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From Inventory to Information

By Eric Newmark

July | August 2006 | Drug safety initiatives, technical innovation, and lean practices are changing the way pharmaceutical supply chains operate. As a result, the role distributors play within that value chain is evolving. Over the past decade, manufacturer discussion around dis-intermediation and direct-to-consumer (DTC) distribution has increased but has largely been driven by concerns over drug safety. With the approaching 2007 implementation of a national pedigree, state-level e-pedigree requirements on the rise, and the proliferation of inventory management agreements (IMAs) throughout the industry, wholesaler arbitrage and resale of inventory into the secondary market are both being rapidly eliminated. As a result, any chance of manufacturers cutting out distributors on a broad scale has largely evaporated. Instead, manufacturers and distributors are exploring ways to create a more collaborative business model.

Manufacturers are currently completely under-whelmed by the level of information provided to them. While the data help them build a historical view, they do not help drive operational efficiency. Without near-real-time frequency of data, manufacturers cannot tie end demand signals to the shop floor nor strive toward a just-in-time operating model. CPG and retail companies have revolutionized the concept of product data availability over the past decade and have set the bar for data availability in the twenty-first century. As item-level traceability grows, the value placed on distributor services will shift to focus more on information than inventory. Distributors will be expected to help map product movement and provide manufacturers with more real-time demand information. These data not only will help manufacturers with sales and operational planning but also will enable them to better enforce IMAs and fee-for-service agreements. These agreements are helping to lean out distribution channels, but they are only as strong as they are enforced. Companies today still have a fundamental level of discomfort around whether information provided is thorough and represents the whole channel. Inventory management and logistics are becoming commodities, and information services will soon become the key differentiator among wholesalers. Within five years, pharmaceutical distributors’ main value proposition will be collecting demand signals for manufacturers, and they will be viewed first and foremost as information brokers. Distributors that are late to the table in offering these services will watch helplessly as customers transfer business to their competitors.

Low Volume, High Value
Although mass distribution will reside with wholesalers, manufacturers do see three significant opportunities for DTC distribution, including customized unit-level fulfillment, low-volume high-value products, and new product launch logistics. Wholesalers are set up for mass distribution, not small, customized order delivery. Opening up multiple cases and packaging together a few bottles of varying type and brand for delivery is not a core competency. Third-party logistics providers (3PLs) such as DHL, FedEx, and UPS specialize in small-unit-level, perfect-order performance and already have sophisticated package-tracking systems in place, positioning them well to capture this market as Internet selling and other direct channels expand. Products that are low in volume and high in value (such as vaccines and high-end biologics) are also well suited for DTC distribution. Lower levels of logistical complexity and highly defined end consuming entities make this possible. Finally, new product launch presents a strong case for DTC distribution. Perfect-order performance during a launch can make or break a product’s long-term success.

To remain competitive, distributors must continue to differentiate themselves through product portfolio (including generics) and services offered. Nontraditional segmentation of service offerings should be explored. Providing tiered levels of service to customers with different operating requirements and sophistication needs at different price points will help more closely align actual services rendered with services charged. Distributors must proactively design transparency into distribution processes and invest in the necessary infrastructure to provide item-, case-, and pallet-level visibility on a near-real-time basis. If distributors do not do this on their own, the endpoints will eventually create this kind of model themselves through a consortium approach. Emerging product tracking services and networkwide subscription models already threaten to provide this type of a platform.

Eric Newmark is senior analyst for Health Industry Insights.

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