6 Steps to Fine Tune Your Distribution Network

Introduction

What if you owned a beat-up, noisy car that was in need of alignment, had issues with timing, or had leaking motor oil? You would fix it and bring it up to a reliable, smooth-running, well-oiled machine. What if you owned a musical instrument, like a piano, that had keys that stick, was slow to respond, and had a tone that was off key? You would fix it and bring it to produce rich tones right on pitch. Once fixed, the instrument could reach its normal potential. The fine tuning starts once the normal operation is achieved and moves to the next level.

The distribution network is like a dynamic machine with many independent parts. The parts cooperatively working together empowers the network to work in unison. Orchestrated together they multiply/amplify their individual efforts; the power and capability can be harnessed to reach higher levels of performance, quality, and value.

The 6 steps discussed here are akin to the peak to peek principle [1], where the peek (look) of the next level cannot be seen until you reach the peak (top/apex) of your current barrier/challenge. Until you overcome/reach that peak, the next peek of the upcoming challenge is not possible. So, too, is success with technology—until the failure or stretching event occurs and is overcome, the learning and problem-solving cannot focus (peek) to achieve the next level (peak). Perhaps the big relearning is that real success only comes from the experience of failure.

With these 6 steps the network can fine tune and multiply its capabilities, solving challenges at a higher level of performance.

Challenges

Distribution is encountering many challenges—internal, external to the company within the biopharmaceutical industry, as well as beyond the biopharmaceutical industry. These challenges are lowering profit margins and decreasing revenue streams. Some of these challenges are:

• Increasing demand for pharmaceutical products from a larger, broader patient base.
• Rising inventory values and new methods of delivery to the patient.
• A slow economy.
• Higher labor costs with increasing distribution and fuel prices.
• Greater energy is expended to liaison/coordinate with outsourced 3PL/4PLs.

The reason for emphasis on “fine tuning” comes from the alarming trends that show distribution activity demand will increase and unit costs will rise in all areas. We cannot control this trend. However, these demands and stresses may be able to be managed or offset through awareness of the distribution networks’ performance and capabilities. This is where technology and innovation introduce a factor that has potential beyond our current knowledge. The magnitude of impact from innovation and technology, as it applies to distribution strategy, will depend on the organization’s key risks, willingness to explore outside the box, and be open to new, novel approaches [2].

Technology and innovation may be the only factor that can overcome the negative effect on the current Distribution and Supply Chain network.

Overwhelming Growth in Distribution!

The growth in the new drug pipeline [2], increasing number of patients, and strong demand for pharmaceutical drugs are placing stress on existing systems. With the majority of new drug growth in (cold chain) temperature sensitive drugs [3], along with increasing costs across the board, the distribution network faces many challenges. This creates an environment requiring dramatic solutions. At the same time there is significant logistical change in the distribution-to-patient network as costs increase at every unit level. How do we address future challenges? This article proposes six (6) steps.

The Six (6) Steps

Given the internal and external challenges, the company must assess the current state of affairs and tailor solutions to its unique strategy. These 6 steps will customize the company’s situation (fine tune) and lay out strategic and tactical solutions.

1. Get a Check Up. Find Out the Condition of the Distribution Network

Most companies use spreadsheets or the notes shared across several departments to write the Distribution and Inventory Plan that determines their strategy for the future. It is recommended that a more formal assessment of performance, capacity, barriers, and gaps is prepared to model the skeleton of the distribution plan. A vital part of getting the accurate picture of your network and its performance is the “As Is” map. It is also recommended that a separate inventory plan with several likely scenarios be used for modeling. The biggest mistake at this stage is not allowing enough time for thorough research and analysis to serve as a foundation for planning. By getting started right with an accurate “As Is” picture, the clear path to build future plans can begin [4].

This may be done by an internal team but it is more objective if the study and modeling are performed by an external party. While preparing for this inventory study, be sure to identify the distribution architecture, actual production sales objectives, and inventory factors. Part of the inventory study should look at: an external assessment, location specific inventory views; external multi-company inventory views; communication vehicles; and execution capabilities for supply chain (SC), warehouse management systems (WMS), and transportation management systems (TMS).

