Can you say what your supply chain is? Most Pharma supply chain professionals tend to give a piecemeal view of their supply chains. A clear well integrated view of supply chain is absent and that leads to a lot of problems which can be attributed to a siloed view of supply chain. The big question is why is this so? Are Pharma companies insulated from the today’s world of intense competition? Is Pharma landscape static? Dr. Rakesh Singh, Chairman, Institute of Supply Chain Management deals with the emerging trends in SCM in the pharmaceutical industry.
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Pharma companies can no longer remain immune to the changes and operate static supply chains. With the emergence of a complex network of hospitals, providers and physicians, supply chain complexity has increased manifold. As the competition intensifies and pharmaceutical production becomes more complex; as companies expand their portfolios, reliance on old logistics and marketing driven approach to manage supply chains will create more headaches. According to an AIOCD AWACS study most pharma companies loose between 3-5 percent of their top line every year due to stock out of moving products at stockist. What is also important is that this is never recorded as the focus is always on stock transfer to stockist i.e. primary sales. And you talk to pharma marketing professionals, you find that they tend to overlook the importance of supply chain and even claim that these changes are hard to come by. Is it possible for pharma companies to ignore the demands of rapidly changing market dynamics? Isn’t there an urgent need to realign the entire supply chain in order to bring in speed, flexibility, responsiveness, visibility and efficiency into the supply chain?
It is a well-known fact that pharma landscape has changed significantly but not the mind-set of supply chain leaders. Numerous studies have compared business metrics across industries and have found that pharma supply chain related performances are very poor in comparison to other industries. If we look at the data in the PWC report this becomes evident. Even though these companies have grown in the range of 19-25 percent, they, on an average perform poorly in comparison to other industry in terms of number of days of inventory, manufacturing lead time, obsolescence as a percentage of sales and cash to cash cycle in days. A comparison with the FMCG companies reveals that Pharma Companies have an inventory of 258 days as compared to 72 days for FMCG companies. When we compare the manufacturing lead time we find the same story. Pharma manufacturing lead time is 150 days as compared to 5 days for FMCG companies.
Most pharma companies loose between 3-5 percent of their top line every year due to stock out of moving products at stockist.
If the mean demand at any outlet is 300 units of a product and standard deviation is 227 the safety stock would work out to be 1023 units. Can we even imagine this if we want 99 percent service level? In a protected patent regime, things would be fine. But in generics it would create a huge problem for the sustainability of the business itself.
Let’s also look at the obsolescence rate in pharma – it is 3 percent of the sales. In FMCG it is 0.5 percent. And cash to cash cycle values are in the range of 200 days. All other industry have cash cycles much lesser than pharma. Automotive cash to cash cycle is 94 days and hi-tech and electronics is 5 days. On all parameter other industries are far ahead and are great example of what pharma industries need to do in order to survive the changing landscape.
Why have FMCG and other industries performed better than Pharma? FMCG companies have adopted end to end supply chain framework. They have linked their supply chain planning and strategy to business strategy leading to superior service, lower cost and a competitive edge for themselves. Automotive, chemicals, mining, hi-tech, retail and food and beverages all of them have lower cash to cash cycle as they began their supply chain streamlining in early 2000. This was done by reduction in set up time, downtime and improvement in performance rate. They also have used information technology to make movement of information and goods flow seamless reducing both stock outs and surplus. Forecasting and sales and operations planning as a starting point of all supply, logistics and sales planning have given them an edge.
What should pharma companies learn and do to prepare for a more competitive world that is emerging? They first and foremost need is to marry their supply chain strategy to business strategy. What does this mean? Let’s look at the basic supply chain and what are the macro processes that define this? The macro processes can be broken into three elements. Supplier relationship management, Internal supply chain Management and customer supply chain management. Seeing the supply chain as a whole means pharma firms will have to link seamlessly all these processes. Linking them through joint planning and technology becomes imperative. In order to let these three macro processes work well a cross enterprise team is a must. We also need to see that within internal supply chain each one of functional heads works with the broader business objective than be focussed on his functional excellence. A cross-functional approach to supply chain planning would set the architecture for a better supply chain.
The on-going COVID 19 pandemic has exacerbated these challenges. Pharma supply chains today have to deal with supply and demand disruptions. Issues of geographical concentration of suppliers, long and opaque supply networks and major shifts in demand are forcing supply chain professionals to re-evaluate their supply chains. Risk and Resilience have become integral to supply planning. It remains to be seen how the industry will shape their supply chain strategies.
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