In a recent article, we provided some guidance for finding the right distribution partner (third party logistics service provider / 3PL). We emphasized that this task is strategically important for biopharmaceutical companies—and for marketing authorization holders, in particular. However, selecting the right partner is only part of the equation. The other part centers around effectively managing the partnership to ensure that it’s an ongoing, valued-added experience for both sides.

As they say in the project management profession: getting married is a project, but staying married is part of daily operations (and arguably more important in the long run). The same is true for the partnership with a 3PL. Finding the right partner should be managed like a project, but keeping the partnership alive for the long-term is critical and should be part of regular operations. The table below provides a bit more detail on the differences between project management and operations management.

Due to these contrasts, the operational management of a 3PL requires different skillsets—and likely different people—than 3PL selection.

It’s helpful to view the 3PL as the point where plan-to-stock and order-to-cash come together. The 3PL stores the final product, ready for shipment to the end customer. As such, it’s the end point for the plan-to-stock activities. At the same time, a 3PL is responsible for (part of) the order-to-cash operations, as shown in Figure 1 below.

This diagram makes it clear that multiple departments should be involved in 3PL operations, even though the 3PL’s scope may vary from one company to the other. Nevertheless, one person or department should generally maintain the relationship with the 3PL’s account management team. This keeps the communication lines clear, which we’ll address in more detail later in this article.

Five Key Areas for a Good 3PL Relationship

A biopharma company should pay close attention to five key areas that help facilitate good strategic relationships  and support effective operations.

Governance

Good governance normally starts with the contractual agreements that are in place, such as the Master Services Agreement (MSA), Service Level Agreements (SLA), and the Quality Technical Agreement (QTA). These should be supported by proper governance meetings and the right performance metrics, as per the diagram below.

One of the main success factors for proper 3PL management is having the right distinction between Operational Reviews (daily/weekly), the more tactical Performance Reviews (monthly/quarterly) and Strategic Business Review Meetings (quarterly, twice per year, or annually). This calls for the correct preparation, attendance and participation in the right meetings, and subsequent delegation and escalation, both on the 3PL side and the biopharma company side.

It is also important to recognize the right moment to transition from a project mode into an operational mode. In the project mode, there is typically more frequent senior leadership involvement, so it is vital to recognize the appropriate moment to move to the more structured governance cycles as described above.

Communications

As always, good communication is critical to success. The main thing here is to distinguish between the day-to-day topics (like order blocks, transport issues, or return requests) and the more strategic issues. We have observed that there is a tendency to diffuse communications with the 3PL, with different departments getting involved. However, our advice is to carefully think about the correct communication channels up-front, then ensure that communication channels are clearly delineated and well understood.

Quite often, a company will use one of two basic models:

1. Butterfly Model – Only the account manager of the 3PL and the logistics manager of the pharmaceutical company communicate on a regular basis, creating a butterfly shaped communication chart, as seen in Figure 4
2. Diamond Model – All departments communicate directly with each other, and the account manager and logistics manager only lead and coordinate in the background, creating a diamond shaped communication chart, as shown in Figure 5

However, we typically recommend implementing a third flavor, which we call the Hourglass Model (Figure 6).

The Hourglass Model is a sort of hybrid approach, using elements from both of the other models. With the Hourglass Model, the 3PL Account Manager and the Logistics Manager serve as linchpins, similar to the Butterfly model. However, their span of communications is somewhat narrower, focusing on the more tactical topics but also serving as an escalation lever in case of recurring operational topics. The Operations Teams and the Leadership teams maintain more direct lines of communication with their counterparts on the other side, similar to the Diamond Model, with Leadership focusing on longer-term strategic issues and Operations focusing on day-to-day management.

The Butterfly Model certainly has its benefits in the early stages of the collaboration, where the account or project managers streamline all communications and are the linchpins for everything. As such, they prevent inconsistencies and communication gaps. However, at a later stage, it becomes necessary for certain departments to talk directly with each other, as in the Diamond Model. Example interactions include Finance-to-Finance, Quality-to-Quality, and  potentially Information Technology (IT)-to-IT. This direct communication is needed because the topics get too complicated and technical for a generalist (like an account or project manager).

In the long run, the best model in our experience is the Hourglass Model. It is inevitable that certain daily, weekly, and operational communication must happen from time to time to talk about things like blocked orders, new customer creations, transportation issues, or planning inbound 3PL shipments.

In addition to the regular operational communications handled by the Operations team, there will still be a major role for the account and logistics managers to streamline the more generic and longer-term overall communications, to keep the communication flows clear, and prevent gaps and inconsistencies. It will be important to nominate the right people to streamline this communication.

