Introduction
Distribution networks and professionals are faced with more challenges now than ever. Networks are being asked to plan a four-fold expansion and are simultaneously asked to plan for closure. This article will lay out the internal factors of the market and the external factors that influence distribution. These factors are harbingers of tight cash flow, scarce resources, increasing cost and growing demand. The growing number of medicines, patients and clinical trials awaits our attention in the immediate future.
Very soon, distribution must adapt to 3PL & 4PL partnership models to support more clinical study deployment and commercial operations in response to the new marketing channels demanded by the healthcare system. As companies expand or shrink, through launching new products or through merging by acquisition, change must be dealt with and solutions must be delivered.
Internal Challenges
The major internal challenges are summarized best by four areas. Three of these are trouble areas identified by the recent “Master of Logistics Study” [1] that directly impact the future distribution network. They are:
- Insufficient Planning - a lack of planning for the impact of resources;
- Lack of Flexibility in the Network - a rigid network that is incapable of flexing when uncertainty occurs, and;
- Poor Internal Focus - a myopic internal focus that limits the enterprises’ ability to achieve the desired performance results.
These three trouble areas for this decade reveal projects needed to fine-tune the distribution network.
The fourth and final challenge area is what many companies call business basics. Like many sports, no matter how sophisticated they become, success rests upon the foundation of executing the basics well. Getting back to basics is driven by the need for cGMP and biopharmaceutical drugs to be handled in a responsible manner. The basics of distribution are the repetitively high level of product quality throughout inspection and accurate verification, precision, and attention to detail.
However, what separates pharmaceutical cold chain from distribution in other industries is that cGMP requires product quantity, lot number/expiration dates, medical identification numbers, and, in the case of blinded studies, the randomization number. In addition to that, cold chain needs the temperature profile, temperature monitor serial number, and the data file that proves the shipping lane was successful.
The key areas of business basics are bolded below.
- The distribution staff receives effective training, uses procedures, understands that everything has its place and purpose and is coached to perform consistently with a high level of quality work.
- Facilities, equipment and computer systems with the proper layout and flow can multiply the efforts of the staff.
- Special software, and applicable technology – such as WMS, TMS, bar coding or optical scanning – are extremely important! These technologies may give ten-fold return and may augment another function that allows an entire system to produce greater results.
- Process flow is addressed separately. The cGMP distribution functions flow into the areas of ordering, receiving, inspection and status, storage/inventory/location, picking, packing, shipping container selection and preparation, shipping and delivery. The flow, whether process, physical or document, is important for control, consistency, repetitive handling and high standard of quality. In fact, simplification of the flow is a low hanging fruit that delivers many rewards.
Different Approaches: Clinical vs. Commercial Distribution
Most biopharmaceutical companies run their commercial and clinical distribution as one activity and manage the logistics, transportation, freight operations, and budget as if they were all the same thing. The truth is that the characteristics of clinical distribution are quite different from commercial distribution (licensed pharmaceutical drug); most courier/freight service companies cannot satisfy the needs of both types of distributions.
As you can see in Table 1, biopharma has two distribution areas that have distinctly different drivers and follow different regulations/guidelines. Knowing the type of distribution and related characteristics will help determine the influencing factors.
Table 1. Business and Shipping-Related Characteristics for Each Distribution Type
External Challenges
The external challenges addresschallenges outside the company and within the biopharmaceutical industry as well as the challenges beyond the biopharmaceutical industry.
Growth and Increasing Demand for Pharmaceutical and Cold Chain Sales
Advances in healthcare have elevated the world’s average life expectancy five years longer than the life expectancy was projected five years ago [2]. The shift of population, economic wealth, and growth among countries creates a focus that will introduce new paradigms. With the speed of advances in medicine and preventive health care over the next 10 years, the average life expectancy could be extended near the 90 year old mark by 2020. In fact, by 2100, 28% of the world population will be over 60 years old and the world population will be over 10.9 billion [3]. This will increase the global demand for medicines and preventative health care, with greater need and wider distribution of temperature controlled products.
Due to these trends, Global Biopharmaceuticals sales by 2016 will approach $1.13 Trillion. Biopharmaceutical cold chain product sales by 2016 will quickly approach $243 Billion [4].
Actually, not only is cold chain [5] growing at a robust rate due to the biopharmaceutical market, but the effect of new innovative packaging for controlled room temperature (CRT) products have moved temperaturesensitive logistics into a role as a major player [6]. Cold chain biopharma products will grow over 32% between 2010 and 2016; faster than all global biopharmaceutical sales and non-cold chain as a whole. By 2016, cold chain products will comprise a notable portion of all pharmaceutical products [4]. The downside is these cold chain products will require more expensive, generally larger and heavier shipping containers, which will incur higher freight costs [7].
