7/27/2019 Partners in Efficiency_ Lessons in Supply Chain Excellence for Life Sciences and Healthcare Companies
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White paper
Partners in efficiency: Lessons in
suPPLy chain exceLLence for Life
sciences and heaLthcare comPanies
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Partners in Efciency2
3 Outsourcing the Supply Chain?
4 Competition and the pressure on
margins
5 The importance o fexibility in
logistics provision
7 Quality Assurance and Compliance
7 Lie Sciences and Healthcare
sub-sectors
8 Key logistics perormance
requirements or LSHC sub-sectors
8 Breaking down the supply chain
10 Future changes in outsourcing
practices
11 How to select an LSP
13 The drive to outsource
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The line between a companys internal operations and its external environment are becoming increasingly
blurred.
No area exemplifies this better than the Life Sciences and Healthcare (LSHC) supply chain, where manufactu-rers have to coordinate their own activities with those of partner organizations, healthcare providers, custo-
mers and patients. Without a clear understanding of the context surrounding the process of delivering a drug
to market (i.e. changes in the distribution models and channels, mergers and acquisitions, increased market
penetration of generic medicines) and changes to the market itself, the chain can soon become a tangled web.
This paper examines how to select a supply chain partner, showing the value of flexibility against increased
competition, investigating the mandatory aspect of Quality Assurance and Compliance and understanding
how cost effectiveness can help margins. Thanks to the segmentation of the LSHC sub-sectors and their
related characteristics and requirements of logistics, we suggest a method to select the best Logistics Service
Provider (LSP).
executive summary
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Partners in Efciency 3
Outsourcing the Supply Chain?
Many companies in sectors such as fast moving
consumer goods (FMCG), electronics, and automo-tive focus on core activities, while non-core logistics
activities are often outsourced to logistics service
providers (LSPs). It is estimated that about 50% of
global logistics are now outsourced in many sectors1.
However, in several industries, including the Life
Sciences and Healthcare (LSHC) industry, it is
generally a smaller proportion of non-core logistics
requirements that are outsourced. In relation to
other industries, the outsourcing of logistics activi-
ties in pharmaceuticals is limited.
The graph below2 shows that spend for outsourcing
logistics is smaller and more fragmented within
LSHC compared to other industries, suggesting thatoutsourcing acceptance within LSHC is lower.
But the outsourcing wind of change is blowing. Five
years ago, there were few examples of large LSHC
companies outsourcing distribution operations to
LSP partners. Manufacturers typically built large,
dedicated warehouse facilities to store their products
prior to shipping to their customers. But by August
2011, all top 10 global pharmaceutical manufactu-
rers2 had outsourced at least part of their distributi-
on operations across the globe, and there are more in
0%
10%
20%
30%
40%
50%
60%
70%
LSHC Hi-Tech Automotive Consumer Retail
s p wg % p w p 3 ppl 3/4 lg p
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10%
20%
30%
40%
50%
60%
70%
80%
Hi-Tech Automotive Retail Consumer LSHC
Pp p w ep Glbl lg
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1DHL internal evaluation2Datamonitor 2011
Partners in efficiency: Lessons in suPPLy chain exceLLence forLife sciences and heaLthcare comPanies
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Partners in Efciency4
the process of evaluating potential partners. Further-
more, companies entering emerging markets are
increasingly looking to LSPs to support supply chain
operations from the outset.
Why the sudden change? Manufacturers are making
constant strategic evaluations of their risks and
challenges, and coming to a common conclusion on
how best to improve their supply chains in response
to various drivers, including increasing levels of
global competition, lower margins, complex regula-
tory requirements, the costs of bringing drugs to
market, generic competition, product and supply
chain complexity.
In addition, as a result of strong competition within
the warehousing and transportation sector, LSPs are
continuously looking for new markets. They consi-
der the LSHC industry a commercially interesting
playing field and are investing in capabilities to
exploit these opportunities.
Competition and the pressure on margins
Like many industries, global competition is driving
market consolidation in healthcare. In 1998, the
revenue of the top 10 pharmaceutical manufactu-rers was 25% of the global market. In 2010, it had
risen to 58% 3.
The continued pace of mergers and acquisitions has
dramatically increased the awareness of the need for
flexibility. Companies see the benefit of shifting
responsibility to a global LSP who is likely to have
access to more facilities and resources, and conse-
quently be able to quickly respond to changing
business needs. As an alternative to investing in
upgrades, more manufacturers see the benefits in
leveraging the existing asset and risk management
infrastructure of an LSP.
