Advanced Logistics Management Assignment

ROLE OF TPL IN GROWING ECONOMY

Submitted By Mayur Nar Roll No. 94 IM-17 / Section B

INDEX

Sr. No. 1 2 3 4 5 6

Contents Overview of Third Party Logistics Selected Industry : Indian Pharmaceuticals TPL in Pharmaceuticals Industry Selected Company : GSK Pharmaceuticals India
GSK Pharmaceuticals India Distribution Selection Criteria of Third Party Logistics for Pharmaceutical Company

Role of TPL in growing economy

Third Party Logistics: According to the Council of Supply Chain Management Professionals, 3PL is defined as "a firm [that] provides multiple logistics services for use by customers. Preferably, these services are integrated, or bundled together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding." Terminology In the "PL" terminology, it is important to differentiate the 3PL from the:

1PL, which are the shipper or the consignee, 2PL, which are actual carriers such as YRC Worldwide, UPS, FedEx, DHL, Ceva Logistics 4PL, which are consulting firms such as CPCS, SCMO, BMT, Deloitte, and Accenture.

Overlapping 3PL can also be 2PL at the same time in the following cases:

when a shipping line owns a freight forwarder, when an airline owns a general sales agent (GSA), when a freight forwarder owns trucks or a warehouse, when a courier company owns planes.

Industry : Indian Pharmaceutical

The Indian pharmaceutical industry is the world's fourth-largest by volume and is likely to lead the manufacturing sector of India. The number of purely Indian pharma companies is fairly low. Indian pharma industry is mainly operated as well as controlled by dominant foreign companies having subsidiaries in India due to availability of cheap labour in India at lowest cost. In 2002, over 20,000 registered drug manufacturers in India sold $9 billion worth of formulations and bulk drugs. 85% of these formulations were sold in India while over 60% of the bulk drugs were exported, mostly to the United States and Russia. Most of the players in the market are small-to-medium enterprises; 250 of the largest companies control 70% of the Indian market. Thanks to the 1970 Patent Act, multinationals represent only 35% of the market, down from 70% thirty years ago. In terms of the global market, India currently holds a modest 1-2% share, but it has been growing at approximately 10% per year[27]. India gained its foothold on the global scene with its innovatively engineered generic drugs and active pharmaceutical ingredients (API), and it is now seeking to become a major player in outsourced clinical research as well as contract manufacturing and research. There are 74 U.S. FDA-approved manufacturing facilities in India, more than in any other country outside the U.S.

TPL In Pharma Industry

(Ref : http://www.pharmaceuticalcommerce.com/frontEnd/main.php?idSeccion=262 ) Logistics service providers offer alternatives to traditional manufacturer-wholesaler relationships It is well known that the Big Three distributors lay claim to 90% of pharmaceutical distribution, and in most cases, they are taking ownership of the products they acquire, thus relieving manufacturers of most of the worries of dealing with the rest of the supply chain. However, either through the pressures of dealing with specialty pharmaceuticals that dont fit neatly into the traditional pattern, or through a desire to have a closer control of the distribution chain, or for the potential of lower distribution costs, manufacturers continue to work with logistics service providers (aka third party logistics, or 3PLs). The main difference between wholesaler-distributors and 3PLs is that the latter do not take ownership of the products. They may do everything elsehandling reimbursements, inventory management, storage, even packaging or direct-to-patient delivery. They tend to be smaller organizations (except the ones that are themselves divisions of the majors), and they tend to manage limited stock-keeping units (SKUs). But there are many exceptions: UPS, the delivery giant, is building up a substantial 3PL business; and when international shipments are considered, there are major logistics companies that handle both inbound and outbound logistics that come into play. Conversely, there are uncounted numbers of small, regional logistics companies that also play a role. Theres been a lot of fluctuation with pharma companies using 3PLs, says Brian Hudock, a partner at Tompkins Assoc. (Raleigh, NC), a supply-chain consulting firm. Some of our clients have been looking closer at 3PL economics, but at the same time weve had some clients pulling out of them. He says the value of 3PLs can be considerably higher for small to medium-tier manufacturers, who can outsource essentially all of their logistics management functions to the 3PL to conserve capital, or for generic manufacturers looking to save costs. Bigger pie In any case, the 3PLs themselves say business couldnt be better, with double-digit growth rates in pharmaceutical volumes and service revenues. Were benefiting from the shifts toward more difficult-to-handle biotech products, from the desire for manufacturers to exert more control on their supply chain, and from the complexity of data handling systems that need to account for chargebacks, rebates, PDMA compliance and the rest, says David Hileman, a VP at RxCrossroads (see box). The company, now a subsidiary of a large services company for long-term care, Omnicare, has three interrelated divisions, for 3PL services, product support (including sample management) and pharmacy support services. One thing that has not brought significant business toward the 3PLs is the industry conversion to fee-for-service (FFS) agreements. A year ago, when the new manufacturer-wholesaler relationship was taking hold (see Pharmaceutical Commerce, Jan/Feb, p. 1), there was talk of a migration toward direct distribution and greater use of 3PLs, but nothing much has come of it, say industry managers. On our end, there was a little uptick in interest, but not as much as I had expected, says Hileman. Manufacturers are not beating a path to our doorbut theyre not running away either. Weve been contacted by some of the majors, but in most cases, they wound up sticking with the FFS arrangements, says Ross Bjella, VP sales and marketing at DDN/Obergfel. What FFS has done is to reveal the actual costs of distribution. A manufacturer that gets stuck with a 5-9% distribution fee for a product that only goes to a limited number of clinics, say, and isnt getting much in the way of value-added serviceswe can represent a lower-cost alternative. He adds that doing the cost evaluation to decide on the more economical choice is fairly straightforward; what the manufacturer

