In the face of spiralling regulation the pharmaceutical supply chain is going to have to focus much more clearly on managing risk. And the pharma industry itself could take a leaf out the high tech and automotive industries’ books in taking a more sophisticated approach to VAT, customs, transfer pricing and international taxation. But while it is true there have been some interesting technological pilots, much of the industry is still firmly stuck in the paper and fax age.
A great deal of the pharmaceutical procurement in Europe is in the hands of monolithic public sector organisations. Slowly and often painfully the public health sector is automating processes such as procurement, although the sheer size and complexity of these nationalised organisations means progress is often measured in years rather than months. Some of the UK’s National Health Service projects are among the largest IT implementations taking place in Europe.
And while the outsourcing of supply chain issues in the conventional sense is still quite rare in healthcare, health organisations are outsourcing in other ways. The NHS is outsourcing the sterilisation of medical equipment to privately operated centres and NYK Logistics is to work with Decon Sciences on a major initiative to improve the supply of sterile instruments to hospitals. In the longer term a number of consortia will bid for contracts to operate the ‘sterilisation super centres’ which will replace hospital sterilisation units over the next three years.
Larry Petterson, head of procurement at Cardiff and Vale NHS Trust, told a recent Oracle summit in London, even relatively limited projects intended to automate procurement have achieved startling results in terms of freeing up medical staff for more productive duties. The trust is implementing a self-service system that will further automate the procurement of supplies. It also means the trust can, for the first time, analyse its purchasing data and so improve the management of its spending.
The pharmaceutical sector might not have led the way in adopting lean manufacturing techniques but the pressures on the industry are unique. No other is policed by governments and regulators as is pharma, not just in terms of basic safety but even down to the form and design of packaging, the number of tablets in a blister pack, the type and number of perforations etc. As Chris Jones, head of business projects at manufacturer, Napp Pharmaceuticals told the Oracle summit, his company sells its pain killers in 44 countries, and such a wide spread of markets is by no means unusual.
A pharma firm will need as many licences as it has export markets, along with many types of packaging to suit the requirements of the various national health administrations and drug and medicine supervisory agencies. In no other industry does one routinely find relatively small firms with such an international spread of customers, though the plethora of regulations on types and sizes of packaging doesn’t make things easy. While there are moves at EU level to develop a common approach it’s unlikely that many countries will give up their individual quirks lightly, especially as governments and health authorities are rightly worried about mistakes being made in dosages or prescriptions, and any attempt to enforce some sort of standard could exacerbate the problems.
It all adds up to a highly fragmented market within the EU, let alone the rest of the world. ‘Our business is very complex,’ says Jones. ‘But at the same time there are pressures – generics are a great threat as medicines come off patent. The health services want cheaper and cheaper drugs which in turn puts pressure on us to make our supply chain slicker and leaner.’
Compressing the supply chain and making it faster and more responsive is all very well in theory but consider some of the processes a pharmaceutical manufacturer has to manage. Jones refers to a ‘hidden factory’ that generates the paper documentation – typically 100 pages of it – that has to accompany each batch of drugs produced, though Napp and partner Oracle are working on ways to include this in the electronic transaction system. In the same vein, Napp and Oracle have worked together to streamline the production of returns to the UK Home Office accounting for waste material. This process now takes minutes rather than days.
Napp is also looking at ways of capturing information from its customers in Europe using the internet rather than EDI to enable smaller players to plug into its systems and processes. Ultimately, it could be possible for customers (doctors and qualified staff – not the general public) to order over the internet, subject to controls.
But whatever efforts pharma manufacturers make, fundamental limitations on the production process remain. They have to take the most stringent precautions against contamination. Food labels such as “May contain traces of nuts” raise wry smiles in the pharma industry where it is normal to spend several days cleaning down production lines. The sorts of last minute decisions to change batch sizes or product specifications that are routine in other branches of manufacturing are impossible in pharmaceuticals. As Jones points out, batch sizes are stipulated on each licence, so it simply is not possible to run off a few dozen extra cases because demand for that particular product has increased unexpectedly. ‘Getting flexibility into a pharmaceutical plant is difficult,’ he says.
Outsourcing of functions such as packaging has been talked about, though Jones is not convinced. ‘It has been tried but most have ended up bringing it back inhouse, ‘ he says. ‘One of the problems is that the subcontractor has to be closely controlled, leading to costs that can be as high as the original inhouse operation.
