Effective supply chain management in domestic pharma to be the key business enabler: OPPI-Ernst & Young study
Sam Pitroda, Advisor to the Prime Minister of India on Public Information Infrastructure & Innovations released the OPPI and Ernst & Young study “Unlocking the potential of the pharma distribution channel” at OPPI AGM 2012
Mumbai, 15 September 2012 – Loss of sales due to non-availability of products at the retailers end in the pharma distribution setup and lack of visibility of pharma companies into stock holding and stock movement in the post CFA (Carrying & Forwarding Agent) supply chain were identified as key concern areas according to the latest study “Unlocking the potential of the pharma distribution channel” by OPPI-Ernst & Young, released today.
The study attempts to understand the character, dynamics and players of the post CFA supply chain, with the intention of strategically leveraging this channel for growth rather being limited by its capabilities and constraints.
The survey findings are structured on the following aspects:
- Effectiveness of the post CFA supply chain in making products available to the end consumer, which manifests in loss of sales over the retail counter
- Efficiency of the supply chain in terms of the cost of making products available to the end consumer, which manifests itself in excess inventory levels in the channel and a month-end ‘skew’ in stockists’ inventories
Muralidharan Nair, Partner, Ernst & Young says, “With new product introduction driven growth on the wane, effective channel management can be a strategic differentiator for the Pharma companies in times to come. Channel management is the key to growing the classic brands but what is less understood is the positive impact it has on the ethical portfolio by virtue of improved trade hygiene and focused efforts of ethical sales reps”.
Tapan Ray, Director General, OPPI says, “In the pharmaceutical industry, the sales force plays an important role in demand generation processes and Supply Chain ensures demand fulfilment. Significant amount of work is being done in improving the deployment and training of the sales force to gain competitive edge in the market place. Quantum efficiency in the Supply Chain system has been brought in by many companies over the years with thrust on process engineering and process upgradation driven purely by customer oriented financial parameters. It is about time to integrate Supply Chain and the demand generation process with a holistic customer focused approach in search of excellence”.
Effectiveness – Non-availability leading to sales loss
Loss of sales due to non-availability of products at the retailer’s end is a reality in the current pharma distribution setup. However, the incidence and quantum of this loss differs across geographies and product categories. The extent of sales loss varies from 0-1% in Metros (across product categories) to up to 5% in tier 2 & rural geographies (as high as 20% in small OTX brands). The variation in loss of sales across geographies and product categories can be attributed to supply chain aspects such as the reach of the supply chain, service levels, the working capital constraints of stockists, awareness of customers and financial returns to stakeholders.
Efficiency – Lack of visibility of post CFA supply chain leading to excess inventories
One of the key operational reasons for excess inventories in the channel is the lack of visibility of pharma companies into stock holding and stock movement in the post CFA supply chain. In the current state, visibility of the post-CFA supply chain is limited, and is traditionally through the visits of the sales force to stockists/retailers as well as through the monthly stock and sale statements of stockists. As a consequence of this opacity in the chain, pharma companies rely on primary sales to stockists as a metric for measurement of performance. Driven by sales targets on primary sales, the sales force may resort to pushing stocks to distributors at month end, which may result in a month end skew in stockist inventories. Where there are variances in demand and primary sales is not aligned to secondary sales, there is an inventory pile-up at stockists.
Some implications of gaps in distribution effectiveness & efficiency:
Faster decline of heritage OTX brands: While the findings of the survey indicate a volume sales loss in the range of up to 5% in OTX brands (up to 20% in small OTX brands), primarily in tier 2 and rural markets, if companies are unable to arrest this loss of sales (compounded over 10 years), it would mean a revenue loss of 30% to 50%. For heritage OTX brands that typically encounter a prescription shift to new molecules, this kind of de-growth will mean faster erosion of brand equity and hasten their decline. Loss of sales could be significantly higher for relatively smaller OTX brands, resulting in their wiped out from the market.
'On the contrary, if companies are able to plug the gap in availability of these categories, it would mean a volume growth of 3%–5% every year, which could almost double the size of a heritage brand over 10 years. The delta between the two cases is 100% to 200%, which emphasizes the benefits of ensuring availability.
Increased pressure of high growth on existing prescription products: Large pharmaceutical companies typically set targets in correlation with the growth of the pharma market. In the absence of growth of OTX brands, and with new product (molecule) launches ceasing to be a key growth driver after the implementation of the product patent regime, pressure on achieving growth in prescription (Rx) products will be significantly higher.
Adverse impact on the growth of existing prescription brands due to conflict of resource allocation: To manage the pressure of high growth, companies could consider two options. They can either neglect heritage OTX brands and invest fully in prescription products, which would indirectly contribute to the faster erosion of heritage brands, or invest the effort of their sales representatives in managing the availability of OTX brands, and thereby detract from their focus on prescription brands. This could lead to a potential conflict of resource allocation leading to sub-optimal performance in both.
Month end sales skew: Lack of visibility of stock holding and movements in the post CFA supply chain leads to companies relying on primary sales for setting objectives. If aggressive primary sales targets in prescription and OTX categories do not match the actual demand in the market, it results in month end sales push to stockists.
For the issues of distribution effectiveness and efficiency identified, the key levers to address the root causes are –
i) Increase visibility of the channel
ii) Release working capital at the stockist
iii) Ensure generated efficiencies are passed down the channel up to retailers
The pharmaceutical distribution and retailing is one of the most complex and less understood aspects of the pharmaceuticals business in India. The reason for this is a unique channel characterized by high degree of fragmentation (over 60,000 stockists, semi-stockists and 600,000 retailers), unorganized independent units with inadequate information infrastructure (highly distributed information assets) and high opacity with sparse visibility of the channel beyond the CFA stock points.
While the role of channel is better understood in regard to OTX products, what is probably underestimated is the positive impact of a well managed OTX portfolio on the performance of ethical products. Hence we believe, effective channel management is not only a tactical necessity but can be a strategic enabler for growth.
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