What we see quite often is that the sales teams and quality organizations are based in the local countries, while the supply chain, distribution, and other departments operate on a regional or global level, often from a European or US headquarters location. This makes it even more important to establish this model clearly, to prevent local teams bypassing communications lines by talking to “their” 3PL directly.

In addition, it would be good if the leaders in the two companies communicate with each other periodically, for example during the strategic business reviews, as mentioned above. This could also be communication on a regional or group level, as most 3PLs have sites in multiple countries. Please note that it is no coincidence that this hourglass model mimics the three governance layers that we explained previously: operational, tactical, and strategic.

Planning

To maintain good cooperation, it is important to plan demand and supply properly. This involves planning inbound and outbound shipments, order frequencies and units shipped. It can also involve looking ahead to required pallet spaces, future product launches, or any other major changes such as regional expansions, updated service requirements, and new regulations. In the long run, nothing is stable, so it is important to share the right information periodically. The governance model and contracts that are in place normally will cover these inputs, and it might trigger conversations with departments that are not usually involved in 3PL management, such as new product introduction teams or the global forecasting department.

Technology

As the pharmaceutical business evolves, so does technology. The days where customers order their products with a phone call or fax to the manufacturer are almost behind us, and even email is seen as an outdated technology. E-ordering and e-invoicing have become the norm, and this calls for effective collaboration between the 3PL and the pharmaceutical company.

Flat-file text interfaces might be appropriate in the beginning of a collaboration, but at a certain moment, electronic data interchange (EDI) or other more sophisticated interfaces will be required. Business intelligence software and enterprise resource planning (ERP) integrations could be leveraged to allow data analytics for regular operations management and long term improvements. That is why it is important to keep both IT departments actively involved and engaged.

In addition to IT, there is also shipping technology to ship and track product efficiently and effectively: things like insulated shippers, GPS and alert trackers, or aggregation in serialization. It is important to stay abreast of these possibilities and implement together with the 3PL as needed.

Measurement

Numbers tell a big part of the story in day-to-day operations. However, not everything that matters can be measured and not everything that we measure actually matters.^[1] That’s why it’s important to have the right key performance indicators (KPIs) in place that align with the company’s strategic objectives. Leaders should set the right targets accordingly, then analyze performance and trends on a regular, systematic basis. Of course, such performance reviews are important, but they’re worthless unless leaders use them to implement and communicate corrective and/or improvement actions.

KPIs can have multiple objectives, including:

• Improve operational efficiency
• Enhance customer satisfaction
• Enable decision making
• Facilitate continuous improvement
• Drive accountability

However, it’s important to recognize that in supply chain and logistics, unforeseen things sometimes happen, and as said, not everything can be measured appropriately. That’s why decision makers should also look at the qualitative aspects of the collaboration, and make sure that the right things get done. In the end, KPIs are a useful tool but they’re not the holy grail.

Closing Remarks

The pharmaceutical industry is one of the most resilient, despite various macro-economic challenges that go beyond the scope of this article. However, the pharmaceutical landscape is constantly evolving, with many mergers, acquisitions, divestitures, and other restructurings taking place on an ongoing basis. Therefore, it’s important to realize that a partnership with a 3PL will not be an indefinite one. Ultimately, there might come a time to part ways. Having the right structure in place will help in such a case, as it can be very important to say goodbye properly.

In addition, new requirements, such as novel products, increased demand, new technologies, or regional consolidation could drive future developments, and may also drive a change in scope or a change in the required service levels. Ideally, the 3PL and the pharmaceutical company will develop together, as per Figure 7 below.

AIM has extensive experience in setting up, maintaining, and properly evolving the relationships between pharmaceutical companies and all major 3PLs. Please connect with the AIM team if you have any questions or need any support.

[1] https://en.wikipedia.org/wiki/Goodhart%27s_law

The biopharmaceutical industry seems to grow more complex on a daily basis. Treatments are becoming increasingly sophisticated, with more advanced therapies having special storage, handling, and administration requirements.  In addition, the industry is becoming more competitive while also dealing with ever-increasing cost pressures.  In such an environment, selecting—and effectively managing—the right third-party logistics (3PL) partner becomes extremely important.  The right partner can help reduce complexity, boost efficiency, and even offer a competitive edge.

Interestingly, biopharma companies large and small all seem to draw from the same small pool of logistics service providers, as there are just a handful of 3PL players active in Europe. Why is that, and what can companies do to make the right selections and establish the right partnership(s)?

