A Green Llight for GST
The pharmaceutical sector in India is one of the most developed and highly regulated industries, with consistent growth and performance. Today, the Indian pharma industry has the capability to produce an entire range of pharma finished formulations for mild to chronic disease. It takes years of R&D efforts before a molecule is certified as safe and efficacious for patients, but all these exacting efforts could be jeopardised on the product’s final journey to the patient. This is because each medicine pack is potentially subject to varying climatic zones and infrastructure before it reachesz the chemist’s shelf and then the patient. Logistics therefore plays an important role in maintaining the efficacy of the drug during the entire transit process.
Underlining the importance of logistics in the pharma supply chain Dr Ajit Dangi, President and Chief Executive Officer, Danssen Consulting informs, “With more and more biologics being manufactured locally as well as those imported on the increase, cold chain logistics have gained importance. It is estimated by the World Health Organisation (WHO) that about 15 per cent of vaccines lose their potency due to a break in the cold chain in developing and in less developed countries. It is not uncommon to see a consignment of biologics arriving by air from Europe lying in the hot Indian sun for hours on the tarmac before being shifted to a cold warehouse. Fortunately, due to efforts made by some associations like Organisation of Pharmaceutical Producers of India (OPPI), there is significant improvement in the storage conditions at some Indian airports.”
Challenges en route
 “The problem is compounded in a large country like India with poor infrastructure, multiplicity of state and central taxes, varying climatic zones and untrained manpower.”Dr Ajit Dangi President and CEO, Danssen Consulting |
The Indian pharma industry has a large supply chain of over 60,000 stockists and about 6.5 lakh retail outlets spread across the country. Dangi stresses, “The problem is compounded in a large country like India with poor infrastructure, multiplicity of state and central taxes, varying climatic zones and untrained manpower. If you add cost of recalls, rejections, wrong / late deliveries and loss of company reputation due to harm it may pose to consumer health due to poor storage of the product, the total cost could be significant.”
Each problem has a solution, and pharma companies too have worked on finding a solution to this hitch. Fortunately the situation is beginning to improve albeit slowly. Dangi explains, “The Central Drugs Standard Control Organization (CDSCO) after long deliberations has now issued guidelines for Good Distribution Practices (GDPs) including those for biologicals. As more and more biologicals enter the pharma pipeline, their storage and distribution throughout the journey from manufacturing to the patient is also becoming a challenge.”
Citing an example, he says that in August 2012, a massive blackout occurred in the country for two days due to failure of the electrical grid. Major parts of the country do not have 24X7 electricity and without a robust back up, cold chain integrity can be compromised.
 “GST will make large regional warehouses economically viable as opposed to the multiple small ones set up to deal with the current tax structure.”Vikas Anand Managing Director, DHL Supply Chain India |
Logistics players too face hurdles while striving to meet industry needs. As Vikas Anand, Managing Director, DHL Supply Chain India explains, “The highly fragmented Indian transport market poses several challenges coupled with various taxation and road permit regulations. Very few regional or pan-India players are currently in existence. Large multi-user facilities can provide the leverage to use economies of scale as a competitive advantage in transport too.”
Identifying the speed breakers
The distribution costs of a typical pharma company is often less than two per cent of sales resulting in most senior managements paying less attention to this critical function. Recommending a systematic approach, Dangi says, “The criticality of supply chain function should become an important agenda for the senior management with GDPs becoming an integral part of the company’s logistics and supply chain policy. All deviations, recalls, destruction of damaged and returned goods etc. should be properly documented and authorised. Continuous training of the employees including those in the field should become part of the guidelines. Management also needs to give attention to high inventories to stockists which often range between 20 -30 days. Most companies have skewed delivery schedules with a sudden spurt in the last week of the month due to poor planning and lack of field force discipline. Companies often go on adding new stock keeping units (SKUs) every year and periodic rationalisation of SKUs should be an ongoing exercise.”
Dr Reddy’s Laboratories (DRL) has spent considerable time and effort to streamline it’s supply chain. For instance, the company switched from the forecast-based supply chain model to the replenishment-based system even though the latter might have been seen as an unconventional choice for a supply chain system for the pharma business in India. As a company spokesperson explains, there are substantial number of success stories around the world, which gave replenishment systems enough credibility to be considered for implementation at DRL.
Comparing the two systems, the spokesperson points out that forecast based systems can deliver very good performance on performance metrics, only if the accuracy of the forecast is good. For products and business segments which are relatively stable and predictable, replenishment based systems are very effective in ensuring high On-Time In-Full (OTIF) and tight control on inventory. But due to frequent replenishments of small lots, transaction costs need to be managed. In cases of products which are in early or later stages of product life cycle, where demand variability is very high, replenishment based systems need to be tailored accordingly.
DRL seems to have reaped the benefits of the time and efforts spent on this exercise. According to the spokesperson, “Incorporating the throughput logic into planning and decision making has ensured that the organisation is able to incorporate the financial cost-benefits into supply chain planning. This ensures that products and markets having high impact, based on business objectives, are given due priority. This has contributed significantly to the growth which DRL has had till date.“
Nor does the company seem content with past success. The spokesperson informs that DRL is now embarking on an intelligent Integration approach, where the organisation is working towards end to end integrated planning across its global network where planning logic is being modelled to address the differential needs of various market segments, by using both forecast based and replenishment based models as needed in its planning systems.
