Prescribing 3PL remedy
Health care companies increasingly turn to outsourcing to cure supply chain ills.
By Chris Dupin
Health care companies are looking at outsourcing more of their logistics, according to a recent study commissioned by UPS.
The company said interviews with about 150 health care executives found 35 percent saying their firms planned to increase the amount of outsourcing they do in the next two or three years compared to just 13 percent in a similar study done in 2009.
Health care companies have a variety of reasons for outsourcing logistics that can differ not only from firm to firm but also from product to product, said John Menna, vice president of UPS Healthcare Logistics Strategy.
| Menna |
Some do so as part of a 'strategic, fundamental business philosophy,' he said. They choose to work with third-party logistics providers because they feel an outside firm can do a better job through logistics expertise, and can potentially lower costs, such as by leveraging facilities that are shared by many clients.
Other companies outsource for what Menna said are tactical reasons. They may see demand for a new product spike because of U.S. Food and Drug Administration approval, or they may have a product that requires special handling for which they lack proper facilities. For example, a biotech product may need to be frozen or refrigerated, or a new Class 2 narcotic may require vault or cage storage, and the drug company doesn't have time or money to set up such facilities.
In addition, the pharmaceutical industry has seen a wave of merger and acquisition activity. When companies combine, they often seek to eliminate parallel supply chains.
New federal health care legislation could be a boon for both the industry and 3PLs since one of the goals is to increase patient access to health care. But the same UPS 2010 Pain in the (Supply) Chain Survey found 55 percent of executives interviewed rank health care reform as a top business concern with 22 percent saying they do not have the current infrastructure to support changes from reform.
'On the surface it is good news for health care companies, because it means more products will be sold potentially and there will be more demand for health care diagnostics, products and pharmaceuticals,' Menna said.
'The challenge from the supply chain perspective is, 'will we need to scale up our ability to move more health care product to market?' ' he said. As the industry seeks to meet that demand, it may rely more on outside logistics firms.
The other goal of federal law is cost control. So Menna expects increased efforts by health care companies to reduce direct supply chain costs and design 'tighter, cleaner supply chains with less inventory' and fewer mistakes, stockouts, recalls and other costly problems.
Recalls could result from, for example, products going out of date or the 'cold chain' for temperature-sensitive products being broken. Also, products may be recalled if the chain of custody is broken, because of concerns that product might be subject to mishandling or even tampering.
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| Cubbler |
'Our experience is very much in line with what that (UPS) report indicated, especially in the North America market,' said Scott Cubbler, vice president of life sciences for North America at Exel.
He said life science companies ' makers of proprietary, generic and over-the-counter pharmaceuticals and medical devices ' have traditionally been willing 'to outsource in some overseas markets to help them get into some markets that they hadn't been in. But here in the United States they had historically been very reluctant to outsource for a variety of reasons.'
Those reasons include the need to comply with complex regulations, complications of having to potentially execute holds or recalls of products, requirements for careful handling and technological challenges of maintaining cold chains, high inventory values and the need for strong security.
It's harder to handle life science products. 'Ten years ago, I'm not sure 3PLs had the expertise to do it,' Cubbler said.
'Traditionally a lot of life sciences companies felt they needed to own their supply chains end to end because of the nature of the products they were moving,' Menna said. 'But I think there is a recognition that with all these pressures and complexities on their supply chain, there is probably a better way to do it and others who can solve some of these things better than they can.'
The UPS executive also said health care companies are keen to invest their capital, time and focus on research and development, new drug discovery, conducting clinical trials, getting FDA approval and marketing drugs to physicians, and 'let supply chain experts help manage their supply chain.'
'It's a great industry for us, because it requires very precise and high standards in terms of on time delivery and tolerance for failure is low in health,' he said. 'Given the way UPS is in terms of quality and highly engineered, it's good fit.'
Over the last two to four years, logistics companies have become more sophisticated, Cubbler said. At the same time life science companies are more willing to look at outsourcing 'because of pressures and changes in the industry are making it harder for manufacturers to keep a lid on costs and have as safe and flexible a supply chain as they need.'
As a result, he said life science has become the fastest-growing vertical at Exel, which is known as DHL Supply Chain in other countries.
Health care is also enjoying double-digit growth at UPS and is one of the firm's fastest growing segments, Menna said, though it remains smaller than big volume areas like retail, high tech and automotive.
Menna pointed to Merck as a company UPS has worked with that made a strategic decision that it no longer wanted to own distribution warehouses in the United States and Canada, but wanted to use its funds for other purposes such as research and development, marketing and product development.
