Snapshot: Pharma Logistics: Prognosis Positive

Pharmaceutical manufacturers, drug distributors, and health care providers are taking a double dose of technology and business process improvement to keep consumers safe and competition one step behind.

Transformation in the pharmaceutical marketplace is challenging traditional approaches to manufacturing and distribution.

“Pharmaceutical, medical, and medical device margins are collapsing quickly,” says Daniel Carbery, senior vice president of operations and generics for Endo Pharmaceuticals, a Chadds Ford, Pa., pain medication manufacturer. Greater price transparency means products are increasingly sold below cost, with others marked up to compensate.

“Pharma has staggeringly high inventory levels. As margins shrink, inefficiency becomes a problem. Entire segments of this industry are built around holding a lot of product,” he adds.

As pharmaceutical companies outsource production globally, product moves through even more layers of distribution before landing at a pharmacy or health care facility. Expanding market and clinical trial activities offshore also present infrastructure and regulatory challenges.

Financial and business model changes aside, compliance requirements, industry consolidation, competition, and rising costs are forcing pharma companies to address pipeline velocity, visibility, and demand-driven value networks to become more responsive to shifting market conditions.


Standardizing Safety

One of every 100 doses of pharmaceutical and biotechnology products manufactured in developed countries is counterfeit, according to World Health Organization estimates. Every pharma company benefits from securing its supply chain and proactively eliminating counterfeit drugs before they enter the system. At the same time, the industry is being tested to determine how much security supply chains can afford without impacting service and budget constraints.

At the center of this struggle is e-pedigree—the use of electronic data to track and trace pharmaceutical products through the supply chain; and serialization requirements that assign individual codes to each item. Where the Food and Drug Administration (FDA) hesitates to tread in establishing e-pedigree regulations, states have stepped in to fill the void. The most aggressive, California, continues to modify its requirements and deadline schedule for e-pedigree compliance.

Many manufacturers, distributors, and pharmacists have objected to aggressive regulatory mandate deadlines and high compliance costs, while acknowledging the ultimate benefits. Pharma giant Pfizer, for example, has been a leader in e-pedigree use for its Viagra product line, but told the California Board of Pharmacy that it would take five to seven years to implement serialization for all its products.

“Regulations aren’t in alignment with standards,” notes Mike Crawford, vice president of integrated supply chain for AstraZeneca, Wilmington, Del., a top-10 pharmaceutical manufacturer. “In response to the call from legislators, we’re out ahead by ourselves.”

Radio-frequency identification (RFID) is regarded as an excellent would-be enabler to capture and deliver chain of custody data through the pharmacy supply chain—if it works for every product. Among adoption issues is the difficulty in getting good RFID reads on item-level packages, particularly for liquids and semi-solids. In one pilot, OxyContin maker Purdue Pharma is adding a customized antenna to Gen2 tags so that it can use both high-frequency and ultra high-frequency bands. But the cost of equipment to read these tags is still prohibitive. As an alternative, many companies are using 2-D symbologies for e-pedigree data to avoid interference issues.


An increasing number of pharmaceutical products are temperature-sensitive—particularly in the biologics category—a factor that introduces additional safety requirements in a lengthening supply chain.

“Manufacturing used to happen closer to market, but now there are more international cold chain requirements,” says Bill Hook, vice president, global strategy, healthcare logistics, for UPS Supply Chain Solutions, a third-party/fourth-party logistics provider. Regulations dictate how and at what temperatures product must be transported.

“Distribution outsourcing is more widely accepted by big pharma to address such challenges,” Hook adds.

Advances in passive and active handling/packaging processes also help contain the higher cost of storing and moving goods with stringent temperature parameters.

U.S. Special Forces, for example, equips medics with a specialized thermal container that maintains its payload temperature for several days. It uses this to transport emergency doses of Coagulation Factor VIIa, an injectable clotting drug, to seriously wounded soldiers in the field without benefit of active refrigeration.

Some companies use RFID tags imbedded with sensors, particularly in international lanes, to maintain temperatures throughout the supply chain. These sensors are programmed to “sleep” on planes so their signals don’t interfere with flight controls.

