Pharma Logistics: Can RFID Heal Supply Chain Security?

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From counterfeiting to tampering to terrorist threats, the pharmaceutical industry faces complex security challenges. Can a dose of RFID track-and-trace technology, prescribed by Dr. Wal-Mart, keep the pharma supply chain safe?

The race is on to secure the pharmaceutical industry's supply chain using Radio Frequency Identification (RFID), but obstacles are slowing the pace of implementation. The technology is too new, the price tag is too high, and the mandates keep coming.

There isn't a pharmaceutical company or distributor out there who isn't investigating RFID for security purposes, and not one will go on record to talk about it. This technology is costing the industry millions of dollars, and right now, no one is sure when they will recoup that investment.

To understand why supply chain security in the pharma industry is a hot button now, it helps to consider how the industry has evolved. In general, pharmaceutical companies do a credible job keeping their supply chains safe. Only 10 percent of drugs worldwide are counterfeit, and Food and Drug Administration (FDA) counterfeit drug investigations have increased to more than 20 per year since 2002.

But this is an industry that has seen tremendous global growth and change. For instance, more drugs are moving around the world than ever before—U.S. pharmaceutical imports have nearly quadrupled from $8.7 billion in 1995 to $40.7 billion in 2002.

In addition, more pharma companies are manufacturing overseas. For instance, 17 of the 20 largest pharma companies worldwide now make drugs, including Lipitor and Viagra, in Ireland, according to a Feb. 2, 2004, Time article. And, Merck is investing millions of dollars in manufacturing facilities located in southeast Asia.

As more drugs are being transported across borders, security becomes a greater challenge. The potential for tampering increases. In a post-Sept. 11 environment, terrorist scares are real. Now factor in the economic incentives provided by an increased volume of high-cost drugs, the ability of consumers to purchase drugs over the Internet, and advanced technologies available to create counterfeit drugs. Throw in two highly publicized cases of counterfeit Lipitor and Procrit within the U.S. distribution system, and a security red flag goes up.

RFID to the Rescue

Enter the FDA, which set out on a mission to meet the counterfeit drug challenge. Its Feb. 18, 2004 report, Combatting Counterfeit Drugs, all but mandates the use of reliable RFID—a track-and-trace technology that creates a pedigree for a product down to an individual unit. The FDA suggests it is feasible for pharmaceutical companies to have all products tagged at the individual item level by 2007.

That's three years away. But Wal-Mart, Target, and the Department of Defense aren't waiting that long. In 2003, Wal-Mart issued a directive to its top 100 suppliers—which include several major drug manufacturers—to start shipping pallets with RFID labels.

Wal-Mart is also requiring drug companies that supply Class II narcotics to utilize RFID tags. The Class II narcotics suppliers were to comply by March 31, 2004; other suppliers are to have RFID tags on all products moving into Wal-Mart's three Texas-based distribution centers by Jan. 1, 2005.

The Wal-Mart mandates and the FDA's counterfeit drugs report have created a scramble among pharma manufacturers, distributors, and retailers to implement a track-and-trace technology, perhaps before its time.

Developing Pilot Programs

How big is the RFID issue in the pharmaceutical industry? "It's huge," says Scott Rizzo, director of supply chain management for Hoffman-La Roche and director of the newly formed industry group The Supply Chain Leadership Council.

"The number-one question in pharmaceutical logistics now is: how do we know where our product is at all times? RFID in this industry is in its infancy, and all pharma companies are struggling with how to best deal with the FDA and Wal-Mart mandates."

Most pharma companies are involved in some kind of preliminary RFID program, but don't feel free to talk about it because the information is so proprietary and the topic is so sensitive. For this article, Inbound Logistics contacted eight large pharmaceutical companies, two top distributors, and several retailers. No one was willing to elaborate or go on record regarding the RFID systems they are investigating for their companies.

One thing that is on the record: all drug companies are investigating RFID, and many are in pilot programs, including McKesson and AmerisourceBergen. So are the big retail drug chains such as CVS and Rite Aid.