In essence, this is a question of cost versus quality, where cost has two components:

1. Costs to establish good quality (prevention and appraisal cost)
2. Costs as a result of bad quality (failure and/or cure cost)

To give a few examples:

• Training staff in advance incurs prevention costs
• Carrying out inspections incurs appraisal costs
• Rework and scrap represent failure costs.

We all know the saying that “Prevention is better than cure,” but what does this really mean? In reality, optimizing supply chain outcomes is about finding the “sweet spot” of prevention versus cure.  As Figure 1 illustrates, the cheapest partner might not be the best partner.  At the same time, exceptional quality comes at a very high cost. In the pharmaceutical industry, the tendency is to go for the best quality due to the nature of our products, and rightfully so. However, in the practical world of logistics and distribution, one should realize that issues and mistakes will happen, such as trucks breaking down, incorrect shipment addresses, or delays due to severe weather situations. Given these realities, the best approach in selecting a partner is to aim for the “sweet spot.” Please note that different products might have different sweet spots. For example a highly sophisticated cell and gene therapy has basically zero room for error, and therefore has different requirements than a commoditized product such as ibuprofen.

Figure 1:  Optimizing the mix of Prevention / Appraisal and Failure Costs

Below, we provide some guidance for companies that must evaluate and select a 3PL partner.  We share some of the attributes an effective partner should possess, as well as some positive indicators that any given 3PL partner has those attributes.

Ideal Partner Attributes

The ideal partner has the right personnel.

The correct distribution of medicinal products relies upon people. For this reason, there must be sufficient competent personnel to carry out all the relevant tasks. Individual responsibilities should be clearly understood and documented.

Positive Indicators: All employees visibly stick to the established procedures, such as reverse parking on the parking lot if that is the rule, or no food in the warehouse space.  People should visibly enjoy their work, and a smile goes a long way.

The ideal partner is clean, dry and cold.

The premises should be designed or adapted in such a way that the required storage conditions are maintained. All equipment related to the storage and distribution of medicinal products should be designed, located, qualified, and maintained to a standard which suits its intended pharmaceutical purpose. Various temperature ranges will apply for pharmaceutical products, most commonly between 2 and 8 degrees Celsius, but also between 15 to 25 degrees Celsius, or at minus 20 degrees Celsius.

Positive Indicators: There is no dirt or garbage inside or outside, such as leaves or discarded equipment. The walls should be dry (mold contamination is an immediate “no go”). There should be no unusual smells. Visible temperature controls are important, and a good partner shows that it complies by using probes, alarms, measurements, isotherm shippers, and so on, to maintain the right temperature from beginning to end.

The ideal partner documents everything.

Written documentation should prevent errors from spoken communication and permits the tracking of relevant operations during the distribution of medicinal products.

Positive Indicators: Documentation should be timely, complete and unambiguous, and it can only be inconsistent if it is stored redundantly. There should be no manual cheat sheets and outdated performance boards.

The ideal partner ensures that your identity is kept, sticks to your rules, and avoids fakes.

Suppliers and their subcontractors should be qualified, and the operations of receipt and storage of your products should cause no negative impact from light, temperature, moisture, or other external factors. Outdated products should be properly destroyed, and controls should be in place to ensure the correct product is picked. The partner should use all means available to minimize the risk of falsified medicinal products entering the legal supply chain.

Positive Indicators: Gates and a clear segregation of different areas. A good partner should be able to demonstrate that it is not possible to pick or pack the wrong product by (for example) purposefully scanning the wrong bar code or deliberately packing the wrong quantity packs. The partners should be able to clearly show how these types of mistakes will be spotted, for example via the 4-eyes principle or use of a check weigher.

The ideal partner knows how to handle complaints, returns, fakes, and recalls.

Complaints should be prevented to the greatest extent possible. When they do occur, they should be logged and addressed. Returns should be handled very carefully, and should always be approved by the pharmaceutical company. In general, it is better to be safe than to be sorry. Fakes should not be able to enter the supply chain, and recalls should be practiced and executed properly.

Positive Indicators Clearly marked areas, proper fencing or caging to prevent mix-ups and access controls in all places.

The ideal partner likes “prenuptial” agreements.

Any activity that is outsourced should be correctly defined, agreed, and controlled to avoid misunderstandings which could affect the integrity of the product. There must be a written contract which clearly establishes the duties of each party. This is the starting point for a good collaboration, but the devil is in the details, as outlined in QTAs, SOWs, etc.

Positive Indicators: A good partner will provide a robust response to any request for proposal (RFP), with clearly described and standardized processes.

The ideal partner likes to do self-inspections.

Self-inspections should be conducted to monitor implementation and compliance with industry principles and regulatory guidelines and should trigger the necessary corrective measures.