Even forecasting demand is difficult in this market. True demand for doctor-prescribed drugs only becomes apparent when the doctor prescribes a drug for a patient. The UK, with its large and reasonably universal health service is a more predictable market than most, says Jones. And in that market Napp can at least produce to stock as it can gauge demand relatively accurately. But in other European markets Napp produces to order which means longer lead times. Theft and counterfeiting of drugs have emerged as serious issues in recent years and Jones believes RFID may ultimately be the answer. ‘The US Food and Drug Administration sees it as a saviour, though it must be remembered that if people can mimic your product they might be able to mimic your RFID tag too.’
Jones says the answer might be for manufacturers to combine RFID with technologies such as holograms. Napp hopes to get an RFID pilot off the ground some time this year.
‘Everyone can see the benefit of taking the guesswork out of demand forecasting and moving to a true pull demand model,’ says Ernst & Young tax effective supply chain management partner, Joel Segal. ‘The problem is getting there.’ More than most other sectors, pharma can benefit from product segmentation – in supply chain terms, a bird flu vaccine really has nothing in common with a bottle of aspirin. ‘We’ve done projects with pharmaceutical companies whereby we’ve created “supply chain families” of products.’
Rules and regulations make concepts such as third party logistics more difficult, and there are other issues on the horizon, adds Segal. ‘How do you know it’s a bona fide product? To do that you need sight of the whole order trail and this is something pharma companies are just waking up to.’
Segal says until now most supply chain professionals have focussed on two things – making sure product gets on the shelves and the cost of doing this. But with everincreasing regulation – for instance the changes in the recent EU edict on supply chain security – they will have to focus more on managing risk.
Technology firm GXS has been involved in various aspects of the pharmaceutical supply chain around the world, says vp for industry and product marketing Steve Keifer, but Europe poses some special problems, in particular countries’ differing regulatory regimes and healthcare models.
At the same time, the manufacturers have grown into large entities as they have sought benefits of scale through mergers and acquisitions – and the process of merging back office functions isn’t complete yet – while in many European countries the wholesalers have a dominant position. ‘But at the retail or hospital end user level, things are still quite fragmented and this has slowed down e-commerce development,’ says Keifer.
GXS has been involved in an interesting project in Europe with mid-sized German manufacturer Dr Mann, which now connects directly to a number of retailers. GXS’ hosted platform is attractive to firms in this size bracket as it offers a monthly turnkey contract without the need to install software or modify inhouse IT systems, says Keifer.
Two European countries have also developed electronic exchanges – Phoenix in Germany and Dafne in Italy. The German pharmaceutical industry selected GXS to provide the Phoenix Clearing Service via its Trading Grid, translating the myriad inhouse data formats used by trading partners in the pharmaceutical community and transmitting it through GXS’ EDI messaging services.
This replaced the old system of wholesalers faxing or phoning through orders to manufacturers, who would enter the order manually into their system and initiate the order filling and shipping processes. Although the industry is close-knit, the increasing complexity of doing business without electronic efficiency was taking its toll and the community recognised the need for a digital solution.
Phoenix connects wholesalers and manufacturers and allows for the seamless exchange of data, greatly improving supply chain performance. Wholesalers can now order goods in the morning from manufacturers and book them into their warehouses in the afternoon of the same day, allowing delivery to pharmacies early that same evening. This means it’s not only wholesalers and manufacturers that benefit from the speed and reliability of Phoenix. People submitting a prescription to the pharmacy in the morning are now able to pick up their medicines later the same day.
Robert Kosch, director of customer liaison for distribution at pharmaceutical wholesaler, Ratiopharm, says, ‘The dividends for the industry and, ultimately, the person on the street relying on us for efficient supply of medicines, are huge. Stripping away the inefficiency of a paper, phone and fax system has reduced costs significantly and revolutionised the way we all do business.’
‘A wholesaler can now place an order that will be delivered the same afternoon,’ adds Keifer.
But it will take time to make this extremely complex, regulated and fragmented supply chain fully “electronic”, given its multitude of SKUs, widely varying storage regimes and exacting labelling requirements. This project is in its early stage and a lot more could be done with technology, not just in the regular supply chain but also in tricky areas such as product recalls. Ensuring that medicines are what they say on the packaging will become more important with the rise of manufacture in developing countries. Tracking and tracing will become a priority.
