The-Future-of-Pharma-and-Medical-Supply-Chains-in-the ...

Future of Supply Chain in U.S. Pharma and Medical Devices - DHL Consulting – October 2018

TABLE

OF CONTENTS

PREFACE 3

MAJOR MARKET TRENDS 4

SUPPLY CHAINS OF THE FUTURE 7

THE FUTURE IS NOW 9

CONTACTS 11

REFERENCES 11

03 04

09 11

07

12


PREFACE

US healthcare spend grew 4.3% per year between

2010 and 2017, and is expected to grow 5.5% per

year between 2017 and 20251. Capturing this growth

represents an attractive opportunity for

pharmaceutical and medical devices (PMD)

companies, although this might prove to be more

challenging than expected.

Major market trends are disrupting the current PMD

industry:

Consumer needs and preferences are changing,

compelling companies in the industry to adapt both

their current product portfolios and the commercial

channels they use to interact with consumers.

Structural changes are reshaping the industry.

Increased scrutiny and on-going industry

consolidation and disintermediation are compelling

PMD companies to reengineer processes to become

more efficient and affordable.

Fast-paced technological evolution offers

unprecedented opportunities to provide a set of new

and differentiated services, and to increase

operations efficiency.

To remain relevant in this new competitive

landscape, PMD companies need to explore

innovative new ways to meet the increasing service

expectations of their customers and achieve the

profitability goals of their stakeholders. New

commercial channels and personalized medication

are among the avenues being pursued. But the

current supply chains of some PMD companies were

not designed and so are unprepared for these new

conditions.

In this context, supply chain transformation emerges

not merely as an attractive opportunity but rather as

a necessity for PMD companies wanting to adapt

their commercial and supply chain processes to the

new environment.

In this paper, we discuss the key characteristics of

supply chains of the future and explore how PMD

companies can leverage these characteristics to win

in the marketplace.

“The decision is not about redesigning the supply chain or not, but about when and how to do it”


MAJOR MARKET TRENDS

CHANGING CONSUMER BEHAVIOR

Aging demographic drives healthcare spend and portfolio shift

It is projected that the group aged 65 and over will

reach 83.7 million by 2050 in the US, almost

doubling the 2012 level of 43.1 million. An aging

demographic has two key impacts:

1) Increasing healthcare spend: the 65+ group

spends 3-5 times more on healthcare services

compared to younger generations2.

2) Product portfolio changes: with the growing

number of older patients and due to clinical

advances, focus is moving from treating fatal

diseases to treating chronic conditions; this means

an inevitable shift in healthcare companies’

portfolios. In addition, as the elderly are less mobile,

more in-home treatments are required.

More educated and involved consumers drive industry focus towards consumer centricity

Availability of information has made consumers

more educated, seeking a greater role in their own

care (e.g., self-medication). In 2016, 80% of internet

users in the US searched for health-related topics

online3. Information asymmetries between

physicians and patients are narrowing, and there are

more opportunities for patients to influence

treatment decisions. Furthermore, nowadays

consumers are more willing to collaborate with

physicians by sharing personal information in order

to receive more tailored products, services, and

insights about their conditions.

In response to growing consumer awareness and

involvement, the healthcare industry is offering

personalized medicine solutions and putting more

emphasis on addressing the needs of each patient.

Emerging direct-to-consumer distribution channels: ecommerce and home delivery

Although the field of medical ecommerce business

has been largely untouched, this will change soon.

With both Amazon and Jet tapping into online

medical products distribution and the home delivery

market4, medical companies face growing pressure

to come up with strategies to expand beyond

traditional distribution channels (e.g., physicians,

hospitals, pharmacies). While this trend toward

online sales implies challenges such as adjusting the

existing supply chain and overcoming regulatory

hurdles, it also comes with invigorating

opportunities for PMD companies to move one or

more steps closer to consumers by cutting out

intermediaries (disintermediation).

The forecast is for online health and personal care

sales volumes to increase at a much faster rate than

traditional drug store sales. The online health and

personal care market is expected to grow at a CAGR

of 13% between 2015 and 2020, reaching nearly $40

billion by 20255.

