Pharmaceutical Sector

Executive Summary

The Pharmaceutical global supply chain (GSC) is driven by a constant need to respond to government and end customer traceability mandates, global sourcing from low cost countries, smart border requirements and delivery in a Just-In-Time (JIT) manner. Logistics and supply chain management (SCM) are thus expected to play a key role in GSC and contribute dramatically to productivity growth of Canadian Pharmaceutical firms over the next years.

For the last decades, the North American (NA) Pharmaceutical Manufacturing sector has been focusing on developing internal innovation activities, such as high quality products and R&D. The current focus is shifting more towards supply chain level activities such as delivering the product to the end customer at the right time, right place, in a secure mode and at a competitive operational cost.

The top three factors that drive a company in the Pharmaceutical industry to implement a lean strategy are Pressure to Improve Operational Performance, Inventory Reduction and Shorter Order Cycle times. Operational performance could be directly linked to logistics and SCM costs while the inventory reduction and the demand to decrease shorter order cycle time are related KPI such as to Just-In-Time (JIT), supply chain agility and inventory turns¹.

Measurement of logistics and supply chain management (SCM) key performance indicators (KPI)  is an essential part of the agile supply chain concept. It is estimated that 37 percent of North American (NA) firms that have put in place logistics and SCM KPI corporate wide measurement applications have achieved a decrease of 15 percent or more in shipment delays compared to only 7 percent of firms that did not measure those KPI consistently⁴.

While inventory turns is the main KPI for evaluating supply chain agility, logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM operations. The combination of supply chain agility and efficient SCM practices is key to long term competitiveness and prosperity of Canadian firms in a global supply chain (GSC) context.

Inventory turns

Between 1992 and 2005 the Pharmaceutical and Medicine manufacturing sector saw a decrease of 36 percent in its raw materials inventory turns, while the average for the Manufacturing sector actually increased by more than 20 percent during the same period².

During the same period but on the finished goods side, the Pharmaceutical and Medicine manufacturing sector experienced a decrease of almost 20 percent in its inventory turns, while the Manufacturing average increased by 23 percent².

For the Wholesale industry, Pharmaceutical, toiletries, cosmetics and sundries wholesalers were also below the Wholesale average in 2003 (by 20 percent) in terms of inventory turns.

On the Retail side, Pharmacies and Drug Stores were actually above the Retail average in terms of inventory turns, with a difference of only 6 percent.

Finally, comparing the Pharmaceutical and Medicine manufacturing sectors for Canada and the U.S. shows that Canada is well below its neighbour in terms of total inventory turns, with a gap of 137 percent. On the Wholesale side, Canada had a slight advantage (7 percent)².

Logistics Costs

In terms of logistics internal costs, the Pharmaceutical and Medicine manufacturing sector was below the Manufacturing average, both in terms of GDO and Gross output share, by 49 percent and 39 percent respectively.

Looking at logistics outsourcing costs, the same picture appears. In fact, this sector has one of the lowest logistics outsourcing costs in the manufacturing industry. Nevertheless, it is interesting to note that while it has such a low logistics outsourcing cost, it relatively has one of the largest storage and warehousing costs (4 times higher than that of the average for Manufacturing).

Finally, inventory carrying costs in the Pharmaceutical and Medicine manufacturing sector, in terms of percentage of sales, are well above the Manufacturing average, with a difference of almost 100 percent².

Technology

The focus of the Pharmaceutical Supply chain is on traceability issues coming from SCM Mandate Compliance initiatives such as the FDA and Health Canada Code of Federal Regulations. In terms of traceability issues, NA Pharmaceutical firms that are proactive in implementing technology to respond to compliance initiatives have improved their time to complete product traceability by 49 percent and reduce by 31 percent their cost of counterfeiting/gray market counterfeiting initiatives³.

Generally speaking, twice as many SCM high technology adopting firms enjoy a reduction in inventory carrying cost compared to low technology adopting ones⁶. Furthermore, in terms of success to implement JIT Lean manufacturing, 79 percent of NA Pharmaceutical Manufacturing firms experienced a reduction in supply chain costs as expected, compared to only 51 percent in average for the whole industry¹.