needs to pay attention to is the dynamics of its markets. Manufacturers have the relationships with the prescribing physicians, he says. They dont necessarily have the relationships with thousands of pharmacists, which the wholesaler-distributors do. Finally, as Cardinal Health Specialty Pharmaceutical Services (SPS) Rob Brown points out, FFS is what the 3PLs have been operating under all along. As wholesalers have moved to FFS, they have studied the 3PL market, which has always been FFS, to observe pricing methodologies and service metrics. Brown, who is senior director of sales and account management at the 3PL division of Cardinal Health, adds that The future challenge that comes from the FFS conversion is how to effectively blend the traditional wholesale and 3PL models to provide the best supply chain solutions for the manufacturer. Specializing in specialties The sweet spot for pharma 3PLs, by most accounts, are specialty products that need refrigeration in storage or transita cold chain management system (see also New Solutions Aid Cold Chain Management in Clinical Trials in this issue). Wholesaler-distributor arrangements work best with large volumes of standardized packages, and while the Big Three can and do handle cold-chain products, the 3PL services can often make better sense. FFF Enterprises, for one, stakes its business primarily on blood products, vaccines and biotech products. Besides the complexity of the cold chain, critical care products also tend to fluctuate significantly based on market demands, says Chris Ground, SVP, national accounts. Think about the seasonal variation of flu vaccines, and add to this the problems that many of the most advanced biotech products are on allocation because of production shortages. It makes for a business with a high customer-service component. FFF has also positioned itself to have a well-secured supply chain, having promoted the concept of guaranteed channel integrity in its distribution practices. In February, it announced the first epedigree program, which provides a traceable documentation of drug movements from manufacturer to dispenser. RxCrossroads Hileman notes that the companys roots are in handling blood plasma products, so it has extensive experience in this type of product delivery. Cold chain products not only are difficult to handle, they also have a limited shelf life, he says. When you to that complexity the fact that some of these products are intended for only a few hundred patients around the country, you can see the value of a single source delivery like ours. Outsourcing economics A different driver for using 3PLs, but one that winds up looking like a conventional 3PL arrangement, is when a manufacturer outsources a large portion of its outbound logistics to a 3PLeven to the point where the manufacturer has no internal warehousing or inventory. Such outsourcing is a major driver in the overall logistics market; while some manufacturers have gone this route, most use it only for selected product lines. We want to be a strategic partner to our pharma clients, says Chris Holt, a VP at UPS Supply Chain Solutions (Atlanta). Their core expertise is pharmaceutical manufacturing; ours is transportation and distribution. Holt says that with the lean new product pipeline, the pharma industrys receptivity to new logistics arrangements is greater now than at any time I can remember. Holt adds that one inherent advantage of using an outsourced inventory management service is that

