BASES OF PHARMACEUTICAL LOGISTICS
Logistics is the management of the flow of resources between the point of origin and the point of consumption in order to meet some requirements, for example, of customers or corporations. The resources managed in logistics can include physical items, such as food, materials, equipment, liquids, and staff, as well as abstract items, such as time, information, particles, and energy. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security. The complexity of logistics can be modeled, analyzed, visualized, and optimized by dedicated simulation software. The minimization of the use of resources is a common motivation.logistics for import and export.
The prevalent view is that term logistics comes from the late 19th century: from French logistique (loger means to lodge). Others attribute a Greek origin to the word: λόγος (pronounced logos) meaning reason or speech, λογιστικοςb (prononced logistikos) meaning accountant or responsible for counting.[1]
The Oxford English Dictionary defines logistics as “the branch of military science relating to procuring, maintaining and transporting material, personnel and facilities.” However, the New Oxford American Dictionary defines logistics as “the detailed coordination of a complex operation involving many people, facilities, or supplies”, and the Oxford Dictionary on-line defines it as “the detailed organization and implementation of a complex operation”.[2] Another dictionary definition is “the time-related positioning of resources”. As such, logistics is commonly seen as a branch of engineering that creates “people systems” rather than “machine systems”.
According to the Council of Logistics Management, logistics includes the integrated planning, control, realization, and monitoring of all internal and network-wide material, part, and product flow, including the necessary information flow, industrial and trading companies along the complete value-added chain (and product life cycle) for the purpose of conforming to customer requirements.
Logistics is the process of planning, implementing, and controlling the effective and efficient flow of goods and services from the point of origin to the point of consumption.
Inbounding logistics is one of the primary processes of logistics, concentrating on purchasing and arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores. Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user.
Given the services performed by logisticians, the main fields of logistics can be broken down as follows:
Procurement logistics
Production logistics
Distribution logistics
After-sales logistics
Disposal logistics
Reverse logistics
Green logistics
Global logistics
Domestics logistics
Concierge Service
RAM logistics
Procurement logistics consists of activities such as market research, requirements planning, make-or-buy decisions, supplier management, ordering, and order controlling. The targets in procurement logistics might be contradictory: maximizing efficiency by concentrating on core competences, outsourcing while maintaining the autonomy of the company, or minimizing procurement costs while maximizing security within the supply process.
Logistics automation
Logistics automation is the application of computer software and/or automated machinery to improve the efficiency of logistics operations. Typically this refers to operations within a warehouse or distribution center, with broader tasks undertaken by supply chain management systems and enterprise resource planning systems.
Logistics automation systems can powerfully complement the facilities provided by these higher level computer systems. The focus on an individual node within a wider logistics network allows systems to be highly tailored to the requirements of that node. Logistics automation is the application of computer software and/or automated machinery to improve the efficiency of logistics operations. Typically this refers to operations within a warehouse or distribution center, with broader tasks undertaken by supply chain management systems and enterprise resource planning systems.
Logistics outsourcing
Logistics outsourcing involves a relationship between a company and an LSP (logistic service provider), which, compared with basic logistics services, has more customized offerings, encompasses a broad number of service activities, is characterized by a long-term orientation, and thus has a strategic nature.[19]
Outsourcing does not have to be complete externalization to a LSP, but can also be partial:
A single contract for supplying a specific service on occasion
Creation of a spin-off
Creation of a joint venture
Third-party logistics
Main article: Third-party logistics
Third-party logistics (3PL) involves using external organizations to execute logistics activities that have traditionally been performed within an organization itself.[20] According to this definition, third-party logistics includes any form of outsourcing of logistics activities previously performed in house. For example, if a company with its own warehousing facilities decides to employ external transportation, this would be an example of third-party logistics. Logistics is an emerging business area in many countries.