EVOLVING INDUSTRY STRUCTURE

Higher spend increases regulation scrutiny

The fact that prescription drug spend per capita in

the US is more than in any other high-income

country5 has put substantial pressure on the US

healthcare market and its regulators.


In 2017, more than 170 drug prescription laws were

passed6. In the same year, the US Food and Drug

Administration (FDA) reorganized its structure,

increased oversight of healthcare industry players

(e.g., drug manufacturers7, compounders8), and

enabled closer federal and state collaboration.

The major tax reforms passed by the US government

of 2017 are expected to partially alleviate some of

the pressure faced by PMD companies. Among all of

these reforms, two are noteworthy. First, the

corporate tax rate was reduced from 35% to 21%.

This tax reduction is expected to help US PMD

companies to become more competitive both

domestically and internationally. Second, a new

requirement was introduced for US-based

multinational companies to pay taxes on

accumulated offshore earnings9. This incentivizes US

PMD companies to reinvest worldwide profits

domestically.

Stakeholders push for value-based pricing

Value-based pricing in life sciences refers to tying

the payment for a medicine to its value rather than

to its volume. This concept aims to create a “fair”

price for medicines and push pharmaceutical

companies to sustain their competitive advantages

beyond product price.

Many industry stakeholders are advocating for the

adoption of value-based pricing. For example, the

US Centers for Medicare and Medical Services has

declared the goal of achieving 90% of all Medicare

fee-for-service payments tied to quality or value by

the end of 201810. On the payers’ side, large

companies (e.g., Aetna, Cigna, Humana,

UnitedHealthcare, etc.) are already signing value-

based drug pricing contracts with drug

manufacturers11. It should be noted that 74% of

patients are interested in value-based drug pricing

but only 13% of drug companies are working or

plan to work on this area12.

Industry consolidation and disintermediation intensify cost pressure

Continuous industry consolidation and

disintermediation through mergers and acquisitions

(M&As) across the PMD industry have been driving

efficiency and cost synergies for all players involved.

After three years of unprecedented M&A activity in

life sciences ($237 billion in 2014, $576 billion in

2015, and $278 billion in 2016), there was a slow-

down during 2017 ($129 billion)13 but analysts are

predicting a recovery of M&A activity in the sector

during 201814.

Similarly, a survey for healthcare executives, clinical

leaders, and clinicians in organizations directly involved in care delivery shows that 81% of

participants expect mergers to continue disrupting

the industry over the next three years15.

Furthermore, M&A activity in 2017 covered many life

sciences sub-sectors, including both pharmaceuticals

(e.g. CVS Health and Aetna) and medical devices

(e.g. Stryker Corporation and Entellus Medical), as

well as other sub-sectors such as services,

therapeutics, and nutrition.

UNPRECEDENTED TECHNOLOGY DISRUPTION

Digitalization deepens connectivity and increases visibility

Digital technologies have dramatically evolved over

recent years. On the one hand, advances such as the

Internet of Things (IoT), mobile devices, and

wearables have increased data access for PMD

companies (e.g., quantity, quality, granularity),

enabling these organizations to enhance visibility

and the consumer experience (e.g., customization).

The global market for life sciences and healthcare

IoT is predicted to increase from $520 billion to

$1.335 trillion between 2014 and 202016 (e.g.,

automatic diabetes care re-ordering, implants).

On the other hand, technologies such as cloud

computing and blockchain are significantly

improving data processing and management,

particularly in terms of speed and security. For

example, the worldwide healthcare blockchain

adoption rate is expected to grow from 50% to 95%

between 2017 and 202517 (e.g., counterfeit track-

and-trace systems, smart contracts).


Advanced data analytics brings real-time insight

Life sciences companies, including PMDs, are

embracing the use of multi-variable regressions,

predictive modeling, data visualization, and scenario

analysis leveraging existing data to reveal better

insights and enhance data-driven decision making.

In this regard, the healthcare analytics market is

expected to expand at a compound annual growth

rate of 15.8% between 2016 and 2022, reaching a

total of $14.9 billion globally18.

