Future perfect – reshaping supply chain strategy1 October 2014
The global pharmaceutical supply chain is changing as the industry relies increasingly on joint ventures and outsourcing arrangements, as product types diversify and as the focus shifts toward emerging markets. These forces are reshaping strategy, which demands new distribution models and technological solutions to ensure cost-effective and flexible supply chain operations. Vitaly Glozman, principal of the pharmaceutical and life sciences group at PricewaterhouseCoopers, discusses what pharmaceutical companies can do to plan for the years ahead.
The global economic and demographic landscape is shifting and, as a result, the map for healthcare provision is changing fast. One of the biggest challenges big pharmaceutical companies will face in the next five years is adapting their distribution models to ensure that their products reach the markets where new opportunities are presenting themselves.
At the same time, the industry has to take into account the increasing pressure from regulators and end users to manage risks along the supply chain to ensure that the right products get to the right people at the right time, without delay or interference. In short, today's market for pharmaceuticals necessitates a fresh perspective on distribution models and the role of the supply chain in the overall performance of a pharma company.
"The best way to look at it is from a macro perspective. Socio-economic trends show that there is a demographic shift happening. Some societies are aging, while others are young and growing. There is a shift in economic power and a rebalancing of economic activity to countries such as the BRIC economies. At the same time, there are big breakthroughs in technology. The internet, cloud computing and data analytics shape many components of our daily lives, and they will continue to shape the pharmaceutical supply chain as we approach 2020," says Vitaly Glozman, a principal in the pharmaceutical and life sciences group at PricewaterhouseCoopers (PwC).
Glozman, whose prime focus during 15 years at PwC has been on the pharmaceutical industry, leads the team that focuses on future state pharma distribution models from a perspective that encompasses the entire value chain. Recently, he has contributed to PwC's Pharma 2020 series of research publications, which started out in 2007 to examine the factors that would define the path of the industry up to 2020.
One feature that this series of research publications presciently described is the growing importance of contract manufacturing organisations (CMOs) and other partners in the supply chain. More entities are involved in today's global pharma supply chain, so the effective management of these relationships is a key factor in defining how well the supply chain can adapt to meet the changing needs of end users and comply with evolving regulatory requirements.
"Payers and consumers will continue to demand effective and cost-efficient healthcare that is delivered in a wider range of settings, including specialty clinics and also in their homes. So, the part of the supply chain that handles the last mile of delivery is changing. Processes like order management and product tracking are changing as a result of these trends. The balance of the supply chain is also shifting away from wholly owned manufacturing operations to a model that includes more outsourcing," explains Glozman.
"We have to remember also that regulations are changing. In the EU there is more anti-tampering regulation and in the US there are e-pedigree rules, and on a global level there are changes that demand a new approach to product tracking and identification. Furthermore, innovation will drive change in therapies towards biologics and personalised medicine, which places new demands on storage and distribution processes."
Era of emerging markets
Glozman's latest research examined the growing importance of emerging markets in the operating models of global pharma companies. The importance of developing economies has been known to the industry for many years, but it still has much work to do in order to optimise delivery of products to these markets.
Key to the success of any efforts to capitalise on the opportunity emerging markets present will be the elevation of the supply chain from a support function to a core strategic capability in the eyes of top-level decision-makers.
"The industry has done a good job of addressing this issue in the last couple of years especially, but the supply chain has fallen behind. Companies have understood that the market is flat in the developed world, so they must capture market opportunities in emerging markets, but they have left behind the supply chain by seeing it just as an enabling function," he explains.
"There is a gap between identifying opportunities and being able to deliver on them," he adds. "We estimate that there is a $40-billion gap between the industry's goals in emerging markets and what they will realise in terms of revenues. To be successful in emerging markets, companies must think more strategically about supply chain operations. Supply chain leadership is often not involved in discussions of strategies to develop emerging-market operations."
In his latest research on emerging markets, Glozman has identified three investment models that companies should consider when seeking to develop their operations in emerging markets.
The first is the import model, which requires a low level of investment and relies on distributors, logistics providers and other transactional suppliers. This would suit companies with innovative product portfolios - typically small molecule therapies under exclusivity, select speciality products and complex biologics - as it requires relatively little capital to launch drugs in specific emerging markets.
