Effective supply chain strategies for an increasingly volatile market

The pandemic has exacerbated many of the problems already inherent in the pharmaceutical supply chain. The pharmaceutical landscape continues to evolve at a rapid pace, with many changes driven by the recent pandemic. Companies have to develop ever more sophisticated supply chain processes and strategies in order to deal with ongoing changes in demographics, urban migration, increasing demand for healthcare, shifts toward age-related disease patterns, and rising health awareness across the population. Let’s look at the top 10 trends that are transforming the pharmaceutical supply chain.

1. The Rise of OTC and Generics

As consumers have become better informed, there has been a tendency for them to self-medicate. Regulatory agencies worldwide have also moved more drugs from the prescription segment to the OTC segment. These factors haves helped spur the growth in over-the-counter (OTC) medicines. The market for OTC medicines is now forecast to outgrow the total current pharmaceutical market. OTC sales have doubled from $14B in 2000 to over $34B in 2017, with world revenue for OTC medicines is predicted to reach $178B by 2024, supported by the trend for drugs to move from prescription to OTC.1

Competition from generics coupled with pressure from expiring patents have flattened or decreased the top-line potential of many branded pharmaceutical business units. Between 2014 and 2020, a combined total of $259 billion in worldwide pharmaceutical sales are at risk from patent expiration.

From a supply chain perspective this means that like most other industries today, pharmaceutical distribution channels must address the increased usage of online ordering and direct-to-customer delivery processes. Amazon’s entry into the pharmaceutical market with its acquisition of PillPack in 2018, highlights the urgency of servicing customers with home delivery.

2. The Growing Demand for S&OP

Given the pharmaceuticals industry’s various challenges already described above, there are strong reasons to use a sales and operations planning solution.

However deploying this type of advanced design has been difficult to date due to the lack of a platform that can enable consensus-based collaborative forecasting and planning across the highly regulated networks. The pharmaceutical industry has been slow to adopt these types of advanced platforms due to its skepticism of cloud-based solutions and the security related to shared data.

Technology vendors have made significant progress in permission based access and data level security causing supply chain leaders to reevaluate the deployment of a cloud-based planning layer over their core enterprise systems. Properly implemented and designed, a cloud-based planning layer enables the sharing of S&OP data across key stakeholders: contract manufacturers, branded and generic business units, distributors, and retailers. This planning layer enables collaborative and iterative simulation planning that takes into consideration pertinent factors such as current demand, projected sales scenarios and supply constraints like lead time and capacity.

Once consensus has been achieved on the forecast and the upstream planning of materials and capacity have been agreed to by all concerned stakeholders (for example, the brand owner and its contract manufacturers), the plan can then be adopted by the respective ERP systems to generate lower-level planning like MPS or MRP. Even better, the cloud platform can be deployed at the execution layer as well, eliminating the need to integrate across multiple ERP silos. This significantly reduces lead times across the pharmaceutical supply network.

The core of this platform shift resides in the master data model and associated data warehouse. The platform contains a deep and rich data model which represents data globally across all underlying systems, empowering both the advanced S&OP functions as well as supporting data and decision integration back into the ERP environment. This allows the supply network to be easily rolled out to multiple sites within the enterprise and also adopted by new suppliers and customers.

However just solving the pharmaceutical S&OP problem is only half the equation. Companies must also consider the full supply network related to executing operations, logistics, and distribution.

3. Optimized Execution in Operations, Logistics, and Distributions

Pharmaceuticals manufacturers now realize that integrating upwards of 100 contract manufacturers in different regions into their core ERP would take several years. A cloud-based multiparty network enables companies to connect to all other trading partners on the network with a single connection. These cloud networks offer instant connectivity and the ability to maintain a complex and scalable network, regardless of the number of interfaces involved.

Given all the complexities related to regulation, compliance, contract entities, and the global nature of supply chains, pharmaceutical logistics and distribution is a critical differentiator, especially given the rapid change in the industry.

These capabilities reduce inventory by providing data on inventory from downstream supply chain partners, which can be leveraged to model demand and regulate drug supply. This results in supply chain efficiencies across the entire supply network.

