Say no to one-size-fits-all model

Hitesh Gajaria

The pharma supply chain is inherently different in its organisation and composition compared to other industries. The major difference is that for the pharma business, the pricing for each end-user is different. Therefore, a hospital purchases drugs at lower rates than a retail pharmacy. There are programmes like Medicare and Medicaid and other insurance programmes where procurement prices are different from what they are for a customer purchasing at a retail outlet. These nuances give a completely different angle to Supply Chain Management (SCM).

The pharma industry is under severe pressure with increasing R&D costs, growing development timelines, increasing payer pushback and a more knowledgeable customer. The industry is responding by cutting down on development time, stopping projects that do not seem promising at the right time and increasing efficiency by outsourcing non-core activities. Therefore an effective SCM is a concern, as the consequences of a faulty start in launching new products may lead to loss in revenue, sale and market share. It may also result in high cost of logistics, high cost of expired drugs, excess inventory at various points in the supply chain, excessive expiry and unliquidated pipeline inventory.

Growth prospects

An ideal situation would be to move from a ‘one-size-fits-all’ model to a more customised approach, considering that the wellness industry can actually not be compared to other industries.

However, there are a few challenges like managing products in different stages of the life cycle, especially with multiple product launches, keeping supply chain flexible to align with changes in demand for new drugs, promotions and disease epidemics, maintaining efficiency in growing supply, manufacturing and subcontractor base and reaching out to new domestic and international markets efficiently while still maintaining quality.

There may be a few drawbacks. Example: An identical supply chain footprint and policies irrespective of products lifecycle stages (especially of relevance in pharma due to the increased time in development of products), non-flexible manufacturing and sourcing facilities and capacities, unexplored alternative sourcing options and drawbacks in distribution networks.

Importance of ‘Strategic sourcing’ in SCM

In order to maintain a competitive edge, it is important that the sourcing strategy has a distinct competitive advantage. The key requirements are: Arriving at the total cost of ownership for products and channels, fixing the right demand flex fence for delivery of products in changing market conditions, pin pointing the sources of risks in supply and contract manufacturing base and their resolution.

Government support and tax implications

The pharma sector has been grappling for some time now with issues like accumulation of Cenvat credit, difficulty in obtaining refund from the government, etc. The impact of these issues has indirectly passed on to the end customer, who has to pay more for essential medicines. Central Sales Tax (CST)/Value Added Tax (Vat) on sale of goods, service tax on services and levies such as entry tax and octroi (imposed by state or local bodies) are some of the various hurdles in the path of efficient SCM.

The government provided an exemption to pre-packaged goods (including pharma products) meant for retail sale, wherein the retail sale price has to be declared on the package. It is expected that the government may extend this exemption to all pharma products (even those that are not meant for retail sale and the retail sale price is not declared on the package), as it would benefit the end-customer in availing medicines at lower costs.

Special additional duty (Sad)

Most pharma companies are involved in the import and subsequent re-sale of unpackaged pharma products. The import of these products involves a duty element termed as Special Additional Duty (Sad) (in addition to the basic customs duty and countervailing duty). The Sad paid on imports is available as a refund to the pharma trader, provided it is proved that state level Vat is paid on the subsequent sales of the imported pharma products. The process of obtaining refund of Sad is extremely cumbersome and time consuming for both the Customs Department and the importers, which thus significantly increases the transaction cost. Therefore, a key focus for pharma companies on the global level needs to be effectively aligning tax strategies with the supply chain restructuring initiatives by implementing Tax Efficient SCM (TESCM).

GST to benefit pharma industry

The Finance Minister of India had announced the intention of the government to introduce Goods and Services Tax (GST) from April 1, 2011. However, given the current political compulsions, the rollout of GST is likely to be delayed. GST, if implemented in line with the recommendations of the task force set up by the 13th Finance Commission is likely to resolve most of the issues like multiple taxes for different parts of the supply chain in light of the increasing compliance burden. The supply chain is highly fragmented due to state/ municipal body level taxes. Unavoidable transportation delays due to check posts at state and city borders are some of the issues that challenge efficient functioning of the supply chain in India.

The way forward

The future trends suggest a longer and more complex supply chain driven by greater product variety and faster change in assortments. The need of the hour is for supply chain strategists to locate their DCs and logistics hubs correctly, ensure timely information, cash flow and a flexible supply chain organisation, which is also collaborative with other business functions and trading partners. It is also imperative that strategists steer clear of supply chain bottlenecks like the absence of cold chains, poor storage facilities and transportation methods, and must ensure that an efficient information technology is in place for both front-end and back-end functions. Also, with trends like third party logistics making the chain longer and more complex, it is essential to ensure flexibility at every stage.

Hitesh Gajaria is executive director of KPMG India.

Source: Modern Pharmaceuticals