Prescription for Supply Chain Visibility

May 1, 2011
Even the largest pharmaceutical companies have a lot to learn about the state and location of their shipments. Forces are at work to change this industry from logistics laggards to leaders.

The pharmaceutical supply chain is complex and the ability to track and trace products throughout the healthcare industry’s production and delivery cycles is becoming essential to ensure public safety. But for pharmaceutical manufacturers those capabilities also represent important cost savings opportunities—opportunities they traditionally hadn’t considered until market forces started narrowing their profit margins.

Today’s pharmaceutical industry may not be the model of supply chain efficiency and best practices, but give it just a couple more years. By that time, those pharma companies left standing after healthcare reform, new FDA regulations and global economic forces have had their way with them will be both logistically efficient and technologically savvy. Right now pharmaceutical manufacturers are mapping their way to that future.

“Most pharma supply chain executives would acknowledge that theirs is not the leading industry in terms of advanced practices,” says Wynn Bailey, partner at PricewaterhouseCoopers Management Consulting. “But almost all of our clients in pharmaceutical have transformational initiatives underway in supply chain. There’s a significant move in the industry being facilitated by the Food & Drug Administration (FDA) and other regulators to adopt processes where you build good quality in on the front end instead of inspect bad quality out on the back end. From a patient safety perspective the industry is quite focused.”

Tracking Chain of Custody

No pharma company has had that safety message drummed into it more powerfully than Johnson & Johnson. Its McNeil consumer healthcare unit has been involved in several recalls related to product contamination. Last year MH&L reported on recalls identifying wood pallets as a possible source of product contamination. Bob Douglass, consultant and commodity manager for J&J McNeil, says this has been an important lesson for managing chain-of-custody.

“Contamination did go from pallets to packages,” he says. “The spray used in curing the wood pallets didn’t dissipate entirely. Even if you package your product in a bottle within a corrugated case, when you put it on the pallet and ship it in containers from Puerto Rico, in high temperatures, fumes get into the products and over time it can leach from the bottle into the finished product.”

J&J McNeil now makes sure the wood pallets in its supply chain are heat treated and that every supplier in the chain of custody, from the primary to secondary suppliers as well as the raw materials manufacturers, changed their procedures for purchasing pallets.

“We’ve done a great job at J&J of mapping the chain of custody so if I know supplier XYZ down the road I have a database where I can go in and find their eight suppliers,” Douglass adds. “It’s taken us a year to get there but we’re there now.”

The FDA is raising the quality bar significantly for the entire pharmaceutical industry—and not just because of the recent J&J McNeil experience. With thinning profit margins, these companies realize they can no longer do everything themselves.

“Ten or fifteen years ago most large pharmaceutical companies had an entire chemical division, manufacturing the chemicals needed for their products,” Douglass observes. “That vertical integration model is changing dramatically. Companies are looking at their asset base and chopping. They’re typically able to source the identical chemicals, given the appropriate lead times to get them approved, at less than cost. Global sourcing is playing a much bigger role.”

Readying for E-Pedigree

A supply chain’s global reach makes establishing an electronic pedigree for the products traveling through it an important goal—one that many states in the U.S. are taking different routes to reach.

EPCglobal, the electronic data collection standards-making body, ratified an international Pedigree Standard in 2007. It specifies an XML description of the life history of a pharmaceutical product as it travels the supply chain. However, most states don’t go much further than requiring that these data get communicated—whether as text files, PDFs or spreadsheets.

California has gone the furthest in specifying an automated chain of information including advanced track and trace technology using the appropriate communication enablers (bar codes or RFID). The California Board of Pharmacy’s (CBoP) requirements will be phased in between 2015 and 2017, mandating an “interoperable electronic system” that will communicate a transaction from the pharma manufacturer all the way to the dispensing of the “saleable unit” drug product.

According to the director of a leading global pharmaceutical firm (who requested anonymity for this article), a company’s approach to ePedigree, should be that during packaging of the finished goods, global trade item numbers (GTINs) are serialized at the unit level, and in combination with the already established Global Location Number, a company will know what it is and where it came from.

“We trade to a wholesaler, they trade to a distributor, that distributor trades to Wal-Mart, a Target local independent pharmacy, mail order pharmacy, etc., and then you pick it up or they mail it to you,” he explains. “Each financial transaction will be recorded so at the point of dispensing at the unit level the serialized product says ‘I’ve been dispensed and I’m authentic.’”

According to California’s requirements, by 2015 all pharma manufacturers will need to have half of their products serialized. The remainder will have to follow suit in 2016. If the Federal FDA supersedes California’s requirements as it has said it would, it may put its own Standard Numerical Identifier law in place, having one track-and-trace/ePedigree program for the U.S. vs. 50 independent ones. It is assumed that will be OK with California.

“They’re begging for that because they don’t want people to not trade with California because they can go to Nevada instead,” our source says.

But in the pharmaceutical world, saying this will happen and making it happen are two different things. Although manufacturers acknowledge it makes sense for inventory management, demand planning and supply chain security, many feel it will be hard to pull off in their multi-tiered supply chains.

“From a pharma perspective, compared to any other retail consumer good, it takes five or six handoffs before the customer gets the product,” our source continues. “When you buy milk, green beans, t-shirts or computers there are two handoffs. Retailers are already there.”

With generic drugs taking the profit margin away from branded therapeutic drugs, pharmaceutical manufacturers are shifting their attention to temperature-sensitive bio-pharmaceuticals. These may represent more profit, but they also have more handling requirements—especially when it comes to maintaining a constant temperature throughout the global supply chain. That’s where e-pedigree requirements may move from regulatory nuisance to industry best practice.