Fourth-party logistics
The concept of a fourth-party logistics (4PL) provider was first defined by Andersen Consulting (now Accenture) as an integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, build, and run comprehensive supply chain solutions. Whereas a third-party logistics (3PL) service provider targets a single function, a 4PL targets management of the entire process. Some have described a 4PL as a general contractor that manages other 3PLs, truckers, forwarders, custom house agents, and others, essentially taking responsibility of a complete process for the customer.
Emergency logistics
Emergency logistics is a term used by the logistics, supply chain, and manufacturing industries to denote specific time-critical modes of transport used to move goods or objects rapidly in the event of an emergency.[21] The reason for enlisting emergency logistics services could be a production delay or anticipated production delay, or an urgent need for specialized equipment to prevent events such as aircraft being grounded (also known as “aircraft on ground”—AOG), ships being delayed, or telecommunications failure. Emergency logistics services are typically sourced from a specialist provider.
As a profession
A logistician is a professional logistics practitioner. Professional logisticians are often certified by professional associations. One can either work in a pure logistics company, such as a shipping line, airport, or freight forwarder, or within the logistics department of a company. However, as mentioned above, logistics is a broad field, encompassing procurement, production, distribution, and disposal activities. Hence, career perspectives are broad as well. A new trend in the industry are the 4PL, or fourth-party logistics, firms, consulting companies offering logistics services.
Some universities and academic institutions train students as logisticians, offering undergraduate and postgraduate programs.
Wholesalers
As previously mentioned, a wholesaler buys pharmaceutical products from the manufacturer and sells them to hospital and retail pharmacies. In contrast to the distributors, wholesalers take hold of products ownership and resells them to pharmacies and charges a wholesale margin. Wholesalers can be categorized as full-line (selling all product lines of pharmaceutical manufacturers) or short-line (often engaging in the sale of selected product lines, such as hospital products, opthalmologicals, and so on). Furthermore, they may be multichannel wholesalers (selling to hospitals, retail chains, retail independents, and mail-order pharmacies) or short-line (covering select retail channels only).
Retail Pharmacies
Retail pharmacies belong to large pharmacy chains that span across nations or small-sized independent retail pharmacies. They are characterized by the regulatory requirement of staffing at least one board-certified professional pharmacist, while large-chain pharmacies also employ several pharmacy assistants or technicians. In contrast to distributors or wholesalers, pharmacists are healthcare professionals coming in direct contact with consumers, and thus, require an advanced professional education and continuous training. Strict regulatory requirements apply to the layout and facilities needed for a retail pharmacy. The profession is even a closed system in some countries; meaning that a pharmacy- operating license can only be transferred by a retiring pharmacist to a new one in order for the number and operating standards of that country’s pharmacies to be protected.
Hospitals
Hospital pharmacies share several common characteristics with retail pharmacies. They both require the presence of qualified pharmacists, have special storage and security facilities, and so on. Nevertheless, under the healthcare reform environment, these pharmacies do not have the same freedom when ordering and dispensing pharmaceuticals because institutional committees closely monitor their budgets. Usually there are institutional pharmaceuticals’ buying committees, which follow strict formulary criteria and cost-containment guidelines.
Dispensing Physicians
One of the dying methods of pharmaceutical dispensing around the world is physician dispensing. This method is based on the drug dispensing, and therefore profit- making, rights given by few national governments to their physicians for either historic reasons or necessity mandated by vast rural areas. Japan and China are two countries that allow physicians to dispense pharmaceuticals. Obviously, the presence of this type of pharmaceutical dispensing presents certain disadvantages, for example, the tendency of these physicians to dispense high-priced products or to overprescribe. The system may be mandated by national conditions, and, as such, it may continue to operate in some markets.
OTC DISTRIBUTION
OTC distribution is a network closely resembling ethical prescription pharmaceuticals’ distribution. But, based on the relaxed regulations concerning the sale of OTC medications, it is a much wider network, which includes food wholesalers, health food distributors, confectionery distributors, grocery stores, convenience outlets, gas stations, or health food stores (see Figure 12.6).