4. Counterfeit Pharmaceuticals

Counterfeit pharmaceuticals are on the rise. WHO estimates that 10 per cent of the medicines in circulation are counterfeit, with the majority of cases reported from developing nations.2 Western markets are not immune, with the number of reported cases having grown steadily over the
past decade.

Counterfeiting is one of the reasons why pharmaceutical and logistics companies are pursuing supply chain capabilities like end-to-end visibility, track and trace, e-pedigree, and chain of custody solutions. In particular, serialization and authentication, coupled with track and trace initiatives, are vital capabilities for regulatory compliance. They can also help prevent and minimize the extent of costly product recalls. They also limit the risk of revenue loss through product diversion and counterfeiting.

Recommended: A Control Tower for Pharmaceutical Supply Chain

These capabilities are being supported with new technologies like network-based control towers, machine learning, and blockchain. These control towers incorporate data from facilities, devices like product authentication scanners, partner ERP systems and more, to provide real time visibility to product throughout the supply network. They use intelligent agents and machine learning to scan the network for potential issues, and automatically resolve them, or recommend resolutions to users.

Distributed ledger technology like blockchain is also being harnessed to enhance trust and transparency between partners, and to create an indisputable chain-of-custody for pharmaceuticals flowing through the network. This combination of serialization, authentication and network-wide transparency greatly reduces the chances of counterfeit and substandard drugs from entering the supply chain, and helps identify them quickly when they do.

Regulation, competition and cost pressure will have a direct affect on logistics procedures. Market changes and decentralized supply chains will require new and modified transportation routes.

5. Rising Healthcare Costs

The pressure to contain or drive down health system costs continues to be of big focus. In the US, healthcare expenditure per person has more than doubled in the last 18 years, from $4,857 in 2000 to $11,193 in 2018.3 The situation is similar in Europe. The Organization for Economic Cooperation and Development reports that on current projections, “public expenditure on health and long-term care in OECD countries is set to increase from around 6% of GDP in 2015 to almost 9% of GDP in 2030 and as much as 14% by 2060.”4

Aging populations are the key factor for growing cost pressures within many of the world’s most advanced health systems. Managing access to healthcare providers, pharmaceuticals, medical devices and procedures will thus become an increasingly crucial factor for managing the cost of
healthcare in industrialized countries.

Increasing constraints and limits on reimbursement will support the shift towards self-medication and OTCs. According to a Booz & Company study, every dollar spent on OTC medicines saves between $6-7 for the US healthcare system as a whole. Thus from a supply chain perspective, this reinforces trend number 1.

6. More Regulatory Oversight

In 2013, President Obama signed the Drug Quality and Security Act (DQSA). The DQSA increases oversight of drug compounding, and incorporates a national prescription drug “track and trace” system with standards for prescription drug wholesale distributors and third-party logistics providers (3PLs). Such regulation is a growing global trend.

Due to more complex supply chains, policy makers worldwide are enforcing stricter regulations for manufacturing and logistics. Selected manufacturing problems and growing public pressure have caused the US Food and Drug Administration (FDA) to strengthen Good Manufacturing Practices (GMP) and control them more strictly. Within a decade, the number of FDA warning letters sent to medical device manufacturers increased threefold in a decade, from 61 letters in 2002 to 181 in 2012 (EC A 2012). The trend shows no signs of slowing down.

The number of FDA inspections of drug and biologics manufacturers has also grown. In the years to come, the FDA expects domestic GMP inspections to decrease and more inspections in the foreign arena (FDA 2013) reflecting the trend towards more globalized supply chains. At the same time, most emerging countries themselves are increasing their regulatory requirements. China published new GMP guidelines in 2012 and has encouraged pharmaceutical companies to pursue GMP certification.

Hand in hand with GMP standards, governments and international organizations such as WHO, have established and increased their requirements for Good Distribution Practices (GDP). These standards define how life sciences products, particularly pharmaceuticals, have to be stored, transported and handled. Higher GDP standards were recently enforced in Brazil, the European Union and China. Singapore is currently drafting new GDP standards (ColdChainIQPC). The European Union also recently released new requirements, including risk assessment of delivery routes, temperature monitoring and reporting of temperature excursions, and the use of dedicated vehicles where possible.