Positive Indicators: A copy of the self-inspection reports should be available, and corrective and preventive actions (CAPA) should be documented and followed up.

The ideal partner does not break, adulterate or steal, and knows how to transport.

Your partner will be responsible for protecting your products against breakage, adulteration and theft, and to ensure that temperature conditions are maintained within acceptable limits during transport.

Regardless of the mode of transport, a partner should demonstrate that the medicines have not been exposed to conditions that may compromise their quality and integrity. A risk-based approach should be utilized when planning transportation.

Positive Indicators: Pallets and racking should be handled and used properly, transport companies should be carefully chosen and use similar principles. The 3PL partner should proactively share best practices, as they are the subject matter expert in this area.

Summary and Good Distribution Practices

As demonstrated, a pharmaceutical company should be quite picky when selecting the right partner. Some readers might have recognized information from the European Guidelines on Good Distribution Practices in the text above. Good distribution practices (GDP) describes the minimum standards that a company must meet to ensure that the quality and integrity of medicines are maintained throughout the supply chain. As shown, it can be used as a guiding principle for selecting the right partner, and explains why pharmaceutical companies should be picky. The guidelines contain the following chapters:

1. Quality Management
2. Personnel
3. Premises and Equipment
4. Documentation
5. Operations
6. Complaints, Returns, Suspected Falsified Medicinal Products and Medicinal Product Recalls
7. Outsourced Activities
8. Self-Inspections
9. Transportation

The EU GDP guidelines might seem very demanding at first, but they are there for important reasons and a good 3PL will demonstrate that they take them very seriously. In addition to the EU GDP guidelines, there are other requirements that should be taken into account. These include things such as sustainability, cost to serve, account management, risk management, implementation capabilities, and strategic fit.

Pharmaceutical companies and their products often have more—and stricter—requirements than the average service provider can offer. Therefore, a robust selection process is extremely important. At the same time, the pharmaceutical manufacturer must view the process as a collaboration. It is a real partnership, and this means setting realistic expectations, using clear processes, nominating the right subject matter experts, allowing sufficient time, visiting the sites, and validating the promises of the 3PL. Finding the right 3PL partner in the right situation is one of AIM’s core businesses and we will be happy to help where we can.

Of course, selecting the right 3PL partner is only the beginning. Once the selection has been made and the contract has been signed, it’s important to forge and maintain a strong and effective working relationship. In our next article, we will focus our attention on best practices for 3PL relationship management.  Stay tuned for that in the coming weeks.

Reference:

Guidelines on Good Distribution Practice of medicinal products for human use – https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52013XC1123(01)&from=EN

Launching a first product in Europe is not an easy undertaking.  Over the past few years, AIM and our parent company, Blue Matter Consulting, have addressed the many considerations and challenges associated with entering European markets. For background, some of those resources are available here:

• Launching a First Product in Europe: The Supply Chain Perspective (webinar summary)
• Transitioning from Local R&D to Global Commercial in Biopharma (summary of a roundtable event held in Zurich)
• 7 Keys to Success in Europe (eBook)

Those resources and others extensively discuss the regulatory, strategic, commercial, supply chain, and other requirements involved in a European launch.  They also stress the importance of local expertise and early preparation (related to strategy as well as the organizational build-out). 

In this paper, however, we focus on a relatively narrow topic:  the costs of setting up and operationalizing a supply chain in Europe.  Specifically, we outline the key cost drivers, along with the “levers” that can affect those costs.

For higher-priced specialty products, supply chain costs will not be the core driver when deciding whether to bring a product to Europe, but they are important. For more traditional products, supply chain costs are likely to represent a larger percentage of the cost of goods sold (COGS) and sales and distribution (S&D) costs and can factor more heavily in the launch.

In situations where there is a competitor already on the market and pricing and reimbursement may be extra-challenging (especially if the competitor is a large manufacturer with an established supply chain), cost can become extremely important.  Regardless, it’s helpful for decision makers to understand how supply chain costs can vary and be influenced.  As we discuss these cost drivers below, it’s important to remember that some are relevant in any commercialization scenario, whether the company intends to “go it alone” or partner in some way.

Some General Thoughts on Supply Chain Set-Up

Before exploring some specific cost drivers, it’s helpful to take a brief look at some various approaches to supply chain set-up, which can impact costs.  Here, we make some broad generalizations, so remember that distinct differences can apply to the various regions (such as the Nordic region, Iberia, the DACH (Germany, Austria, Switzerland) region, CEE (Central and Eastern Europe), and even specific countries.  Local expertise will be critical to success in such a complex and variable environment.