It is rare today to find pharmaceutical companies conducting supply chain and clinical supply activities within their internal organization. Most inventories are not visible at various stages of manufacturing or at external outsourced facilities. Although internal enterprise systems for pharmaceuticals do a good job of financials, they do not have critical data such as physical inventory location and condition across the supply chain.

These studies usually take from 6 to 9 months to gather, vent, review, and resolve issues. This study becomes a blueprint for the “As Is” map and documents the cost base for improvements and building scenarios.

2. Get a Plan. Settle on the Objectives and Move Forward

Now that the condition of the distribution network is established and broad input has been gained, the next move is to identify the goals and objectives for the short-term (1 yr) and mid-range (5 yrs).

At this stage identification of improvement projects, resources, funds, and schedules can begin. By partnering with contractors, vendors, and suppliers an excellent source of education, resources, and solutions can be gained.

This timing is important because the “As Is” map was just completed and agreed upon by executives. Quick response with proposals reinforces urgency, initiative, and creates organizational momentum to move these new projects.

This step is where executive alignment is gained with future plans, especially future network innovations, determining IT systems to integrate and reach forward to the end user. The rationalization and consolidation of facilities will work closely with the inventory management planning [5].

Settling on the objectives for the next 5-10 years appears to be monumental, but the consequences of not having objectives are devastating. After objectives are identified then a plan can unfold addressing internal challenges, external challenges, risks, and the strategy for the future. The plan is important because IT enterprise conversion and new technology may require lengthy acquisition timeframes and larger investments.

3. Make Decisions. Outsource? Offshore or Nearshore?

Based on the first 2 steps and the company’s priorities it can be decided which is best—to outsource or insource the future distribution network, and where the activity will take place—offshore or nearshore.

Outsource or Insource?

The first decision is whether the products are made and/or distributed inside the company (insourced) or another outside company is contracted to make the product/clinical supplies, distribute, or deliver the service (outsourced). Today, a majority of biopharmaceuticals are utilizing outsourcing to perform their clinical supply or commercial activities.

Bottom-line, without significant change, distribution costs will continue to increase. Depending on the company’s strategy and financial structure it may be best served by outsourcing. For a single pharmaceutical company, especially for clinical supply and distribution activities, the resources and assets are only partially utilized. By outsourcing clinical services the leveraged assets deliver savings to the pharmaceutical company. The outsourced contractor can profit and fully utilize its capacity by supporting a large number of studies from many client pharmaceutical companies in a country/region at a lower unit cost basis. This is especially evident in the depot services area. By itself, the single pharmaceutical company can only service its unique clinical trial(s) often overpaying and underutilizing resources.

Getting it Right! Importance of the Correct Key Performance Indicators (KPIs)

The trend of large pharmaceuticals to outsource clinical services and distribution to the 3PL, if properly managed, offers flexibility, mobility, and additional capacity as well as significant savings. Mutual understanding and priorities for KPIs should be tested to make sure the outcome is what the sponsor wants. The Key Performance Indicator (KPI) is the metric that is of primary importance to the sponsor. It is the first indicator to the sponsor that performance may be going in the wrong direction and action must be taken. Many times the KPI is the tail that wags the dog only to be discovered later after much damage has occurred.

For example, a KPI to ensure new orders are shipped to the clinical site as fast as possible may result in the first 100 orders being sent by 100 shipments to 20 sites. An alternate recommendation is a second KPI to maximize units per shipment and allotting one shipment per site every 5 days. The outcome for cold chain pharmaceutical products using the first KPI has a distribution cost over $60,000 USD per week [6]. The second KPI has a distribution cost of $12,000 per week. For an 800-subject study requiring 4 doses per subject every 6 months, the first KPI would annually cost over $1/2 million USD versus the second KPI cost under $100,000 USD. However, if shipping excursions and inventory waste are considered, the cost for the first KPI may increase costs from 5 times to 6 times the cost of the second KPI.

Since the KPI(s) is the focal point for decision-making it is important to verify that the cause and effect of the KPI gains the proper outcome. Make sure you want what you are asking for! Along these lines, developing the quality agreements, the working relationship, expectations, and escalation triggers are vital to successful outsourcing.

Special note: Although there is significant savings potential, the sponsor still is responsible from a regulatory standpoint for drug quality. A key internal management role is needed to oversee 3PL activities and escalations. This is a critical internal responsibility that should not be overlooked or assumed to be the responsibility of the outsource company.