The second option is a local or regional model with more investment in manufacturing, packaging and quality-testing capability in a developing economy that serves as a hub for local or regional distribution. This initial emerging-market operational investment would help establish regional controls, and opens up the possibility of sharing regional regulatory requirements and using existing investments to supply additional regional markets.
Finally, the 'originate' or global model requires high investment in assets, formulation and differentiated technology in an attractive emerging market to manufacture or package products for global supply. It would suit companies with market-driven portfolios - typically small-molecule products with limited remaining exclusivity or a strategic manufacturing asset to support global demand - and could combine global active pharmaceutical ingredient manufacturing with regional or local drug manufacturing or distribution.
The choice of which model to adopt requires supply chain considerations to be put at the heart of the strategic decision-making process, which is a rarity in the industry at the moment.
"In a recent study of 15 companies with emerging-markets operations we found that only two have done a good job of involving supply chain leadership in questions of whether to enter a market, what products to introduce at what price, and how to enter a particular region. Those were large but relatively new companies, which are less constrained than others by their existing footprint," explains Glozman.
"Others have not yet brought in supply chain people for those strategic discussions. Some of them have thought about this problem, but traditionally Big Pharma is tethered to its existing footprint, so it has to consolidate existing operations before developing opportunities in new markets."
Elevate the supply chain
There is a pressing need for pharmaceutical companies to engage more directly with customers in emerging and developed markets, and to do so requires the industry to adapt the supply chain to be more flexible and responsive. The supply chain must, therefore, play a more strategic role to support new operating models.
"The supply chain must move from its traditional role as an enabler - essentially a back-office function - to become a core capability in the delivery of products to customers," urges Glozman.
"We are seeing new trends in the operating models of big pharma companies, including more use of hub-and-spoke models. Pharma companies like to have a lot of control over the distribution process - even more than the high-tech industry - because of the potential risks to their products. They will want to keep control and increase flexibility in the supply chain, so a hub-and-spoke approach suits them well."
The hub provides a controlled and accountable way of improving distribution models, in which partners handle the country-specific spokes. This is one of the key shifts in distribution models that Glozman identified in his emerging-markets research, and it is shaped by a world in which technological change and macro-economic trends will become stronger forces in moulding strategies.
The development of regional hubs to supply neighbouring emerging markets holds many advantages.
"This infuses flexibility while maintaining control, especially in developing economies. As the macro shift of wealth continues we will also see more public/private partnerships in those regions where infrastructure is limited. That will help pharma companies to establish control of infrastructure and compliance in the developing world, which is a huge market," Glozman remarks.
Progress towards the new models outlined above is evident, but it is slow. Glozman sees hub-and-spoke models emerging in the Middle East and Latin America, where they are working well. He also notes that public/private partnerships are just starting to appear, notably in the supply of vaccines to India, sub-Saharan Africa and South East Asia, though they remain somewhat under the radar.
"They will become more visible and widespread in the delivery of vaccines and medical devices. Two large pharma companies are working with local governments in countries like India to supply vaccines, but we will see the practice widen to include more profitable products, too," he notes.
The rate of progress towards these new distribution models depends largely on the degree to which the supply chain becomes a strategic consideration. This, in turn, depends on the industry finding a reliable means by which to measure the performance of the supply chain in a way that is meaningful to the people in charge of investment decisions.
"Something needs to be done with analytics to find better ways to measure supply chain performance, just as companies do with R&D or overall corporate performance. The supply chain is no less important, but there is no way to adequately measure how well it performs. The industry needs to focus on the balance of cost, customer service, quality and risk, so we will see the birth of a new set of metrics," says Glozman.
The pace of change in the industry is rising, not least because of technological advances. Cloud computing and enhanced data analytics are changing how companies gather and use data to optimise the supply chain. For Glozman, it is time that the industry's approach to the measurement of supply chain performance, and its involvement of supply chain leadership in strategic planning, evolved at the same speed.
We're disappointed that the industry has not started to view the supply chain as a more strategic function," he says.
"It is happening, but much slower then expected. The industry must recognise the power of the supply chain to brand and position products, as well as control factors like risk and quality."