Other companies employ 24/7 monitoring services for temperature-sensitive shipments, with intervention and contingency plans to prevent product spoilage.


Pharma has long been a heavily regulated industry, with compliance costs a key focus for executives. “We’re really keeping an eye on legislation,” says AstraZeneca’s Crawford. “It has great potential to change how we do business.”

However, “leaders are no longer looking at compliance for the sake of compliance,” reports Hussain Mooraj, research director, healthcare and life sciences, for research analyst firm AMR Research. “They’re looking at incorporating compliance into excellence initiatives—how to improve processes and develop operational effectiveness. Compliance comes along for the ride.”

While there will always be areas where compliance seems to add little value, in a surprising number of cases it can be part of overall business process improvement (see sidebar below for an example).


Pharma companies invest heavily in research and development, then must attain FDA sanctions before releasing a product to market. The time required for approvals, a highly competitive sales environment, and a substantial tier of generic drug companies poised to jump into the market upon patent expiration, all combine to magnify speed-to-market demands.

The Wall Street Journal reports that generic competition will likely eliminate $67 billion in U.S. pharma sales each year between 2007 and 2012, as more than three dozen drugs lose patent protection. So as new drugs near market-readiness, pharma companies must hit on all cylinders to market and deliver those products quickly.

Companies are increasingly using contract manufacturing sites across the globe to quickly and economically meet market expectations—but globalization adds complexity. Consequently, pharma manufacturing executives’ number-one future concern is leveraging contract manufacturers to facilitate new product launches and agile response to demand, according to AMR Research’s 2007 Life Sciences survey.

“It takes a cross-functional team to be successful in introducing new products,” says Vincent Colicchio, manufacturing and product supply chain manager at dermatological pharma manufacturer Stiefel Laboratories, Coral Gables, Fla.

Enterprises must tap operations, distribution, manufacturing, quality control, financial, regulatory, and sales functions to execute new product introductions quickly. “You’ve got to be nimble and flexible to meet all the product requirements,” he says.


Periodically re-evaluating logistics networks is a best practice in any economy, but rapidly rising fuel and materials costs make now a smart time to rethink transportation and distribution.

For example, AstraZeneca once moved most of its inbound pharma products by air, but has shifted one-third of that volume to ocean to satisfy economical and environmental concerns. Accordingly, the company expects to reduce freight costs by at least $20 million in 2008.

“We manage transportation closely to keep lead times in line with demand,” says AstraZeneca’s Crawford. “We’re trying to adjust at both ends to keep inventory at the right levels. You can’t recapture time, but you can accelerate in other areas to compensate.”

As a result of a network optimization initiative, Stiefel Laboratories will shave close to $250,000 a year in fuel costs. The company closed a distribution facility in Duluth, Ga., and consolidated U.S. distribution in its Oak Hill, N.Y., operation.

Stiefel is also working with its carriers to reassess and prioritize routes, thereby shortening lead times to customers for both in-house and contract-manufactured goods. “We expect to see improvement in finished goods inventory, freight costs, speed to market, and efficiency,” says Colicchio.


The pharmaceutical industry is just beginning to embrace the supply chain as a competitive differentiator.

“Supply chain teams at leading companies are focused on synchronizing demand and designing the most profitable response, which means focusing holistically on each interaction,” reports AMR Research.

“This is a significant shift from existing thinking. Imbuing this point of view within the business and inspiring the traditional life sciences supply chain organization is a major challenge and needs to be led from the top down to be successful,” the report notes.

With healthcare in the national spotlight, pharma companies are under pressure to refocus processes around the patient. Supply chain executives play a role in delivering efficiencies that contain costs while enabling their companies to be innovative and profitable.

CASE STUDY: AstraZeneca Unlocks Safety Cap

Government authorities and the public want assurance that the products they use are legitimate and safe, so pharmaceutical supply chains are under pressure to boost safety beyond even today’s standards.

At the same time, pharma companies are subject to the same pressures as any other industry—rising fuel costs, mounting regulation, globalization, and sustainability, among others.

