Vinesh Balakrishnan Yezhuvath

Africa, despite being the most natural resource-rich landmass on the planet, houses only 15% of the global population, but bears 24% of the global disease burden. With such statistics, Africa no doubt represents an immense untapped market for the pharmaceutical companies. However, factors such as lead time, logistics, and transportation infrastructure availability make the pharmaceutical distribution a challenging frontier. From the manufacturing line to the drug store shelves – the distribution network of a typical pharmaceutical company is extremely complex. Let’s take Pfizer for instance; on an average day, 30,000–35,000 different stock keeping units (SKUs) are delivered by 80 internal manufacturing sites, and more than 300 external suppliers travel through 4,000 international trade lanes to more than 110 markets worldwide.

Shifting Value Proposition

As efficiently as they may seem to operate, pharma supply chains are notoriously reactive to consumer demand pressure and evolving compliance requirements. Between applying and actually receiving regulatory approval for distributing a particular medicine in Sub Sahara African region, it takes around four to seven years. This, and similar gaps in the supply chain ultimately cause acute shortages in drug supply and force patients and healthcare providers to needlessly spend as much as USD 230 mn on substitute treatments. In light of this scenario, supply chain leaders need to review their current and planned initiatives and lay the foundation to innovate the pharmaceutical distribution network to cope with the demands of new channels like Direct to Pharmacy, Direct to Patient. Commercialization of Personalized Medicine will need a completely different set up and capabilities.

Emerging markets, such as Africa, come with their unique set of challenges and require pharma companies to strike a balance between having their ‘own presence’, partnering with existing dealer(s), and building a dealer network ground-up. Since the ‘least cost network’ is no longer the primary consideration, determining the goal of the network has become critical. The need of the hour is to weave the patient dimension into the product, facility, and pharmaceutical distribution partners’ matrix.

Network redesign, therefore, has to be performed at a more tactical level, and executed as part of the integrated business planning. Typically, the pharmaceutical distribution network review or redesign happens once every three to five years or due to events such as merger and acquisition. There is a need to shorten this cycle now possibly to a quarterly basis. Although customer service levels and delivery flexibility remain the top priority from a distribution network design perspective, each hour of inventory held pushes up the overall cost of doing business.

Segmentation to Untangle Supply Chain Complexities

Segmentation can play a key role in deciding how these three factors – inventory visibility, sensitive products’ storage and shipments, and distribution network optimization – need to be balanced.

To meet the emerging challenges in pharmaceutical distribution network redesign, it is important to use a scientific approach – considering product, supply, and customer based segmentation to determine where the distribution network should be placed. A well-parameterized dynamic simulation model to support time base variation, uncertainties, and operations is necessary. There is a need to evaluate different strategic scenarios—storage, infrastructure, transportation capacity, inventory and shipment policy, and so on to determine the optimal global and local distribution network. These probabilistic scenarios can then be analyzed using traditional financial criteria—capital investment, operational expenditures, and net present value (NPV)—to determine cost and revenue opportunities. Moreover, the facility, third party logistics (3PLs), fourth party logistics (4PLs), transportation entities, related network, and other data points such as service fees should evaluated to ascertain the location of the distribution network.

Drug shortage should be considered another vital parameter for segmentation. For instance, by using rapid simulation, we can assess how the distribution network responds to drug shortages and identify an effective tactical response. Drug pricing, degree of desired distribution control, and threshold sales can be further factored in to enrich the simulation model.

The concept of ‘maximum value network’ should be used to simulate the redefined pharmaceutical distribution network. To illustrate, if you are a drug distributor, gaining access to an emerging market could deliver you more value than bearing the cost of setting up a distribution network in that country.

Today, an increasing number of pharmaceutical companies are embracing emerging technologies such as Big Data analytics and statistical information modelling to gain greater information transparency. A major drug distributor is already leveraging artificial intelligence (AI) to collect data generated at multiple subsidiaries and storage facilities for countless SKUs as they make their way to customers.

With the rise of the Internet of Things, enhanced capabilities to track product movement and exposure to operating environmental conditions of the product (be it drug or devices) have become possible. Using AI in the supply chain can provide insights to market volatility.

It’s definitely time for pharma companies to build capabilities for a more frequent run for network determination.

Will new technologies like AI and IoT play a key role in identifying network distribution plans, their frequency, and the overall impact on cost to serve?