Offshore or Nearshore?

The second decision is a choice of location—offshore or nearshore. This is a decision to make, distribute, or service the product inside, near, or outside (offshore). Offshore is sourcing your product or business process to a foreign, distant organization in order to reduce cost. Nearshore generally refers to sourcing your product or business process locally, importing or returning manufacturing to the US or to countries closer.

Special note: Recent history has shown that once the offshoring savings and improvements are realized and the labor costs rise in the first offshore country (China) the effort is not abandoned and returned to the US. Instead, offshoring is just moved to the next country (Vietnam) (nearshoring) that has a lower labor cost but equal skill performance [7].

4. Work Smarter. Focus on Effectiveness and Efficiency

This means not only doing things with speed, economy, and accuracy while improving performance (efficient) but also doing the right things (effective) and delivering value. This is opposed by doing the wrong thing efficiently. Here are some examples of working smarter:

• Start with renegotiating with your courier/transportation network to gain visibility and appraise your pricing position. Knowing your purchasing position and associated costs will help prepare for the necessary actions to take.
• A valuable approach, when possible, is to deliver supplies and retrieve returns on the backhaul route. This looping route allows full vehicle utilization for the transportation costs. Most transportation costs include the destination trip out and the return trip with an empty vehicle [8].
• Utilize depots to consolidate supplies and move closer to the sites. Depots are GMP storage areas, usually smaller than a warehouse, used to store product closer to the destination location. A depot provides a variety of clinical activities that consolidate the bulk of supplies in the host country/region and operate more effectively when co-located in the same time zones, with knowledge of local services and clinical practices [9]. Where justified, a depot is an excellent opportunity for outsourcing and offshoring.
• Extend delivery time, use slower transportation, and consolidate shipments when possible. These steps usually lower the cost for non-cold chain clinical shipments. However, caution should be taken for cold chain. The longer delivery time usually requires a heavier, larger package and transportation costs may exceed the alternative faster express delivery services.
• Utilize the Pareto Analysis to determine where your efforts can make the greatest impact. As a generalization, this technique will help you find the vital few activities that will produce the majority of results, etc. This is also referred to as the 80/20 Rule. For example, your company may find that 4 out of 20 store action areas (20%) account for 225 of all 282 customer complaints (80%). The Pareto chart shown in Figure 1 relates to customer attraction or retentions of $5.2M annual sales. Which complaints should the company invest its resources to resolve?

Figure 1. Pareto chart

5. Reshape Geographic Coverage

Shape Geographic Coverage to Commercial Inventory and Delivery Goals.

Reduce the Size of the Clinical Study and/or Shrink the Geographic Coverage.

The size of the study dramatically affects the logistics costs. As fuel costs increase, the distribution quickly becomes a major cost factor. Even if the number of subjects in a study cannot be reduced, the geographic area covering the locations of the clinical sites could be reduced, thereby decreasing transportation distance and costs. Reducing the geographic size can reap the advantages of economies of scale, reduce delivery times, and lower courier costs.

Often clinical site selection is made without consideration to transportation or logistics. For example, a study of 300 subjects where drug supply requires 4 doses per subject with each dose 6-8 months apart is conducted in India. Subjects are not restricted by geography, such as rural, urban, or suburban locations. The study site selections are outsourced through a local CRO in India for 13 sites, shown in Figure 2. The team after study completion agreed that alternative Figure 2B would also be acceptable.

Figure 2. A) Dispersed 13 sites versus B) clustered 6 sites.

Both Figure 2A and B will deliver the same drug trial objective outcome for the study. However, Figure 2B has logistics costs 1/3 those of Figure 2A and improves delivery service and inventory utilization beyond those of Figure 2A [6].

6. Leverage Innovation and Technology

For the last decade we have witnessed tremendous advancements in computer science, mobile communications, voice recognition, and strong artificial intelligence (AI) [10]. These advances and the adaption of news tools are now available for use in the logistics field. Where the other fine tuning steps generally result in additional improvement jumps in productivity, the innovation and technology area is a multiplier of productivity improvements exponentially growing over time.

Each company is at a different stage and level in the innovation and technology arena. Adapting a company’s strategy to various innovation and technology solutions is a key success step. In this area it is just as important to know what you are not pursuing as well as what solutions you will pursue. This will clarify direction and optimize resources.