For Mike Crawford, vice president of integrated supply chain for $29.6 billion AstraZeneca, this means tackling security on multiple fronts.

AstraZeneca is one of the world’s largest pharmaceutical companies, producing well-known brands including Crestor, Nexium, Seroquel, and Symbicort.

Moving those drugs from point of manufacture all the way to the patient requires a multi-pronged and continually evolving approach to supply chain security. In packaging, the company employs several overt and covert product authentication techniques to easily identify counterfeit drugs.

One challenge is crafting solutions that are visible to the patient without being easy to replicate. For example, AstraZeneca uses color-shifting inks and holograms in its packaging. Other markings and design features are concealed and known only to those charged with ensuring authentication at other stages of distribution, including Customs.

AstraZeneca recently began tackling e-pedigree and serialization requirements. The company intends to extend e-pedigree to all its products by the end of 2008.

“E-pedigree will enhance supply chain security for patients,” says Crawford. “It will provide greater assurance at the point of use that patients are getting a legitimate product.”

AstraZeneca is taking a system-wide approach, using e-pedigree across all its product lines to address security needs globally. While the United States’ closed loop pharmaceutical system already affords some protection, the more open, global system offers even greater opportunity to improve security and safety, Crawford says.

As AstraZeneca’s supply chain initiatives move ahead, the supply chain is becoming an increasingly critical factor in decision making. “Over the past few years we have leveraged supply chain, packaging, and manufacturing capabilities to stay competitive in terms of delivering value to the business and improving working capital,” Crawford says.

H.D. Smith’s Extra Dose of IT

Thin margins and hefty demands for track-and-trace capabilities are among the many factors forcing companies to leverage information technology to deliver efficiency and visibility. But transitioning from legacy systems to state-of-the-art IT infrastructure remains a challenge for the healthcare and pharma industries.

That’s certainly the case for H.D. Smith, a privately held, full-service wholesale distributor that delivers pharmaceuticals and other merchandise to retail, hospital, and institutional pharmacies. To keep pace with marketplace demands, it is upgrading its legacy IT infrastructure with packaged applications.

“Our legacy systems do not handle the level of detail we need,” says Brian Landry, senior vice president of information technology, who joined the Springfield, Ill., company one year ago to lead the IT transition. To improve distribution operations, provide more discrete data, and drive new automation, H.D. Smith has selected a new warehouse management system (WMS) from Manhattan Associates, Atlanta, Ga.

“The WMS has provided both internal and external visibility,” says Landry. “We’re not required to track our date-sensitive products, but we will be ready to track by manufacturing lot if that becomes a requirement.” For example, H.D. Smith will have the capacity to manage e-pedigree data as it passes through distribution.

To date, the distributor has deployed the WMS to the first of eight warehouses. The implementation has already boosted throughput and accuracy in warehouse operations, enhancing customer satisfaction—a must-have in the pharma industry.

But transitioning from legacy to packaged applications has proven more challenging than anticipated. “We initially implemented the WMS to do things the way we’ve always done them, rather than doing them better,” Landry says. “Now we’re modeling process improvements.”

H.D. Smith is also considering additional packaged applications, including procurement and forecasting functionality. These business process changes, along with a potential ERP implementation, will impact how and when the WMS is deployed to remaining warehouses.

While the path remains uncertain, the destination is clear: an IT infrastructure that better supports the needs of a 21st-century pharmaceutical supply chain.

CASE STUDY: Stiefel Laboratories: Prescribing E-Pedigree Compliance

Despite the many issues the pharma industry has raised in protest of e-pedigree law, it is, at its heart, a business process that adds much-needed security to the supply chain.

That’s a sentiment embraced by Stiefel Laboratories, a privately held Coral Gables, Fla., manufacturer of dermatological products such as Duac topical gel, Soriatane capsules, Brevoxyl acne wash kit, and REVAL�SKIN skin care products. The company is one step ahead of California’s pending e-pedigree regulations, expecting to obtain full compliance for its U.S. business by Dec. 1, 2009, and for serialization to be in place by July 1, 2010.

