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.
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!
The word ‘supply’ consists of two components:
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 first step to understanding pharmaceutical supply chains is knowing who all the main players are. In most supply chains, there are three main constituents.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Next, ABC needs to pay for COGS. In this case of Advil, it is the cost of raw materials used to manufacture each pill so they’ll have something to sell. This means looking back on their supply chain activities they paid Drug Company XYZ $0.50/tablet.
Since there are 200 tablets per bottle then that’s $100 worth of raw materials just from them alone. Thus, making up a significant portion (~33%) of expenses associated with creating Advil before it ever gets put into bottles!
After all, marketing was factored in, we consider direct sales as well those with retailers like Walmart, we calculate sales. The company sold 500,000 bottles containing a total of 100 million ibuprofen tablets. We can then add up their COGS to get the Total Cost Of Goods Sold (COGS) which in this case is $100,000.
Lastly, we need to look at any additional expenses they may have incurred. These would include things like overhead costs from having an office/warehouse space. It might also include salaries for employees who oversee different aspects of production.
Some pharmaceutical companies even go so far as to offer medical benefits packages. These might cover prescriptions filled by patients across their product lines!
If ABC had 30 full-time employees working 40 hours per week on average each year at $15 dollars per hour or about $30k annually, they’d be paying around $500k. This is why most companies have considerably more than this to work with when accounting for expenses.
Now we know how ABC arrived at the Total Cost Of Goods Sold and what Gross Revenue was. This is quoted from selling 500,000 bottles containing 100 million ibuprofen tablets. So if you add them together then it would look like: $4500+$100,000 = $105,000.
If we subtract out the Total Cost Of Goods Sold ($105,000) from the Gross Revenue ($145,500) then it gives us an idea as to how much profit ABC made in a given year. This also takes into account costs related directly & indirectly associated with creating Advil.
Now that we’ve gone over the basics of how Pharmaceutical supply chain companies like ABC turn ibuprofen tablets into Advil. Let’s talk about why it’s important to have a third-party logistics (or “third party” for short) company involved in their supply chain.
Third parties are contracted by producers/manufacturers who need help beyond their capabilities. They are also savvy enough with regard to keeping costs down. This is so they can remain competitive in large retail markets where profitability is extremely slim.
Due to this fact along with other drugs directly or indirectly associated with medications, the benefits are great. Many patients take advantage of generic equivalents made available at cheaper price points. This oftentimes leads them not only to buy from different companies but also pharmacies that are capable of offering these.
Solutions like these where they provide warehousing & distribution solutions are wonderful. They allow producers/manufacturers to get their products to retail markets while saving them money in the process. This is why 3PL exists.
The benefits of utilizing 3PL logistics in a pharma supply chain are:
Most of this would not be possible without 3PL, because most supply chains have very limited resources available to them.
If ABC had utilized a solution like this while still trying to manage their own warehousing & distribution needs then they probably wouldn’t have ended up in the situation described at the beginning of this blog post.
This is because it would give them access to additional resources that can help reduce costs. These are associated w/ creating, storing and shipping batches of ibuprofen. It could save them anywhere between $25k-$100k annually!
Now let’s talk about what you’ll need if you’re interested in utilizing logistics services. We will cover those provided by third-party companies for your pharmaceutical supply chain.
First off you’ll want someone who has experience with these types of things. Make sure they understand how medications are manufactured. They should also understand where storage warehouses & distribution warehouses are located.
Secondly, they’ll need to have an understanding of the regulations & laws surrounding this industry. There’s a lot more involved than just shipping boxes around on trucks.
This is because you want someone who has experience dealing with things like FDA regulations. This also involves other applicable rules.
These vary from state to state or country to country. It depends on where your company is based whether it be domestically here in the United States or elsewhere.
Other aspects of logistics include transportation management services. For instance, it would require special equipment to secure temperature-sensitive materials. This is done during transit so they don’t spoil before reaching their intended destination(s).
Finally, make sure they offer some software designed for managing the pharmaceutical supply chain. There are specific things that need accounting for when dealing w/ medications.
These include temperature-controlled storage areas, different types of materials being utilized. It will require them to have access to special equipment capable of handling these substances. Make sure they’re properly equipped before signing any type of agreement or contract.
In conclusion, utilizing a third-party logistics company to help manage the pharmaceutical supply chain is something that’s going to prove beneficial in a number of different ways.
This includes things like reduced administrative costs by eliminating redundancies. Simultaneously, reducing prices for patients & increasing market reach & availability of drugs/medications.
You’ll have greater flexibility when it comes to how inventory is managed. This applies both at the producer end as well as that for retail outlets/pharmacies.
In other words, you can take advantage of all these benefits without incurring additional fees. This otherwise might not be possible due to being understaffed. Not to mention, dealing w/ insufficient facilities on their own!
In short, utilizing a third-party logistics company is an excellent way for any business or organization to save money. Get in touch with us for a full-scale 3PL logistics solution.
Onsite Global Logistics is a third party logistics provider 3PL helping companies with innovative global logistics and supply chain solutions
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