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Turning Tide

As the life science and healthcare industries turn to logistics service providers for help, what is the best way to ensure an outsourcing strategy is successful?

Today, many companies in sectors such as fast moving consumer goods (FMCG), electronics and automotive focus on core activities to maintain and strengthen their competitive advantage. The non-core logistics activities are often outsourced to logistics service providers (LSPs), and it is estimated that around 50 per cent of global logistics are now outsourced in many sectors (1).

However, in several industries the outsourcing of logistics activities is not yet so commonplace. In the life sciences and healthcare (LSHC) industries, it is generally a smaller proportion of the non-core logistics requirements that are outsourced. In relation to other industries, the outsourcing of logistics activities in the pharmaceutical industry is limited.

Figures 1 and 2 show that spend for outsourcing logistics is smaller and more fragmented within LSHC compared to other industries, giving an indication that the level of maturity for outsourcing acceptance within LSHC in lower (2).

Why are the non-core logistics activities in many cases still operated by the LSHC companies themselves to a much greater degree compared to other industries? This is likely to be because the pharmaceutical industry is much more conventional than others, with logistics activities and regulations perceived as being very complex. For example, transportation, storage, handling and production activities are strictly regulated by national governments. For this reason, pharmaceutical companies have always wanted direct control over their end-toend supply chain.

But times have changed. By August 2011, all top 10 global pharmaceutical manufacturers had already outsourced at least part of their distribution operations across the globe, and there are others in the process of evaluating potential partners (2). Furthermore, companies entering emerging markets are increasingly looking to LSPs to support supply chain operations from the outset. Why the sudden change? Manufacturers are facing consistent strategic evaluations of their risks and challenges, and coming to a common conclusion on how best to improve their supply chains in response to these driving forces.

The Value of Flexibility against Increased Competition
As in many industries, global competition is driving market consolidation. In 1998, the revenue of the top 10 pharmaceutical manufacturers represented 25 per cent of the global market. In 2010, the top 10 were responsible for more than 58 per cent of the market (see Figure 3) (3).

The continued pace of M&As, and even divestitures, has dramatically increased the awareness of the need for flexibility among manufacturers. Companies see the benefit of shifting responsibility to a global LSP who is likely to have access to more facilities and resources, and consequently a greater capability to quickly respond to changing business needs.

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 affecting the supply chains of manufacturers. Seventy per cent of generic drugs are now delivered direct to retailers in the US; in Europe the ‘direct to pharmacy’ (DTP) model has become mandatory for generics manufacturers and has been increased for brand-name drugs by a double-digit ratio.

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, forwardlooking manufacturers to seek out greater flexibility in their supply chains.

Quality Assurance and Compliance
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 manufacturer are not as advantageous as drawing on the collective knowledge gained from thousands working for many. A key area of expertise an LSP can bring is regulatory and compliance knowledge. National, state and local regulatory bodies create a bewildering range of requirements that a manufacturer’s 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 utilise knowledge across their customer bases.

Cost Effectiveness to Answer Lower Margins
LSHC companies need flexibility in order to drive savings and efficiency, and the smartest option is to partner with an LSP who has the experience. The increasing complexity of supply chains, the real 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 customised solution to address their company’s unique business needs, rather than building expertise in-house.

Finally, margin pressures demand efficiency improvements. At the same time, supply chains must deliver increased flexibility to address mounting complexity and risk, and assure regulatory compliance. A smart way to meet these divergent objectives is by leveraging the infrastructure of an LSP to support other manufacturers, including state-of-the-art technology, people and expertise. The degree of cost sharing that is desirable varies by manufacturer. For example, outsourced warehousing and transportation can be shared or dedicated. In a dedicated model, manufacturers can own or lease the facility, and outsource only the labour, processes and technology. Or, they can outsource it all for a more complete solution and fewer assets on the balance sheet. Depending on the financial details of existing leases or ownership, and the manufacturer’s forecasts, it can make sense to sell existing dedicated facilities and leverage an LSP’s shared-use supply chain 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 manufacturer’s prioritisation of flexibility and cost determine which warehousing and transportation solution is the best fit for each product in a manufacturer’s portfolio.