Creating the Pedigree

Just what is RFID and how does it work? "RFID is like the Mobil speed pass," says Jamie Hintlian, partner at Accenture, the Washington, D.C.-based global management consulting and technology services company. Hintlian is working on a cross-supply chain pilot program with several major pharmaceutical companies, retailers, and distributors, including Pfizer, Johnson & Johnson, Procter & Gamble, Rite Aid, CVS, Barr pharmaceutical, and Abbott Laboratories, as well as The Healthcare Distribution Management Association and National Association of Chain Drug Stores.

"The RFID device consists of an 1/8- inch square tag with an antenna printed in copper," Hintlian explains. "The tag contains a chip with a unique identifier, which, when excited by RF energy, basically wakes up and announces itself."

Here's how it works: A tag is commissioned from the manufacturer's site with lot and batch number, and expiration date. That physical item stores all this information. As it moves through the supply chain, the tag builds a history or "pedigree."

For example, the tag can tell a reader which dock doors the product moved out of, which aisle it came down, and whether or not it arrived at a facility.

"In the drug industry, when a product reaches the point of dispensing—likely the retail pharmacy—and anything is amiss, you can automatically presume the product is counterfeit," says Hintlian. "If the product doesn't meet requirements, it will trigger an alert."

Better Than Bar Codes?

RFID technology offers more than bar coding because of its track-and-trace ability and the pedigree it creates for a drug. This pedigree will help secure the integrity of the drug supply chain, according to the FDA report, and some states have already begun mandating a paper pedigree for drugs.

RFID brings two additional advantages to the table, according to Hintlian. First, it is a ready means for mass serialization. A bar code contains a SKU and some other information, but it is static. The idea behind RFID's electronic product code (EPC) is that it acts as a unique identifier for each item or serial number, with no two numbers the same.

In the pharmaceutical industry, the bar code on a bottle of tablets contains a SKU and a national drug code. That bar code contains information about the drug, but not about the specific bottle of tablets because the same bar code is used on every bottle.

With EPC, there may be one million bottles of the same product, but each one has its own unique identifier. EPC is a key in a database that can be used to associate all kinds of information—that a specific bottle was in a particular facility at a certain time, for example.

Line of Sight

The second advantage of RFID, says Hintlian, is that you don't need line of sight to read an EPC. While a bar code has to be visible to a reader, an RFID tag need only be within the antenna and reader scanner range, which is between two and eight feet.

"When dealing with high-value prescription drugs, RFID frees pharma companies from having to inspect all the cases and bottles to verify they are there; every single bottle tagged gets recorded within minutes of being received," Hintlian says. "There is less handling, built-in distribution integrity, and increased order accuracy.

"We are working with the manufacturers, distributors, and retailers in our RFID pilot program to evaluate the potential of RFID technology to enhance pharmaceutical product manufacturing, distribution, and retail operations," he explains.

Is RFID a replacement for bar coding? Definitely not, Hintlian says. "We are not telling companies to drop everything they are doing with bar codes and use RFID. That's not practical or necessary," he says.

"RFID will, however, be key to keeping the supply chain safe," Hintlian notes. "Many believe it will become a necessity for prescription pharmaceutical distribution, but it will require a cross-supply chain initiative. RFID works when trading partners share a common set of capabilities."

RFID adoption in the pharmaceutcals industry may be coming sooner rather than later, assuming companies can overcome implementation challenges. Kara Romanow, an analyst at Boston-based AMR Research, is working with several pharmaceutical companies that are using various methods and systems to meet Wal-Mart's January 2005 mandates. These companies are making good progress, she says, but many will not meet the Wal-Mart deadline, mainly because the technology is too new.

"We are finding some glitches," Romanow admits. "Ten to 12 percent of the tags are dead on arrival, but more importantly, another five to 10 percent are dying enroute to Wal-Mart. This is a technology that has been touted as superior, but we are only getting an 80- to 90-percent read rate, which is a far cry from bar coding's 100-percent read rate.

"What's more, we really are trying to bend the rules of physics," she says. "We are discovering that these tags can't be read through metals or liquids, which poses additional problems for pharmaceutical companies. The RFID software companies are all trying to figure this out as we move along."