the 3PL has a multiclient warehouse, which should translate into lower warehousing costs, especially when the special needs of FDA compliance for pharmaceutical storage are taken into consideration. We work closely with our customers; in some cases, their own warehouse management system is running on our computersthey control whats going on in their part of our building. Order to cash But the most critical component of manufacturer-3PL relationship is how well the 3PL can manage the order-to-cash process. All of the 3PLs interviewed for this article provide this vital back-office function for pharma clients. These services are performed on behalf of our manufacturing clients and are branded back to the manufacturer, says Cardinal Healths Brown. This aspect of the 3PL offering is critical, as it equates most directly to a 3PLs ability to positively affect the clients cash flow. Brown says that this is the No. 1 reason that Cardinal SPS is chosen. You can't differentiate yourself on your ability to pick, pack and ship, the conventional services of a distributor, adds RxCrossroads Hileman, everybody does that. We provide a billing service that takes orders in whatever form the customer sends them-fax, e-mail, EDI, e-commerce, then make the delivery and collect the reimbursement. Hileman says that RxCrossroads employees can act as the representative of the pharma company, or can simply be the communication point where billings emanate from. The actual financial IT systems might be on RxCrossroads computers, or at the clients. DDN/Obergfels Bjella says that his company offers a Chinese menu of financial services-you pick and choose which ones you want to have us do. He says that since the company already has 95,000 ship to destinations in its IT systems (which represents the bulk of retail or clinical pharmacies in the U.S.), his company can offer streamlined access to the marketplace. Longtime observers of the pharmaceutical distribution field speak of the good old days when pharma manufacturers handled most of their own distribution. Those days are probably gone forever, but its good to know that todays 3PL industry offers so much flexibility.

GSK Pharma
GlaxoSmithKline Pharmaceuticals Ltd is a Indian subsidiary of GlaxoSmithKline plc, one of the world's leading research based pharmaceutical and healthcare companies. It is one of the oldest pharmaceuticals company in India. It product portfolio includes prescription medicines and vaccines. Established in the year 1924 in India GlaxoSmithKline Pharmaceuticals Ltd. (GSK Rx India) is one of the oldest pharmaceuticals company and employs over 3500 people. Globally, we are a 28.4 billion, leading, research-based healthcare and pharmaceutical company. In India, we are one of the market leaders with a turnover of Rs. 2572 crore and a share of 4.3%. GSK Pharmaceuticals gets a boost as they go live with Proteus WMS. GSK Pharmaceuticals have gone live with Proteus Warehouse Management Solution. GSK, one of the worlds leading research-based pharmaceutical and healthcare companies, were looking for a third party logistics company to store and ship their products on behalf of their Ireland operation, and a warehouse management solution to control stock movements and ensure delivery. After a selection process was carried out they chose PRL Group, a large third party logistics provider in Dublin to store their products and the Proteus Warehouse Management Solution to control their processes within the warehouse.

GSKs products are sold in more than 150 countries around the world, with operations in 119 countries. They make prescription medicines, vaccines, over-the-counter medicines, and consumer healthcare products. Their business accounts for 6.3% of the worlds pharmaceutical market. They have strong positions in several therapeutic areas including anti-infectives, asthma, cancer, cardiovascular, depression, diabetes, HIV/AIDS and urology. Proteus Warehouse Management Solution is used to ship prescription medicines. Alan Downey, GSK Operations Manager is delighted at the way the project was delivered. The commitment shown to deliver the project on time by the Proteus team was second to none, said Alan. The Proteus team of Tony, Lynne, Mike and John and the PRL Group team all did a brilliant job, ensuring that the implementation and live operation went smoothly. Alan continued, The post go-live support was also outstanding. Proteus MD, Howard Turvey said, We are proud of the comments we have received from Alan. Our team are talented individuals who are dedicated to delivering projects on time. Our close partnership approach with PRL and GSK has produced an outstanding result.

GSK Pharma India Distribution in India

The pharmaceuticals distribution business in India is in for a shake-up. The way in which pharmacies have been doing business in this country is set to change. New players are entering the marketplace, and older players are having to adapt to change or opt out. The Indian pharmaceuticals market is essentially volume- rather than value-driven. Even a slight variation in volume sales has a direct bearing on the overall growth of the market. For instance, when unit sales of pharmaceutical packs rose 10 per cent n 1998 from their level in 1997, the corresponding increase in sales value was 14.1 per cent. In the first six months of 1999 unit sales decreased 4.2 per cent compared to 1998. The corresponding growth in rupee terms dropped to 5.4 per cent compared to average 11-14 per cent during the 1990s. In a geographically diverse and extremely competitive market where sales volumes are high, distribution plays a crucial role. Further, the common incidence of brand substitution makes it imperative for a company to make available its brands at all times and at various levels of distribution. Given an estimated 60,000 stockists and more than 5.5 lakh retailers in the country, plus the population of dispensing doctors, who account for roughly 10 per cent of the pharma market, ensuring availability at every level is not an easy task. (note: 10 lakh = 1 million) In the seventies and early eighties, there were few but large distributors. As pharma companies expanded their marketing operations, these distributors faced logistics problems while attempting to cater to emerging markets. As a result of this many small players became stockists and wholesalers, making the sector fragmented but more localised. According to the Retail Druggists and Chemists Association, there were roughly 10,000 distributors and 1.25 lakh retail chemists in India in 1978. The number of distributors has increased six-fold, and retail outlets five-fold in the last two decades. However, the penetration of medicines has not grown proportionately. It is estimated that more than three-fifths of Indians still do not have access to modern medicines. Which means that the urban and semi-urban marketplaces have become extremely competitive at the stockist and retail levels, while the rural market is largely unattended. If the volume growth, as experts say, is to come from the rural sector, then the trade has to shift to rural areas.