Apart from this, business intelligence and analytics are being leveraged to get key insights into business trends and performance metrics on real-time basis, so DRL is geared towards addressing the real issues and root causes on a proactive basis. This will ensure that the company will continue to be a flexible and fast paced organisation, even as it grows in scale and size.
The case for GST
In spite of the fact that logistics and supply chain is a very critical function to ensure product integrity in the pharma value chain, it has received little attention from the Government as well as managements of pharma companies. With a huge mandate, Prime Minister Narendra Modi’s Government is expected to be more stable. Corporates seem to be more optimistic and are expecting an industry-friendly approach. Sectors like pharma and automobiles have already started anticipating a push to long-awaited policy reforms like Goods and Services Tax (GST) from the new government. GST was first proposed in the 2006-07 budget speech, was to be implemented in April 2010 but implementation was postponed each year.
 “The tearing agenda of the new Government is to put the economy back on track without wasting much time. GST is one agenda where all political parties, corporate, and Governments have supported ideologically as an effective tool to enhance the flow of movement of Goods and Services.”Anil Arora Managing Director, MJ Logistic Services |
So will the new government put GST back on the front burner? Anil Arora, Managing Director, MJ Logistic Services says, “The tearing agenda of the new Government is to put the economy back on track without wasting much time. GST is one agenda which all political parties, corporates, and governments have supported ideologically as an effective tool to enhance the flow of movement of goods and services as it prima facie removes the barriers of multiple taxation, repetitive documentation and state wise red tape.”
Anand too is positive on this front rationalising, “There is renewed optimism in the air and the expectations of a young aspirational India are high from the new Government. Several urgent issues need to be addressed quickly; among them are tax reforms. Clearly on the agenda will be simplification of the tax structure with a quick move towards implementing the GST. This could see some progress, provided it receives support from the states.”
It is equally important to know why the industry is talking about GST. Current supply chain structures in India are engineered to harness fiscal benefits arising from difference in tax structures across regions. Anand explains the need for GST in India and its benefits to corporates saying, “A single unified tax on both ‘goods’ and ‘services’ with the objective of eliminating tax cascades will bring about a transition from the existing origin-based to a destination-based taxation regime. Hence, under the proposed GST scenario, by using network strategy, every distribution-intensive company has an opportunity to re-look at their supply chain structure and gear up for the proposed tax reforms, to align their supply chain distribution network to customer markets moving away from tax issues.”
Benefits galore
Arora tries to explain the reasons for the delay of rolling out GST saying, “The current avatar of the legislation was formulated by finance minister of a state ruled by current Government; the pitfalls of 2010-2013 were created by change of direction in the finance ministry due to frequent changes of the portfolio between various ministers of the previous Government. The previous Government did not have the majority and the political will to roll over minor bumps in the road-map created by states with vested interests. Having a clear majority, it will be easier for the current Government to clear those without much internal and external resistance.”
Implementation of GST will bring better transparency and efficiency to the system, because as Anand explains, “Simplifying the distribution network and merging smaller warehouses to regional centres will result in economies of scale being generated where the location will no longer need to be fixed depending upon Central Sales Tax (CST) constraints but can be decided based on demand and supply patterns, centre of gravity, long-term logistical and real estate considerations. I.e. cost to serve basis.”
Arora points out that since the cycle of implementation to actual increase Government’s revenue and other benefits will take two-three years to reap, it is also in the current Government’s interest to target implementation at the earliest so that they can reap full benefits before it hits the elections again in 2019.
Moving into the fast lane
In today’s technology age, several IT-enabled companies have systems like track and trace technologies, etc. to monitor supply chain integrity and such tools should be actively employed. Similarly, bar coding, radio-frequency identification (RFID), anti-counterfeiting devices, temperature indicators and new packaging materials are also now available.
“While these may appear little expensive initially, ROI from the point of view of product quality and integrity makes its consideration worthwhile. Stockists and C&F agents should also be encouraged to invest in IT systems to increase supply chain efficiency. This will also improve the number of days of inventory holding and also loss of sales due to stock outs,” suggests Dangi.
Commenting on the implementation of GST and its positive impact on the pharma industry, Anand notes, “Large scale shared facilities with multiple users will set the platform for consolidation in the post GST scenario. GST will make large regional warehouses economically viable as opposed to the multiple small ones set up to deal with the current tax structure.”
Arora anticipates, “The latent advantage of the implementation of GST will be that in the following years it will lead to enhancement of revenue by not only enhancing the flow of goods and services, it will also disenfranchise the parallel economy and bring the entire trade revenues into the mainstream. It, however, needs to be simplified to the maximum and implemented to perfection as post-independence this is the biggest change in the way our economy works. With automation and e-implementation in most of the state departments being complete, I don’t think it will be a big challenge.”
If the right decision is taken at the right time, then the final outcome will be beneficial in the long run. Considering the future growth potential of the pharma industry in India, GST is sure to help the industry grow. Thus all eyes are on the Modi Government in the hopes that the long awaited GST regime will finally see the light of day.
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