presented in the next
subchapter.
71
5.5.3.2. Soft Costs Analysis
The softs in the thesis refer to the costs that are currently abstract, but will occur with
a high probability when project takes place. These kinds of costs usually include the
cost of labor FTE, system development, and other unexpected future costs.
In order to identify what kind of costs might occur, a number of round tables and
brainstorming sessions were organized with supply chain experts in BI. As a result, a
number of cost types were determined. However, it is not possible to quantify them
due to their abstract nature. Therefore, only the potential implications of soft costs
will be mentioned in the results instead of directly showing their quantitative impact.
5.6. Results and Limitations
To begin with, it important to pay attention how the material flowed to this region.
As seen from Figure 30, the air transport mode accounted almost 40%. Since the
goal of BI is to use ocean freight for the 90% of the shipments, the results reflected
also this modality optimization.
Figure 31 Modality Ratio for Scope Region, 2013
Source: Analyzed and derived from BI Warehousing Statistics, 2013
Based on the calculations, the results yielded relatively close figures (Figure 32). The
total transport costs rendered 9 million euros in 2013. Once the shipments were
consolidated and shipped according to the designed setups, the costs varied between
5 and 6 million euros. However, it would be biased to compare the AS-IS costs with
38%
62%
AIR OCEAN
72
the calculated results. The main reason is that the calculation cannot reflect
additional costs such as the demurrage costs, promotions, changing fuel surcharge
changes and etc. These additional costs cannot be either excluded from AS-IS costs
as the data is not available in the invoice level. The main focus of the comparison is
to realize the saving potential among the scenarios with AS-IS as the upper limit. In
other words, the difference of 3 or 4 million euros between scenarios and AS-IS case
cannot be stated as the potential saving due to the other looming costs.
Figure 32 Transport Costs by Scenarios, 2013
Source: Calculated and derived from BI Internal Database (2013)
Firstly, the calculation method of Scenario 1 was designed on the maximum
consolidation potential and it is highly theoretical. In reality, the shipments cannot be
consolidated internally once a month, but maximum in weekly buckets. Once the
consolidation is performed based weekly buckets, the potential savings decrease
dramatically. Another important point to note is if the Demand and Shipment
9 €
6 €
5 €
6 €
0 €
1 €
2 €
3 €
4 €
5 €
6 €
7 €
8 €
9 €
10 €
AS-IS Scenario 1: D&SConsolidation
Scenario 2: EUControl Tower
Scenario 3: Hub-to-Hub
Миллионы
AS-IS Scenario 1: D&S Consolidation
Scenario 2: EU Control Tower Scenario 3: Hub-to-Hub
73
Consolidation can be harmonized optimally with the production planning. As it is
another huge topic, the author cannot include the harmonization and viability
analysis between Scenario 1 and Production Planning.
Secondly, Scenario 2 and Scenario 3 also have additional costs along with the
transport expenditures. In the first place, the capital costs employed will be higher
due to the longer lead time of the finished goods. Moreover, minimum 2 additional
FTEs required to manage the complexity in the hubs. Notably, another percentage of
savings are kept by the 4PL running the EU Hub as commission. Lastly, effective
consolidation process still requires the demand consolidation internally.
To summarize the cost comparison of the scenarios regarding the consolidation,
obviously the cheapest one was the second. The Demand and Shipment
Consolidation generated higher costs due to the less consolidation potential among
the other options, and the last scenario’s costs were affected by the multiple leg
transportation, and the BI’s regulation stating to allow only FTL for the
transportation.
Another determined positive impact of hubs was the decrease in the destruction costs
as they would enable the modality switch by creating the required high volumes.
When analyzed, the destruction costs contained the following figures:
Table 8 Destruction Costs for the Scope Countries, 2013
KSA 744.208 €
Kuwait 312.661 €
Philippines 306.908 €
Indonesia 200.288 €
UAE 113.579 €
Malaysia 85.331 €
Singapore 61.982 €
Thailand 48.450 €
Bahrain 31.537 €
Oman 21.025 €
Grand Total 1.925.969 €
Source: BI Internal Complaint Management Database, 2013
74
CHC23%
PM77%
Asia Region
CHC47%
PM53%
MENA Region
The table clearly indicates that most of the destruction costs come from the big-
volume countries. It brings to the conclusion that not only the hubs, but also Demand
and Shipment Consolidation process can save the products from being destroyed.
Responsiveness is a critical issue in term of Scenario 1. As the demand requests and
shipments are managed internally and the process becomes more complicated, the
responsiveness in regions decreases significantly. Scenario 2 also does not add any
value in terms of this aspect. The main player in this field will be Scenario 3 which
can boost the responsiveness.
The apparent question is why the responsiveness is essential for BI. There are mainly
two factors that force the firm to improve the reaction of the supply chain. Firstly, the
anticipated expiration of some blockbusters in the regions fluctuate the demand for
the products and leads to the prerequisite of lean supply chains.
If looked closely at the forecasted sales percentage of business segments in the scope
regions, PM business plays crucial role (Figure 33). It automatically confirms the
fact that the responsiveness will be the main topic.
Figure 33 Sales by Business Segments in Asia & MENA Region, 2017
Source: BI Internal Database
Secondly, a great portion of sales are generated by the tender business in MENA
region. It makes demand forecast more fluctuated and unreliable.
In a broader scale, the need for derives from the increase of the demand uncertainty.
Consequently, the supply chain type moves towards more Agile Supply Chain type
(Table 9). It means that BI faces with transferring part of the production to the
regions, which indeed serves as the driver of establishing regional hubs.