Challenges for the life sciences industry will have many consequences for logistics within the sector. Shifting disease patterns and innovative products will have an impact on what and how we store and transport. Regulation, competition and cost pressure will have a direct affect on logistics procedures. Market changes and decentralized supply chains will require new and modified transportation routes.

“If you want to know ahead of time the changes awaiting the pharmaceuticals supply chain it is useful to extrapolate experiences from the consumer and retail sectors, which were dealing with the same trends and pressures long before pharmaceuticals.”

7. The End-Consumer Matters More

Many companies in the pharmaceuticals sector are facing a challenge; they must decide if, when, and to what extent they should develop a direct-distribution channel to the end consumer.

Sales of products in the OTC category have been growing faster than other pharmaceutical products in the past few years. Products catering to the consumer desire for private health monitoring are emerging; for example smartphone apps and add-on devices allow testing and digital recording of blood sugar values for diabetic patients. The growth of wearables in the medical sector is projected to reach $12.1 billion by 2021.

The internet is an increasingly important channel for consumer health information. According to Forbes, 93% of millennials aren’t scheduling preventative care appointments with doctors, and rely heavily on social media for health related information and advice. Changes in the prescription drug segment towards a more consumer- or patient-oriented supply chain are on the horizon.

In the US, direct-to-home delivery schemes of prescription drugs for patients with chronic diseases are a cost-effective reality. With Amazon’s entry into prescription home-delivery in 2018, the trend appears to be accelerating. The continuing rise of tele-medicine and home care will also continue to drive the need for home delivery of drugs.

Considering the growing direct-to-consumer segments, online information services and tele-medicine capabilities, manufacturers in the life sciences sector have to determine whether they want to develop their own e-commerce operation and, if so, whether it should be organized by establishing their own fulfillment capability or by distributing their products via a third-party or 3PL/4PL platform.

8. Outsourcing of Pharmaceutical Manufacturing and Medical Devices

Looking ahead it is clear that competition will drive the formation of value added networks as well as supply chains differentiated by product and region. R&D will continue their trend of outsourcing to contract research organizations (CROs) and the manufacturing of medical devices and pharmaceuticals will also continue their shift toward outsourcing. In the last few years, contract manufacturing organizations (CMOs) have grown rapidly. Market research firm Visiongain predicts that the global contract pharmaceutical market to exceed $79 billion by 2019, and continue strong growth through 2025.

Supply chain visibility is an important if not essential enabler for the more advanced outsourcing approaches; therefore, IT investments and outsourcing must be considered simultaneously. Differentiated operating models with a broader spectrum of service providers are being designed based on product characteristics. For example, in specialties there is an increasing build-up of ownership (chain of custody) down to the point of application (direct-to-hospital/ pharmacy).

“One Network’s platform is a real time supply network, providing full order, shipment, and inventory visibility along with a tunable system of control for ultimate adaptability.”

9. Pharmaceuticals Will Take Cues from Retail and Consumer Goods

If you want to know ahead of time the changes awaiting the pharmaceuticals supply chain it is useful to extrapolate experiences from the consumer and retail sectors, which were dealing with the same trends and pressures long before pharmaceuticals (for example, the proliferation of distribution channels).

Thus, using retail and consumer goods as a guide, we can expect that companies will tailor the mode of transportation, warehousing and depth of distribution in each country for different pharmaceuticals and medical devices. For example, generic drugs and consumer medical devices may be transported via ocean and long-haul road freight (and selected higher value modes for ”emergency” situations, when a standard, slow-mode shipment misses a checkpoint or encounters a hold up) while specialty drugs will be shipped using air freight, express or even courier services.

Generic drugs may be distributed over several logistical steps involving several distributors and transport providers while high-value specialty drugs and medical devices might be distributed from a single global or regional distribution center directly to the hospital (pharmacy or ward) or even the physician specialist at point of care.

Thus we will see increasing movement toward differentiated supply chains driven by several factors; increasing pressure to optimize cost or maximize value for products that differ by volume and value; the requirement for lead-time service levels (acute versus chronic treatment); new requirements for temperature management or documentation; and specific
regulatory regimes.

By 2025 most companies providing medical devices and pharmaceuticals will have tailored their supply chain along product categories such as; high-value/specialty drugs and implants; innovative standard drugs and devices; generic drugs and frugal/low-tech devices; and OTCs and consumer medical devices.