Central vs. Localized

We often see companies starting off with a relatively straightforward set-up, selling from a central EU trading company into various EU markets. This structure allows for simpler tax, accounting, external reporting, and order-to-cash processes and it’s often combined with a centralized distribution system. In our view, however, these are distinct decisions to be made. A central distribution system may not always be the most cost-effective solution, particularly if product must be shipped over long distances under rigid temperature and service requirements.  In such cases, a more localized set-up can sometimes improve service levels and cost-effectiveness.

Use of Limited Risk Distributors (LRDs)

While a set-up with a single EU trading entity is the mandatory minimum, a pharmaceutical company may decide to add LRDs to their set-up. LRDs will assume some of the decision making and financial risk.  However, their presence will drive up the complexity of order-to-cash processes and with that, supply chain expenditures.  While LRDs don’t have any other direct impacts on supply chain expenditures, they do result in higher compliance costs and fees.

Lean vs. Comprehensive Trading Infrastructure

A lean trading infrastructure that relies heavily on third party vendors will minimize the need for pharmaceutical and trade licenses in a number of countries. For example, outsourcing instead of employing mandatory roles (e.g., Qualified Person or Responsible Person) can reduce complexity. Sound analysis is required to determine whether it would be more cost-effective for a given company to retain more functions in-house vs outsourcing them.

Cost Drivers and Trade-Off Options

When planning to commercialize a therapy in Europe, there are some key decisions that leaders must make.  These decisions can have profound implications on the supply chain and related costs.  Unfortunately, it’s usually challenging to pick the optimum path forward, as decision-makers must understand, quantify, and evaluate the trade-offs involved.  Below, we offer some general commentary on each.

Launch Sequencing

In most cases, a company will not launch an asset into all its targeted European markets simultaneously. Commercial, access and reimbursement, and resourcing constraints often prevent that. A first product launch in Europe typically takes several years from the moment of EMA approval until the product has launched in the majority of EU markets.

Early Access Programs (EAPs), Compassionate Use (CU) programs, and others can be good pathways for initial launches in some markets, which can enable the company to begin laying the groundwork for a fully-fledged commercial distribution system that can scale as more launches occur. 

The sequencing and timing of market launches depends on a wide range of strategic factors.  From a supply chain standpoint, there are several considerations.

• Faster launch sequencing or phasing can be resource-intensive and require more up-front investment in supply chain development.
• Proper launch phasing also impacts hiring needs.  Initially, certain must-have roles can be established in-house while others can be filled via outsourcing.  As the supply chain matures, more capabilities can be brought in-house. This can help control up-front costs and reduce financial risk.
• Once revenue starts coming in, the company can scale up the supply chain infrastructure as needed, enabling volume growth to bring down post-launch per-unit distribution costs.
• For complex geographic markets, a company may decide to use a partner or distributor to enable faster development and control risks.  The company can reevaluate the need for those partnerships after several years.  In smaller markets, international pharmacies could be useful.  Clear, robust analysis is needed to determine the optimal approach for each market.

Distribution Channels

The basic distribution channels that can be used for a therapy (wholesale vs. hospital vs. retail pharmacy vs. direct-to-patients) can significantly impact various factors that relate to costs. Also, it’s important to remember that some channels are more suitable for certain products or product types than others.  Table 1 provides a brief overview.

Table 1 – Relationship of Distribution Channels to Various Cost Factors

It’s important to remember that decisions regarding which distribution channels to use are not always made by the biopharma company.  For example, some higher-priced specialty products must be dispensed via the hospital channel. For example, this is often the case in Spain and Italy.  In Spain, wholesalers are only active in the retail chain, meaning that if your product is only supplied to hospitals, the wholesale channel will not be a viable option.

There are also markets, such as the Nordics in which the wholesale channel is very dominant. For a launching pharmaceutical company, it would make little sense to implement a different channel. The flip-side, however, is that the company has very limited negotiation leverage in contracting with such parties. This is an area where having the right local knowledge and support is essential.

Distribution Network Models

Above, we briefly contrasted centralized vs. localized distribution models.  Here, we add a few more thoughts on the topic. Shipping from a single warehouse location to any customer in Europe (centralized) vs. shipping from regional or local warehouses (localized), typically implies:

• Longer distance shipments
• Potentially cross-dock or infeed needs requiring time, bringing extra risks for product integrity
• Only one warehouse partner to be found, contracted, and managed
• Single reporting a data feed
• Lower service levels to be offered (on average)

Ultimately, the company must make decisions regarding the most appropriate network model to use by weighing the trade-offs between storage and transport costs, the typical order frequency, average order size, and most critically, the product requirements.  From a practical standpoint, the cost of adding and managing an additional third-party logistics (3PL) partner can often be lower than attempting to transport directly to end customers from a central location. Cost and service levels don’t always have to be in opposition to one another.

