Inside This Issue - Opinion
Outside U.S., Rx supply chain is another world
June 2nd, 2014
Viewed from an international perspective, U.S. wholesale drug distribution is a model to be envied.
While our nation’s wholesale distributors deserve much credit, they function by connecting product delivery to retail, mail order and clinical operators that deserve as much credit for the efficiency as do the wholesalers themselves.
When forward buy profits crashed along with declining price inflation some years ago, wholesale drug distributors, motivated by sheer survival, reinvented their business model to shift distribution costs to manufacturers. Other adjustments and changes created a new business model. Distribution fees were shifted to manufacturers, replacing some of the margin charged to retail and clinical end-users. Effectively, wholesale distribution costs were built into manufacturers’ products costs.
Just-in-time inventory powered by technology links created negative cost-value inventories at the wholesale level. Tight payment terms to wholesalers from end-users combined with liberal payment terms by manufacturers from wholesalers contributed to negative value inventories. For wholesalers, inventory carrying costs effectively declined to zero if not even a minus value. Capital was freed up to be used for other purposes.
For an investor in either privately owned or publicly traded drug and health and beauty aids wholesalers, the wholesale business model became more an asset management play than a distribution play. Efficient electronic links among and between manufacturers, wholesalers, retailers, mail order entities and clinical operators enabled near-perfect in-stock conditions. A product ordered became a product allocated to an order with an allocation advice notice sent electronically to the end-user. Thus, product delivery could be counted on to be at a user location by a particular time on a particular day.
Product not in stock became, almost always, a problem at the manufacturing level. Only when a product price level had descended to a commodity level that had pushed out all but the most determined suppliers did the model experience compromises. Product shortages in the supply chain could almost always be traced to the manufacturers’ inability to supply. Such is the case today.
Contrast this near perfection of U.S. wholesale drug distribution with what exists in other countries and on other continents.
Not long ago this writer had a lengthy conversation with the chairman of one of Europe’s largest wholesale drug distributors. A question being pursued was why retail community pharmacies in one of Europe’s largest countries were married to six deliveries per day. More to the point, why would a wholesale distributor bear the obvious cost burden of multiple daily deliveries? The answer was a stunner: “Because they are happy to pay for it.”
Implementing available efficiency-producing technologies was a thought foreign to the wholesaler and the retail community pharmacies being served. It must be noted that this particular European country, like others in Western Europe, prohibits single-owner entities from owning more than three pharmacies. In effect, chain pharmacy companies cannot exist. Multiple daily wholesale deliveries do not exist in European countries that allow chains to exist. Chain pharmacies in most developed countries insist on supply chain efficiencies.
In India, a manufacturer’s product first moves to a consolidator and forwarder, then to a wholesaler, then to a stockiest and then to a sub-stockiest, each time passing through the hands of a compensated business entity. A serious attempt by this writer and a client to disrupt the multiple layers of bureaucratic inefficiency met with the full wrath of the system’s political chain of protection. It failed.
Touring a prominent drug wholesaler in a major city in India was a unique experience. The wholesale facility was a montage of several homes that had been connected together, with multiple rooms on multiple levels. Pfizer products were stocked in one room, GlaxoSmithKline products in another, Ranbaxy in another and so on. Was there an electronic form of inventory control? Not one that could be rationally explained or demonstrated to function. And this was only three years ago.
On the Island of Trinidad in the Caribbean drug wholesale in-stock conditions are, to be kind, haphazard at best. Consider that everything in distribution on the island either flies or floats in. Thus, lead times from order to receipt of products is extended, causing the wholesale function to react poorly to seasonal or other normal sales pattern disruptions.
Venezuela is another story. The Chavez — now, Maduro — government, in power for some 14 years, has effectivey disrupted the normal flow of goods of any kind. Foreign suppliers do not trust the Venezuelan currency. They insist on being paid in U.S. dollars, a commodity in extremely short supply due to governmental controls. Shortages of food and drug products exist daily throughout the country.
The conclusion that U.S. drug wholesale suppliers are the envy of the world is not speculation. It is real.
ROBERT COOPMAN is president of Robert Coopman Consultants, based in San Antonio. He can be contacted at email@example.com.