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Pharmaceutical Manufacturing and Packing Sourcer

Optimal Operations

With the logistics branch of a pharma operation becoming increasingly recognised for its value-adding potential, Johan Beukema at Buck Consultants International discusses performance optimisation methods that can be undertaken throughout the logistics process.

For many years, logistics and supply chain operations have been treated as a necessary burden by many companies; the usual mantra being ‘if it’s not broken then don’t fix it’. With logistics execution usually taking place on a countryby- country basis, with just a small amount of central management, the focus has generally been on keeping things running as they have been for a long time and not letting the costs run outside the budget. In an industry where margins are high and commercial projections continuously point at even further growth, this was a logical situation.The industry itself was aware they were not a frontrunner in supply chain development, but also knew that their challenges were in much different areas.

During the last five years this picture has changed significantly. Even before the economic crisis the pharmaceutical industry was faced with significant cost pressure, regulatory challenges, changing wholesaler landscape, increased competition and challenges in the entrance to emerging markets.All of this has led to a situation in which the supply chain function in the pharmaceutical industry is moving from being a pure cost drain towards a value-adding factor in company growth.This article presents a summary of major development directions in pharma supply chains, based on our experience in working with leading pharmaceutical and biotech companies around the world.

Centralisation of Supply Chains

Centralisation of supply chains does not literally mean moving to one centralised distribution centre (DC) serving the whole of Europe. For high value/low volume products (typically speciality pharma and biotech) it often does mean moving to a central European DC, sometimes surrounded by two or three small satellite DCs to cover an area, such as South of Italy and Spain.Typical locations for these central European DCs are the Benelux countries and the western part of Germany.

For Big Pharma, which has a much more diversified product portfolio and with much higher volumes and lower margins, centralisation means a rationalisation of the decentralised local-for-local network towards a more regionalised set-up. These companies are now considering grouping the different countries in Europe and setting up one distribution centre per region. Logical regions include Benelux, the Nordic countries, German-speaking countries, eastern Europe, south-eastern Europe, and so on. Although the development is still in progress,we can expect a mix of truly regionalised chains with four to six DCs in Europe and companies that will still keep a more decentralised structure and only group smaller countries together, resulting in 10 to 12 remaining main DCs in Europe.

Centralisation of Supply Chain

Management Apart from the physical centralisation direction there is another, perhaps even more important development going on; namely the centralisation of management of (at least) the European supply chain. As has been the case already for many years in other industries, headquarters are taking over the lead, initiating physical centralisation, benchmarking country organisations, leveraging logistics procurement, setting standards, and so on. Recent examples show that an increased level of central management can lead to significant cost reductions, service improvements and flexibility increases, even in companies with a very decentral physical structure.

Logistics Outsourcing

Large parts of the downstream supply chain of pharmaceutical companies are already outsourced for a long time.Usually it is the wholesaler or pre-wholesaler who takes care of the finemeshed domestic distribution, sometimes only from a physical perspective but also including more order-to-cash and customer service activities.

Also, on a European level, manufacturers are now leaning towards outsourcing major logistics operations.Manufacturers of high value pharma products in particular – usually companies that have grown very fast over the last decade – take a broad view on outsourcing. Besides warehousing and distribution, functions such as order-taking and processing, invoicing, dunning, customer service, quality inspections, and so on are also considered to be outsourced to the external party.Drivers behind this trend are, among others, flexibility towards the unsure future, increased capabilities of healthcare logistics service providers, focus on core activities, and lower costs (leverage with other customers of the service provider as well as a different labour/cost profile of the LSP versus the pharma company).