The number of New Molecular Entities (NMEs) is the fundamental indicator of R&D potential. Figure 1 below illustrates the robust nature of the industry to respond, even under negative economic pressures.
Figure 1. Growth in the number of New Molecular Entities (NMEs) in the USThe 30 NMEs launched in the U.S. in 2012 is the most that has been launched in the past 10 years [8]. This is a significant achievement under the adverse economic conditions and supports that the drug development pipeline is still healthy and growing.
Crude Oil Prices Prove Fickle
In 2008, the price of crude oil quickly surpassed $138 per barrel, strangling key areas of business and personal spending. By 2009, a shrinking US economy and falling global demand dropped the oil price down to $40/barrel. For three years, the price slowly crept up to $100/ barrel in 2012. The reality today is that the cost of oil production is around $70/barrel [9]. Not surprisingly, most industry experts agree that as demand returns to pre-2008 levels, the oil price of $100/barrel is here to stay [10]. As a 2013 update, unfortunately, the government continues to delay effort to expand usable oil supplies. The government’s lack of action has artificially propped up the cost of oil which in turn drives distribution costs upward.
Cost of Freight is Climbing
The future challenge is how to deal with fuel price and labor cost increases. Is there a way to offset the increasing costs? Two clinical trends, new cold chain (temperature sensitive) products and the overall growth in the number and size of clinical studies, explain why rising fuel prices are important to the pharmaceutical industry. At the end of 2009, three of the top ten drugs were cold chain products that required more complex packaging [11] and higher distribution costs. By 2015, it is projected that eight of the top ten drugs will be cold chain. The result is that clinical studies are trending towards more countries, more clinical sites, and a larger subject population, growing the number of shipments thus increasing distribution costs [12].
The best indicator of distribution costs is the U.S. Freight Rate CPM (freight cost per mile) in Figure 2. This also shows the 2012 levels are now on par with the 2008 levels [13].
Figure 2. US Freight Rate Index CPM Historical Graph 2007-2012Obviously the cost of fuel is one of the main causes of high distribution costs. However, labor will soon take first place as the greatest contributor to distribution costs! Not surprisingly, government regulations are driving labor costs up. The imposition of a shorter workday and week (referred to as HOS), along with more paperwork could force delays in service and delivery time. In addition to the HOS, labor costs have risen due to a shortage of drivers and a population of older, more skilled drivers holding higher wages [14]. The component of labor cost under new government rules promises to push labor costs higher with little opportunity to ever drop.
In addition to labor, counterfeit and commercial (product loaded) vehicle theft have risen as billions of dollars of stolen cargo and vehicles have left a negative impact on the economy and the industry. This should be addressed through risk management.
Managing Risk Levels
Today, risk is not an exercise in worry but a calculated evaluation. The calculation involves the probability of an event, the magnitude of impact from this risk event and other factors specific to the business, as well as the cost for mitigation or contingency. Risk events could be severe weather/natural disasters, business related accidents, vehicle theft, counterfeiting, terrorism and cyber theft. Planning should include proactive activities that could avoid or offset disaster.
As a real-life example, in 2008, our team prepared for possible risk events at key traffic bottlenecks in the EU that might occur around the 11th of September. The event which we did not want to occur happened. Fortunately, our planning and preparation paid off. We had chosen, just the week before, to reroute truckloads of IMPs across the English Channel by ferry. As the loads ferried from Felixstowe, UK to Hook of Holland, NL, the explosion(s) closed the freight portion of the Channel Tunnel (also known as the Chunnel) under the English Channel between Folkestone, England and Coquelles, (near Calais), France [15]. If we had driven the Chunnel route, our staff may have been injured and over 15,000 doses destroyed. Are the risks that may influence your business well-known?
Moving Forward: Innovation and Technology
Since the 1970s, technology, especially computer technology, has developed so quickly, it has shifted from a linear to an exponential growth rate. To understand the magnitude of this growth, it is projected that computing speed and logic/software will match that of the human brain by 2025 [16]. Current artificial intelligence (AI) software, such as voice recognition, can learn as it goes, using limited logic boundaries today. Today, computing speed, higher level software and robotic engineering can readily support most distribution and logistics functions.
Figure 3. Exponential Growth of Computing & Milestones - When Computing Will Match Animal and Human Brain Capacity [17]
Figure 4. Percent of Goal by Year – Linear vs. Exponential Rate of Growth [20]Aspects of Beneficial Technology
With technology in the digital world, it is not a question of if the impossible is possible but rather a question of when it is possible.
