The Ultimate Guide to the Pharmaceutical Supply Chain

The pharmaceutical supply chain is an often overlooked aspect of the healthcare industry. However, it’s one aspect that every business should be paying attention to.

The pharmaceutical supply chain includes everything from production to distribution and warehousing. It can seem like a daunting task for a company new to this field. However, there are many things you can do as a pharma executive or manager in order to optimize the performance of your supply chain.

In this article, we’ll cover what you need to know about how pharmaceuticals flow through the various stages of their life cycle.

So whenever you’re ready to dive deep into supply chain management, keep on reading and get your notes ready.

Pharmaceutical Supply Chain Basics

The pharmaceutical industry operates within the framework of a typical supply chain. This includes suppliers, manufacturers, warehouses for storage. It also covers distribution centers where products are finally delivered to stores or pharmacies.

Understanding this process is essential. This is especially true if you want your business in the pharmaceutical sector to run smoothly.

In order for all parties involved in this to work together efficiently, it’s vital that everyone be familiar with their role. They must also understand other players downstream or upstream – even beyond the boundaries of one company.

This means knowing who does what when things change throughout different stages of production. It must continue leading up until the product reaches the end consumer.

To begin with, let’s look at supply chains in general and how they work. If you already know about this topic feel free to skip ahead – for everyone else continue reading!

Supply – Chain

The word ‘supply’ consists of two components:

1. (a) supplying something
2. (b) what is necessary or required

This includes everything in business operations. For instance, raw materials, labor force, utilities like electricity & water. It also covers financial resources among many other things.

A chain on the other hand refers to “an object that consists of a series of interconnected links”. This essentially means anything composed of several parts linked together one after another. Typically used to describe processes or methods.

Thus, a supply chain can be thought of as a network that brings anything together from start to finish.

The Main Constituents of the Supply Chain

The first step to understanding pharmaceutical supply chains is knowing who all the main players are. In most supply chains, there are three main constituents.

Manufacturers

This includes manufacturers at different stages along with those transporting raw materials. These are for making medications such as chemical compounds or active ingredients.

These days many large-scale drug companies have moved towards outsourcing their manufacturing activities. This is due to rising costs and stricter regulatory requirements among other reasons.

It’s important for everyone working within this field to understand both sides. This includes roles/responsibilities on either side.

Warehouses & Distribution Centers

This is where Pharmaceutical supply chain products store before being distributed to various parts of the world.

This includes large-scale facilities owned by or contracted out to major drug companies. It also covers regional warehouses for storage and distribution.

And finally, the transportation means used at each stage.

Retailers

These can be big-box stores like Walmart & Target carrying a wide range of items. These might include OTC medicines that can be purchased without a prescription. There are local pharmacies that often provide medication only to patients requiring treatment.

The supply chain process also involves several other players. For instance, advertising agencies, regulators among others. However, it’s these four main roles within pharma supply chains we focus on here.

Supply Chain Terminology

So how does the pharmaceutical supply chain work exactly? Before we get into that however let’s define a few terms to be familiar with.

COGS

This is short for Cost of Goods Sold and refers to total expenses associated with manufacturing any given product. In pharma, it usually includes the cost of raw materials, labor costs. This goes along with transportation & other overhead expenses among others.

This figure doesn’t include things like research & development activities. Don’t worry about having two numbers you need to reconcile later on when attempting to determine COGS.

Marketing Costs

These are all related expenditures involved in promoting your products. These can range from advertising campaigns including TV commercials or print ads.

It might also cover promotional efforts targeting both healthcare providers (HCPs). For instance, physicians or nurses as well as the consumer audience.

Revenue

This is also in accounting lingo known as Gross Revenue and refers to total income from all sources. This includes both COGS & Marketing Costs among others before any expenses have been deducted. This means it’s essentially how much a company has made during a given time period.

This doesn’t include taxes, interest payments on loans/debt nor other things that companies need to pay for.

Don’t get too caught up trying to figure out why you’re not seeing this number reported by many manufacturers. They often just report their Gross Profits instead.

Real World Supply Chain Example

Now let’s look at an example of what happens within the real world. Say Company ABC manufactures Advil (ibuprofen). They sell in bottles containing 200 tablets each.

They purchase their raw materials for $0.50/tablet from Drug Company XYZ. The company also manufactures this product in the same size & dosage but at a much greater scale than ABC.

This means they can sell it to them pretty affordably. There’s no need to go out and find any other suppliers. They are able to work closely together on maintaining quality control standards.

It is common for companies to use similar ingredients when creating medications that have very similar effects.

Maximizing Profits

Moving forward, ABC needs to decide what price point will maximize profits while still making Advil accessible. It should be accessible enough where people feel good about purchasing it over competitors.

For instance, (ibuprofen) manufactured by Johnson & Johnson (JNJ). These are also accessible at most pharmacies & stores that stock medications.

They then market Advil to both HCPs (doctors, nurses) as well as consumers by producing TV commercials. They ran print ads in high-traffic publications. For instance, newspapers or magazines where the public frequently looks for medication information.

Now we know how much it costs ABC to make a bottle of ibuprofen. Let’s say they’ve charged retailers like Walmart for it, let’s say $14/bottle. Now, we can determine their Gross Revenue would be:  (Number of tablets sold)*(Price per tablet) = 200*$14 = $2800.

However, remember this doesn’t include any marketing efforts. Thus, when you add them on top of this amount you get their total Gross Revenue at $4500.