“It’s a competitive advantage to have the business process in place so wholesalers have little doubt we can run the business,” says Vincent Colicchio, manufacturing and product supply chain manager at Stiefel, which projects $1 billion in sales this year.

But the real evidence of Stiefel’s belief in e-pedigree’s ability to reduce risk and deliver efficiency lies in the manufacturer’s plans to apply this business process to its expanding over-the-counter aesthetics line. Unveiled this year, REVAL�SKIN skin care products are sold directly to aesthetic physicians and medical spas via online orders. Stiefel is partnering with a third party to distribute pick-and-pack orders because its own distribution network is designed for truckload and less-than-truckload delivery to wholesalers.

“Ultimately we will look toward placing this brand under e-pedigree even though it is more of an over-the-counter product,” says Colicchio. “This will protect our supply chain stream and ensure the integrity of the product.”

Eventually, serialization is also in the cards, if the cost/benefit is there. E-pedigree “is a business process for security,” says Colicchio. “It ensures our revenue chain.” It also provides Stiefel with greater control if new products become targets of counterfeiting, diversion, or other security threats.

Item-level RFID use to carry e-pedigree data remains a challenge for Stiefel because many of its 4,000-plus SKUs—2,500 of them active—are semi-solids that distort radio signals. So the company, which manufactures in six countries to serve its global market, is using 2-D bar codes on product and carton containers. RFID may eventually be used for pallets.

CASE STUDY: Endo Pharmaceuticals: Collaboration Cures Inefficiency

For Endo Pharmaceuticals, the smart route to an effective, efficient, and secure supply chain is close collaboration with its partners.

Perhaps surprisingly, one of these partners is the U.S. government. As a manufacturer specializing in pain medication, many of Endo’s products are controlled substances. For years, it had to endure cumbersome, paper-intensive processes for tracking orders to the end customer, then reporting to the Drug Enforcement Administration (DEA), which archived the paperwork. Delays led to excess inventory and the process was burdened by high costs and lack of visibility and control.

In January, Endo will publish the results of a five-year collaboration with the DEA and other pharma companies to replace those multi-part forms and processes with the Controlled Substance Ordering System (CSOS). CSOS swaps paperwork for public key infrastructure (PKI), digital certificates, and e-commerce to speed orders and give companies and the DEA more visibility into the location and movement of controlled substance drugs, and significantly boosting security and enabling less inventory.

“In theory, the DEA can track quantities by ZIP code for every opiate,” says Daniel Carbery, senior vice president of operations and generics for Endo Pharmaceuticals.

It’s a voluntary program, but “is becoming a defacto requirement because the current system is so painful,” Carbery says. CSOS is a great example of successful industry-government collaboration, he adds.

UPS Supply Chain Solutions, Endo’s fourth-party logistics partner (4PL), is also party to CSOS’ successful implementation. UPS SCS monitors the movement of orders to detect micro patterns in shipments: complaints, damages, or changes in ordering habits. If a micro pattern develops over two to three months, the routing is changed to avoid the possibility that a diversion or other problem is occurring, even though in most cases this step is merely precautionary.

When Endo Pharmaceuticals formed in 1997, executives made a strategic decision to outsource the bulk of its logistics and distribution to avoid costly investment in internal infrastructure. UPS operates a semi-fixed system for Endo—the manufacturer rents dedicated space and UPS picks, packs, and ships its orders. The 4PL provides domestic and international transportation services, as well as customer service and security. Endo employees are tasked with quality control.

The two companies work closely together, and this flexible partnership allows Endo to scale its operations quickly. Carbery provides one example: “In 30 days, we acquired a drug. On the day the deal closed, we moved products from the previous owner’s warehouse to ours and started to ship under the new name, a pace rarely achieved in the pharma industry.”

The arrangement provides a competitive advantage for Endo that exceeds questions of lowest cost. “Using a 4PL can be incredibly expensive without the right internal talent,” observes Carbery.

Endo’s approach, he adds, is an effective strategy in an industry where margins are no longer enough to compensate for supply chain inefficiencies.

“My goal is for product to move from the factory, through the UPS DC, to the store,” says Carbery, minimizing additional touches that increase cost, time, and risk.

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