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Currently, pharmaceutical manufacturers are said to waste $25 billion on supply chain inefficiencies. Technology offers a way to achieve transparency and results.
The pharmaceutical industry’s efficiency woes have been put under a spotlight, as prices that consumers pay for prescription drugs continue to climb at staggering rates (1). While academics, politicians, media, and industry professionals debate various healthcare reforms, a significant opportunity for improvement remains largely untapped. This opportunity lies, not in policymaking, but within pharma’s literal core: its supply chain.
The pharmaceutical supply chain is one of the most complex in the world. For decades, it has also been traditionally resistant to technological change. While digitization has taken over nearly every imaginable process in other businesses such as the automotive industry, it has yet to bring the pharma supply chain to its full potential.
Imagine the ability to analyze performance throughout every step of the testing, manufacturing, and distribution process, or to forecast and respond to demand in real time. While these abilities have previously seemed impossible, they are now within reach, as cloud and big data technologies advance. The opportunity to facilitate end-to-end transparency across all internal and external stakeholders (see Figure 1) has not only entered the realm of possibility but become a strategic imperative for a small but growing number of pharmaceutical manufacturers, their customers, and partners.
Supply chains across all sectors struggle to effectively manage inventory, but when one zeroes in on the pharma industry, its challenges are even more pronounced. McKinsey estimates that the pharmaceutical industry could recover $25 billion through inventory reduction alone (2).
Historically, pharmaceutical companies have erred on the side of carrying too much stock in an effort to ensure 100% fulfillment. That is no surprise, particularly for drugs that treat serious chronic disease, for which a single company tends to be the sole supplier or one of very few suppliers. The stakes are often viewed as too high to risk a stockout, even if that means discarding millions of dollars worth of inventory on the drug’s expiration date.
Lengthy cycle times exacerbate the inventory problem. Early in my career at Baxter Bioscience in Belgium, my team supervised the manufacture of blood collection bags in France. We periodically donated blood to see how long it would take from the beginning of the manufacturing process to actual use. I will never forget the day when a colleague came running into the office, thrilled because the blood bag used on him earlier that day had been manufactured only two months earlier. In pharma, overall cycle times are often in the hundreds of days, on top of the four or more additional months required for the product to move through the distributor, to the pharmacy and, ultimately, to the patient.
Fifteen years ago, companies had few, if any, resources at their disposal to slash excess inventory or shrink cycle times. They had zero insight into global inventory, information that’s traditionally spread across--and stuck beneath--countless legacy IT platforms. With recent advancements in data analytics software, centralized visibility into such an information-intensive process as prescription drug production, pharmaceutical manufacturers can more quickly identify levels across suppliers, track external market changes, and make fast, informed decisions that optimize impact on inventory. These decisions can then be shared immediately with suppliers, contract manufacturers, other partners, and even regulators to ensure alignment.
When information is visible across a network, all entities are better positioned to avoid overages (as well as shortages) within their own supply. In turn, they each are better equipped to reduce cycle time for the greater whole and optimize inventory for the end product.
Today, a growing number of pharmaceutical companies are immersing their businesses into new technology designed to allow information transparency. So are their downstream customers. For example, one large wholesale distributor is currently using artificial intelligence-driven cloud software to collect data dispersed across multiple subsidiaries and storage facilities for the hundreds of thousands of stock keeping units (SKUs) that get distributed to customers.
Advanced data analytics lend insight into important metrics such as gross margin, demand, volume, manufacturing absorption, and service level targets, as well as granular visibility into how those data points interact with external information including commodity prices, global events, and weather patterns. Armed with rich insight, the wholesaler gauges interruptions in the supply chain that might yield too much, or too little, inventory. As a result of its inventory reduction efforts, the company is able to meet demand 99% of the time, has seen an increase in service levels, and has saved tens of millions of dollars, which represent working capital that can be put toward other high-value business initiatives. This example only shows what might be possible if pharmaceutical manufacturers were to embrace new technology for supply chain optimization.
If data visibility is important for inventory control, it’s crucial as supply chains grow in capacity and reach. Due to an aging population, increasing consumer empowerment, and other external factors, drug demand is on the rise: Spending on prescriptions surged in 2014, growing by 11.4%, and by 6.8% in 2015 (3). The upward trend has only continued through 2016 and into the new year. Moreover, pharma companies are continuing to expand their operations into emerging markets, particularly in Turkey and in the BRIC nations (Brazil, Russia, India, and China). Countries that were once treated as small-volume export markets are now significant areas of growth.
As addressable markets swell in both depth and geographic spread, so do pharmaceutical manufacturers’ networks of suppliers, contractors, and partners, as well as the set of regulations that all parties must comply with. Visibility across every step of the supply chain is increasingly necessary to serve every region with as little overhead as possible without sacrificing speed or quality.
Today, digital transformation is becoming a prerequisite for ensuring supply chain visibility, speed, and quality. Reaping the benefits of new technology, however, requires that pharmaceutical companies open their internal data to all supply chain partners, from suppliers to contractors to pharmacies, while keeping absolute control over the data that various internal and external entities are able to access. Using this approach to data, stakeholders have access to real-time analytics that can allow them to quickly identify core factors that drive performance and supply.
Beyond performance analytics, digitization and the cloud will allow pharmaceutical manufacturers to take advantage of global serialization--the ability to follow and authenticate a product as it makes its way along the supply chain from the beginning to the end user. This disruptive capability could allow pharma companies to gain timely visibility into entire operations, no matter their complexity or geographic reach. It will be up to manufacturers, distributors, retailers, and pharmacies in the industry to open up and share this information so that they can collectively benefit by saving the $25 billion in inventory costs that is now wasted.
The move toward digital transformation is currently in its early stages at some pharmaceutical companies, including one of the world’s largest and oldest. The company has successfully implemented this type of digitization and visibility throughout its operations across 70 countries. Its system draws data from factory machine sensors and its SAP enterprise resource planning software, then analyzes the information in real time for every KPI across the supply chain, down to the SKU, to provide data such as order status, delivery date, inventory, and forecasted demand.
Digitization enables an important shift, from simply checking off the proverbial box of lean inventory management toward implementing a demand-driven supply chain that maximizes value, minimizes latency, and optimizes risk. As the economy becomes more global and industry-wide consolidation complicates operations, pharma supply chains can no longer be about squeezing margins but bringing value to the end customer: the patient.
McKinsey’s estimate of $25 billion in pharma supply chain waste is actually a conservative one, as effective inventory management brings advantages beyond improved cash flow. Visibility enables collaboration, prevents fragmented decision-making, and reduces lead times, fostering greater trust and productivity across parties. Instead of a disjointed collection of organizations operating in chaotic silos, the supply chain becomes a harmonious network of suppliers, manufacturers, distributors, and pharmacies. Ultimately, the benefits trickle down to the customer in the form of speedier fulfillment and higher-quality products.
1. A. Shanley, “What Price Healing,” Pharmtech.com, November 2, 2016.
2. McKinsey, 2014 Outlook on Pharma Operations, McKinsey.com, 2014.
3. Henry J. Kaiser Family Foundation, “What are the Recent and Forecasted Trends in Prescription Drug Spending,” kff.org, December 2015.
Vol. 41, No. 2
When referring to this article, please cite it as A. Jacques, “The Digital Supply Chain: Seizing Pharma’s Untapped Opportunity," Supplement to Pharmaceutical Technology 41 (2) February 2017.