Automation and robotics drive zero defects and

improve cost efficiency

The concept of automation is not new in the PMD

industry, although current cutting-edge innovations,

especially in the robotics field, are creating

opportunities for companies to achieve previously

unseen levels of quality, speed, and reliability.

Some of the technologies that are starting to be

utilized in the industry are machine learning,

collaborative robots, autonomous guided vehicles

(AGVs), unmanned aerial vehicles (UAVs), additive

manufacturing, 3D printing, and e-fulfillment.

For example, between 2012 and 2016, the number

of pharmaceutical and life sciences robots shipped in

North America increased at a compound annual

growth rate of 21%19.


SUPPLY CHAINS OF THE FUTURE

PRESSURES ON TRADITIONAL SUPPLY CHAINS

Current market trends have created pressures that

simultaneously impact multiple nodes of the

supply chain, such as increased expectations for

customization and visibility, augmented scrutiny

and regulations, and higher complexity of last-mile

delivery.

In line with these pressures, PMD companies are

exploring new channels to get closer to their

customers in an attempt to improve their ability to

predict customer behavior and to provide better

targeted products and services.

In addition, external stakeholders (e.g., customers,

regulators) are holding traditional supply chains to

higher standards of speed, efficiency, and accuracy.

Traditional supply chains were not designed and

are unprepared to handle these new standards.

SUPPLY CHAINS OF THE FUTURE Traditional PMD supply chains are linear, with

information flowing in a structured manner from

one step to the next. However, to succeed in this

new environment, PMD companies must transform

the way their supply chains operate; they need to

move towards a network structure that

interconnects internal functions and external

stakeholders.

This new structure is designed to facilitate

collaboration and accelerate the information flow

across the network. Yet, transforming the supply

chain involves more than reengineering a set of

processes or changing the organizational structure:

it requires PMD companies to think differently

about the supply chain, embedding it as integral

part of the business strategy and of multi-

functional decision making.

There are four key characteristics of a PMD

company’s supply chain of the future: agile,

connected, intelligent, and automated. Although

each characteristic’s individual value is relatively

marginal, all of them together create strong

competitive advantages within a supply chain.

Traditional Supply Chain in Pharma and Medical Devices

New Market Pressures (non-exhaustive)

• More high-value product

• More tailored / customized products

• Increased scrutiny

• Shorter shelf-

life

• Geography-

specific

regulations

• e-Commerce unit-picking

• Fewer end-points but more shipments

• Consolida-tion

• Increased visibility and traceability

• More specialty clinics

• More direct-to-consumer

• More educated consumers

• Pricing pressure

Hospitals

and clinics

Pharmacies

Patients

Inbound to

Country

Overseas

Manufacturing

ReturnLogistics

Domestic

Manufacturing

Distribution

Center

Full-line

Wholesaler

Supply Chain of the Future in Pharma and Medical Devices

Research &

DevelopmentCustomers

SuppliersFull-line

Wholesalers

Manufacturing Logistics

Supply Chain

of the

Future in PMD

Internal Function External Stakeholder


AGILE

An agile supply chain requires a governance

structure and processes that allow for nimble

adaption to always-changing demand fluctuations,

driven by market trends, consumer preferences, and

new channels (e.g., ecommerce), and for responding

to unforeseen events.

At the same time, given consumer demand for

customization and geography-specific regulations,

companies need to design supply chains that are

able to adjust the product in different stages (e.g.,

postponement), producing smaller batches, and

providing shorter lead times.

Given the fast pace of change in the competitive

landscape as well as industry consolidation, PMD

companies need to design a

supply chain that can be

quickly scaled or integrated

during M&A activity.

CONNECTED

A connected supply chain

integrates PMD companies

internally (processes,

departments, regions,

business units, etc.) and

externally (suppliers,

distributors, insurers, hospitals, consumers, etc.),

creating an ecosystem that enables real-time data

collection and enhances visibility across the end-to-

end supply chain (e.g., remote patient monitoring).

All members of the supply chain need to closely

collaborate and develop trust-based relationships to

achieve an open information flow that will increase

traceability, control, and data availability.

To succeed in this area, companies need to put in

place data harmonization processes capable of

integrating data from different sources, increasing

the frequency, quality, and granularity of

information.