75
low
high
One of the interesting benefits that hubs bring was certainly control over high value
shipments. Obviously, it is of great importance for BI to find a solution in this matter
as the company sends finished goods with values over million euros, and thus pays
additional transport insurance fee as well as higher shipment rates. In that case, hubs
enable company to distribute the value of shipments equally among containers and
keep under the set limit of 500 thousand euros. Nevertheless, this paper is unable to
identify the savings from this feature due to the lack of the data for the value of
goods shipped. This information belongs to the category of Transfer Prices and
considered highly confidential.
Table 9 Future Position of BI in Supply Chain Matrix
Source: Analyzed and derived from Lee (2002) and BI Internal Database (2014)
Lastly, the most common utilization of hubs by other competitors in the market,
taxation partly covers the purpose of hub establishment in the company. Especially,
Scenario 2 enables the firm to deal with the complexity and costs of logistics in terms
of MENA region. However, there is strong resistance from the Tax Department in
terms of establishing hubs in other regions. Neither the author can identify any
positive points in that matter as it requires the disclosure of several confidential
information as well the know-how of tax systems and regulation in multiple
countries.
To sum up, the following table is established to evaluate the benefits of 3 Scenarios
to BI:
Demand Uncertainty
Supply
Unce
rtai
nty
Risk hedging Agile SC
Efficient SC Responsive SC
high
76
Table 10 Summary of Results
Categories Scenario 1:
Demand &
Shipment
Consolidation
Scenario 2:
EU Hub/
Control
Tower
Scenario 3:
Hub-to-Hub
Savings on
Consolidation of
Shipments
Savings on
Destruction Costs
Responsiveness
LSC
Savings from
Control of High-
value Shipments
Taxation
?
Production
Planning and
Sustainability
?
More positive impact than
other scenarios
Positive Impact
No Impact
? Identify Positive Impacts
? Identify Negative Impacts
77
6. CONCLUSIONS AND RECOMMENDATIONS
This paper investigated the hub relations and benefits for the pharmaceutical industry
on the example of Boehringer Ingelheim. Specifically, it analyzed the advantages and
applicability of hubs from different angles and explored the existing best practices
from other industries.
The knowledge of the other businesses was collected by organizing peer-to-peer
interview with the firms in the field of consulting, freight forwarding and fast
moving consumer goods.
Moreover, the BI Internal Database was used to obtain the crucial information for the
evaluation of the hubs. The opinions of the supply chain experts also added a great
value to the investigation process of the topic.
Based on the input of the respondents and BI, a number of conclusions are drawn.
Particularly, hubs are inevitable for the following cases:
CONSOLIDATION PURPOSES- when the destination countries are far from
the origin countries and the intensity of the low-volume shipments are
extremely frequent.
SAFETY REASONS- when the finished goods are dangerous and cannot be
transported with the other type of goods.
RESPONSIVENESS- quick reaction of companies keeps the profitability of
the businesses at the same level.
Other benefits of hubs were well recognized by the companies in the different
industries and already in place for the successful business operations. In particular,
facilitating Vendor Managed Inventory, bringing more transparency to the material
and the information flow, decreasing the safety stock, avoiding the redundancy of the
resource allocation, and improving the quality of the product distribution were
among the list of main drivers for the hub establishment.
One of the main findings of the paper was the sophisticated utilization of the hub
model in the tax and customs optimization processes. It became apparent that many
of the multinational companies opened the hubs in the regions and linked them in
order to receive some tax incentives, or customs privileges.
The question of the suitability of the interaction in the pharmaceutical industry was
also sufficiently discussed. The tough competition and the changing market trends
78
led pharmaceutical businesses to become more considerate about the costs of the
logistics and distribution services. In that sense, the harmonization of hub setup in
the supply chain enabled those companies to realize some savings in that area.
Moreover, the control over the high-value shipments contributed to the logistics
savings, which is a unique feature of the pharma industry. Lastly, transferring the
manufacturing step, Late Stage Customization, was used as a bonus argument to
support the initiation of hubs in the sales regions.
Due to the complex supply chain and overlapping functions of other ongoing projects
in BI, the company might not capture all the advantages mentioned above. Namely,
the hubs in the regions would not be necessary in order to generate savings by
consolidating goods. Neither would they not add value to the transparency to the
information flow once the Supply Chain Control Tower is in place. The destruction
costs can be decreased by Demand and Shipment Consolidation Project as well.
The benefits BI can achieve from the hub model can include the control over the high
value shipments and the shorter way to the markets.
Nevertheless, the expected expiration of some blockbusters and the nature of the
tender business in the sales regions will require BI to establish regional hubs in the
future. Therefore, this paper suggests the following recommendations:
Use EU Hub/ Control Tower for the Consolidation-the model offers the most
optimal transportation costs
Develop the Demand Consolidation systems internally- it is the prerequisite
for the successful EU Hub project implementation
Investigate the opportunities of tax and customs savings for the regional
hubs- those savings will pay back the investments and costs of the hubs and
open the doors for the improved profitability and sustainability
To sum up, the hub models in the pharmaceutical is important and beneficial, and the
implementation strategies should be on the focus of the companies.
79
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APPENDIX
Appendix
Diagram XXX
Source: Skowron-Grabowska (2008)
Diagram XXX
<http://www.inrets.fr/fileadmin/partenariats/fluide/pdf/publications/Raimbault_Doue
t_English.pdf>
Source: Capgemini (2011), p.8 Pillars of CT
82
Source: Capgemini (2011), p.10 Functions of CT
83
