Five years ago, large life sciences and pharmaceutical manufacturers typically built big, dedicated warehouse facilities to store their products before shipping them to customers. Very few outsourced distribution operations to third-party logistics (3PL) partners.

Times have changed. That is the conclusion drawn from an independent survey of large manufacturers recently commissioned by Exel and sister organization, DHL Supply Chain.

Global life sciences and pharmaceutical manufacturers doing business in the Americas region are increasingly outsourcing all or some of their supply chains. Global and country-specific factors are influencing this decision, with the net effect of driving these companies to seek greater supply chain flexibility, expertise and cost efficiencies, in that order.

Supply chain managers interviewed were consistent in believing the solution that will allow them to achieve these goals is outsourcing all or part of the supply chain. Clearly there are good reasons why, according to the survey, 10 of the top 20 global pharmaceutical manufacturers have begun outsourcing all or part of their warehousing and transportation operations. Following are the top three that stood out in the survey.
 
1. Multiple global challenges have increased the value of the supply chain flexibility that outsourcing provides.

Cost pressures, global competition, market consolidation, increasing regulatory requirements, product security concerns and channel pressures have dramatically increased awareness of the need for flexibility among supply chain managers of the largest manufacturers. Flexibility was a priority for many, and they believe they have achieved that by selecting global 3PLs with more facilities and resources than they had in-house. This translates into the flexibility to expand or contract capacity, change locations, product mix, product storage and handling, and customer mix.   

2. Regulatory compliance and local conditions require a team of experts that manufacturers typically cannot support in-house.

As global competition increases, the need to focus scarce resources on core capabilities and leverage the expertise of others intensifies. In switching to outsourcing, manufacturers acquire peace of mind from best-in-class technology platforms, security infrastructures, warehouse operating procedures, regulatory compliance, and disaster recovery capabilities. In addition, these improved platforms can enable improvements in both service levels and costs, often facilitated by better reporting and analytics.

3. Outsourcing yields greater supply chain cost efficiencies, helping offset margin pressures.

Life sciences manufacturers shared how margin pressures were driving organizational mandates for cost reductions in commercial operations. When supply chain managers examined their operations, they reported finding a range of inefficiencies and relatively high cost structures driven by underutilized facilities, high labor costs and expensive fixed assets. Manufacturers that have outsourced all or part of the supply chain have reduced capital requirements for facilities and equipment, as well as labor costs.

Factors Influencing Supply Chain Dynamics in Key Americas Markets

Shifting the focus to supply chain dynamics in the U.S., Canada, Mexico and Brazil, key local factors in these important markets highlight why supply chain flexibility, expertise and cost efficiency are critical needs. They also demonstrate why many of the organizations we interviewed are looking to 3PLs to help them navigate the local terrain.

The U.S. market — the largest for pharmaceutical manufacturers — showcases the impact of major trends in pharmaceutical markets: the growth of generics, high-cost, specialty and biopharmaceuticals, personalized medicines, and the increasing range of associated patient care and physician office services. For supply chain managers, these major trends translate into a need for greater flexibility to support more fragmented supply chains, increased specialty product handling requirements, and smaller, more frequent shipments. In distribution operations, these changes demand fast, accurate warehousing, fulfillment and transportation capabilities.

In Canada, low population density increases the percentage of small shipments, and hence the proportion of operating costs spent on distribution. One large manufacturer reported that it is consolidating operations across different life sciences business units to increase average shipment size.

The geography often dictates multi-modal transportation to deliver to local distributors serving remote regions. From a warehousing perspective, sharing distribution locations and modes through 3PL-managed supply chains can offer lower costs and improved coverage.  

The life sciences market in Mexico has seen significant growth in the last decade, with growing demand for medical devices, and over-the-counter and generic pharmaceuticals. Ongoing government efforts to protect intellectual property, as well as the end of a requirement to operate local manufacturing, have increased the confidence of international manufacturers entering the market. This is intensifying competition in a market previously dominated by domestic manufacturers, and driving increased attention on cost reduction in the supply chain. A number of manufacturers interviewed believe that the improved supply chain performance they achieve with outsourcing will be a useful defense in the Mexican market against this global competition.

For international manufacturers, dealing with legal and regulatory delays and complexities can be overwhelming in this market. Some manufacturers have found that they enjoy fewer, shorter licensing delays when using 3PLs that are familiar with local regulatory bodies. Crime is also still a concern in Mexico, and the need for a comprehensive security approach is a well-understood cost of protecting expensive products both in warehouses and in transit.

All these factors have led not only to international manufacturers establishing local operations, but also the largest domestic manufacturers evaluating 3PL partners for warehousing and transportation operations.

Brazil is the largest Latin American healthcare market and is experiencing strong economic growth. Like Mexico, the Brazilian government is trying to balance the population’s needs for low cost medicines with the desire to make available the full range of sophisticated medications offered by international manufacturers. This is driving growth in generics, and branded manufacturers are attracted by the size of the market and increasing prosperity as well. Significant intellectual property reforms and incentives for research, development and production have further fueled interest and participation in the market.

As in Mexico, knowledge of national, state and local regulatory requirements is critical. For example, in some Brazilian states, there is a licensing requirement to have a warehousing operation in the same state as the manufacturing facility. A 3PL with experience in the industry and local market can help navigate this and other challenges to design the most advantageous warehousing and transportation network to serve this growing economy.

Supply chain managers must also continue to be vigilant about theft, crime and driver safety in Brazil. Detailed risk management plans that provide the most security with the lowest impact to operations may include the use of GPS tracking, escorts, background checks on all personnel, vehicle safety checks, and established solutions and training to prevent and address hijackings. Supply chain teams should work with authorities, customers and partners to measure, analyze and continuously improve security plans.

Respondents’ Advice on Selecting a 3PL Partner

Interviews with manufactures that already are working with a 3PL partner revealed that the selection and management of partners are critical to initial and ongoing success. Below are some of their recommendations for manufacturers considering supply chain outsourcing.

• Carefully evaluate not just current requirements but the range of potential future scenarios to ensure the necessary flexibility is part of the assessment process.
• Take time to ensure the selection process gathers useful and distinguishing data. For example, to assess global size, ask 3PLs for the number of healthcare facilities globally, the total square footage of warehouse space and the transportation modes under management, rather than just how many countries it operates in.
• Perform a fully loaded costing study on existing facilities, labor and transportation capabilities to create an accurate baseline, which can then be used to compare 3PL proposals and anticipated benefits.
• Consideration should also be given to 3PLs that can bring value from local, state and country tax considerations and any economic incentives that can be secured from governing bodies.
• Focus on an outcomes-based evaluation rather than being prescriptive in how 3PLs should operate, to avoid the mistake of paying the 3PL to operate how you currently do, rather than leveraging its expertise to gain best practice improvements as a 3PL.
• Existing knowledge and experience in the relevant life sciences sectors are critical for success. A good 3PL understands global and local forces impacting the life sciences and healthcare industry, including your areas of specialization, and what they mean for your business and supply chain specifically.
• A 3PL that takes the time to understand your business during the evaluation process and tailor its solution accordingly would deliver more value and satisfaction in the long run, compared to one that focused solely on offering the lowest cost per activity with off-the-shelf products.
• 3PLs should demonstrate a commitment to operational and service excellence, as well as continuous improvement against key metrics. The most successful outsourcing relationships are characterized by a forward-looking, proactive approach that jointly asks not, “Where was your business?” but “Where is your business going and what can we do to make it more successful?”