The Indian pharmaceutical industry is poised for significant growth but faces challenges such as price pressure and increased regulatory scrutiny. Supply chain efficiencies are critical for companies to remain competitive, requiring strategic, tactical, and operational interventions. With the advent of the new drug price control order and the implementation of GST, companies must restructure their logistics to optimize costs and service levels.

1. Pharma Bio World10 June 2013
Supply Chain Efficiency – A Lever for
Enhanced Competitiveness
I
ndian pharmaceutical industry today
holds a distinctive position in the global
market with high growth in generics,
contract research and manufacturing
services. The industry is the 3rd
largest in
volume terms and 10th
largest in value, with
current revenues of over USD 20 billion.
The industry has been growing at a brisk
rate and is expected to reach between
USD 55 to 70 billion by 2020.
With many drugs going off-patent and
India emerging as a low cost supplier of
generics, the opportunities for the Indian
Pharma generic companies are immense.
But there are numerous challenges too.
Global customers expect prices to be
lower while at the same time demanding
increased service levels. Already there is
a price pressure in the generics market
and operating margins are under stress.
This is also evident for major global
players who have established their
generic manufacturing base in India, as
they experience year-on-year reducing
margins in their India operations (Refer
Figure 1 below).
As competitive pressures intensify,
organisations will need innovative
products, novel processes and operational
efficiencies to grow their business and
sustain their profitability. Supply chain
efficiencies can significantly improve
operations and be a key differentiator
for companies.
The opportunities for the
Indian pharmaceutical
industry are immense but
increasing competition,
increasing regulatory
pressures and stringent
price control means
that companies need
to constantly improve
their costs and service
levels. Supply chain
efficiencies will play
a crucial role going
forward and will become
the key differentiator for
companies. Companies
will therefore need to
adopt an approach that
encompasses strategic,
tactical and operational
interventions to remain
competitive and create
value for their customers.
Current & Potential Supply Chain
Challenges
Pharma companies today face a number
of supply chain challenges that could be
an impediment in realising the company’s
business objectives.
New Product Launches: To remain
competitive and to differentiate from
competition, companies continue to
launch generic drugs in new dosages as
well as various combination drugs. This
increases the SKU spread for a company,
which in turn increases the supply chain
complexity. Also, with product launches
that are phased out by geographies, the
complexity only increases as diverse
product portfolios have to be managed in
different regions.
For drugs coming off-patent, the 180-day
exclusivity period for the first approved
generic drug manufacturer also poses
supply chain challenges. To maximise
sales in the exclusivity period, some
companies manufacture and stock the
drug pre-approval. However, if approval is
denied, the whole stock is wasted and has
to be usually written off.
On the other hand, starting manufacturing
post approval can lead to significant lost
sales. The challenge for pharma supply
chains is to find the right balance between
these options. An agile supply chain with
Manish Panchal
Practice Head - Chemical & Energy
Tata Strategic Management Group
Siddharth Paradkar
Principal
Tata Strategic Management Group
Anirban Majumdar
Project Leader
Tata Strategic Management Group Figure 1: Operating Profit of MNC Pharma Companies (% of Net Sales)
Source: Capitaline, Tata Strategic Analysis
49.2%
14.6%
27.9% 28.5%
25.2%
33.4%
17.9%40.7%
10.2%
30.6% 29.2%
20.2% 23.8%
10.1%
32.9%
14.2%
22.4%
27.0%
18.3%
6.9%
-2.6%GSK Pharma Abbott India Sanofi Novartis India Merck India Astrazeneca Fulford
FY 08 FY 10 FY 12
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2. Pharma Bio World12 June 2013
will therefore become extremely critical
for companies looking to protect their
bottom line.
Distribution Costs: Most formulation
companies in India procure their API from
companies that import their raw material.
Availability of quality raw material is often
a challenge and delays are common,
which impacts the production schedules
of the formulators. This means that
dispatches are often sent through air
vis-à-vis ship or road. Special handling
requirements (like sanitised environment,
cold storage, limited transhipments,
etc) and higher proportion of part truck
loads (to avoid contamination) is typical
of the industry, and this only adds to
the transportation costs. Therefore, the
distribution costs in the pharma industry
a short turnaround time is the need of
the hour.
Regulatory Guidelines: The industry
has stringent regulations and guidelines
in place to ensure that a safe drug is
being delivered to the consumer. The
industry works on GMP guidelines that
mandate every process and product (final
& intermediary) has to be tracked and
validated for compliance. This makes the
entire manufacturing system rigid and any
changes usually require a long lead time.
Thus it becomes difficult to fully exploit
short term opportunities like shortages
of competitors’ products, break-out of
diseases, etc.
While most companies acknowledge this
issue, pharma companies find it difficult to
align all partners by optimising the buffers
across the supply chain. If managed
effectively, enhanced responsiveness of
the supply chain can become a significant
competitive advantage for companies.