Increased Ownership Through More Direct Routes

In addition to the development directions addressed above, manufacturers are also taking more ownership of the full supply chain through which their products flow to the patient. Often not directly driven by pure logistics parameters, companies are increasingly looking for opportunities to bypass the traditional wholesalers in the chain and ‘go direct’.This is not a new concept, but we see increasing attention to it, even in companies that traditionally would not think about this. From a geographical perspective this subject is very prominent in the emerging markets: south-eastern Europe, Russia and the CIS countries, as well as Asia and South America. Closer to home, Scandinavia is also a focus point because of the recent changes in the regulatory context there, opening up the market for much more direct distribution setups.

As mentioned before, the drivers for changing the so-called route to market are often not purely logistical. It is mainly about commercial margins, product quality and compliance, and facilitation of business growth. However, changing the commercial route to market directly impacts the company’s supply chain.Usually the life of the supply chain manager does not become easier: he becomes responsible for cost items he previously did not even have an insight into; he has to manage different distribution partners who act on the company’s behalf; he has to gain an insight into the behaviour of the final customer; and his planning scope becomes much wider and more complex.

Going direct sounds easy; however, this can mean something different for each company; from the well-known direct-topharmacy concept of the UK, to ‘just’ turning a former commercial distributor contract into a fee-for-service contract with the same provider; or from setting up an e-commerce route for specific products and countries to switching from pre-wholesaler to a pure logistics service provider. In fact, all steps taken by manufacturers to take more direct control of the end-to-end supply chain can be considered steps towards building a more direct relationship with the final customer, be they patients, doctors or pharmacists.

Supply Chain Differentiation

A final development direction that is worth mentioning is the differentiation of supply chains. Facing current challenges as described before, as well as having learned from other industries such as consumer electronics, retail and fashion, automotives, the pharmaceutical industry has also recognised that a ‘one size fits all’ solution is not always bringing the most value for the company and its customers.

Companies are now starting to tailor the supply chain setup to the specific requirements per product/market combination.This can lead to downstream as well as upstream differentiation. An example of downstream differentiation is large pharma companies with a broad product portfolio, who keep high volume/lower value products in a decentralised setup, but set up centralised solutions for their high value/lower volumes product ranges.

More upstream differentiation can be observed when companies are trading off which products to finish at which location. Customising products (final fill-and-finish activities, packaging and labelling, and so on) can be done close to primary production, close to the final customer or somewhere in between, and companies are starting to create differentiated strategies to reach the optimal situation per product/market group and thus creating the most value for company and customers.

A specific concept that we often come across when working on supply chain differentiation is the postponed packaging concept. Creating a final production step physically located close to the market but far enough to be able to reach leverage across different countries has been done by many pharmaceutical companies already.Nowadays the concept is being optimised in terms of, for example, which products should go through the postponed packaging step and which should not; how to optimally integrate the postponement in the overall supply chain; and where to locate this activity (keep in Switzerland or move closer to the European market point of gravity), and so on.


Pharmaceutical supply chains are on the move: exciting developments are going on in an industry where significant optimisation can still be realised. Optimisation directions companies are focused on:
  • Centralisation of supply chain management
  • Regionalisation of physical supply chains
  • Strategic outsourcing of logistics processes
  • Differentiation per product/market combination
It is not easy to get all this done, but still the industry has recognised the importance of making progress in these directions. Based on our experience in helping companies in pharma as well as other industries to define and execute the right steps towards optimal supply chain solutions, three major prerequisites for success can be defined as:
  • A clear vision and leadership
  • Collaboration with other stakeholders, both internal and external
  • The understanding that the supply chain can directly contribute to the strategic positioning of the company and is not only a cost centre – a key driver for companies that have already made steps in this direction
The agenda for the next three years will partly involve the development of concepts as described above. But more importantly, it is necessary to make the shift towards execution: putting good ideas into excellent practice.

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Johan Beukema is Partner, Healthcare at Buck Consultants International. He is based in the Netherlands and has over 14 years of experience working for leading pharmaceutical and medical technology companies, supporting them to improve their logistics practices from a supply chain strategy and network perspective, as well as on a more operational level, including logistics outsourcing and implementation management. Email:
Johan Beukema
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