Technology in Distribution Services

In some ways you may have to become a “techie,” looking at other industries and innovations to see parallel applications, for example: using artificial intelligence for routing and logistics problem-solving, employing 3D printing for product packaging, and utilizing nanotechnology for serialization and scanning [2]. Other applications could be:

• Inventory pulled and picked by robots. Amazon’s new distribution system utilizing robots [11] for small item picking may shed light on techniques already used in the pharmaceutical manufacturing process [12].
• Implement optical scanning, laser marking, new labelers for serialization, BC/coding, counter-counterfeiting marks, and/or pedigree marks.
• Nanotechnology promises to open up many out-of-the-box solutions.
• Software on board, at site, build-as-go, or enterprise-wide to span and tie information across the network.
• Trace chain of custody and bridge distribution to transportation systems to IXR.
• Monitor security and traffic via drones [13] and GPS.
• Utilize alternative transportation modes: marine transport, railways, or airships [2].
• Employ shipping containers with improved monitoring, payload, and performance [2,8].

Note: If properly leveraged, the 3PL can quickly move to innovation and technology with lower operating costs and solutions. It should be noted that there is a cost of innovation in the initial stages. It is estimated that only 1/3 of these projects are actually paying out as planned. However, as the successful projects are completed, the savings/improvements recouped at the end of the project should more than compensate for the initial investment loss. The innovation process seems to follow that the loss of the initial projects must take place to learn and reap the rewards from the later successful projects.

Alternative Transportation Mode(s)

The alternative modes include: marine transport, railways, or creative use of non-petroleum fuels such as natural gas and biofuels. In the last few years, marine shipment of temperature sensitive (2°C to 8°C) pharmaceuticals has been successfully conducted. This may be a viable option depending on tax benefits, delivery time requirements, and product characteristics. Further in the future the modes will include airships and drones. “By 2015, thousands of drones are expected to be flying above America” [13].

Integrating and Simplifying IT Systems

Tools that integrate information across the supply chain and technical platforms for inventory in warehouses (WMS) and within the transportation (TMS) stream are beginning to develop. Recently developed mobile applications are easing and enabling operators at key points to access or input data to feed the integrated system.

Different languages, platforms, and technologies make up the fragments of the supply chain and distribution network. One approach is a common compiler language that has the power to articulate in each individual different language from process controllers, computers, analog machines, and GPS. This includes temperature monitors that communicate data to provide a transparent, almost real-time dynamic pipeline of products, services, and information [14].

Use Shipping Containers with Improved Payload and Performance

The major components of distribution costs are weight, size, packing and assembly labor, container costs, fuel prices, and distance traveled. When applicable, the addition of the transfer cost and costs for each multiple mode should be included. New technology materials are delivering superior performance packaging and significant savings that may offset weight, size, assembly, and container costs, and reduce fuel costs. For pharmaceuticals, these packages must be “qualified” before they can be used with temperature-sensitive drugs. Although qualification often takes time (6-9 months), it has significant value.

These improved containers address the key factors influenced by weight, size, fuel price, and assembly labor [8,9].

• New technology materials reduced the external size of the shipping container and the weight per payload decreased to cut the cost of freight by one-quarter (25%). Additionally, labor is reduced due to fewer parts and easier assembly.
• A green approach is to have containers that can be reused at least 6 times, which would reduce the container portion of distribution costs by a third to half. This approach addresses the environment, reduces the overall costs, and supports all the compliance requirements for the drug and the cold chain.
• Several shipping containers are now qualified for 120 hours allowing shipments to depart from the distribution point 5 days per week versus the former 2-3 days per week, reducing overtime labor and express shipping charges.

Conclusion

The trends for this decade are towards more distribution delivery points, much growth in the number of clinical studies, and sites with higher costs to operate. The growing study loads are imposing larger clinical distribution systems, supported by several different transportation networks. The transportation networks have operating expenses that are directly dependent upon the price of fuel. This growth trend in the size of studies, the numbers of cold chain drugs, together with the increasing price of fuel and labor, are pushing costs higher. The same trend is taking place in the commercial area as well. Applying the 6 fine tuning steps generates solutions that multiply performance results.