For start-up companies with a single product, it makes sense to look at the expected pipeline development over time, considering the supply chain features and capabilities that upcoming products—or new indications or dosage forms—might require.  It pays to stay ahead of the curve.

Product Configuration Choices

Determining the optimum product configuration for use across multiple markets can be very tricky indeed, sort of like a complicated puzzle.  Simply put, a company typically needs to maximize the number of markets for which a given stock-keeping unit (SKU) is fit for use (as opposed to country-specific SKUs). Doing this reduces the overall number of SKUs that the company must manage and should also imply:

• Larger, more cost-effective batch sizes
• Less volatility in demand (as demand fluctuations “average out” across markets and stock can be shifted as needed, since it can be used in multiple markets)
• Easier inventory management
• Reduced out of stock and expiry risks
• Potentially enhanced ability to negotiate exemptions on certain requirements with some local authorities (especially in small markets and for “hospital only” products)

SKUs that can be used in multiple markets do, however, increase the risk for parallel trade. This is of course perfectly legitimate, but it may counteract some of the above mentioned benefits when taking only the manufacturer viewpoint.

Internalization or Externalization Choices

As mentioned earlier, a company’s choice to take on more burden in-house vs to rely more heavily on outsourcing can have major implications on supply chain cost and risk, as well as other factors.  Table 2 outlines some key factors and the relative impact of in-house resourcing vs. outsourcing.

Table 2 – Key Implications of In-House Resourcing vs. Outsourcing

From a process perspective, there are plenty of tasks to outsource, mainly those of an operational nature. Storage and distribution of the physical product are obvious ones, but there are many 3PLs that also offer varying degrees of service in the order-to-cash or order-to-invoice space. Finding the right “fit” and truly outsourcing are key. For any company, there is a thin line between having appropriate oversight of outsourced services and inadvertently introducing “flowstoppers” by injecting itself too much into the operational process. Our recommendation is to have proper oversight over supply chain partners, but to delegate operational execution leveraging the core competencies of such partners.

Service Levels

Service levels are another factor that can drive costs.  Strategically, the company will need to determine if it wants to out-perform competitors from a service level standpoint or basically conform to market norms.  Obviously, providing a premium level of service will often require “white glove” partners and drive costs upward, and the company must determine if the competitive advantage to be gained is worth the cost. One approach is to provide a premium service for a patient’s first-time use and/or for the titration period, if applicable, then to move to a standard service for the maintenance phase.

To help evaluate whether the added cost is justified, the company must consider the nature of the required service (e.g., urgency level, first use vs. maintenance, “on the shelf” availability needs, etc.). Such factors play a major role in determining the required fulfillment speed, transport solutions, and so on.

Parting Thought

This brief article only offers a high-level view of the cost drivers associated with biopharma supply chains in Europe.  It is imperative that companies begin considering these drivers and factors early, several years before launch.  Too often, supply chain questions are left unaddressed until late in the process, unnecessarily putting companies a few steps behind when the initial launch dates start coming into sight.  If your company is planning to launch a new product into European markets, then please connect with AIM. We can help evaluate your specific situation and ensure that you proactively identify and follow the optimum pathway.

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.

Note: To connect with AIM to discuss strategic and operational issues related to biopharma supply chains, please click here.

Ensuring a safe and reliable supply of needed therapies is critically important, but the rising cost and complexity of managing supply chains in Europe has biopharma companies straining to handle the pressure.  In part 1 of this 3-part series, we introduced the economic and regulatory factors that are driving the situation.

The major economic factors include Europe’s aging population, rising healthcare costs, and the impacts of parallel distribution.  The regulatory factors include the EU Falsified Medicines Directive, growing requirements regarding out-of-stock (OOS) reporting, the increasing mandatory application of digital ordering, and various green policies.

These factors combined push up inventory levels and increase supply chain complexity while also requiring biopharma companies to invest more in tracking and reporting technologies, Sales and Operations Planning (S&OP) / Integrated Business Planning (IBP) processes, and additional supply chain infrastructure components.  As a result, biopharma companies face rising costs and eroding profit margins. These factors also create additional barriers to potential new entrants.

The remainder of this series will outline some strategies that biopharma companies can use to manage this complexity.  Part 2 focuses on “upstream” supply chain strategies while part 3 will focus on “downstream” strategies.  For our purposes here, “upstream” refers to the manufacturing and packaging steps in the value chain, while “downstream” refers to all that happens when transferring a packaged and labeled product to the point of dispensing it to a patient.

