Pharmaceutical and Healthcare Supply Chains – How to Maximize a Shrinking Margin in 2016

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Published February 11, 2016

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By Brian Hudock
Partner, Tompkins International

In 2015 I predicted that the Healthcare industry was finally sharpening its focus on profitability and efficiency. While I was writing this Walgreens moved on Rite-Aid and further consolidated the Retail Pharmacy market, but more importantly strengthened their negotiating leverage on price breaks. If the cost of the supply chain from sourcing to production to distribution was not a priority, it just became critical to profit margins and customer service.

Key Drivers for 2016 Supply Chain Leaders
Like most other industry supply chain leaders, pharmaceutical industry leaders will complete their transition from the department leaders to the executive boardroom, but with the added quality, compliance, and regulatory oversight, across all segments of the healthcare market from medical devices to biotech. The industry leaders who have been there for years fully understand this brings rewards, as well as higher expectations.

The question is how lean and efficient can you make your organization?

Transformation of the supply chain starts with the understanding of where costs originate. This is closely followed by understanding the true flow of materials from sourcing decisions to customer usage of the product. In healthcare, risk and product security must always be vetted to insure product traceability and integrity at every step. In supply chain, the focus will continue to be on control and key spend areas including:

  • Key Supplier Relationships
  • Inventory Management
  • Transportation
  • Warehousing and Distribution
  • Track & Trace Compliance

In order to achieve this, supply chain leadership will focus on key supplier relationships and improving forecast accuracy, inventory levels from raw materials through finished products in the entire supply chain, reducing expedited shipping to control critical moves, leveraging third party partners for distribution capacity and core competency, as well as leveraging their compliance systems.

  • Key Supplier Relationships: Accurate forecasts drive a high percentage of obsolete API’s and raw materials, historically the value of lost production or missed sales hid this waste. However, as materials become more specialized and more costly and sell margins erode, this makes sourcing a critical part of supply chain management and improvement targets. The supply chain will continue to take control of sourcing, influence forecasting, and in building supplier relationship and owning supplier communications.
  • Inventory Management: Building on key supplier relationships, the improved planning from forecasting and tighter supplier integration will facilitate lower stock levels and more rapid response to changes, also allowing for long-term reduction in finished product levels. In the short term, improved “market level inventory” visibility will become critical to minimize field expiration of product, returns, and overproduction based upon “internal DC only” visibility to global inventory levels.
  • Transportation: Dedicated partners for delivery who can provide secure, time sensitive movement around the globe have been a focus for years. In 2016, mode selection and “expedite” usage will continue to be challenged as forecasting and planning variability is reduced. Again, the ability to leverage improving 3PL partner capabilities will expand in transportation optimization.
  • Warehouse and Distribution: 3PL partners have proven their ability to manage many business functions and meet compliance demands across healthcare segments. In many cases, better and more efficiently than healthcare manufacturers. This trend to outsource non-core competencies will continue, but will better 3PL competition in the market, cost pressures and service demands on 3PLs will increase, and the top 3PLs will step up to meet the industry needs.
  • Track & Trace Compliance: The deadline is looming and the industry is a mix of leaders and laggards. Many will turn to 3PLs to gain the required expertise and systems on the warehouse and distribution side. Full integration with manufacturing and co-manufactures is critical to address. This will be a focus of those lagging in 2016 as the probability of additional extensions is fading.

Even with all the pressures facing the supply chain with cost optimization and compliance issues, the increased use of 3PL partners, and diversity of organizations, supply chain organizations will continue to grow and become core competencies for many organizations.

Challenging times will create stronger supply chains, supply chain leaders, and further prove the value of internal expertise. The ability to balance internal tools, infrastructure, build supplier and customer trust relationships, and leverage external 3PL organizations to build local and global networks that can adapt quickly, will accelerate for everyone this year. What you learn in 2016 and the foundation you establish will likely determine if you plan for change or if you react to daily challenges while moving forward.

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