Inventions of complementary technology
Many technologies make significant strides then halt and cannot be realized because complementary technologies have not been invented or discovered…they are before their time. Even with the increase of computing speed, the world had to wait on the physical devices and materials. These inventions, such as bar coding [18], polymers and computing devices (vacuum tubes to transistors to integrated circuits to silicon chips) allowed the rate of growth experienced in the digital world to bridge over to other fields like distribution.
Emergence of technology and innovation into the distribution world changes the complexion of the basic work stream and competitive playing field. An example of this new technology is the ability to capture costs almost real-time. Currently, most costs are based on averages or standards and are rough estimates [19]. The total cost for an activity is often not known until weeks after the activity takes place. Fortunately, this rapid availability of cost data delivers a powerful tool to respond to market conditions (competitor’s lower prices) or environmental conditions (increase in gas prices due to adverse weather) quickly.
Exponential growth
Among the law of exponential returns, the most notable is Moore’s law. It is startling because most areas of growth are close to being linear. A linear 4% improvement in one year would extrapolate to a 100% completion in 25 years. On the other hand, a 1% improvement in year one using the exponential rate doubling every two years will reach 100% completion in the 13th year.
Thanks to exponential growth of computing speed, storage devices and high-level applications the function of machines today can process large amounts of data and perform logical thinking processes that could not be achieved in the last century.
Higher level software applications - Artificial Intelligence (AI)
The higher level applications that can pattern data into logic then learn and upgrade itself helped launched AI as a field of study, which later resulted in many computer applications. Today, voice recognition is a good example; the self-learning function within AI has reached beyond basic voice identity levels to learn the speaker’s individual voice pattern and expressions. It is estimated that computing speeds and AI will reach human brain computing capacity by 2025 [16]. The tasks of finite problem-solving and decision-making of distribution are already feasible today with AI.
Conclusion
In the very near future, special machines or robotics that deliver a wider range of tasks at a lower cost will emerge. This will introduce a new work style as machines take roles formerly exclusive to humans. For labor intensive, repetitive and/or highly precise tasks, these lower-cost computerassisted machines will dominate the work-force. An example would be pull and pack [21]. Machines can perform beyond human accuracy and endurance using large databases and identification protocols. With these new computing tools, the capability exists to make decisions based on real-time performance data and actual costs.
Innovation and technology can turn the way we do business upside down and turn bottlenecks into super highways. The cost savings, speed/productivity improvements and competitive implications can be significant. What if the use of oil to fuel tractor trailers were eliminated and replaced by a source at a fraction of the former cost? What if …? Should be asked, especially for technologies already in place in other industries. For example, the application of robotics to the automobile industry could be expanded to broader distribution and logistics tasks or general use applications.
The next steps are knowing where you are and deciding where you want to go.The last step is how to get there. The how is revealed by ideas and concepts put into action through technology and innovation.This empowers biopharmaceutical companies to focus their energy to deliver greater value, slow down the growth of costs and speed up the process of bringing a high-quality drug to the market and the end-user.
Glossary
Artificial Intelligence (AI) – a technology and branch of computer science that studies and develops intelligent machines and software. The central problems (or goals) of AI research include reasoning, knowledge, planning, learning, communication, perception and the ability to move and manipulate objects. General intelligence (strong AI) is still among the field’s long term goals. Source: Wikipedia
Channel Tunnel (also called the Chunnel) is an undersea rail tunnel beneath the English Channel at the Strait of Dover linking Folkestone, Kent, UK with Coquelles, near Calais in France.
CPM - Cost per Mile (CPM) indicator comprised of 8 main and 65 cost components and related to freight transport by land. See US Freight Rate Index
IMP - Investigational Medicinal Product – IMP is a term used in the European Union (EU) for clinical drugs or clinical supplies; drugs used in clinical trials. “a pharmaceutical form of an active substance or placebo being tested or used as a reference in a clinical trial, including products already with a marketing authorization but used or assembled…. in a way different from the authorized form,..” Directive 2001/20/EC, Article 2 (d)
Linear versus exponential growth - Linear growth is expanding by repeatedly adding a constant. Exponential growth is expanding by repeatedly multiplying by a constant. Table 4 is an example of linear versus exponential growth. Linear growth of 4% per year will achieve 100% level at year 25. Linear equation is y = 4x. The exponential growth of doubling every 2 years will achieve 100% level in year 13. Exponential equation y=2x/2
NME - new molecular entity (NME), or a new chemical entity (NCE), An NCE or NME is a molecule developed by the innovator company in the early drug discovery stage, which after undergoing clinical trials could translate into a drug that could be a cure for some disease. Under the FDA Amendments Act of 2007, all new chemical entities must first be reviewed by an advisory committee before FDA can approve these products.