Whether or not the sale of OTCs is allowed outside the traditional pharmacy setting differs from country to country. Countries with strong pharmacists’ trade associations have often protected their right to exclusively market pharmaceuticals to the final consumers, arguing that eveonprescription pharmaceuticals need to be properly marketed and explained to the persons ieed.
WEB DISTRIBUTION
The expansion of the World Wide Web revolution around the globe has given rise to a new pharmaceutical dispensing method: patients receiving their medications by contacting a Web-based, or “virtual,” pharmacy and having their prescription medications shipped to their home. The number of operating virtual pharmacies is expanding quickly to meet customer needs for increased convenience, privacy, and speed of prescription filling. Some of the different drug dispensing scenarios appearing around the globe are: (1) pharmaceutical manufacturer-operated Web pharmacies; (2) medical Web sites offering information, education, prescribing, and dispensing; (3) Web pharmacies offering cutthroat drug prices; and (4) selfmedica- tion medical sites offering medical advice, computerized diagnosis of selected diseases, and pharmacy referrals.
Nevertheless, there are still several unsolved ethical aspects that need to be addressed by the relevant healthcare ethical and legislative bodies so that several potential problems are averted. For example, prescription authentication is almost impossible by a foreign-based virtual pharmacy; dispensing of unregistered products to the ordering patient’s country presents serious regulatory problems; and getting prescription pharmaceuticals without a prescription or with a virtual prescription presents problems. These are issues that need to be resolved soon by the setting of a legal framework.
Distribution Strategy
The design, implementation, and control of distribution strategy are some of the most important tasks of the overall marketing strategy. This strategy is a part of the overall logistics strategy that involves both inbound materials and products and outbound materials, parts, or finished products logistics. The outbound materials, parts, or finished products go to their customers (either the final consumers or finishing manufacturing sites) adding the final step in the manufacturing, processing, and packaging of the products).
KEY CHANNEL DECISIONS
What, then, are the main channel decisions a distribution manager is called to properly evaluate and decide upon? The five most important issues are: (1) channel intensity, (2) channel length, (3) channel integration, (4) key distribution functions, and (5) channel conflicts.
Channel intensity refers to the number of distribution intermediaries and retail outlets a manufacturer is using in order to reach the final customers, an issue that is discussed later. Channel length refers to the levels of a distributioetwork covered by any single channel, that is, whether the channel reaches the final customer or only mediates the distribution of products between the manufacturer and another intermediary (for example, a wholesaler). Channel integration is an indicator of distribution activities’ consolidation within a single player (such as pharmaceutical manufacturer). It also indicates whether or not the manufacturer is using various contractual schemes to outsource the distribution function. Recent years have witnessed the increasing vertical integration of manufacturers, namely, the acquiring of external distributioetworks and their integration into the manufacturer’s supply chain. The managed care reform and the desire of the manufacturers to “control their destiny” (or contain their costs in a fiercely competitive market) mandated such moves. Nevertheless, the little experience gathered does not overwhelmingly support such an integration, especially when outsourcing of noncore competency areas are a must for manufacturers trying to focus on innovative R&D in their therapeutic area niches.
EXTENT OF DISTRIBUTION
The extent (or breadth) of the distribution decision determines the number of wholesalers, and, ultimately, retail outlets that will be carrying the product. As far as prescription pharmaceuticals are concerned, most countries have pharmaceutical distribution laws that mandate the full and uninterrupted availability of all prescription medicines at all retail pharmacies throughout the country. Therefore, it is not up to the manufacturer to decide which retail pharmacies to use, but only to decide on the number of distributors who will supply these pharmacies. A common phenomenon is stocking as many retailers as possible with a new pharmaceutical during its launch period because this is required before the territory’s prescribers can prescribe the product to their patients. The decision to stock or have it delivered just-in-time is a critical decision for the pharmacist too, because a critical case (e.g., a life-threatening infection) cannot wait for a distribution delivery to the pharmacy and the patient’s family may decide to search for it at another location. A frequently chosen strategy is the manufacturer (or a wholesaler) contacting its collaborating retail pharmacies, informing them of the new product launch, and offering special introductory payment terms if the pharmacists stock the new medicine. The continuation of this policy depends on the prescribers’ and patients’ acceptance of the new medication, which ultimately makes the product available in more outlets and eliminates the need of special terms offered to select pharmacies.