This seems unlikely in the near future. Post-liberalisation scenario Drug distribution in India has already begun changing following liberalisation. The changes were initiated by pharma companies, which are increasingly replacing company-owned depots and warehouses with clearing and forwarding agents. The aim is to cut overheads. The C&F agents operate under contract on companies behalf. An agent is paid a fee that depends on the turnover of products, and ranges from 4 per cent on a high turnover product to 10 per cent on a low turnover product. There is no tax problem here. Excise duties apply only when products are considered sold, that is, only when the goods pass from C&F agents to stockists. So manufacturers can move excess goods to C&F depots as and when required without having to pay excise duty before the goods are actually sold to the stockists. "The C&F agent is in a better position to understand market needs and provide feedback to the manufacturer on sales trends," says a logistics executive at Glaxo Wellcome. Glaxo replaced all its warehouses with C&F agents in 1996. Given the poor infrastructure in India, which results in extended transit time, companies can move seasonal products well in advance to C&F agents without incurring ex-factory excise costs. Now, let us examine changes taking place at the stockists and retail levels. Stockists Stockists in India operate on a margin of 8 per cent on the 'maximum retail price' of price-controlled drugs and 16 per cent on de-controlled products. There are an estimated 60,000 stockists in India. Usually a stockist handles the business of six to eight companies. A few of them handle more than 50 companies. Traditionally, stockists have been non-competitive, with each handling a select group of retailers, and vice-versa. However, the recent spate of mergers and acquisitions in the drug industry has put stockists in a quandary. When two companies merge, the number of stockists almost doubles. That can complicate things. For example, Glaxo Wellcome has 32 stockists, of whom 12 are Glaxo stockists and 10 each were inherited from Burroughs Wellcome and Biddle Sawyer. Mumbai is divided into five zones. Most pharma companies appoint two stockists per zone. Since a Glaxo, Burroughs Wellcome and Biddle Sawyer stockist in a particular zone would cater to the same number of retail outlets, the ideal solution for the company would be to retain any one of them. However, the stockist association is vehemently opposing this and "considering the past it would be prudent for a company to continue with all of them or to face total boycott", says an industry source. While it is business as usual in other respects for a merged entity, their stockists are steeped into more intense competition. Says Kishore Shah, president of the Retail Chemists and Druggists Association, "Today two stockists of the same company are competing against each other. Retailers are taking advantage by bargaining for discounts, and stockists are left with no option but to comply in order to sustain their business." According to Shah, some stockists operate on margins of 2 to 2.5 per cent, and pass on as much as 6 per cent to retailers. "Small stockists who operate by taking bank loans are finding it hard to sustain such undercutting practices. Even bigger stockists are thinking of diversifying into other businesses. As I see it, there will not be more than 20-25 stockists in Mumbai after 2003".

Reputed Mumbai traders such as Chimanlal Chimanlal and Company, Premji Vishram & Company, and Sevantilal Kantilal and Company are selling their prized Princess Street offices and moving to the suburbs. In case of 60-year-old N Thimanlal and Company, the owners are gradually phasing out the distribution business and moving to the more lucrative retail end of the business, say trade sources. Retail Competition at the stockist level is proving to be a bonanza for retailers, at least for the time being. But this section has also begun to have its own share of worries as the concept of retail chain outlets is beginning to get tested in India for the first time. The first retail pharmacy chain was started by the Subiksha Retail Services Pvt Ltd, which operates 19 retail outlets in Chennai. Similarly, The Medicine Shoppe, one of the largest retail drug store in the US, opened two retail outlets in Mumbai and has franchised three more in Mumbai, Calcutta and Baroda respectively. It is planning 100 such outlets in India. The drug retail market is very competitive and crowded with more than 5.5 lakh pharmacy outlets. Together, they account for 80 per cent of the pharma market. "We are not worried about competition per se. What is disturbing is the financial muscle of these retail giants and their dictatorial style of operations which is creating unhealthy competition," says a representative of the All India Association of Chemists and Druggists. Though consolidation in drug distribution is still at a very formative stage, industry observers are encouraged by corporatisation of retail trade. "Corporatisation would lead to elimination of at least one layer of distribution. This would enable companies to offer higher margins to retailers. Consumers too will benefit as drug companies would be in a position to pass on the benefits to consumers.. Corporatisation of trade would mean fewer players. This would improve administration and enhance customer relationship," says a distribution head of a leading Indian company.