There are good reasons why almost all the top global pharmaceutical manufacturers have begun outsourcing all, or part, of their warehousing and transportation operations. Looking at the top 20 pharmaceutical manufacturers, the estimated percentage of sites outsourced to an LSP is more than 60 per cent, while ‘mature markets’ such as North America and Europe have a higher percentage of in-house solutions (1).

LSHC logistics characteristics and requirements can be evidenced by dividing them into four main sub-sectors: patented drugs, where time to market is key; non-patented drugs (generics and over-the-counter), where supply chain effi ciency determines the competitive advantage; biopharmaceuticals, which are becoming an important sub-industry delivering signifi cant advances in healthcare; and medical devices, where innovation and new product technologies make production fl exibility important in determining competitive advantage.

The complexity in logistics determines if operating according the Good Distribution Practices (GDP) or Good Manufacturing Practices (GMP) requirements is necessary. For transportation, storage, and handling, operating according to the GDP requirements are generally suffi cient (see Figure 4, page 75). 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 to be 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 (pipeline) stock. The inbound and intercompany transportation of patented drugs and high value medical devices is therefore mostly shipped by air. Low value LSHC products are mostly shipped in full containers, or in full truck loads, rather than using parcel services or partially empty truck loads. High fl exibility, on-time and safe delivery are important.

Storage and handling activities 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 according to the GDP regulations, but authorities often have no binding restriction to comply with GMP regulations. In practice however, the pharmaceutical companies are acting according to GMP (or FDA) regulations for storage and handling on their own initiative.

The infl uence of GMP and GDP requirements are not limited to the physical warehouse alone, but also by the following aspects:

  • Logistics design and operation
  • Warehouse design and material handling
  • Logistics information systems (tracking and tracing, first expiry, first out, lot-numbering)
  • Stock level management
  • Handling of products
Handling of Products
VAS is a combination of logistics and light industrial activities that are implemented to customise products for the clients or country in question. VAS can be divided into two categories (4):

  • High-end, value-added logistics activities generally add considerable value to the product. These activities can include: sterilisation of medical devices, testing, repairs and assembly of kits (assembly can also be a low-endvalue- added service, depending on the degree of diffi culty)
  • 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 material, sealing, quality checking (quality checking can also be a highend value-added service, depending on the degree of diffi culty) (see Figure 5, page 78)

How to Select a LSP
A fully loaded costing study should be performed on existing facilities, labour and transportation capabilities to create an accurate baseline, which can then be used 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 that can be secured from governing bodies.

One key recommendation, shared by manufacturers who have outsourced already, was to focus on an outcome based evaluation, rather than being prescriptive in how LSPs should operate.

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 takes into account the global and local forces affecting the life sciences and healthcare industry, including the client’s areas of specialisation, and what they mean for its business and supply chain specifi cally (see Figure 6).

The business, cultural and strategic fi t are also seen as important factors by LSHC companies. Manufacturers shared the belief that an LSP that takes the time to understand their business during the evaluation process, and tailor its solution accordingly, would deliver more value and satisfaction in the long run, versus one that focused 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 improvement against key metrics. The most successful outsourcing relationships are characterised by a forwardlooking, proactive approach that jointly asks not ’where was your business,’ but ’where is it going, and what can we do to make it more successful?’.

None of the driving forces for outsourcing outlined in this article are expected to diminish in the next fi ve 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-sourced to outsourced supply chains. In a highpressure environment, where senior management expects lower operational costs and sustained service levels, companies consistently realise benefi ts, including improved fl exibility, service levels, compliance 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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Fabio Mioli has been Director, Business Development Life Sciences & Healthcare (LSHC), at DHL Supply Chain EMEA, since November 2010. He joined DHL from Wyeth Pharmaceutical, Italy, where he held responsibility for supply chain and commercial operations, including sales forecasting, distribution and trade, mature product portfolio and hospital tender management. Prior to that he worked for the pan-European pharmaceutical wholesaler, Alliance-Boots/Alliance Healthcare, as Commercial Affairs Director for Italy, with responsibility for industry relationship, generics (Almus), and pre-wholesaler (Alloga). Other roles include Head of Procurement for Schering-Plough, Italy and Purchasing Manager for Procter & Gamble. Fabio graduated in Mechanical Engineering.
Fabio Mioli
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