As global competition increases, LSHC manufactu-
rers are painfully aware of the pressures on profit
margins. At the same time, traditional strategies to
1998
25%
75%
2010
42%58%
Based on Total Global Industry RevenueTop 10 manufacturers
All other manufacturers
toP 10 PharmaceuticaL manufacturersmarket share3
fg 3
31998 figures from IMS Health, 2010 data from 12th Annual Pharma Exec 50
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Partners in Efciency 5
boost revenue and profits are proving less effective:
public and private purchasers are increasingly
resistant to price increases. New blockbuster drugs,
which typically generate more than $1 billion ofrevenue for their owner each year, are fewer and
further apart.
Margin pressures are driving manufacturers to seek
cost reductions in commercial operations. When
healthcare companies examine their operations,
often they report finding inefficiencies and high cost
structures, driven by under-utilized facilities, high
labor costs and expensive fixed assets. At the same
time, supply chain budgets for high cost products are
a small percentage of the value of the inventories.
This explains why finding a strategic partner to
navigate the complexity, and to provide flexibility,
risk management, and best practice is an even more
important consideration than cost.
The importance of flexibility in logistics
provision
LSHC companies need flexibility, and the smartest
way to deliver it is to partner with a LSP who already
has it. The increasing complexity of supply chains, thereal and potential changes in products and customers,
and the myriad of local regulatory requirements in
each geography, require industry and local expertise.
It is typically quicker, easier and less risky to partner
with a provider that can create a customized solutionto address their companys unique business needs,
rather than building expertise in-house.
Fluctuation in demand for branded and generic
products, and changes in distribution channels are
driving the continued evolution of supply chain
models. For example, the loss of patent protection is
impacting the supply chains of manufacturers. 70%
of generic drugs are now delivered direct to retailers
in the United States; in Europe the Direct-to-Phar-
macy (DTP) model has become mandatory for
generics manufacturers and has been increased for
brand-name drugs by a double digits ratio.
Meanwhile, new direct-to-patient, high-cost specialist
therapies are also causing manufacturers to reconsider
how they take products to market in order to better
respond to consumer demand. Differences in supply
chain configurations between different products and
the likelihood of new supply chain models have
caused savvy, forward-looking manufacturers to seekout greater flexibility in their supply chains.
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Partners in Efciency 7
sheet. Depending on the financial details of existing
leases or ownership, and the manufacturers fore-
casts, it can make sense to sell existing dedicated
facilities and leverage an LSPs shared-use supplychain solution. In this case, an outsourced facility
or transportation mode is shared between multiple
manufacturers. Benefits include lower costs,
flexibility and scalability.
Product characteristics, regulatory requirements, cost
considerations and the manufacturers prioritization
of flexibility and cost determine which warehousing
and transportation solution is the best fit for each
product in a manufacturers portfolio.
Quality Assurance and Compliance
Non-core logistics activities in many cases are still
operated by the LSHC companies themselves, to a
much greater degree than in other industries. This
is because the healthcare industry is a much more
conventional industry than some, with logistics
activities and regulations perceived as being very
complex. Transportation, storage, handling and
production activities are strictly regulated by
national governments. So its not hard to see whypharmaceutical companies have traditionally wanted
direct control over their end-to-end supply chain.
However, LSPs are experts in regulatory and
compliance knowledge. National, state and local
regulatory bodies create a bewildering range of
requirements that a manufacturers small supply
chain team can struggle to stay up-to-date with, let
alone learn when entering a new geographic market.
LSPs with experience in that market can leverage
knowledge across their customer bases.
As global competition increases, the need to focus
scarce resources on core capabilities and leverage the
expertise of others intensifies. The perspectives
gained from a few people working for one manufac-
turer are not as advantageous as drawing on the
collective knowledge of thousands working for many.
The potential to leverage expertise goes beyond
people and knowledge. Healthcare companies indica-
ted a wide variety of gaps in their existing operations
processes and infrastructure, including inadequate
controls, a lack of cold chain or controlled substance
capacity, and outdated facilities or technologyplatforms.
Life Sciences and Healthcare sub-sectors
In analyzing the logistics priorities and requirements
of LSHC companies it is helpful to divide them into
four main sub-sectors:
Patented drugs: An R&D intensive sub-industry,
dominated by multi-national companies, which
covers about 50% of the European market. New
product launches are extremely important, and the
time to market determines the ultimate competitive
advantage a company can create.
Non-patented drugs: Also known as generics and
over-the-counter (OTC). Dominated by companies
that are specialists in the sales of non-intensive
drugs and focus on local markets. These products
have significantly lower profit margins than paten-
ted products. Competition is strong and supply
chain efficiency determines competitive advantage.
Biopharmaceuticals: Expected to grow and deliver
significant advances in healthcare. Products include
vaccines, hormones and enzymes which often
require special transportation and storage condi-
tions that have to be maintained from the produc-
tion release up to the final distribution to the
customer (i.e. cold chain).
Medical devices: Often sold through B2B channels.
