Perils of non-controlled open-ended supply chain

Introduction

The Indian pharma sector is currently the 4th largest in the Asia Pacific geography, behind Japan, China and South Korea. The industry is expected to grow at an average CAGR of 14% to more than $40 Billion by 2013.(1)

The Indian pharma industry is highly fragmented, with around 20000 registered manufacturing sites and 250 pharma companies holding more than 70% of the market and the Top 10 players holding about 17%. The Majority of pharma production is with contract manufacturers or loan licensees for cost benefits.(2)

Institutional sales constitute about 18% of the pharma sales while the sales through

the regular distribution channel are about 82%. (1)

The regular distribution channel consists of about 80 to 100 thousand stockists and more than 550 thousand retailers. A typical drug manufacturer may connect with about 30 CFAs, 500 to 5000 stockists and about 200K Retailers.

The supply chain is very open with limited brand owner control over the activities within the supply chain. This presents multiple challenges to the brand owner.

Challenges

1. Product overruns at the contract manufacturer (CM):- The contract manufacturers can typically manufacture 8-10% extra drugs compared to the batch sizes agreed with the brand owner as per contract. This is referred to as the “product overrun” by the contract manufacturer. This is currently possible for the contract manufacturer since there is no systemic way for the brand owner to track the manufacturing activities at the outsourced location. The contract manufacturer gets considerably higher margins by selling this product overrun directly to the distribution channel, compared to what the brand owner

offers as a transfer price. This results in loss of direct sales for the brand owner.

2. Drug diversions by institutions:-

Institutional sales in an Indian context include sales to government hospitals, the military and private hospitals. Traditionally, the military is mandated to buy the drug stocks through tenders in quantities twice as large as the projected demand for those drugs for the following year. Pharma companies are required to sell the drugs to institutions at discounted prices. The surplus available at the institutions is at times pushed to regular channels by leveraging the price discounts. This results in lost sales for the brand owner’s product through the regular distribution channel. This loss is estimated at about 20-30% of the institutional sales.

3. Drug diversions within distribution channel:- Pharma companies run geography-focused promotional offers as part of their marketing strategies, estimated at about 5-7% of the sales in the regular distribution channel. The promotional products are routed through the regular distribution channel to the retailers/patients. Within the distribution channel, there is no mechanism for the brand owner to ensure that these promotional products reach the intended parties. The stockists can claim the discounts for routing these products to the intended parties and divert them to other geographies, where the product may be priced higher intentionally by the brand owner. This results in a payout to stockists against false claims, lost sales at higher price in unintended geographies and ineffective promotional strategies.

4. Recirculation of expired products:- Ideally, expired drugs are supposed to be routed back to the drug destruction facilities

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