Should You Outsource Your Pharma Supply Chain?

By Ed Miseta, Chief Editor, Clinical Leader

Have you thought about taking the bold step of outsourcing some or all of your pharma supply chain? If so, you won’t be the first company to consider it. When I visited the UPS Worldport facility in Louisville last fall, I had the opportunity to tour the company’s healthcare logistics facility, which houses products for more than 120 pharmaceutical clients. With over 500,000 square feet of storage space, cages with high-level security features, and freezers with temperatures as low as -20°C, the facility is suited to meet the needs of pharmaceutical companies. But is outsourcing this function the best option?

I have always been a big believer in absolute and comparative advantage, the economic theories that state everyone should perform those functions they can manage better or more efficiently than others. If the advantage for pharma companies is in discovering and developing new molecules, then why not do that, and leave supply chain issues to the experts?

With the pressures faced by pharma companies today, improving efficiency and managing cost remain high priorities. Finding a scalable supply chain solution that is right for your company, along with qualified personnel to handle it, can be a challenge. As the globalization of drug development continues to be a trend for sponsors, and as security and regulatory issues complicate the supply chain, more firms may be looking to hand off the function altogether.

Cost Up, Service Down?

Companies have several concerns about outsourcing their logistics, with one of the biggest being increased costs. That may be an incorrect assumption. According to the report 2014 Third-Party Logistics Study: The State of Logistics Outsourcing, outsourcing will cause:

• logistics costs to decrease by 11%
• inventory costs to fall by 6%, and
• logistics fixed assets to be reduced by 23%

There will be a cost involved in having someone else do the work for you, but those costs will be offset by savings in other areas.

Another misconception is that service levels will fall (and customer complaints rise) if companies outsource. However, a report by C.H. Robinson notes that may be the case if you outsource and do not have open dialogues with your provider. But if companies collaborate with their outsourcing provider, customers will benefit from the best practices that both companies bring to the relationship. In some instances, the provider’s processes and technology may do a better job of serving customers. Outsourcing does not mean your supply chain issues will go away, but working with a third-party provider will allow sponsors and providers to work together to configure solutions that will alleviate problems.

John Menna, vice president of global strategy, healthcare logistics, UPS

John Menna, UPS vice president of global strategy, healthcare logistics, believes outsourcing has been a game-changer for many pharma and biotech companies, allowing them to reduce costs, increase operational efficiencies, and produce better outcomes for their organizations. He has been told by clients that outsourcing logistics has resulted in savings of around 15 percent of their total logistics costs.  

Despite the evidence showing cost savings and efficiencies that can be accrued, there are still many companies reluctant to give up that control, going so far as to state that logistics is a core competency for the company. But that scenario seems to be slowly changing.

“There has certainly been an increased interest in outsourcing in recent years,” notes Menna. “When the industry was putting out blockbuster drugs and profit margins were high, many were not concerned about saving 15 percent on their logistics costs. But when margins got squeezed, profits dipped, lower reimbursement costs became a reality, and the patent cliff struck many companies, those factors had companies scrambling for ways to reduce cost. This created an increased interest in examining whether the supply chain was an area where savings could be realized.”

Regulations and Security are Concerns

Ask any supply chain executive what keeps them up at night and they will likely tell you regulation and consolidation (mergers and acquisitions). The regulatory environment is also one of the main factors that will cause executives to consider outsourcing their supply chain altogether. Menna notes ever-changing regulations can often cause sponsors to seek professionals with expertise in those areas. But the regulations can be both a threat and an opportunity for sponsors, since the companies that can find a solution to those regulatory issues are going to win in the marketplace. Issues with temperature-sensitivity and high security are not easy for any sponsor company to overcome on their own.

“If you are selling medications in 150 countries and the regulations in those countries are constantly changing, it can be very difficult for any company to keep track of that,” states Menna. “It has always been a major pain point for pharma. If you are just selling in the U.S., keeping track of new regulations is doable. If you expand into Europe, it becomes more difficult. When you start to get into additional markets, that’s when many companies will suddenly find themselves in trouble.”

The shift to increased biologics production is creating greater temperature-sensitive requirements for shipping, which has resulted in UPS making larger investments in its own internal capabilities. The company is also working with industry bodies around the world, crafting solutions to meet new regulations and helping to shape those regulations so they are fair and do not overburden the industry with undue cost.

Whether a pharma company is managing the supply chain itself or outsourcing to a third-party provider, there are going to be security risks. To manage the risk, sponsors must examine different measures that can be put in place to protect and monitor shipments, and maintain close vigilance over them. Two categories of protection are processes/procedures and technology. Processes and procedures might involve performing tighter driver security screenings and background checks, as well as having adequate rules in place regarding the hand-off of a truck from one driver to another. The technology that can be used to track pharma shipments is ever-changing, but will help companies monitor shipments, recognize if a problem is taking place, and be able to intervene quickly to counteract potential threats. Menna notes UPS has security personnel deeply embedded throughout the logistics chain that most people would not see or recognize.  

Changes Drive New Thinking

Disruption in the healthcare industry, including mergers and acquisitions, specialization, therapeutic and product spin-offs, and convergence are blurring the lines between who is really a manufacturer, wholesaler, distributor, and retailer. A myriad of companies are now getting involved in various segments of the supply chain, causing life science executives to rethink their strategy.

“There are many different things converging and becoming much more complex,” says Menna. “For that reason many companies are finding it easier to just outsource the entire process. Many sponsors are also looking for growth in new markets. When they get into new countries and new markets, they need to understand how their supply chains will be affected, and whether they want to purchase the assets and capabilities or hire someone to do it.”

One challenge companies will have to tackle has to do with growth ahead of demand. Companies must decide how much infrastructure will have to be built in new and emerging markets ahead of real demand by its customers. They will also have to decide on the proper timing of those investments. One bad guess could cost the company millions.

“This is one area where it certainly pays to outsource,” says Menna. “These decisions have to be very smart and strategic. Throw in some amount of political risk, and it can be quite a challenge. Since logistics companies are already making decisions about when and where to build in new markets, all based on input from customers, they can be far more experienced in making these decisions.”