TMS - Transportation Management Systems (TMS) are software solutions. They address all modes of transport as well as manage the flow of transportationrelated information, documents, and money.
WMS - Warehouse management systems (WMS) are software solutions and enable a seamless link to order processing and logistics management in order to pick, pack and ship product out of the facility.
US Freight Rate Index - or “Cost per Mile” (CPM) indicator is based on standard equipment model of a fully loaded 48 foot trailer with a standard long-haul semi-tractor power unit. The US Freight Rate Index represents the cost and potential profit for the standard equipment configuration to travel 1 mile, and is reflected in USD$, or portion thereof
References
- Holcomb, Mary C and Monradt, Karl, contributing editors, “20th Annual Study of Logistics and Transportation Trends”, September 01, 2011
- Lauren Cox, “We Will Live Longer in 2050, Study Predicts”, ABC News Medical Unit, 12/14/2009
- “Global Population, Faces of the Future”, Int’l Section, pg 64, The Economist, June 22-28, 2013
- Basta, N., “Pharmaceutical Commerce, 2012 Cold Chain Directory, Overview, pg 3 Supplement May/June 2012, www.pharmaceuticalcommerce.com
- Basta, N., Pharmaceutical Commerce, Nov/ Dec 2011, p.1” and Jan/Feb, 2012, p.26 & 30”
- Holloway, I., “Presentation EU Regulatory Guidelines: Controlled or Ambient Temperatures, Stability Data and Compliance”, IQPC 8th Cold Chain Management and Temperature Control Summit, Toronto, Canada- February 24, 2010
- Rizzo, TJ and Ulrich D., “Bringing room-temperature pharma shipping under the “CRT” umbrella” Pharmaceutical Commerce, March/April, 2012, p 22-24
- Figure 1, Development in NME graph (1990-2012); source: New Molecular Entities approved by FDA
- Goff, R., “Approaches to Offset Rising Fuel and Distribution Costs” Journal of Pharmaceutical & Biopharmaceutical Contract Services”, May/June 2011, Vol.2, Issue 3, pgs. 30-35
- Taken from Crude Oil Cost History (2004-2012) graph; source: www.tradingeconomics.com | NYMEX
- Basta, N. and Lipwicz, M., “New Study Sees Double- Digit Growth in Cold Chain Services for Life Sciences”, Pharmaceutical Commerce, April 2010, Vol. 5 No. 3
- Basta, N., “Pharmaceutical Commerce’s Biopharma Cold Chain Sourcebook, 4th ed., published April 16, 2013, www.pharmaceuticalcommerce.com
- Figure 2, US Freight Rate Index CPM Historical Graph (2007-2012); source: www.freightrateindex.com
- Jeff Berman, “New ATA report focuses on ways to address the truck driver shortage”, Logistics Management Magazine, July 17, 2012
- Laura Dixon, News, “Channel Tunnel Fire Causes Travel Chaos”, pg. 8, THE TIMES, Friday, September12, 2008
- Ray Kurzwell, pgs. 2-8, 259-273, addressing AI, “ The Singularity is Near”, New York, Penguin (USA) group, 2005, copyright @ Ray Kurzwell, 2005
- Figure 3, based on Ray Kurzwell, Pg. 70, “Exponential Growth of Computing “ The Singularity is Near”, New York, Penguin (USA) group, 2005, copyright @ Ray Kurzwell, 2005
- Tony Seideman,”Barcodes Sweep the World” from Wonders of Modern Technology, Spring 1993
- Mark Woodward, guest post “5 Supply Chain Predictions for 2013”, The Year of the Network”; Forbes.com, Technology section, 12/18/2012@ 6:32PM
- Figure 4, Linear vs. Exponential Growth, R. Goff based on Wikipedia. See glossary.
- Sam Grobart, “Amazon’s Robotic Future: A Work in Progress”, November 30, 2012, Technology section, Automation; www.BloombergBusinessweek.com
C. Ray Goff Jr. has over 25 years of experience with major biopharmaceuticals in commercial and R&D areas. Ray led vaccines global clinical supply chain, cold chain and distribution organization for nearly a decade. He has a PMP, several Executive Certificates from MIT Sloan School of Management and a BS. Ray has patents, published many articles and held leadership in associations.