Articles
September 25, 2023
Ensuring a Reliable Biopharmaceutical Supply in the EU, Part 3: “Downstream” Strategies for Dealing with Complexity
A range of factors are boosting the complexity of biopharmaceutical supply chains and making it increasingly difficult for manufacturers to maintain a steady, reliable supply of therapies. Over the past couple of months, we’ve been publishing this series of articles to explore the situation and hopefully to provide some guidance that manufacturers can use to overcome their supply chain challenges.
In part 1, we introduced the economic and regulatory factors that are driving the current challenging supply chain environment. In part 2, we began to explore potential solutions, focusing on “upstream” supply chain strategies that manufacturers can potentially use to manage complexity. Upstream strategies are those that relate to the manufacturing and packaging steps in the value chain.
In this third and final installment, we discuss some high-level “downstream” strategies. Here, “downstream” refers to all that happens with a packed and labeled product until delivery at the point of dispense. The strategies we outline below do not comprise an exhaustive list. However, they do provide a solid starting point for enhancing supply chain security while also helping to mitigate costs and risks.
Supply Chain Distribution Strategy
One key factor to investigate early in the supply chain design process is the customer channel that’s to be served and the matching distribution model. As with many things, this involves a tradeoff between control and complexity.
For example, if a product will be dispensed through the retail channel, then the company will be faced with a very widespread customer base that will likely order in small quantities or even single units. Depending on the prevalence of the indication and the price point of the product, retail pharmacies may or may not hold any stock of the product. That said, it’s likely that retail stocks will be relatively low and thus that particular customer channel will require frequent, fast, low-quantity shipments.
This creates a lot of complexity from a customer approval and order-to-cash point of view. A manufacturer launching its product across Europe will have to review, approve, and set up many thousands of retail customers which can put a strain on the company’s resources during launch. At the back end, the accounts receivable (AR) processes for all these small orders will be quite resource-intensive.
One strategy that a company could consider is the use of wholesalers. Aside from having the “right to be supplied” in some markets, wholesalers are typically very strong in the retail channel. They can offer a high service level, potentially delivering multiple times per day. For the manufacturer, this would limit the number of customers to be approved. Plus, wholesalers typically order in higher quantities, thus reducing the total number of transactions that the biopharma company must manage.
One potential downside of this strategy is that a manufacturer will likely have to contract with the wholesaler to get the in-market sales data for its product (something they would have direct line of sight to in the case of a direct sale to an end customer). As with any trade off, contracting one or multiple wholesalers by market will also take considerable resources from a company.
So how does this translate into a distribution strategy? Well, if a company’s customer base is limited to a handful in each market that would order infrequently (for example every two weeks) in larger quantities, then it may make more sense to have one central stock point in Europe. Within 48 to 72 hours, the company should be able to fulfill wholesaler demand across most of Europe which, considering wholesalers typically hold stock, should be acceptable.
But what if a company’s product is dispensed via a hospital channel and it may need to serve a thousand customers across Europe? In this case, it might be better to hold stock in several key markets or even in each market. Hospitals will typically ask for delivery within 24 to 48 hours, which may be achievable from a central location. However, that may not be the most cost-effective way nor give the company the optimum level of control from a temperature requirements perspective.
Another perspective involves parallel trade. Selling in bulk to another actor in the supply chain will increase the chance that this actor may decide to distribute the product in another market. As we described in part 1, this makes demand more unpredictable and therefore increases a company’s supply risk. Selling direct to an end customer, hospital, or retail pharmacy may offer a company a better understanding of the in-market demand and enable it to spot demand anomalies earlier on so it can more quickly adjust supply to match.
Supply Management by Quota Allocation
When managing supply, it is imperative to limit volatility as much as possible. One way to achieve this could be to install a stock allocation system (also referred to as sales quotas). Stock allocation systems are designed to ensure that customers receive enough product to meet their actual demand without introducing volatility that can make supply chain management more difficult. For example, some customers may over-order by a large margin to “stock up” on a product before an announced price increase takes effect. This can end up diverting too much product to those customers and cause supply shortages in other markets due to the inherent scarcity of product supply. A stock allocation system is designed to control this.
Cross-border trade, driven by different pricing across markets and/or exchange rate fluctuations, can also drive volatility in the supply chain. This is a legal practice, but it can be challenging for manufacturers to manage. Stock allocation systems may be able to help.
As part of Good Distribution Practices (GDP), wholesale distributors–which can refer to anyone holding a Wholesale Distribution Authorization (WDA)–must ensure that a sufficient amount of product reaches the customers within a satisfactory time-period. One way to achieve this is to truly understand the patient-driven demand, exclude inventory stocking effects, and be able to recognize any other abnormalities. This doesn’t come for free though, and it requires an Integrated Business Planning approach to align teams within the business. These typically include Finance, Supply Chain, Marketing, and other operational departments.
It is sometimes argued that stock allocation systems are a root cause of supply availability issues. While we do not agree with this statement, we do acknowledge that it is essential for each pharmaceutical company to be able to ensure supply in all cases, and especially in medical emergencies. For that reason, various safety nets should be implemented.