There are 37 worldwide government regulations, the most recent being Saudi Arabia and UAE, and all have mandated electronic monitoring. That means shipping 20 pallets for $X,000 from point A to B will double in cost thanks to the addition of active and passive shippers as well as electronic monitors as part of the import paperwork.

“Now that we have the World Health Organization and 30 other countries getting on board saying you will do supply chain maintenance and product serialization, temperature management and monitoring, logistics becomes a big factor, when it never was before,” our source adds.

Saving Transportation Costs

Right now pharmaceutical supply and operations planning is all about push. The goal with serialization will be to master the reverse supply chain as well as recall management. And, by the way, that will also improve S&OP.

If the major pharmaceutical companies were forced to adopt e-pedigree sooner, but within their own enterprises, many would already have one of the major raw materials: an enterprise resource planning (ERP) system. And according to Brian Hudock, a partner with Tompkins Associates, supply chain consultants, most of these companies have very strong ERPs which let them know the state of every product in their plants and DCs.

“It doesn’t get complicated until product goes out of the manufacturer’s hands at the DC and reaches wholesalers, retail outlets and hospitals,” Hudock says. “That’s where the system is breaking down at this point.”

Where it is working, logistics efficiencies are resulting in substantial paybacks. Hudock tells of one of the big pharma medical suppliers which looked at ordering patterns to see how hospital groups purchase. Many send P.O.s several times a day across the same product grouping. Historically the pharma companies have treated those as individual orders and packaged them as such. That could mean sending 25 parcels to the same customer address.

“Getting 25 down to one LTL shipment, and two or three parcels that were much larger, means significant cost savings for whoever pays the shipping,” Hudock says. “For one shipping point it can mean savings between $4 and $8 million a year.”

Getting Tech Savvy

Recognizing the growing need for pharmaceutical manufacturers to master the ins and outs of e-pedigree, transportation providers like UPS are working with the industry to provide solutions that address not only compliance, but benefits that can be achieved before compliance has to kick in. For example, UPS has worked with Genzyme Pharmaceutical in Cambridge, Mass., over the last three years on e-pedigree serialization. In the process both companies have learned lessons that apply to today’s pharmaceutical supply chain. Technology provides one important example.

While California made recommendations to use RFID technology at the item level for e-pedigree, UPS and Genzyme decided to go with 1D and 2D bar-coding and to modify existing EDI interfaces as the mode for communications. The reasons for moving away from RFID were primarily because the impacts of RFID on sensitive healthcare products are still unknown and the technology still has issues with liquids, which comprise many of the new biopharmaceuticals.

Using data collection technologies, Genzyme will now be better able to tell exactly where its products have been distributed—all the way down to the individual “bottle” level. This further secures the healthcare supply chain because consignees can now validate that a product received from Genzyme was actually manufactured by Genzyme, and Genzyme can now determine the origins of any products that appear in a diverted market, further securing the process.

Kevin McPherson, global marketing director for UPS, adds that these new temperature sensitive products will require a new shift in focus to what goes on inside the primary packaging.

“We need to change our focus to the temperature and what’s really going on inside that bottle or vial or that package,” he says. “If it comes out of compliance while in transit, you don’t know that until the journey has ended and at that point it’s too late.”

According to McPherson, the pharma industry has designed its solutions around the “happy transportation path”—where a positive outcome will happen all the time. However, weather, catastrophic events and human error conspire against that outcome, so managing the 1 or 2% of the time those shipments won’t make it on time becomes a priority because a patient’s health is at risk.

“We have to move from a mentality of solving problems with packaging to solving them proactively with visibility tools,” McPherson concludes.

Safety and Sustainability

While the pharmaceutical industry learns how to apply visibility tools for patient safety, it is learning that technology can also be applied to environmental safety—or at least sustainability.

Pharma wholesaler McKesson Corp. worked with IBM Corp. on an initiative to reduce carbon dioxide emissions as well as trim drug distribution costs. McKesson supplies one-third of the prescription drugs used by hospitals and pharmacies in North America, providing pharmaceuticals to more than 40,000 health locations in the U.S.

This wholesaler is using IBM’s Supply Chain Sustainability Management Solution (SCSM), a Web-based analytical tool, to determine the value of keeping pharmaceuticals that need to be kept cold, such as insulin and vaccines, in one central refrigeration facility. The engines in the tool calculate inventory costs, and the potential reduction in carbon emissions, against the option of keeping such products in all its warehouses.

The tool takes into account data on all the energy consuming equipment McKesson has in its warehousing and transportation operations, including lift trucks, conveyers, refrigerators, HVAC and trucks, along with their specifications and hours of operation. Based on this information, the tool estimates energy use and carbon emissions relating to supply chain activities and reports on them by operation, site, product, or other categories.

“We are at the forefront of the track and trace effort, working with GS1 in trying to establish what the future will look like,” says Don Walker, senior vice president of distribution operations for McKesson. “But what’s most exciting about this tool is the ability to create a what-if scenario in understanding what some of the drivers are relative to efficiencies, inefficiencies and costs within the supply chain. We can model that so we can get some view of what potential downstream impacts would be and translate that into the carbon footprint piece.”

Each of the players in the pharmaceutical supply chain has an incentive to identify efficiencies that will benefit all trading partners. Whether the incentive is regulatory-, economically- or environmentally-based, the safety and health of every consumer will be the ultimate payback.

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