In this paper, we discuss a range of potential upstream strategies.  This list is not intended to be fully comprehensive. However, we think it represents a robust range of ideas for helping mitigate complexity, cost, and risk.

Manufacturing Strategies

To Outsource…or Not?

A company must plan its approaches to manufacturing and packaging—as well as risk mitigation in those areas—very early.  This is true regardless of whether the company plans to manufacture in-house or rely on outsourcing.  Obviously, creating in-house manufacturing is a time-consuming, complex, and lengthy process.  However, the same is true for outsourcing.  Identifying, evaluating, selecting, contracting, qualifying, and ramping up a contract manufacturing organization (CMO) takes a lot of time and effort. 

Moreover, once choices are made, they will be essentially fixed for a number of years.  Manufacturing and packaging steps must be included in the regulatory dossier submission process, and making changes can result in dossier approval delays, launch delays, or supply issues after launch.

Determining what to keep in-house vs. external is not always easy to do.  Such decisions require leaders to explore capabilities, conduct analyses, build business cases, and shepherd their decisions through vetting with executive leaders and even the Board of Directors in some cases.

Building in-house capabilities requires high up-front investments and potentially involves a long learning curve, but it allows the company to keep control over its technology / intellectual property and the manufacturing capacity of the asset.  Outsourcing can offer more flexibility, faster ramp-up, and a lower financial burden, but it makes the company fully dependent on its external vendor(s).  It also requires intensive and ongoing vendor management once things are up and running. 

Single-Sourcing vs. Multi-Sourcing

Apart from the outsourcing question, the next question is whether to use single sourcing or dual (or even triple) sourcing approaches.  Single sourcing, although the “leanest” and easiest to set up, also means a single potential point of failure with limited opportunities for back-up.

On the other hand, it’s more likely to afford the company better volume leverage, a faster learning curve, and the chance to build better partnerships. Dual/multiple sourcing allows for better risk mitigation, cost negotiation leverage, and higher available capacity for demand surges.

The Need for Understanding Risk and Business Continuity Planning

When planning for manufacturing and packaging, leaders must make well-informed decisions, with a strong understanding of the potential implications of their choices.  It’s always advisable to perform a thorough risk assessment, weighing in on best and worst case scenarios.  Ultimately, any decisions should be backed up with a strong business continuity plan (BCP).

A good BCP should allow a manufacturer to understand and manage risk across the full manufacturing and packaging chain at any time. BCPs might include elements such as capacity reservation, inventory policies, dual sourcing, options to extend capacity (e.g. by increasing production shift hours), set up of back-up vessels, mixers, lines, etc., and also well-informed location choices (e.g. one CMO in Europe and one in the US).

Finally, for Europe, the Manufacturing & Importation Authorization (MIA) strategy must be well thought through. This is essential to fulfilling GMP requirements. A MIA can be obtained by biopharma companies but can also be outsourced (which is often the case with start-up companies) to a CMO. Outsourcing, however, limits the ability to change if a second  source is sought and also increases the dependency on the CMO.

De-Bottlenecking Strategies

Another method for ensuring a secure supply is to address bottlenecks in the process. Here, we highlight three ways to “de-bottleneck” upstream:

1. Decoupling manufacturing from packaging
2. Applying a kind of “takt time” concept
3. Optimizing batch-sizes for packaging runs

Decoupling Manufacturing from Packaging

When we refer to “decoupling manufacturing from packaging,” we basically mean two things:

1. Having different entities or work centers manufacturing active pharmaceutical ingredients (API) and/or bulk drug product (DP)—whether in-house or via a C(D)MO—vs. performing labeling, packaging, and serialization operations
2. Splitting the manufacturing step from the packaging step; For example, a company may produce tablets in bulk and then store them in inventory before placing them in bottles or blister packs followed by packaging them in cartons and applying labeling and serialization, which would make them country-specific.

API and bulk DP manufacturing processes are heavily governed by GMP, often involving long lead times and resulting in batches that bring fairly long forward demand coverage. Process hiccups are somewhat common, resulting in deviations and delays, hence schedule adherence is always a big challenge.

Labeling, packaging, and serialization are not as strictly governed by GMP, more distinct, and organized per stock keeping unit (SKU).  They can be planned on short notice and—once set up—are easily repeatable.  Unlike DP and manufacturing, they don’t typically come with many deviations and corrective and preventive actions (CAPAs).  This allows for more agility and can result in specific and smaller batches for certain markets or groups of markets. Furthermore, rework is fairly easy to organize.  Ideally, packaging runs are automated, but rework can be set up semi-automated or even fully manual.

