Using Supply Chain Technology to Improve Pharmaceutical Profit Margins

The pharmaceutical industry is one of the most competitive on the planet.  The global pharmaceutical industry was estimated to be worth $1 trillion in 2014.  While there have been tremendous profits to be earned over the years, and still great potential for the future, the business is not without its constraints.

According to 2016 figures from PhRMA, it takes anywhere from 10 to 15 years to develop a drug and less than 12 percent of drugs entering clinical trials result in an approved medicine.  Development costs are nearly 20 percent of a company’s sales.  Because these R&D costs eat into profits, pharmaceutical firms must find ways to produce better margins on the production side.  One way to do this is by employing various supply chain technology solutions.

Improved Forecasting

Historically, even large manufacturing companies have used spreadsheets for demand planning and forecasting activities.  This is often a flawed system as it relies on historical data rather than actual demand figures.   The solution is to implement an advanced demand planning solution to develop forecasts based on demand rather than sales.

One success story is A.R. Medicom, who implemented just this sort of system and was able to cut its inventory by $3.5 million.  The system that the company executed took the guesswork out of forecasting and allowed it to increase the accuracy of its forecasts by as much as 16 percentage points.  The company is also able to better serve its customers by having fewer items on backorder and developing the ability to respond more quickly to client needs.

Inventory Management

Technology solutions are increasingly being used to solve some of the biggest challenges facing pharmaceutical company supply chains.  In one recent survey, industry respondents were asked about these difficulties and tasked with ranking their priority.  The top two were “lack of coordination” and “inventory management.”   Managing inventory in the supply chain isn’t simply about saving money anymore.  In this industry, it’s also about safety.  According to the World Health Organization (WHO), counterfeit medicines in some countries are as high as 30 percent.  Tighter inventory controls in the supply chain can help reduce these figures.

Visibility in the Supply Chain

Supply chain analytics are used to better manage all facets of the supply chain, giving drug companies visibility inside the supply chain.  This is still a challenge as there is no one system that provides unlimited transparency from demand visibility to inventory visibility to freight analytics that also allows a company to optimize for the best margins.  One report from Ernst & Young concluded that an average of 40 percent of these company’s working capital is tied up in inventory, an area that visibility in the supply chain can help reduce.

In a globally competitive marketplace, there aren’t many pharmaceutical companies that are privately-owned.  These large multi-national corporations must answer to shareholders and find ways to continually improve profits.  One of the most effective ways that is gaining traction is by improving supply-side operations through leveraging technology.  Firms can create more accurate forecasts, manage inventory more efficiently, and produce heightened visibility in the supply chain.  All of these elements translate into greater profits in this ambitious industry.


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