In contrast to prescription medicines, OTC medicines are items with a low customer decision involvement and a high switch rate if a specific product is not available at the point of purchase. Therefore, they require wide availability in as many points of sales as possible, and an intensive distribution strategy is indicated. Table 13.1 shows some of the advantages and disadvantages of the various intensity distribution breadths.
SELECTING A DISTRIBUTOR
The decision to select a distributor is a critical one for the organization. It requires careful strategic planning from the organization, delicate negotiations with the potential distributor (often with current distributors fearing their profit margin erosion) and painful and time-consuming changes if a distributor has not met the company’s expectations. There are a variety of selection factors for a new distributor. These factors can be categorized as strategic or operational, or as organizational or market-, product-, and environment-related (see Figure 13.1). Strategic factors are those having to do with the desired distribution intensity, the frequency and speed of distribution, or the required level of customer satisfaction. On the other hand, market-, product-, or environment-related factors are those imposed by the intrinsic characteristics of these three forces. Organizational factors are strategy-related, mandated by the company’s intended level of service, desired customer satisfaction level, and internal resources and capabilities. These issues are very closely related to the work of marketing and product managers who have determined the required levels of customer service and satisfaction for the company’s products to gain a competitive advantage. Furthermore, the tools of situation and competitor analysis, which are both described in following chapters, can help determine the internal resources and capabilities, as well as the required KSFs in the field of distribution.
Market characteristics such as size, density, geography, clustering, urbanization, and infrastructure largely affect distribution decisions and are critical to the overall commercial success of pharmaceutical products. A variety of technological tools are
available today from third parties that can precisely describe geographical territory characteristics, monitor the progress of a distribution shipment, and provide on-line data for fast decision making.
Distribution strategy-related product characteristics include their lifesaving potential, their shelf life and storage requirements, and their packaging and distribution complexity. Obviously, lifesaving, hospital products require frequent and fast deliveries, while special storage needs require special facilities along the supply chain. Furthermore, a product’s packaging may require protective repackaging for shipment or may render standardization difficult (e.g., ability to palletize), which increases the complexity of distribution. Additionally, competitive supply chain strategies and the availability of technological tools along the distribution path are significant factors in a product’s distribution strategy or in selecting its distributors.
In conclusion, the selection of distributors should be a carefully designed process, involving a multidisciplinary team of experts—internal and external to the organization—working to optimize the distribution function and achieve higher customer satisfaction.
LOGISTICS FUNCTIONS
The company’s logistics functions involves both inbound and outbound functions. The first deals with materials and resources coming into the organization for manufacturing, processing, or finishing, and the second deals with any activity related to the handling of manufactured goods to their customers. Figure 13.2 shows the main logistics functions. The next few pages are devoted to only a brief overview of these activities.
Materials Management
Inbound logistics are involved with the management of inbound materials. It includes the planning of production needs, procurement of the required raw materials, quality assurance (adhering to strict internal standards), transportation to the manufacturing site, and salvaging or scrapping quantities unused by manufacturing. Each of these steps plays a critical role in the uninterrupted supply of high-quality products, and should be managed by pharmaceutical manufacturers effectively and efficiently.
Inventory Management
The management of the finished goods inventory is probably one of the most sensitive issues in the industry today because of accusations of creating excessive overhead costs or being responsible for costly stock-outs in times of unpredicted high demand. Nevertheless, despite the high costs involved, maintaining a sufficient inventory is essential for the following reasons: purchase economies, transportation savings, safety stock, speculative purchases, seasonal supply, maintenance of supply, production savings, and substitute supply.