UPS converted Merck's U.S. distribution facilities into multiclient warehouses and got rid of its warehouse in Canada and moved into shared facilities. Doing this, UPS was able to help Merck significantly reduce costs, time in transit, and ordering to delivery time, Menna said.
Another manufacturer (Menna could not name it because of confidentiality agreements) decided to no longer move its vaccines through a wholesaler, but instead ship directly to clinics, physicians, and pharmacies administering the vaccines.
'We do storage, pick-pack and transportation of their temperature-controlled product,' he said, and the company has increased market share over the past two years.
By shipping the product from a UPS distribution facility near its hub in Louisville, Ky., he said the company can take orders as late as 11 p.m. or midnight, and deliver product the next morning.
Cubbler said that globally, Exel or DHL has relationships with every major life science company and in North America it has 18 different customers, using about 3 million square feet of space for life science products. Clients include firms such as Novartis, Johnson & Johnson, Philips, and Medtronics.
With Novartis, Exel helped the company overhaul logistics for its U.S. pharmaceutical business, including the movement of goods from its factory to the warehouses of the 'big three' U.S. pharmaceutical distributors: McKesson, Cardinal Health and AmerisourceBergen.
Among the factors driving Novartis to outsource were the desire to reduce heavy truck traffic at its headquarters campus in New Jersey, reduce cost, improve security, diversify risk and decentralize product, enter new markets, and prepare for growth in international shipments and biopharmaceutical products that are temperature-sensitive.
Exel relocated Novartis' warehouse to a new offsite campus and gave it access to the 3PL's network of warehouse and distribution facilities in the United States and Canada. It developed new warehouse management systems and other IT processes, including systems that permit same-day order processing.
Exel also helped Novartis get ready for looming pedigree regulations, which require an audit trail so companies are able to track pharmaceutical products from factory to pharmacist down to the bottle level so products can't be counterfeited or tampered with. Regulations are being developed in many states, including California and Florida. But California has delayed implementing its rule until 2015.
Cubbler said the needs of each life science client are different, with some liking to centralize inventory and others preferring to spread it out to three or more locations.
Exel has major warehouse campuses in Mechanicsburg, Pa.; Atlanta; Memphis; Chicago; Toronto; Los Angeles; and Dallas. Co-locating customers in campuses like Mechanicsburg, near Harrisburg where 20 Exel customers use about 4 million square feet of distribution space, can reduce expenses by sharing costs for security, finance, human resources and administration, he said.
Another challenge for health care supply chains is demand for health care products by the growing middle classes in emerging markets such as China, Brazil, India and Russia. China also announced an ambitious universal health care program in 2009.
Pharmaceutical Research and Manufacturers of America (PhRMA) estimated that 2009 sales abroad for its U.S.-owned members and the sales by U.S. divisions of foreign-owned PhRMA members was $103 billion compared to $183 billion in domestic sales.
'A lot of health care companies are trying to figure out how to get their health care products into those markets,' Menna said. 'Those are markets that tend to have weaker infrastructure and when you are talking about moving pharmaceuticals and other health care products you need to have a high degree of reliability.'
Some health care companies are moving toward a more centralized distribution platform or network, he said. For example, in Europe, companies used to have warehouses in nearly every country. With cross-border trade easier, some are trying to develop centralized facilities, though this creates complexities such as the need for packaging and inserts in multiple languages, and complying with other national regulations.
Some countries are centralizing distribution of health care goods for Southeast Asia in Singapore.
Companies are also buying more active pharmaceutical ingredients and intermediate chemicals from overseas suppliers.
Pharmaceutical trade was liberalized in 1995 under the so-called pharmaceutical zero-for-zero initiative, under which the United States and 21 other countries eliminated tariffs on many finished drugs, active pharmaceutical ingredients and chemical intermediates used to make pharmaceuticals.
Originally that list had about 7,000 products on it, and it has been expanded three times in the past. Currently there is a group working to expand it by another 735 products, which would make more than 10,000 items eligible for tariff-free treatment.
An International Trade Commission report in September said 2009 imports of products included in the pharmaceutical agreement topped $85 billion, while U.S. exports exceeded $41 billion.
Those numbers would increase substantially if the list is expanded. ITC said industry sources estimated that just 12 percent of the 735 items proposed for addition to the list could boost the value of items entitled to duty-free import by $440 million and exports by $150 million. Inclusion of all 735 items would magnify that figure.