Contract Pharma: Tell me about the expanded agreement with Merck, and UPS’ history working with the company.

Bill Hook: Three years ago, we were a supplier of Merck, predominantly supplying a portion of their package delivery service in North America. We had a long-term relationship where we were a partial provider for them on that front.

Then Merck had a call to arms for all their suppliers. They were really interested in a new concept they called “Supplier Value Management.” It involved working with suppliers in a new fashion, to drive value for Merck. That relationship would be much more engaged one, and they were challenging all their suppliers to come forth with a new model to improve business performance.

That began the journey. In early 2010, they announced an expanded partnership with us in which UPS took over their main distribution center in the U.S. here in Atlanta, and also their operation center in Reno, NV. They also outsourced their distribution business in Canada. That was a big step forward in terms of our relationship, and it was a test of the collaboration and openness that we believed would drive a lot of results for Merck and UPS both.

It was a stepping-stone, a proof-of-concept step in what was just announced: the broad, global collaborative relationship that we’re now embarking on.

CP: What was involved in Supplier Value Management, and how were you able to structure the new collaboration in a way that managed to benefit UPS, too? I ask because some contract service providers tell me that when the client asks for “process improvement,” it seems to be a code for “can you do it more cheaply and pass the savings on to us?”

BH: That’s a great question. The first initiative focused on the U.S. and Canada, and we showed how we could drive value together. That involved Merck selecting us and our mutually exploring what value we would create in the partnership. From that platform, we decided how we would measure that value creation. Cost savings were part of it, if they were achievable, but it also involved disposal of assets, enhancement of services in some cases, speed to market, in terms of taking days out of their supply chain and reducing inventory. So we developed a broad, agreed-upon formula to allow us to measure value.

That gave us the freedom to do what UPS does best: re-engineer the processes and gain value by changing the way things are done. It was a cornerstone, along with the good governance process, to make sure this was a unique relationship, from an outsourcing perspective. So it wasn’t about “doing it cheaper.” 

CP: Do you have similar partnerships with other large pharma clients?

BH: We work with a lot of companies in the field, small, medium and large. What’s unique about our Merck partnership is the notion of value capture. In many cases, they will come to us and say, “We have a challenge, and we’d like you to solve it.” As a result, we’re working with them in areas of opportunity and, in a sense, competing against ourselves and the benchmarks of the industry.

In this relationship, our common goals in driving value cover every region of the world and also cover all the services in the supply chain, whether ground, sea or air. It’s about integrated solutions, and that’s the key for driving value. That’s what makes this relationship unique.

We have other major relationships with companies in the industry, but nothing that’s as impactful, broad and encompassing as this one.

CP: You mentioned taking over those Atlanta and Reno facilities in the U.S. stage of the partnership. Have there been further asset transfers as the deal has gone global?

BH: It’s on a case-by-case basis. One of the challenges that Merck had was integrating the assets of Schering-Plough. In terms of network size, SP was of a comparable size to Merck. So they had to really work out how to collapse these into a single global supply chain network. We’ve had dedicated teams working with them on supply chain redesign, to help them simplify what they have.

In some cases, neither a Merck nor the legacy SP facility could handle the combined operations, so it allowed us to write on a clean sheet of paper, as it were. We’re evaluating assets and people as part of that redesign and integration process.

CP: How long will it take to implement the whole operation?

BH: We’ve implemented a lot of the ground transportation package and are implementing the air freight stage, as well as distribution centers in different geographies. We just opened one in Brazil last week, and are working on a number of other sites in Asia, Europe and Latin America. We’ve completed implementation of the operation in Canada. But the full implementation, the finished state of it, won’t be done until 2014 or 2015. 

CP: Are there services or regions that you’re not handling?

BH: It’s a very large supply chain. There are some areas that we’re not investing in, and those will be handled by another Merck partner. We have a lot of assets and capabilities internationally, but there are some parts of the globe that we’re not focused in on.

That said, one of the ways that this partnership has benefited UPS is that it’s accelerated our global expansion. Merck has enabled us to move much more quickly into some markets.

CP: As a result of knowing that you had guaranteed business in these markets, from Merck?

BH: Yes. Brazil, for example, is a market in which we didn’t have a healthcare presence. It was a priority for Merck, so that accelerated our plans and now we’re operational there. Merck has also helped us forge a much stronger entry into China.

CP: And none of these new operations are going to be single-client?

BH: Wherever possible, we’ll keep a multi-client environment. We believe that’s the optimal solution from cost and flexibility standpoints. Merck is keen for us to do that. In one market, we thought we’d go with a single-client setup, but after consulting with them, we concluded that multi-client was the better option.

CP: What’s led companies like Merck to consider these strategic partnerships rather than the old style of transactional, tactical relationships?

BH: It’s been quite an evolution. From a market standpoint, it’s a period of unprecedented change for drug and device makers, due to product life cycles, patent cliffs, emerging markets, increased regulatory concerns and safety concerns. The issues have grown so great that companies are no longer looking at squeezing out incremental improvements, but are really trying to change the way they’re doing things.

From a UPS perspective, we’ve been building a very strong commitment and capability in this area and introduced some unique solutions for different clients. As our gold standard of compliance became more recognized, it became a perfect scenario those companies to outsource. In the past, they may not have trusted a partner this much.

CP: How did the new Merck’s increased reliance on biologics and vaccines affect your service offerings for them?

BH: The changing product portfolio drove them to achieve some key characteristics. They were looking for a more variable cost structure, both to reduce fixed costs but also to give them the flexibility to introduce new products, like those vaccines. They need to be able to adapt very quickly.

Going into emerging markets with biologics and vaccines means Merck is heavily relying on our temperature-sensitive services, like our Temperature True air freight solution. It’s certainly a challenge, in regions with less infrastructure in place, to support cold chain requirements. In some cases, we have to build infrastructure in those markets. We’re also getting more innovative with the packaging, which is necessary to get product to remote areas. 

All our new strategic distribution centers have freezers and coolers; it’s a lot more investment in technology and infrastructure, but it enables companies like Merck to handle the changes in their portfolio. Their vaccine program is becoming very significant to them, so it’s critical that we can deliver those products to hospitals or directly to pharmacies, as needed.

CP: Are you looking at more of these major partnerships with any of the other major pharmas?

BH: This isn’t the exact formula for every company, so it’s not a one-size-fits-all model. Right now, we have a number of clients that are looking at how we work with Merck and assessing how it may benefit them.