Hence, this final step in the manufacturing process is where a company can gain flexibility for reacting to changing market dynamics.  Of course, that assumes that the prior steps resulted in sufficient stocks of base material (in particular API and DP bulk stocks).

Applying a “Takt Time” Concept

The “takt time” concept basically sets the pace and rhythm of a manufacturing process and aligns it with customer demand. As a metric, it represents the amount of time “budgeted” to manufacture each part—in this case an SKU—such as producing one part every x seconds. It is typically applied in discrete manufacturing environments, of which drug packaging is an example.

A company can “tune” its packaging operation to market demand by (for example) creating a concept much like a bus schedule.  This involves mapping distinct SKUs across the available scheduling hours per packaging line, with regular timeslots that can be used, reserved, or remain flexible.  A key condition for success is to have a sufficient inventory of packaging components at all times. That’s a fairly low-cost investment, and ordering lead times for packaging components are relatively short (typically 4-6 weeks). 

Optimizing Batch Size

Optimizing the batch size for packaging runs can be achieved, for example, by combining smaller volume SKUs with larger volume SKUs, based on market forecast. This means that multi-market packs need to be created, which is allowed within the regulatory frameworks. A key element to watch is the available space on the artwork components, which is not unlimited.  There must be room to fit all the required languages or pictogram components as well as to fulfill serialization requirements.

Strengthen (or Develop) S&OP / IBP

An essential enabler to recognizing and mitigating potential supply chain challenges, especially in the mid- to long-term, is to have some form of a Sales and Operations Planning (S&OP) process in place.  In its most mature form, which few companies actually achieve, such a process is referred to as Integrated Business Planning (IBP).

Even though the process is not always liked—typically because it requires a significant level of commitment across functions—it can be key to driving the right executive, tactical, and operational decisions to prevent situations with short supply, whether due to unexpected high demand, manufacturing or distribution issues, or other unexpected disruptions.

Proper S&OP / IBP identifies upside / best case scenarios and downside / worst case scenarios and evaluates their likely respective impacts on the organization, supply chain, and so on.  Via a cross-functional process, planners document the desired expectations and outcomes, then develop action plans (complete with supporting business cases) for achieving their goals. 

This type of cross-functional planning provides a forcing function that drives leaders to think through possible scenarios ahead of time, be proactive about how to deal with them, stay focused on generating the desired results, and be more conscious of the trade-off decisions required.  It integrates perspectives related to product development, regulatory needs, commercial issues, technical operations, supply chain needs, and finance. 

In simple words, “to govern is to predict.” S&OP / IBP builds in preparation time, helping the organization to be proactive and ready to act, rather than reactive and always trying to play “catch-up.”

SKU Clustering and Artwork Exemptions

There are various packaging and SKU-related measures that could be used to ensure a more reliable supply.  A quite common approach is to create a single package design that can be used in multiple countries, thus reducing the total number of independent SKUs that the company must manage.  For example, one larger country could be combined with typically one or two smaller countries to ensure supply in each of the markets.

However, that solution might not be as simple as it seems, as there could be differing serialization, distribution, blue box, and other constraints that make it difficult to create packaging that satisfies the requirements of multiple countries.  A thorough analysis is needed to identify the best opportunities for clustering and working out the details.  Having the right combination of countries clustered will help to level out demand fluctuations in different markets.  As we will explore in part 3, it is essential to keep stock in the right places to ensure the company’s ability to leverage SKU clusters as much as possible.

Another strategy that can help limit the number of SKUs or increase cluster size could be to request exemptions to the labeling and package leaflet obligations based on Directive 2001/83/EC article 63.  Although there are limited formal regulations to fall back on, companies may request translation exemptions or ask to omit part of the information on the artwork.

For example, an English or German language package could be made available in the Czech Republic, provided the relevant authorities approve and certain local measures are taken to safeguard the safety of the product.  This may involve providing the package leaflet in the local language separately.  Especially in early access, ultra-low prevalence, or unforeseen stock-out situations, this could be a feasible solution to ensure supply.

A manufacturer should do the necessary work to understand its opportunities for clustering and for exemptions.  It should then develop a clear plan of action and request exemptions in a timely manner.  Both strategies can help reduce SKUs and complexity while serving to proactively smooth out supply issues.

Coming Next

In part 3, we will explore “downstream” strategies.  Specifically, we will offer some perspectives on topics such as

• Active SKU management
• Product life cycle management
• The potential to apply direct delivery models
• The introduction and management of supply allocation models

That’s a relatively extensive list.  The key to success for any company will likely be finding the right combination of upstream and downstream strategies.

Note: To connect with AIM to discuss strategic and operational issues related to biopharma supply chains, please click here.