Re-setting the pharma procurement value chain

Almost three years after the COVID pandemic put the world into lock down, we are still not yet free of COVID-19. In fact, we now have steadily increasing cases of monkeypox, which was previously confined to endemic regions.

Are we better prepared for the next health threat? Have we plugged the gaps to respond faster? Let’s not forget the many obstacles in this path.

For one, analysts point out that India Pharma Inc is still heavily dependent on imports for key raw materials. More than 70 per cent of its raw material requirements and in the case of certain drugs, more than 90 per cent are imported. Nearly 70 per cent of APIs are imported from China, and the cost has reportedly jumped by orders of magnitude, thanks to geo-political concerns. This has impacted the margins of pharma drugs.

While higher raw material, freight costs as well as pricing pressures in the US business due to high channel inventory will continue to drag overall performance for the pharma sector, how will the first two challenges hamper the development of medicines and diagnostics for future health threats?

Corporate boardrooms have been in re-set mode to prepare themselves for this scenario, incorporating the hard lessons of the COVID pandemic into business-as-usual practices. This exercise has been enriched with direct feedback from cross-functional heads who were never part of boardroom discussions in the pre-pandemic era.

This is vital because some vital benchmarks have not yet – and probably will not – revert back to pre-pandemic times.

Express Pharma, as part of SAP India’s Industry Knowledge Exchange (IKEX) Series, in partnership with the Indian Pharmaceutical Alliance (IPA), has culled some of these insights over a series of interactions. In May, we met up with CFOs, IT heads and CRAMS leaders for an overview of how collaborations and technology are driving business innovation in the lifesciences sector. (https://www.expresspharma.in/collaboration-tech-driving-business-innovation-in-life-sciencessector/).

And, in July, we got pharma procurement leaders, along with IT and operational leaders, to decipher their game plans on the procurement and SCM side. While the SAP team gave an overview of how pharma companies can transform their organisations into intelligent enterprise by achieving value with intelligent ERP systems, pharma leaders spoke of transformations within their organisations to cope with disruptions in the pharma supply chain.

Harking back to the total disruption of pharma procurement during the early stages of the pandemic, Sapna Sharma, Director, Procurement, Category Head for API, Excipients and Respiratory, Cipla, said creating alternatives for suppliers topped the list of her company’s learnings. “We have to be proactive, not reactive about creating alternatives for suppliers, especially those where we could predict we might have a problem. Cipla had started on this process a couple of years back. So, during the pandemic, we were able to move to alternative suppliers very fast as we already had them in place.”

This process actually started way back in 2008, when China shut down many chemical and API manufacturing units before the Beijing Olympics. That was the pharma, and other sectors, first
warning of supply chain shocks due to heavy dependence on imports.

But, even though this might seem like a logical thing to do, there was a lot of push back within companies, because as Sharma pointed out, it is a laborious process. For instance, one API might go into multiple SKUs. Sharma says it took some time to create a mindset that alternative suppliers were
necessary. Cipla also created a plan to shift not just to alternative vendors, but alternate sites of existing vendors. As part of this initiative, Cipla also started educating their vendors, so that they were in line with the company’s overall strategy.

Sharma also spoke about putting better inventory management systems into place at both Cipla and their vendors, by implementing supplier scorecards to identify their strategic partners. Cipla stopped spot buying, and put in place strategic partners for key inputs that led to better forecasting, negotiating better rates considering the volume consolidation.

Logistics lock down
While procurement heads were setting right their house, their peers in logistics, the next step in the supply chain, found that there was no going back to pre-pandemic times. As Pratyush Kumar, General Manager, Demand Planning and Logistics Excellence, Glenmark Pharma, detailed, each shipping container, which used to cost $2500 pre-pandemic, today quotes at a whopping $12000. There is no way pharma companies can add this cost increase to the price of the output goods (medicines), as the markets are extremely competitive and price-sensitive.

Glenmark used this opportunity to make transportation more cost effective through various measures. Giving a small example, he described how they reduced the huge difference between the gross weight and the volume weight in air freight as pallets were not being utilised optimally. When prices increased, Kumar recounted how even this small opportunity was used to put more packs per pallet.

A second major realisation was that while inventory used to be considered a cost, the pandemic proved that freight is the real higher cost. Glenmark decided to increase inventory levels in order to reduce air freight costs and ship more products by sea rather than air. But shipping by sea came with its own drawbacks. The US-India shipments, which used to take 22-25 days, were now taking up to 45 days. To cope with the decreasing reliability and visibility of sea freight, Glenmark installed IOT enabled data loggers in all consignments to get real-time visibility. This enabled the company to make decisions in real-time to reroute to the final destination to make up for some of the delays. Pratyush Kumar also explained how forecasting technology had helped them prepare better and save costs.

The new definition of BC-AD
In spite of these strategies, it’s a different reality today. As Vickram Srivastava, Head of Planning, Global Supply Chain, Sun Pharma, points out, “Disruption is part of the new normal and the new business paradigm. This is part of the new Gregorian calendar, Before Corona (BC) and AD (After Disease). And it’s not yet clear that we are in the AD phase as yet.”

Srivastava points out that our dependence on imports from China has increased multi-folds over the last two decades and cannot be replaced easily. To his mind, the difference has come from a sustained effort by China’s policies to encourage the chemical/pharma sector.

Also, he mentions that the focus has to be to invest in new complex products and getting it right the first time in addition to de-risking the current supply chain for business continuity. Using digital technology to understand market trends and demand from the sales and marketing field force directly to the upstream vendor supply chain would be the real game changer.

Shortages of certain vital materials like filters persist even post the pandemic. So, it’s no longer about Business Process Re-engineering (BPR) but Business Continuity Plans (BCP), which is not just about
putting in place alternate vendors, but about end-to-end mapping of value chain to ensure undisrupted supply of critical life-saving drugs. Especially as most pharma companies in India are now dealing with complex and niche generics, where not many alternative vendors may be available, which is why Srivastava feels that pharma companies need to see their vendors as long-term collaborators, going beyond cooperation.

Mindset change
The search for alternate vendors needed procurement and technical teams to work together as alternate vendors needed to be validated before being onboarded. And, in some cases, the lack of time forced companies to repurpose the existing stocks.

For instance, Dr Aravind Badiger, Technical Director, BDR Pharma, recalled how the increase in cases of the rare fungal infection, termed ‘black fungus’ called for huge quantities of liposomal Amphotericin B. However, shortages of filters and lipids was one of the reasons why initially production could not ramp up in time.

BDR Pharma probably had the largest batch size of 30,000 vials, but no filters. The company finally used filters that their QA team was using after due sterilisation and tests. They had to educate the procurement team to consider other alternative sources after scientific due process was followed, and then convinced them to use other products.

However, taking Srivastava’s po