Moreover, the most revealing are the first 2 steps—knowing where you are and deciding where you want to go. The advancement of strong AI and the exponential growth of computing capacity and speed promises to match the capability of the human mind by 2025 [2,10]. The future solutions arising from technology growth for distribution and supply chain will be staggering. The remaining steps empower pharmaceutical companies to focus their energy with more innovation and sophistication to deliver greater value, slow down rising costs, and speed up the process of bringing a new drug to market.

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, the free encyclopedia
Nearshore—a derivative of the business term, offshoring. Refers to relocation from offshore location to a location closer to USA or within USA. The complexity of offshoring stems from different languages, long distances, different time zones, and overriding communication barriers. Nearshoring doesn’t overcome all of the barriers, but the proximity allows lower costs and more flexibility to align organizations. From Wikipedia, the free encyclopedia
Offshore—describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. The economic logic is to reduce costs. From Wikipedia, the free encyclopedia
Outsource—the process of contracting out a business process, which an organization may have previously performed internally or which the company deems necessary, where the process is purchased as a service. The definition of outsourcing includes both foreign and domestic contracting. The more clear term for foreign contracting is offshoring. The opposite of outsourcing is called insourcing. From Wikipedia, the free encyclopedia
Pareto Analysis/Chart—application of the Pareto principle
Pareto Principle—(also known as the 80/20 Rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Named after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population—it is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.” There is nothing special about the number 80% mathematically. From Wikipedia, the free encyclopedia

References

1. R.H. Schueller. Peak to Peek Principle, published by Bantam; copyright Robert H. Schueller, March 1, 1990.
2. R. Goff. Factors that influence bioPharma distribution. Pharmaceutical Outsourcing™. Journal of Pharmaceutical & Biopharmaceutical Contract Services Nov/Dec 2013; 14(7): 26-31.
3. N. Basta. Pharmaceutical Commerce’s Biopharma Cold Chain Sourcebook, 4th ed., published April 16, 2013, www.pharmaceuticalcommerce.com.
4. M. Napolitano. 6 Tips for Network Modeling Success, Modern Materials Handling, July 2011, pp 42S-46S; www.mmh.com
5. J. LeTart. The 4 Building Blocks of Inventory Visibility. Logistics Viewpoints. com, a blog for Logistics, SC and 3PL Executives, Aug 7, 2012.
6. R. Goff. Workshop Clinical Trial Logistics and Design. IQPC Clinical Trial Supply & Logistics Summit, San Diego, CA, Nov 7-9, 2011.
7. Quote by Paul Evanko, Sr VP, St. Onge Company, Modern Materials Handling, July 2011, p 44S, “As labor becomes more expensive in China, then manufacturing isn’t moving back here (to the US). It will move further south in Asia into Indonesia, Malaysia, Vietnam and India.”
8. R. Goff. Approaches to offset rising fuel and distribution costs. Journal of Pharmaceutical & Biopharmaceutical Contract Services May/June 2011; 2(3): 30-35.
9. R. Goff. Sophisticated approaches to cold chain transportation for multisite global supply chain network and labs for clinical supplies. American Pharmaceutical Outsourcing Journal Nov/Dec 2006; 7(7): 44-48.
10. R. Kurzwell, pp 2-8, 259-273, addressing AI, The Singularity is Near. New York, Penguin (USA) Group, 2005; copyright Ray Kurzwell, 20059.
11. S. Banker, The New Amazon Distribution Model. Logistics Viewpoints.com, a blog for Logistics, SC and 3PL Executives, Aug 6, 2012.
12. S. Grobart. Amazon’s Robotic Future: A Work in Progress, Nov 30, 2012, Technology section, Automation; www.BloombergBusinessweek.com
13. S. Kashiwagi. Need a college major? Try drones. Courses offer entree to field. USA Today Friday, Jan 3, 2014, p 6B.
14. R. Goff. Excellence Award, COLTs—Combined Logistics and Temperature Shipping System” segmentation, IQPC Euro Cold Chain Conference, Jan 2011, Rotterdam, NL.

Ray Goff recently joined Global Supply Chain at Bayer Healthcare to globally support cold chain management. Formerly Ray held responsibilities for supply chain, distribution, logistics, and project management at several major Fortune 500 biopharmaceuticals. Ray offers ideas and approaches proven to streamline processes, improve cycle times, and reduce costs.