Growth is expected. This sub-sector covers a wide
range of medium and high-technology products
such as surgical and medical instruments, electronic
medical equipment, X-ray, CAT and MRI equip-
ment, dental equipment, diagnostic products and
medical disposables. Customer service is crucial, as
is production flexibility. Products are characterized
by their high value, density and stock policy, an
important factor to prevent extreme high working
capital in inventory.
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Partners in Efciency8
Key logistics performance requirements for
LSHC sub-sectors
According to the Supply Chains Operations Refe-
rence Model (SCOR) methodology, we can measureoverall supply chain performance through key
indicators in five categories (for specific key perfor-
mance indicators see box out):
Delivery Reliability: delivering the correct
product, to the correct place, at the correct time,
in the correct condition and packaging, in the
correct quantity, with the correct documentation,
to the correct customer.
Responsiveness: The speed at which a supply
chain provides products to the customer.
Flexibility: The agility of a supply chain in
responding to market changes to gain or
maintain competitive advantage.
Costs associated with operating the supply chain.
Asset management efficiency: the effectiveness of
an organization in managing all assets inclu-
ding fixed and working capital to support
demand satisfaction.
Companies in the patented drugs sectors need to
focus on flexibility, while also prioritizing reliabilityand responsiveness.
Producers of non-patented drugs need to pay
particular attention to costs and asset management
efficiency indicators as well as keeping an eye on
reliability.
Biopharmaceutical suppliers require reliability from
their supply chain above all else, with responsiveness
and flexibility only slightly less important.
For companies in the medical devices sub-sector
flexible logistics solutions are paramount, but
reliability and responsiveness indicators also need to
be satisfied.
Breaking down the supply chain
If we look at the range of supply chain activities,
day-to-day operational activities are seen as trans-
portation, warehousing, VAS (Value Added Services)
and assembly (postponed manufacturing). This is a
typical subset of activities that is generally outsour-
ced and operated by LSPs in sectors such as automo-
tive, FMCG and electronics.
The outsourcing of planning and administrative
activities on a tactical level (order entry, accountmanagement, after-sales up to Vendor Managed
k lg p (kPi)
Perormance attribute Typical KPIs
Supply chain delivery reliability Delivery perormance
Fill rates
Perect order ullment
Supply chain responsiveness Order ullment
Lead times
Supply chain exibility Supply chain response time
Production fexibility
Supply chain costs Cost o goods sold (CoG)
Total supply chain management costs
Value-added productivity
Warranty/returns processing costs
Supply chain asset management efciency Cash-to-cash cycle time
Inventory days o supply
Asset turns
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Partners in Efciency 9
Inventory and Supply Chain Integration) is lagging
behind. Although numerous LSPs position them-
selves to take over these activities, many companies
are reluctant to outsource them.
The increasing dependency on the LSP and the
selling-out of the internal supply chain expertise are
the main decision drivers for this strategy.
The complexity in logistics determines if operating
according to the GDP (Good Distribution Practices)
or GMP (Good Manufacturing Practices) require-
ments is necessary. For transportation, storage, andhandling, operating according to the GDP require-
ments are generally sufficient. The requirements for
the VAS activities are a grey area where both GMP
and GDP could possibly be applicable (depending on
the complexity of the VAS activity). Production, the
most complex logistics activity, is always operated
according the GMP requirements.
The choice for a transportation modality (air, sea,
road and rail) is mainly determined on product value
density in relation to the working capital in (pipe-
line) stock. The inbound and intercompany trans-
portation for patented drugs and high value medical
devices are therefore mostly shipped by air. Low value
LSHC products are mostly shipped in full containers,
or in full truck loads. The outbound transportation
from the pharmaceutical companies to their custo-
mers (final distribution) is mostly carried out using
parcel services or less than full truck loads. High
flexibility, on time and safe delivery are important.
The storage and handlingactivities are in most
cases relatively complex compared to transportation.
LSHC industries are focused on reducing a health
risk and have comparable driving factors for the
storage and handling of their products. In theory,
the storage and handling activities within the
pharmaceutical industry need to comply with the
GDP regulations. Authorities often have no binding
restriction to comply with GMP regulations. In
practice however, the pharmaceutical companies are
acting according to GMP regulations (or FDA) for
storage and handling on their own initiative.
The influence of GMP and GDP requirements are
not limited to the physical warehouse alone, but on:
Logistics design and operation
Warehouse design and materials handling
Logistics information systems (tracking and
tracing, first expiry, first out, lot-numbering)
Stock level management
Handling of products
Value Added Services (VAS) is a combination of
logistics and light industrial activities that are
implemented to customize products for the custo-
mers or country in question. VAS can be divided into
two categories3:
High-end-value-added logistics activities
generally add considerable value to the product,
such as: sterilization of medical devices, testing,
repairs and assembly of kits (assembly can also be
a low-end-value-added service, depending on the
degree of difficulty).