GXS’s recent experience in Australia shows that introduction of new products into the market can also benefit from slicker management. With increasing research and development costs it’s vital to launch products as widely as possible, as soon as they are approved, to maximise sales in the limited window between launch and the opening of the market to generic versions.
RFID may become important one day, says Keifer, though pharma will probably be a follower rather than a leader. RFID would be economically feasible higher up the supply chain at current tag and equipment prices but at the highly disaggregated retail level it is hard to justify tagging individual cartons or bottles.
The European Commission has recently launched a public consultation on building a consensus on RFID, citing medicine safety as one of the potential benefits. It says RFID markers in medicine packaging would help to combat the spread of counterfeit products. Pfizer has recently introduced such a device on Viagra bottles.
Pharma is also one of standards organisation GS1’s target sectors, says the organisation’s manager of business development in the UK, Malcolm Johnston. GS1 has successfully promoted its standards within the NHS supply chain and there are plenty of incentives for the healthcare industry to adopt them, he says. While margins may be higher than in most food retailing, there are vital issues such as traceability to deal with product recalls and to fight counterfeiters.
Johnston says the supply chain is characterised by ‘a multitude of pharmacies that must take delivery from different manufacturers, all with their own marking standards. We need a set standard with which everyone concurs.’
GS1 has progressed to the extent that it now covers virtually all of pharma manufacturing – with surgical instruments following a bit behind – and also the wholesale sector. ‘The problem is bodies such as the NHS, which have different ways of buying product.’ Johnston says the Food and Drug Administration is much tougher on insisting that everyone in the pharma supply chain adopts GS1 and it has the power to make it happen. And the UK’s Purchasing and Supply Agency recently insisted on GS1 standards for anyone putting products on its website. Countries in which the health service is highly centralised – in Scandinavia, for example – have made better progress than ones in which it is more fragmented.
Patient safety is the driver behind the adoption of standards but there is also a strong business case, says Johnston. It could address many issues such as missed deliveries and – perhaps the most problematic – return logistics. The latter is a process that can take several months as every stage is certified and documented and diverts expensive staff from more profitable tasks.
The pharmaceutical industry, often encouraged by governments, tends to put the technological cart before the horse says IBS’s Andre Grigjanis. The head of the IT vendors’ pharma division says that ‘limiting discussions to technologies like RFID is a big mistake’. He points out that even now, with counterfeit drugs soaring (six per cent of the total in Europe, perhaps 60 per cent in Africa), several instances of drugs having to be recalled and a bird flu epidemic looming, the industry doesn’t have the basic IT infrastructure in place either to identify whether products are what they claim to be or to keep track of which stocks of vaccines are held where. Even bar coding is by no means universal so he sees it as somewhat premature to talk about untried concepts like RFID.
A cheaper alternative
Grigjanis says a much cheaper technology is available in the form of bar code matrixes – essentially two bar codes forming a grid of information. These would be cheap and easy to produce, small enough to put on any box, bottle or sachet and capable of carrying a much wider array of information than a conventional bar code, including important data such as lot number and expiry date.
GS1’s Johnston adds that it is unlikelypharma will be able to leap straight from the pen and paper age because ‘RFID would give so much data the sector wouldn’t have the systems to manage it – and there is also the issue of making RFID work in sub-optimal environments’.
Johnston agrees that bar code matrixes are promising, especially for small items like vaccines or instruments that are difficult to mark with conventional bar codes.
But RFID will come, and the pharma industry could be among the early adopters in around two years’ time, says Vincent Menvielle, Manhattan’s head of RFID and author of a paper on traceability issues in the industry. He says results of a pilot involving 14 companies show that ‘while RFID is not a magic tool, it gets good results’.
There are technical issues to be solved. The pharma industry might need a higher spectrum of frequencies than others and the encoding of information might have to be faster than current technology can achieve, but Menvielle is nevertheless convinced these issues can and will be addressed over the next two years.
Moreover, the fact that some segments of the industry have not even adopted basic technology such as bar coding yet could be to RFID’s advantage, Menvielle says, as without any existing technology to write off or update the industry could perform a technological ‘leapfrog’. Adoption will come not only because of government demands for more traceability, but also due to simple commercial pressures.