Indian pharmaceutical industry is on a roll and how! Unaffected by the economic downturns globally, pharma has been one of the few fortunate sectors to sustain growth. But to augment growth going ahead, Sukhendu Patnaik writes that the industry must transform its tech capabilities and supply chain efficiencies. The good news is it has already started happening and the industry is set to offer newer paradigms in showcasing GenX supply chain best practices.
Domestic pharmaceutical industry is one of the few sectors, which has remained unfazed by the economic turmoil during the last decade. Market growth has remained robust even though operating margins have been sluggish in the recent past. The industry has been facing a unique situation when new drug discoveries have been few and far between. New drugs are one of the major drivers of growth. During the initial days of a product in the market, the margins are justifiable high. Now that driver is no more present. During the last few years, government regulations have capped prices of large number of formulations and have removed quite a few fixed dose combination formulations. This has done two things. One – sizable top line is wiped out for discontinued formulations and two – both top line and bottom line are reduced for those formulations coming under price control. The industry is rediscovering itself to balance lower realization and subsequent lower bottom lines. During this, churning supply chain approaches of pharmaceutical companies have been undergoing subtle changes.
Finding the realms of supply chain
Supply chain as a function encompasses the upstream starting from manufacturing to the downstream of distribution and customer engagement. All other functions like procurement and planning fall in between. However, pharma industry is taking its own time to recognize this. Most players consider distribution function as the supply chain. There are only a very few organisations who have a holistic view of the function. Most MNCs have a very different approach to managing supply chains. With new products drying up, operating margins under pressure, organisations are forced to figure out ways to optimize cost. This has led to focusing on supply chain as an opportunity to optimize cost. This exercise has led to recognize substantial organizational value tied up in this function. Supply chain transformation is being viewed at three different levels- strategic, distribution and technology adoption.
Working on core competencies
At a strategic level, organizations are asking fundamental question on manufacturing and distribution operations. Look at manufacturing from post-independence time to early 90s. During this period, every pharma company had to have own manufacturing facility to start with. There was no option to outsource manufacturing till mid-90s. Primarily the industry believed that confidentiality of technology and control over quality would be compromised if manufacturing is outsourced. However, the question of core competence answered some of the riddles. Is manufacturing the core competence of the top companies? If not, then why not outsource those products, which do not have significant technological confidentiality? This has been a fundamental shift in the supply chain since the 90s. Currently more than 50% of all domestic products are outsourced.
Supplier management systems have ensured that quality management systems, documentation and compliances are at par with the best in class the in the industry. The contract manufacturing space has witnessed evolution with capability to develop new formulations. Three major contract manufacturers cater to more than 25% of the domestic market demand. This shift in approach has offered significant flexibility to the industry for quick entry or exit. Access to technology through contract manufacturing has offered competitiveness to the industry.
Working on unique distribution models
On the distribution operation side, the transformation has been incremental. This has three elements to consider. One is the physical distribution network, second is the logistics services and the third is the transaction solution. Till the second half of 80s, distribution network was replicated by most organizations. All major companies would have their company owned depots at the same city across the country. For example, any company planning to operate in Gujarat will have a depot at Ahmadabad. Very rarely one would think of Baroda or Rajkot or any other place. Such an approach had reasons as well. Those distribution centers were manned by the company employees.
There were companies who would service customers (distributors) of a state which does not have a depot there from Mumbai. Those things have changed with outsourcing of distribution services to third parties. This has improved agility and reduced cost of operation. Pharmaceutical warehousing has been witnessing gradual changes over the last decade. Now quite a few large companies have developed their state of the art warehouses with 80% temperature controlled carpet area and a dependable cold chain ecosystem. Utilization of greater heights in warehouse has helped reduce warehouse rental cost. Some degree of modernization in warehousing like racking, stacking and use of mechanized storage and retrieval equipment has been witnessed during the last decade.
Material movement is an area, which has witnessed significant improvement in this industry over the years. There was a time when company owned vehicles, passenger trains, postal services were used to reach material to the distributors. Now we have dedicated logistics service providers who offer multi-modal transport solution to the industry. Though 70% of materials are still moved on surface with an average speed of 40kmph, yet reliability of services have improved.
Cold chain vehicles and air cargo services have developed capacity to address the current need. Currently 30% of the market is contributed by metro and tier I cities. The balance is with semi urban and rural geographies. Over a period of time with hyperlocal operators, the last mile delivery will improve.
Traditionally pharmaceutical industry is far advanced in adopting cutting edge technology as far as R&D is concerned. The same cannot be said for manufacturing though. And the industry is a laggard in technology adoption in any other business processes. In India, inventory management and commercial transaction on IT solutions started in the late 1990s. By the end of last decade, almost all companies were using some kind of IT platform for business transactions. However, implementation of a dependable ERP solution in large companies is not seen to the extent the industry requires. There are companies using legacy systems developed in-house even though the business volume has grown beyond Rs500 crore, data analytics to offer deeper insights to business is few and far between.
Key lies in adopting GenX Tech tools
Pharma supply chain is going to be transformed in foreseeable future driven by technology, GST roll out and infrastructure development. The most visible change would be in the space of physical distribution. Large aggregation of 3PL would be a game changer. 4PL operations would follow thereafter. Some global 3PL players tried it out in the last decade without much success. The industry was not ready for such a change 10 years back. In the recent past, there is a lot of buzz around tech enabled logistics start-ups. Few players with game changing technology and significant funding are changing the landscape for better. Better vehicle capacity utilization, real-time material and vehicle visibility are going to be the norm.
Connecting distribution centers with distributors and retail pharmacies on mobile app improve inventory turn. Inventory write-off of to the extent of 1.5% would be reduced substantially. Warehouse operation efficiency is likely to improve by using RFID technology. Truck deployments lead time; average waiting time, loading and unloading time are going to see significant improvement due to use of simple technology solutions. Reaching out to patients, healthcare professionals and trade partners through digital platform will be explored in the coming few years. May be delivery of essential and life-saving drugs would be done through drones as long as regulations are in place to handle such operations.
Things to look forward to
With GST roll out, large 3PL players will offer end-to-end supply chain solutions. These entities will be managed by career professionals with high credentials. So, the current distribution centre operators who own legacy business without adequate skill and resources would give way to such entities. Such operations would offer single point contact with multiple services with a high-end technology layer. Pharma companies need not develop solutions for changing market environment. Distribution network design and optimization would be done by these 3PL operators. Market segmentation and customer connect would be handled by such entities while providing data analytics. These players would provide an opportunity for overseas players to enter Indian market through a single gateway.
These are exciting times for pharma supply chain to unlock greater value of the organization. Till the last decade, supply chain operations were managed by talents who have grown in the organization irrespective of the skill sets and competency for the job. Now, the industry has started realizing that skilled and trained talents are required to take the supply chain operations to the next level. The leaders in the pack have already initiated activities to transform their supply chain. Now it’s time for others to follow suit.