PRIORITY # 2 FOR STRATEGIC RECOVERY FROM COVID-19 PANDEMIC: INVENTORY MANAGEMENT

July 03, 2020

The war being waged to destroy the CORONA-19 Pandemic appears onerous and it has necessitated the establishment of priorities for attack. What is the 2nd most important priority after Supply Assurance being the first? The ability to respond to a surge in demand is largely dependent on the quantity and location of raw materials, work in process and finished goods inventory in the supply chain, and the ability to respond. It is the various modes of transportation which enable the delivery of the product to the patient in need of urgent care. On the supply side, the inventory of raw materials, and on the demand side, the finished goods inventory, have become the hotspots for problem resolution. Let us examine why the transformation of Inventory Management is the 2nd highest priority in the recovery from the apocalyptic crisis we face.

Demand has already soared for diagnostic tests for COVID-19 and key drugs related to the use of ventilators, such as anesthetics, sedatives and paralytics. Not only the unexpected surge in demand during the pandemic shocked the overall system, the decimation of air cargo and trucking capacity exacerbated the satisfaction of demand. Furthermore, changing governmental regulations across countries created severe impediments to shipment of medical supplies and APIs.

The ability and time to respond to demand is the unprecedented dimension to be considered.  The triple factors of quantity of inventory, geographical placement and the mode of delivery must drive the new optimization equation. We have always utilized the tradeoff between inventory investment and transportation cost. The company nVentec has illustrated the breakdown of inventory for the major bio-pharmaceutical companies where Abbvie carries 3 months’ supply whereas Celgene has over a year’s supply. A sacred mantra of supply chain professionals has been the maximization of inventory turns where safety stock was provided to meet 99.9% of the demand in a demand distribution with plus minus 3 Sigma variation. When a stock out causes loss of human life, the optimization thinking has to be revisited.

Source: nVentic, information@nventic.com

The pharmaceutical industry has a multi-step supply chain of manufacturers, wholesaler, and pharmacies in several channels including stand-alone retailers, grocery, and discount stores and healthcare facilities. Pharmaceutical manufacturers operate under strict regulatory oversight. As the Drug Supply Chain Security Act (DSCSA) of 2013 phases in, manufacturers will have to be able to track and trace every drug from origin to consumer. To comply, manufacturers are building the capability to identify a batch of powder from an individual supplier and trace that all the way through the process to a pill that is packaged and shipped to a pharmacy. However, major retailers and suppliers often plan in silos, not sharing demand signals that could improve inventory flow through the respective supply chains. Lack of technology and regulatory barriers have constrained coordination among business partners. Currently, pharma supply chain leaders have “limited control” over pharmacy supply chains, making it difficult for them to synchronize the end-to-end supply chain. The traditional models of Vendor Managed Inventory or Consignment Inventory or Available to Promise (ATP) planning have not been leveraged.

Logistical and Regulatory challenges are impediments to recover from a disruption. Over the past two decades, the drug supply chain has become longer, more complex and fragmented as companies have outsourced production overseas and increased the use of contract manufacturers. Typical markets are likely to respond to a shortage by increasing production, logistical and regulatory challenges, limit the ability of drug manufacturers to increase production. When companies wish to increase production, either by modifying an existing facility or building a new one, they may have to obtain approvals from many different national regulatory bodies, and/or find a new source of active pharmaceutical ingredients (APIs).

Traditionally manufacturers have relied on wholesalers to navigate regional complexities and gain access into the market.  This is just one link in a long chain of organizations involved in the distribution process which also includes pharmacies and pharmacy benefits managers (PBM). This process has led to many inefficiencies and inflated costs in the supply chain. Amazon.com’s business model of Direct-to-Consumer can help transform the supply chain of healthcare and unleash unprecedented efficiencies and patient care. Called Direct to Patient  (DtP) distribution, the approach of eCommerce has allowed patients participating in clinical trials to receive treatments at home, increasing the treatment success rates as patients are more likely to continue with the trial. DtP has streamlined the diagnostic testing process by changing where and when samples can be collected. Finally, manufacturers can deliver significant cost savings to their patients. It has drastically reduced the amount of waste attributed to the traditional distribution methods as with each handing of the baton, from wholesaler to pharmacy and beyond, the delivery time to the patient is decreased. Inventory management in a DtP model would be much more manageable but the reconfiguration of the supply chain would be Draconian. This ultimate streamlining may be inevitable in the Post-COVID-19 pandemic world.

Submitted by Devendra Mishra, Executive Director, BSMA

 

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1 Comment

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    Probably somewhere between JIC and JIT – because the optimal tradeoff between efficiency and risk is in the middle, not the extremes. That is, a return to the old JIT with very low buffers is unlikely in the foreseeable future – especially when external sourcing is global and has long lead times. But the bigger point is a likely shift towards more controlled and predictable sources, even when more expensive. And also a shift away from long-term repeat contracts with selected partners to a more “platform approach” with an opportunistically determined and changing cast of sources when possible.

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