TransportationStorage and
HandlingVAS Production
HIGHComplexity in LogisticsLOW
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Partners in Efciency10
Low-end-value-added logistics activities which
generally add little value to the product, such as:
printing and labelling, packaging and repacking,
adding manuals, bundling of promotion materi-al, sealing, quality checking (quality checking can
also be a high end-value-added service, depen-
ding on the degree of difficulty see Figure 5).
Future changes in outsourcing practices
For each of the four pharmaceutical sub-industries
(patented drugs, non-patented drugs, biopharma-
ceuticals and medical devices), the complexity inlogistics will determine the outsourcing focus for
the future.
Sterilization
Bundlingof promomaterials
Printingof text andlabelling
Sealing
Qualitychecking
Packagingand
repacking
Testing
Finalassembly
Repairs
Addingparts andmaterials
HighEnd
LowEnd
ValueAdded
Services
Complexity of Logistics Activities
tp l lg
TransportationStorage &Handling
VAS Production
Patented drugs
Biopharmaceuticals
Medical devices
Non-patented drugsLSHCs
ub-sectors
No focusPartly focusFocus
HIGHComplexity in LogisticsLOW
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Partners in Efciency 11
The more advanced LSPs are investing to become
GMP/GDP compliant for storage and handling. So
there is not only demand for outsourcing, but also
supply. Therefore, the overall expectation is that out-sourcing of the storage and handling activities will
continue to grow, and will certainly increase within
the biopharmaceutical, medical devices and the non-
patented drugs sub-industries in the coming years.
Leading LSPs are currently equipped to sterilize,
repair and assemble medical devices. The outsour-
cing of VAS activities within the non-patented drugs
sub-industry is also a rising star. It is not expected
that the same will apply for the patented drugs
companies. The pharmaceutical manufacturers of
patented drugs still elect to maintain their direct
control over their VAS activities (particularly
high-end-value). But adoption of outsourcing is
increasing here too.
How to select an LSP
For manufacturers considering supply chain out-
sourcing, both the selection and management of LSP
partners are critical to initial and ongoing success.Manufacturers should carefully evaluate not just
current requirements, but the range of potential
future scenarios, to ensure the necessary flexibility is
part of the assessment process. It is worth taking the
time to ensure the selection process gathers useful
and distinguishing data. For example, to assess global
size, ask LSPs for the number of their healthcare
facilities globally, the total square footage of ware-
house space, and the transportation modes under
management, rather than just how many countries
they operate in.
A fully loaded costing study should be performed on
existing facilities, labor and transportation capabilities
to create an accurate baseline, which can then be used
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Partners in Efciency12
to compare LSP proposals and anticipated benefits.
Consideration should also be given to LSPs who
can bring value from local, state and country tax
considerations, and any economic incentives thatcan be secured from governing bodies (see Figure 6).
One key recommendation, shared by manufacturers
who have outsourced already, is the importance of
performing an outcome-based evaluation, rather
than being prescriptive about how LSPs should
operate. This is to avoid the mistake of paying the
LSP to continue running the operation in the same
way as before, rather than leveraging its expertise
to gain best practice improvements.
For most manufacturers, the cost and functional
capability are only part of the evaluation criteria.
Existing knowledge and experience in the relevant
healthcare sectors are critical for success. A good LSP
understands global and local forces impacting the
life sciences and healthcare industry, including
areas of specialization, and what they mean for
the business and supply chain specifically.
Business, cultural and strategic fit are also seen as
important by LSHC companies. Manufacturers
share the belief that an LSP who takes the time to
understand their business during the evaluation
process, and tailor its solution accordingly will
deliver more value and satisfaction in the long run,
versus one that focuses solely on offering the lowest
cost per activity with off-the shelf products. LSPs
should demonstrate a commitment to operational
and service excellence, as well as continuous impro-
vement against key metrics. The most successful
outsourcing relationships are characterized by a
forward-looking, proactive approach that jointly
asks not Where is your business?, but Where
is it going, and what can we do to make it more
successful?.
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Partners in Efciency 13
The drive to outsource
None of the driving forces for outsourcing outlined
in this document are expected to diminish in the
next five years. If anything, the pace of change,competition and complexity will only continue to
increase. It is clear that the tide has turned, and an
increasing number of LSHC manufacturers have
shifted their preference from in-house supply chains
to outsourced ones. In a high-pressure environment,
where senior management expects lower operational
costs and sustained service levels, these companies
who have outsourced consistently realize benefits,
including improved flexibility, service levels, compli-ance and security, as well as lower costs. For these
reasons, we expect LSHC manufacturers across the
globe to continue to evaluate and select LSPs that can
offer supply chain and industry knowledge, and
ultimately simplify their lives.
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Partners in Efciency14
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