INTELLIGENT

An intelligent supply chain leverages available

information to uncover more and better insights,

and to improve data-driven decision making across

the end-to-end supply chain.

PMD companies need to implement key

performance indicators (KPIs), data visualization

tools, and management reports to transform large

amounts of data into summarized relevant

information, and to simplify analysis through

graphical representations.

Furthermore, the supply chain of the future needs to

leverage advanced analytics tools to predict or

identify early any changing conditions (e.g., health

alerts) and to simulate the outcomes of alternative

scenarios (e.g., what-if analyses for risk

management).

AUTOMATED

An automated supply chain

optimizes the allocation of work

between humans and machines to

gain operational efficiency, increase

service levels, and reduce cost.

Manual and repetitive tasks (e.g.,

planning, coordination, regulatory

compliance) need to be shifted

away from supply chain professionals, enabling

them to focus on value-adding activities to drive the

business (e.g., achieving growth and service-level

targets).

Utilization of collaborative robots needs to be

combined with other technologies like machine

learning algorithms and artificial intelligence to

leverage data generation to create further

automated process optimization (e.g., order-picking

robots).

Supply Chain of

the

Future in PMD


THE FUTURE IS NOW

Change can be seen as a threat to the way work

is currently done, especially when things are

going well. Change can trigger fear and

resistance in an organization; however, change

can also create valuable opportunities to rethink

strategy and improve operations.

Changes in consumer behavior, technology

evolution, and cost pressures have been

disrupting the PMD industry for some time now.

Therefore, the decision is not whether to

redesign the supply chain but instead when and

how to do it.

Proactively building a supply chain of the future

is critical to leading change in the industry rather

than allowing competitors or even new PMD

incumbents to seize this lead.

However, trying to achieve a complete

transformation of the supply chain within a short

period of time can be very risky, as well as

demanding considerable effort and expense.

Must-do tasks for transforming the supply chain:

1. Align supply chain and business strategy

2. Align supply chain operating model to strategy

3. Identify opportunities and define strategy for the B2C and B2B ecommerce channel

4. Adapt physical setup before network collapses

5. Create end-to-end supply chain transparency

6. Use data, instead of instinct or history, to make decisions

7. Monitor and control to secure reliability

8. Invest smartly and prioritize short-term, low-risk, high-impact opportunities

9. Expect benefit realization only in the long term if investing in advanced automation

10. Identify the best ecosystem of partners – you can’t do it alone!

In the context of competition and risk, a phased

and structured approach may be the best way to

begin supply chain transformation. Companies

should focus first on short-term, low-risk

initiatives, and plan to tackle later any long-term,

high-risk bets. In addition, PMD companies need

to develop a supply chain strategy that considers

the whole transformation effort.

SHORT-TERM

The first thing that PMD companies should do is

reassess their corporate and supply chain

strategies, making sure these account for new

market conditions and quick-win opportunities.

They should define one or two key priorities

(e.g., improve connectivity and agility).

Once the supply chain strategy and priority areas

are clearly defined, companies can start small by

adopting some new technologies within a single

function. Alternatively, they can begin to

optimize the logistics network by using one

region as a pilot, and then use this to convince

stakeholders to apply this blueprint for further

growth.

MEDIUM-TERM In the medium term, PMD companies should

focus on defining 2- to 3-year development plans

and execution roadmaps for capabilities within

the previously selected strategic priorities (e.g.,

lean supply chain design and warehouse

optimization).

Plans should be aligned with the previously

defined overall business and supply chain

strategies, and execution roadmaps should cover

multiple functions.

LONG-TERM Looking further into the future, PMD companies

should plan to roll out execution roadmaps in

step-by-step phases defined by geographies,

technologies, or functions.

Agile project management (e.g., Scrum),

execution monitoring, and activities to measure

benefits realization are essential in the long term

to secure successful implementation.