One computer company that understands the need for customers to test this new technology before actually sending product to Wal-Mart is Sun Microsystems, Santa Clara, Calif. Sun opened a test center in Dallas for customers who are using its software to implement RFID and need to meet the Wal-Mart deadline.

"We ask customers to pick a representative product and send it to our test center," says Elizabeth From, Sun Microsystem's life science strategist. "It's easier for these companies to test their tags here than to set up their own pilot system. The idea is to get rid of any glitches before they start shipping to Wal-Mart."

She agrees with Romanow that a lot of the hard work centers around physics—dealing with the liquids and metals, and finding the right material for the tags. "Sun has a 100-percent read rate in its own warehouse, where it has done its own pilots on different packaging," she notes, "so we know we can read through certain materials."

The Cost Factor

But even after the physics is worked out, pharmaceutical companies will still need to deal with the cost factor. Although investing in RFID implementation will be expensive, the ongoing costs of tags will be the biggest pill for companies to swallow—especially in the pharma industry, which is being pushed to tag at the individual level rather than container or pallet level.

At 25 to 35 cents a tag for high-volume shippers, and 50 to 60 cents for low-volume shippers, all companies will be hard-pressed to justify the costs, especially if they can't utilize the information they obtain from RFID tags to drive inventory and transportation management.

So, how can companies recoup RFID costs? In the long run, the information gained from creating these pedigrees will be invaluable, agree RFID suppliers and consultants.

"The cost of inaccuracy in this industry—with its high-value products and added compliance issues—is very high," says John Chorley, senior director of Oracle Inventory and Warehouse Management.

"Tagging at the individual level and tying backroom management systems into RFID will give companies a labor cost savings as well as the ability to track the product through the supply chain," he explains. "This can minimize the costs associated with recalls, expirations, and possible counterfeit problems."

Elizabeth From says her customers are battling the same challenges, but that there are bigger issues all the companies are investigating.

The broader issue, says From, is whether, to meet a retailer's demands, companies will just "slap and ship"—purchase tags and scanners to implement the bare bones of RFID—or try to do something with the tags and minimize the costs. "There is no way to get savings if you just slap and ship," she says.

Some companies have indeed chosen to just slap and ship in order to comply with Wal-Mart. "This is a cheaper way to go," says AMR's Romanow, "but even putting a bare bones slap and ship RFID program together costs money. These companies will spend tens of thousands of dollars, and won't use the information they obtain from RFID tags."

Getting a Return

Other companies, however, will spend $13 million to $22 million for a fully integrated RFID system, complete with tags and readers. They'll also make changes to their existing backroom management systems and data warehouses.

"These are the companies that will get something out of the implementation, such as labor savings and the ability to gain insight into their supply and demand," Romanow says.

Oracle has seen companies approach RFID both ways, according to Chorley. "We help companies with their short- and long-term RFID goals. Most companies with short-term requirements are looking for packaged solutions to meet compliance mandates. They need to quickly and cost-effectively generate RFID labels and the ability to associate labels with a specific shipment," he says.

"We also work with companies that are treating RFID as an integral component of their business and are looking at it as a long-term strategy," he adds. "These companies are interested in understanding how RFID will transform existing business processes, impact data management, and improve analytics."

To a large degree, deciding how extensively a company wants to implement RFID will come down to costs and return on investment. Companies that investigate RFID systems and processes will have to

do a lot of internal selling to those who control the purse strings. There is no getting around the fact that implementation costs will be high.

It all comes down to the FDA's intent for RFID technology. With the prevention of counterfeit drugs driving this initiative, anything less than a full RFID implementation program makes little sense for companies that ship prescription products. Pharma companies can't help prevent fraud unless they have visibility into the supply chain and utilize the information garnered. This is achieved only by connecting RFID to internal inventory management systems.

In the case of suspected counterfeit, tampering, recalls, or safety issues, RFID technology will give a drug company the ability to find a single pill bottle anywhere along its supply chain, and pull it easily from distributors' warehouses or retailers' shelves.

In time, RFID will become standard practice in the industry, predicts Scott Rizzo. "It's a matter of time," he says. "The benefits are enormous and they expand from safety into recalls and counterfeits prevention, track and trace, and overall logistics fortification."

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