Some of these safety nets can include:
- Maintaining safety stocks in various strategic locations or dedicated emergency stocks, especially for critical medications – Sometimes, these emergency stocks are legally required
- Using late-stage customization to enable rapid response to shortages – For example, this could include adding final labels at the latest possible stage so that stocks originally intended for one market can be easily diverted to other market(s) that are experiencing shortages
- Building safety margins into the stock allocation quotas mentioned above
These safety nets are typically implemented in collaboration between the manufacturers, their third-party logistics service providers, and local wholesalers or distributors. Even though the EU is one jurisdiction, local or country-specific regulations are common, and it takes time and effort to implement this properly in all member states.
Product Life Cycle Management
The topic of product life cycle management can be looked at from an upstream as well as a downstream perspective. For example, a company will often need to closely manage a product’s SKU mix throughout its life cycle, which requires—and can help facilitate—a strong understanding of demand patterns and trends. There will often be competing factors for managers to consider, as medical and commercial personnel will typically argue for more SKUs (to make things more convenient for prescribers and patients) while supply chain leaders are usually seeking to minimize SKU’s (to reduce complexity).
As a product moves through its life cycle, the optimum balance can shift from one side of the scale to the other. A common—but not universal—pattern can involve fewer available SKUs as a therapy comes on the market, followed by a proliferation of SKUs as it matures, and finally a contraction in available SKUs as it nears the end of its life cycle. It’s important to remember that every product has its own market situation and requirements, though.
The following illustrates some of the factors that decision-makers must juggle when optimizing the number of SKUs. Consider a medication that requires a gradual buildup in dosing for the patient’s body to get used to it. A company has a few options regarding SKUs. It could:
- Offer small “starter” packs that get a patient started on therapy, then transition them to the regular dosage form afterward.
- Create one—or multiple—strengths that make it convenient for patients to “double up” and increase their dose appropriately.
- Introduce a titration pack with multiple strengths to support the process for the patient
It’s easy to imagine that each option could have its own effects on demand fluctuations between SKUs as the market matures.
One potential challenge with introducing multiple strengths in a market may be that—depending on a company’s pricing strategy—some cannibalization can occur. For example, patients may be instructed to double up on a lower dose versus transferring to a higher dose. This can make it difficult to predict the demand for the lower dose vs. the higher dose. In this case, the result could be over-supply and ultimately wasted product in the higher dose form. Similar situations can occur when a higher dose has a different indication approved or vice versa if a lower dose, for example, has been approved for pediatric use.
Minimizing the number of available SKUs will lead to higher demand (and higher inventories) on a per-SKU basis. Consequently, that lowers complexity and reduces the risk of stock-outs. However, one should be careful to ensure that medical compliance remains possible with the SKUs available. In addition, there can be commercial reasons to broaden the SKU portfolio, such as a pediatric SKU to increase the intellectual property rights by 6 months via the Supplementary Protection Certificate (SPC).
In any case, decisions around SKUs should be endorsed cross-functionally with a pivotal role for Supply Chain in connecting the dots. Throughout the product life cycle, it makes sense for supply chain leaders to coordinate with their commercial and medical colleagues to understand what’s happening in the market and act accordingly. They should revisit the topic of SKU rationalization on a regular basis to ensure the most appropriate combination is available on the market.
Remaining Shelf Life
One trend that we observe is that remaining shelf-life requirements are increasing. Remaining shelf life requirements dictate the minimum time required between the delivery and expiration date, normally described in months or as a percentage of the product’s maximum shelf life. Although it makes sense on an individual level to aim for the highest possible overall shelf life, it is counterproductive on a macro level, as it could lead to premature scrapping of perfectly good product.
Another issue is that the industry typically uses planning systems that cannot distinguish between the various customer types. For example, a patient that needs an urgent product for treatment tomorrow has different shelf-life needs than a large distributor that is serving many different individual countries over the next few months.
There are various technical mitigations in place that are too detailed for this short document, but one obvious mitigation, which is sometimes overlooked, is to negotiate lower required remaining shelf-life once the need arises (for example, in situations of unexpected supply shortages due to unforeseen issues). This calls for good coordination between the supply chain team, commercial leaders, the purchasing customers, and often local Health Authorities.
Final Take-Aways
As we conclude this 3-part series on building reliable and affordable supply chains in the EU, several key takeaways are worth emphasizing:
- When seeking opportunities to manage complexity and risk—and control costs—be sure to consider all components of the supply chain, both upstream and downstream. It’s very likely that a combination of strategies across the full spectrum will be the key to success.
- To work well, the strategies that a company uses must fit with the product’s profile, market requirements, and pricing, as well as the company’s level of maturity and capacity for implementing them.
- Be flexible and willing to shift from one strategy to another as new insights are gathered and as the product moves through life cycle periods.
- Determining the optimum level of control for your company is critical. A virtual manufacturing and supply chain may limit options on the one hand but can also offer opportunities on the other.
- Maintain a solid data infrastructure. To maintain a secure and reliable supply, ongoing and sound data analysis—combined with agility in leveraging the data to make decisions—is key.
AIM will continue to develop information and resources useful to biopharma supply chain professionals. Check our LinkedIn page or the Insights section of our website to see our latest publications.
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