Supply chains will also be differentiated within each product category, for example into cold chain and non-cold-chain specialty drugs – because of the strong growth in demand for both generic drugs and specialty drugs, more specific supply chains for these two segments are expected to emerge.

Building on a wide range of experience in supporting e-commerce retailers in their logistics processes, logistics service providers are well equipped for advising and supporting companies in the pharmaceuticals sector in their quest for a more direct channel to the end customer.

Better visibility in the supply chain is essential to control and optimize logistics processes. Traditionally companies in the pharmaceuticals sector have used a push logistics approach to distribution, which is characterized by over-stocked warehouses throughout the supply chain. Given today’s increasing cost pressures, overall inventories will have to become leaner and supply chains more efficient by changing to a pull or demand-driven approach with increased visibility.

There is an increasing interest in multiparty networks as a means to achieving a more consumer-centric supply network, and to enable end-to-end visibility. Multiparty networks connect all pharmaceutical trading partners, from suppliers, manufacturers, CMOs, distributors and logistics providers, and enable network-wide visibility through a control tower. Network-based control towers provide a means not just of monitoring the supply chain, but of resolving issues too.

10. Growing Recognition That Inventory Management Should Be a Top Priority

Industry insiders are beginning to put increasing focus on improving their inventory management practices, which lag far behind those of other industries. A recent Gartner survey found that 77% of life sciences manufacturers have reached an inventory management maturity that is only basic or lagging.

Unlike the consumer goods sector, the stock levels in the pharmaceutical supply chain (“pipeline stocks”) typically amount to 30–90% of annual demand in quantity. There are usually 4–24 weeks of finished goods stocks. Stock inventory typically ranges between 1 and 8 turns. And supply chain cycle times (defined as elapsed time between material entering as raw material and leaving as product) are often between 1 and 11 months. Expired product is certainly very costly and the returns and destruction process difficult to manage from a compliance perspective. This represents a significant opportunity from an inventory perspective as compared to other industries per the chart above.

The requirement for increased supply chain visibility will be highest in the generics and OTC segments, where cost pressures are especially strong, as well as in the specialty drugs segment, where inventories tie up large amounts of capital due to the high product values involved. For specialties, a direct-distribution model with a single regional or global distribution center generating visibility to multiple points of sale could be an early win.

The optimization of supply chains could lead to an increased risk of stock-out situations, ranging from local, short-term shortages to regional drug shortages, due to manufacturing issues that require dedicated shortage-management efforts. Increased visibility of inventories will be both essential and very useful. Potential excess supplies of product in one place can be moved in time to prevent supply shortages in other places. The same would be true in a local epidemic or even pandemic scenario, when demand for a specific product suddenly increases.

Moving from a traditional supply chain design to a cloud-based network platform with integrated planning and execution can provide the framework and architecture to optimize supply chain performance while minimizing any associated risks.

A Control Tower for Pharmaceuticals and Healthcare Supply Chains

By developing and maintaining the ability to adapt their supply chains, companies in the pharmaceuticals sector will be well prepared to seize the opportunities ahead. One Network provides a real-time network platform with a pharmaceuticals control tower powered by artificial intelligence and blockchain to provide a single platform for all trading partners in the pharmaceuticals sector. One Network’s platform is a real time supply network, providing full order, shipment, and inventory visibility along with a tunable system of control that incorporates legacy systems for maximum returns on IT investments.

The platform is modular and adaptable, and provides solutions out of the box supporting critical pharmaceutical needs such as serialization and authentication, chain of custody, and track and trace. The platform includes an SDK and developer tools enabling solutions to be modified quickly, and new solutions built from scratch.

Thus overall One Network’s platform and control tower should be a top consideration for any pharmaceutical company searching for ways to better collaborate across their supply chain, improve service levels, reduce costs, adapt to changing market conditions, and improve compliance.

1 “Over the Counter Drug Market Size”, Global Market Insights, 2017.
2 “1 in 10 Medical Products in Developing Countries is Substandard or Falsified,” World Health Organization, November 28, 2017.
3 “National Per Capita Health Expenditure in the US from 1960-2018”,
4 “Healthcare Costs Unsustainable in Advanced Economies Without Reform,” Organization for Economic Cooperation and Development.