Selection Criteria of Third Party Logistics for Pharmaceutical Company:

Today's complex global business environment - with its rapidly advancing technologies, emerging world markets, and vastly extended supply chains - places increasingly critical decision-making demands on logistics professionals. In a world gone global, the challenges of providing seamless supply chain solutions across geographical and cultural boundaries have increased exponentially. Overall logistical requirements, vendor choices, and other dynamic variables can make the outsourced 3PL decision-making process an exercise fraught with pitfalls if not conducted carefully and correctly. Compounding the situation is the fact that global third-party logistics, driven by increasing international logistics cost factors, is estimated to be a $390-billion industry. There is no indication the number of players providing these service offerings will diminish. This makes partnership decisions for shippers even harder to grapple with. With these caveats in mind, here are six critical essentials of global supply chain strategy you should weigh, analyze, and consider carefully before selecting your 3PL. Keep in mind: the 3PL's price is seldom the only selection criteria; you must also consider total supply chain costs.

1. Cultural alignment. The biggest challenges shippers face today are controlling international supply chain visibility, lead times, and total landed costs - including inventory carrying costs, obsolescence costs, and customer service. So, selecting a third-party logistics provider best suited to meeting their specific and unique global distribution needs, both culturally and operationally, is critical. Every shipper should ask: "Does my company and the 3PL we will work with share the same values, such as ethics and responsibility; and can we understand and agree upon what the specific nature of the partnership arrangement will entail?" If the two parties cannot agree on these points, the rest of the criteria become moot. 2. Company infrastructure. With globalization and new technologies, it is critical that both parties have the physical resources and accessibility to shipment data to meet each other's needs. In the age of customized one-to-one marketing, supply chain solutions become all about personalized service. If the two partners do not share common capabilities and company resources, a 3PL will not be able to provide proper supply chain visibility, and the shipper will not obtain the necessary capacity and services when delivery of goods is required. If you source from India, for instance, does the 3PL have its own offices in the region to work with your suppliers? 3. IT capabilities. IT capabilities work hand-in-glove with company infrastructure. If the shipper and 3PL cannot communicate on the operating platforms they already have in place - whether EDI, XML or the Web - and be responsive to each other's changes in IT structure, it is likely they will not be a good match. Real-time data sharing and ongoing timely responsiveness is crucial to providing a seamless supply chain. IT compatibility is essential for providing global logistics services such as shipment documentation, purchase order visibility, cross-docking support, and advanced services including forecasting, inventory replenishment, and life cycle management. How fast can the 3PL respond to IT requests? 4. Ease of doing business. A supply chain partnership will only be as good as the skills and cooperation its participants bring to it. How flexible is each partner willing to be on items such as exceptions, scheduling, and services? If the supply chain is to be optimized, it's important that both partners work together to empower all participants. A third-party logistics provider that is right for you will customize services to meet your specific supply chain needs. But it is essential that shippers work closely with their 3PL to share critical shipment and forecast information that will enhance visibility and help optimize the total value chain process. 5. Metrics. Cost is always important, as the success of any supply chain partnership ultimately relates back to customer satisfaction. This means that you and your 3PL partner must establish agreed-upon benchmarks for success, and frequently review measurement data to ascertain if the global logistics process is performing well or needs improvement. This process can involve measuring on-time performance, damages, cost-per-touch, total landed costs, and other metrics. Your metrics should be the 3PL's metrics.

6. Partnership intangibles. Value-added customer service-related items can be further enhanced if both parties are able and willing to jointly invest in their common success. It is vital that each partner fully understand the meaning of "global collaboration." As global trade and IT capabilities accelerate, and trade complexities increase with new crosscultural regulations, it becomes even more imperative that you give great care to choosing a global 3PL. Selecting the right supply chain partner for your specific distribution needs will dramatically enhance your worldwide supply chain management results.