Impact of DPCO: The new Drug Price
Control Order (DPCO) 2013, to take effect
soon, brings 348 essential medicines or
652 medicine packs of various dosages
and strengths under direct price control
as against 74 bulk drugs earlier. As
a result, the market will see a value
erosion of ` 1600 crore, with revenues
of MNC companies expected to take
a hit of 18 per cent and revenues of
domestic companies to go down by
9 per cent. Supply chain efficiencies
have been traditionally high (3-5 per
cent) when compared to other industries
(1- 2 per cent) (Refer Figure 2 above).
However, in the changing market scenario,
with increasing competition in the generics
space and the government and insurance
companies continuing to apply cost
pressures on the healthcare sector, it
is imperative for pharma companies to
critically review their logistics costs.
Operational Inefficiencies: Most pharma
supply chains suffer from a high degree
of month-end skew in their order patterns.
Many pharma companies have more than
50 per cent of their monthly sales in the last
week, while some companies have even
reported 60-75 per cent of sales on the last
day of the month. A key reason for this is
Figure 2: Distribution Costs of Pharma Companies (% of Net Sales)
Source: Capitaline, Tata Strategic Analysis
Figure 3: Levers for Supply Chain Restructuring
STRATEGIC
TACTICALOPERATIONAL
• Network Design
• Distribution Model
• Supply Chain
Partner Selection
• Strategic Inventory
Positioning
• Logistics Processes &
Systems
• Route design
• Carrier Management
• Analytics and KPI
monitoring
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3. Pharma Bio World14 June 2013
that for most pharma companies, primary
sales are “push sales” that are tracked
in monthly buckets. As a result, ordering
also tends to aggregate towards the
month-end. Consequently, physical
dispatches often spill over into the
next month, further skewing the order
and replenishment cycle. In addition,
distributors often wait till late into the month
for the special month-end discounts that
companies offer, which further accentuates
the skew. This high skew puts an enormous
amount of pressure on the company’s
supply chain and makes it sub-optimal.
Introduction of GST: The current
supply chain network of pharma
companies is based on a state level
tax optimisation mechanism instead of
operational efficiencies. However, with
the implementation of GST nearing reality
now, decisions on selection of vendors
and setting up of units will be determined
by logistical considerations of costs
and serviceability rather than tax saving
priorities. For pharma companies it may
imply restructuring of their logistic network
to leverage efficiencies of scale and a
complete revamp of existing distribution
models and processes.
Way Forward
Going forward, improving service levels
and enhancing customer value are going
to be key differentiators for pharma
companies. However, this will require a
comprehensive approach to the Supply
Chain that requires interventions at the
strategic, tactical and operational levels.
1. Strategic Intervention – Pharma
companies need to ensure that
they have the right supply chain
infrastructure in place to cater to the
needs of the market and conform to
government regulations. Thus, it is
imperative for companies to ensure
that they have the right distribution
network in place that not only makes
them GST ready but also enables them
to respond faster to the market in a
cost effective manner.
It is also critical for companies to
create distinct distribution models
for different product categories. The
current distribution model typically
is a homogeneous one, operating on
standardised lead times and service
levels. This is in dissonance with
the market reality, where customer
tolerance time varies across products
and geographies. A distinct supply
chain will help ensure appropriate
service levels and inventory for various
categories/segments.
Considering that costs and service
levels will be critical success factors
in the industry, companies would also
need to ensure that they have the right
logistics partner to help them achieve
these dual objectives. World class
logistics partners can bring in best
practices and help create significant
competitive advantage.
2. Tactical Intervention – With the right
infrastructure in place, companies will
also need to ensure that they have the
right material at the right location at
the right time. An effective inventory
strategy will help companies not only
to support their distinct distribution
models but also ensure service levels
are achieved at optimum costs.
This obviously has to be supported by
a set of robust processes and systems.
While logistics service providers
can bring in best practices, it is
imperative for the company to ensure
that these processes and systems
are aligned to the company’s supply
chain objectives. This becomes more
critical in a differential distribution
model where multiple processes for
different distribution models may be
counter-productive if not designed and
managed effectively.
3. Operational Intervention – Pharma
companies will need to put in place
strong checks and measures to ensure
that supply chain operations meet
their desired objectives. This may
include monitoring adherence to milk
routes, dynamic route optimization and
strong contract management reviews
for transporters and carriers. It will
also be critical for companies to have
a dashboard for daily monitoring of
performance parameters, with early
warning alerts and analysis paths.
Conclusion
Increasing competition and the focus of the
government on the healthcare sector would
drive improvements in service levels and
cost reduction in the future. Companies
would need to revamp their supply chain as
the classic way of supply chain operations
may soon become untenable. Supply chain
executives in pharmaceutical companies
must revisit their strategy to align it to
current and potential supply chain needs.
Successful implementation of strategic,
tactical and operational interventions
will drive supply chain efficiency as a
key differentiator and help organisations
protect margins and achieve sustainable
competitive advantage.
© Tata Strategic Management Group, 2013. No
part of it may be circulated or reproduced for
distribution without prior written approval from
Tata Strategic Management Group.
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Supply chain executives in pharmaceutical
companies must revisit their strategy to align
it to current and potential supply chain needs.
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