The strategic decisions of defining the optimal inventory level and containing its costs are central to a company’s supply chain management. The levels of inventory are related to the product characteristics (customer type, lifesaving potential, storage requirements, expiration date) or various market characteristics (size and growth,
influencing trends, demand cyclicality and seasonality, tender bidding, retailer demands, and so on). All of these factors should be factored efficiently when estimating each product’s future demand. This process is called forecasting.
Warehousing
A host of tasks and activities are associated with product warehousing, such as receiving and storing, collecting customer orders, picking, labeling, and repackaging the ordered goods, and making them ready for physical transportation to customers.
There are several types of warehouses used by the pharmaceutical industry. They range from vertically integrated facilities to fully outsourced warehouses kept by third parties. Some types of warehouses include: (1) private: kept by sole firm; (2) public: with own, as well as other companies’ stock; (3) bonded: avoiding taxes and tariffs until product is ready to be sold; (4) field: when a firm requests receipt of goods in warehouse (i.e., to use as loan collateral), value is negotiable; and (5) contract: kept by third party. Selecting any given type depends on the company’s strategic intent, its internal resources and capabilities, and specific market conditions that exist in every national market (such as the evolutionary stage of third-party warehousing facilities, special legislation, profitability issues, and others).
Materials handling during warehousing involves the unloading and loading of product, transferring to and placing in their storage place, and transporting them within the warehouse for labeling, bar coding, and repackaging purposes. This handling can be manual or mechanized. Some of its important issues are movement, quantity, time, and space.
Repackaging involves placing product goods and product information (e.g., patient information leaflet) together into one package. It also includes special labeling of the outer packaging in country-specific manners, placement of the individual customer- ordered quantities in their shipping containers along with the accompanying shipping documents, and bar coding for easier processing. Some important issues for repackaging are the following: interior packaging (e.g., PIL, patient information material), exterior packaging, packaging materials (type, recyclability, size, variance, transportation mode, palletization), and corporate branding.
Transportation
Physical distribution, or transportation, involves the shipment of the finished and repackaged goods to customers via water, railroad, motor, and air. Powerful shipping specialists exist in almost every market. These agents are subcontracted by the manufacturer or its distributors using one of the following legal arrangements: common, contract, exempt, and private.
In addition to the integrated or mode-specific shippers, there are a variety of other transportation intermediaries, such as small-package carri¬ers, freight forwarders, brokers, and intermodal (between various modes, e.g., between water and air) marketing companies.
An important component of the shipment is the accompanying document commonly known as the bill of lading, which describes the origin of shipment, receiver’s address, and transportation contract terms. It also serves as a receipt of goods and a certificate of title of the goods.
When selecting a transportation agent, a manufacturer/distributor should pay attention to the following: (a) transportation rates, (b) minimum weight requirements, (c) loading and unloading, (d) packaging and blocking, (e) damage in transit, and (f) special services (e.g., payment collection, reverse transportation).
Customer Service
One of the most important issues in pharmaceutical distribution is the degree of customer service provided by the various supply chain members. The strategic importance of this issue is clear in view of the fiercely competitive marketplace conditions existing in major markets, as well as the need for customer satisfaction in building a sustainable competitive advantage. Table 13.2 lists some customer service variables in ethical pharmaceutical distribution.
Defining the minimum required customer service level, as well as ensuring each member of the supply chain meets that level is a challenging task for pharmaceutical manufacturers. Nevertheless, a multidisciplinary team is helpful in setting the standards, while specialized customer service personnel should evaluate and control channel member performances. The latter can be enforced by using contract term or brand leverage by the manufacturer.
References
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2. Roger Morriss, “Colonization, Conquest, and the Supply of Food and Transport: The Reorganization of Logistics Management, 1780–1795,” War in History, (July 2007), 14#3 pp 310–324,
3. Ayrault Dodge, Theodore (1995). Hannibal: A History of the Art of War Among the Carthaginians and Romans Down to the Battle of Pydna, 168 BC. Da Capo Press.
4. Joint Logistics Analysis Tool
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