Logistics – changing the fortunes of pharmaceutical and medical device companies

William Kammerer of Accenture explores the impact that logistics can have on the success of pharmaceutical and medical device companies and the importance of improving supply chain effectiveness.

Simply put, failure to improve supply chain effectiveness will compromise competitiveness.

For most life sciences companies, challenges are mounting and the barriers to profitability are stiffening. In pharmaceuticals, pipelines are thin, blockbuster drugs are debuting less frequently, and the duration of clinical trials has increased drastically. Along with device manufacturers, pharmaceutical companies also are setting their sights on emerging economies, but untested strategies, new product mixes and limited market insights are making local market penetration unpredictable and expensive.

In both sectors (drugs and devices), volatile trade conditions combined with vacillating fuel and commodity prices are complicating logistics, even as new competitors—often in developing regions—enjoy lower-cost infrastructures. The net effect is that real, enduring success has become tougher for life sciences companies to attain.

Interestingly, very few companies in this industry consider supply chain excellence to be one of those fundamentals. Life sciences companies typically spend more time and effort on the commercial and research sides of the business and, conversely, place a lower priority on supply chain improvements.

One reason may be that the industry's average logistics costs as a percent of sales is 1.5 percent—much lower than many other sectors, according to research .1 But even if logistics and other supply chain-related costs are low, this does not justify sub-par supply chain performance. Consider, for example, that companies with weak supply chain skills may fail to recognise—and subsequently capture—the revenue-building, cost-reducing potential that supply chain excellence brings to any business.

Life sciences companies with minimal supply chain savvy may be overlooking the harder-to-quantify benefits of supply chain excellence: exploiting sudden opportunities, maximising customer loyalty, minimising risk. Like never before, supply chain leaders leverage their capabilities to be more agile, more responsive and more customer-focused than competitors. They are more likely than most to have the right products in the right places at the right time, which in turn makes them stronger and more successful competitors. By contrast, supply chain also-rans are frequently burdened by high inventories, poor controls, insufficient supply-chain-wide visibility and reactive networks that make it harder to respond quickly to changing business conditions.

The findings from a recent comprehensive survey of more than 1,500 executives in 21 countries looking at the specific capabilities and improvement opportunities associated with high performance in supply chain managementwere striking.

For example, high-performance companies - aka "Masters" - are less likely than most of their peers to consider fulfillment a cost center and more likely to position fulfillment as a strategic differentiator and driver of growth. Research results showed that companies with "Master's" level transportation, distribution and order / inventory-management skills achieve higher service levels for growing the business and lower costs for operating the business. Members of this elite group average 98 percent on-time and in-full delivery, while enjoying 50 percent lower inventory and outbound transportation costs than less-savvy competitors. Given that 80 percent of the pharmaceuticals market is now populated by generics, logistical capabilities that reduce costs are more important than ever.

Ehe key traits of "Masters" in supply chain planning were also identified. Among other things, this group excels at product life cycle management and thus is better able to avoid over- or under-stocking product, spending too much (or too little) on marketing, investing too much (or too little) on refinements, and misadjusting inventory levels.

All of these findings are highly relevant to the life sciences industry, despite the many distinctive challenges life sciences companies face. Take one such challenge: rapidly shifting business conditions, as evidenced by shrinking pipelines, more patent cliffs and increasing competition from generics. Mastery of logistics can help address these issues by improving the ability to tap lucrative markets, rapidly distribute new products, reapportion resources and implement innovative customer-service programs. Heightened regulatory pressures are another obstacle: pushing up development expenses, increasing risk and forestalling income.

The "Masters" are better positioned to meet these challenges with centralised operations, formal change management mechanisms and greater supply flexibility. Security and counterfeiting are also top-of-mind concerns. Fortunately, mastery of logistics and higher levels of security are virtually synonymous, regardless of industry. In effect, high performers excel at understanding and mitigating risk. With more transparent and flexible operations, they may even make risk a competitive leverage point by anticipating and responding more effectively to volatile events.

In life sciences, six pillars of logistics excellence were identified into which logistics-improvement opportunities can be grouped in efforts to potentially improve the financial health of life sciences companies.

• Logistics Strategy – Masters employ a dynamic, demand-driven logistics strategy that maximises their responsiveness to changing business conditions.

• Compliance – Masters manage their supply chains with stringent KPIs and metrics-guided processes to ensure timely delivery of high-quality, in-compliance products.

• Distribution – Masters have advanced distribution networks with multichannel fulfillment.

• Inventory and Order Management - Masters integrate order management and inventory capabilities to excel at fulfillment

• Global Transportation – Masters take a proactive approach to transportation planning, with tight controls and end-to-end visibility.

• In-Market Optimisation - Masters take a center-led approach to blending global reach with local relevance

The simple truth is that supply chain improvement opportunities are extensive, attainable and frequently under-acknowledged. Regardless of product size, type or value, life sciences companies that excel at supply chain management may be able to:

• Increase revenue by orchestrating more-innovative services and more-efficient and comprehensive product launches that focus fully on cradle-to-grave product life cycles.

• Improve margins through operational excellence and better deployment of resources.

• Minimise risk by increasing awareness of (and responsiveness to) disruptions such as labor unrest, quality glitches, currency fluctuations, port delays, recalls, market shifts and supplier-performance problems.

• Reduce costs by streamlining processes and reducing inefficiencies in areas such as inventory management.

Operations executives in the life sciences field understand the sector's many challenges. And while research confirms that mastery of logistics has the ability to help life sciences companies raise revenues and costs, pharmaceutical companies and medical device manufacturers may not be associating their most-daunting barriers with the supply chain initiatives that could help them surmount those challenges. This is especially true for those who have failed to embrace value chain transformation as a process of moving from traditional inside-out based operations to a model where the key business outcomes desired define how every point on the chain is set up.

References

 1 Accenture, How Excellence in Logistics Can Change the Fortunes of Pharmaceutical and Medical Device Companies, April 3, 2013

 The next article in this series is due to be published at the end of January.

About the author:

William Kammerer, managing director in Accenture's Life Sciences Supply Chain practice. He has more than 24 years of experience helping clients develop and implement supply chain strategies across retail, consumer products and life science organisations. Prior to joining Accenture, William worked in

management consulting and in the transportation and logistics industry. He specialises in logistics management, supply chain network design and integrated planning and fulfillment operations.

Closing thought: How important is it to improve supply chain effectiveness?