SUPPLY CHAIN OF THE FUTURE INITIATIVES (NON-EXHAUSTIVE)

Agile Connected Intelligent Automated

Now

Network Design

SC Visualization /

Orchestration

Platform

SC alignment

with business

strategy

Digitalization

strategy

e-Commerce

strategy

SC

network

design

Warehouse

optimizatio

n

Inventory

optimization Predictive

routing

RPA for

repetitive

processes

Machine learning-

based demand

forecasting

Transpor-

tation

optimization

Predictive

shipment

Lean SC

design

Inventory auto-

replenishment

Warehousing

automation

Blockchain-based

end-to-end

transparency and

serialization

Augmented

reality for

warehousing

Analytical risk-

management

Self-guided

vehicles

M&A and post-

merger integration

strategy

CONTACT US For more information, please contact:

Joel Rambaldini Associate Partner

DHL Consulting

[email protected]

Joel is an associate partner in DHL Consulting and has more than 9 years of experience in supply chain

consulting (over 35 engagements) including 4 years managing projects in life science, pharmaceuticals,

and biologics supply chains. He has led engagements in Americas, Europe, and the Middle East

focusing on topics such as strategic network design and process reengineering.

Cesar Fernandez Giove Project Manager

DHL Consulting

[email protected]

Cesar is a project manager in DHL Consulting and has more than 10 years of experience improving

business performance through data-driven decision making in world-leading companies across several

industries such as healthcare, consumer packaged products, and industrial products. His areas of

expertise are business strategy, pricing and profitability management, and business case development.

Acknowledgements The authors would like to thank Matthias Vollmert, Han Chen, Andrzej Skrodzki, Jason Adriaenssens,

Yizhou Jiang and Afra Morris of DHL Consulting for their contributions to the preparation of this publication.

mailto:[email protected]

mailto:[email protected]

REFERENCES

1 U.S. Centers for Medicare and Medicaid Services (CMS). https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html

2 U.S. Census Bureau. https://www.census.gov/prod/2014pubs/p25-1140.pdf

3 NBC News. http://www.nbcnews.com/id/3077086/t/more-people-search-health-online/#.Wn3tBZWouUk

4 CNBC. https://www.cnbc.com/2017/05/16/amazon-selling-drugs-pharamaceuticals.html

5 The Commonwealth Fund. http://www.commonwealthfund.org/publications/issue-briefs/2017/oct/prescription-drug-costs-us-outlier

6 National Conference of State Legislatures. http://www.ncsl.org/research/health/prescription-drug-statenet-database.aspx

7 U.S. Food and Drug Administration. https://blogs.fda.gov/fdavoice/index.php/2017/08/new-steps-to-strengthen-fdas-inspection-and-oversight-of-

drug-manufacturing/

8 U.S. Food and Drug Administration. https://www.fda.gov/NewsEvents/Newsroom/FDAInBrief/ucm592610.htm

9 The Wall Street Journal. http://deloitte.wsj.com/cfo/2017/12/21/tax-reforms-likely-impact-on-life-sciences-and-health-care/

10 Forbes. https://www.forbes.com/sites/brucejapsen/2015/01/26/medicares-bolt-from-fee-for-service-means-50-percent-value-based-pay-by-

2018/#6cd0577e669d

11 Healthcare Dive. https://www.healthcaredive.com/news/how-payers-are-tackling-value-based-drug-pricing/429015/

12 BDO. https://www.bdo.com/blogs/healthcare/january-2018/consumers,-healthcare-orgs-unaligned-on-pricing

13 Statista. https://www.statista.com/statistics/331801/total-value-of-merger-and-acquisitions-in-us-healthcare-and-life-sciences/

14 Bloomberg. https://www.bloomberg.com/news/articles/2017-12-22/analysts-cross-fingers-for-2018-return-of-biopharma-mega-mergers

15 BDO. https://www.bdo.com/blogs/healthcare/january-2018/consumers,-healthcare-orgs-unaligned-on-pricing

16 Business Insider. http://www.businessinsider.com/e-commerce-disrupting-health-and-personal-care-market-2015-4

17 Statista. https://www.statista.com/statistics/759208/healthcare-blockchain-adoption-rate-in-health-apps-worldwide/

18 BCC Research. https://www.bccresearch.com/market-research/healthcare/healthcare-analytics-technologies-markets-report-hlc187b.html

19 Recode. https://www.recode.net/2017/4/3/15123006/robots-sold-america-growth-300-percent-jobs-automation

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