The global pharmaceutical and healthcare industry has experienced a number of severe shocks to the system in recent decades. What was once a sector where profits flowed from ‘blockbuster’ drugs and a customer base willing to pay premium prices has transformed into a quite different world as a consequence of competition from generics along with reduced budgets available to healthcare providers. Compounding these problems are increasing regulatory constraints and more challenging logistics requirements as bio-pharmaceuticals and related products increase the need for stricter control of temperature and shelf-life as they move through the supply chain. As a result there is now a significantly greater focus across the sector on supply chain management. Previously, when margins were higher and logistics costs were a relatively small proportion of total costs, supply chain issues tended to take a back seat. Now things have changed. Recent research by UPS® has highlighted that many companies are finding it difficult to develop supply chain capabilities that can simultaneously take out costs whilst ensuring regulatory compliance, track and trace, product security and stricter temperature and shelf-life control. Because of these pressures, a new approach to the design and management of supply/demand networks in the industry becomes imperative. In today’s marketplace, there is a need for supply chains that are cost-effective, efficient and agile. Companies operating in every industrial sector and in every market around the world have been confronted in recent years with significant challenges. These challenges have come from numerous sources – economic recession, demographic changes, geo-political upheavals to name but a few. The healthcare and pharmaceutical industry has been no exception and has been impacted by major changes in the competitive and market environment.

1. How to add agility and
customer focus to the
healthcare supply chain
Martin Christopher, Emeritus Professor of
Marketing and Logistics, Cranfield University, UK.

2. Introduction
The global pharmaceutical and healthcare industry has
experienced a number of severe shocks to the system in
recent decades. What was once a sector where profits flowed
from ‘blockbuster’ drugs and a customer base willing to
pay premium prices has transformed into a quite different
world as a consequence of competition from generics along
with reduced budgets available to healthcare providers.
Compounding these problems are increasing regulatory
constraints and more challenging logistics requirements as
bio-pharmaceuticals and related products increase the need
for stricter control of temperature and shelf-life as they move
through the supply chain.
As a result there is now a significantly greater focus across
the sector on supply chain management. Previously, when
margins were higher and logistics costs were a relatively
small proportion of total costs, supply chain issues tended
to take a back seat. Now things have changed. Recent
research by UPS®
has highlighted that many companies are
finding it difficult to develop supply chain capabilities that
can simultaneously take out costs whilst ensuring regulatory
compliance, track and trace, product security and stricter
temperature and shelf-life control.
Because of these pressures, a new approach to the design
and management of supply/demand networks in the industry
becomes imperative. In today’s marketplace, there is a need
for supply chains that are cost-effective, efficient and agile.
Companies operating in every industrial sector and in
every market around the world have been confronted in
recent years with significant challenges. These challenges
have come from numerous sources – economic recession,
demographic changes, geo-political upheavals to name but
a few. The healthcare and pharmaceutical industry has been
no exception and has been impacted by major changes in the
competitive and market environment.
Amongst these business transformations
some of the most critical have been:
Shift from a sellers’ market to a
buyers’ market
Commoditisation of markets
and the growth of generics
Increasing supply chain complexity
In common with many other industries, pharma has been
impacted by the growing power of its customer base.
For example, the increasing consolidation amongst retail
pharmacies has led to greater demands for high levels
of service and responsiveness. Likewise, hospitals and
government agencies have used their buying power to
demand lower prices and have used regulation to specify
which drugs may or may not be made available through
public health services.
With the expiration of patents on what were once
‘blockbuster’ drugs sold at higher prices, the rise of lower
cost generic manufacturers has been dramatic. In 2015
it was estimated that drugs worth about US $4 billion
in revenue were subject to generic competition –
representing about 40% of the pharma market globally,
up from 27% in 20101
. The effect of this new source of
competition on established players in the industry has been
significant, leading to large parts of the market becoming
‘commoditised’ and subject to increasing pressure on price.
Complexity in the pharma supply chain has many sources. The manufacturing
process by its very nature often involves long lead times and uncertain yields.
The growing range of products and the number of variants within a product family
mean that total stock-keeping units (SKUs) continue to rise in many companies.
In addition, the need to service multiple geographic markets and to provide local
customised solutions for specific customers as well as meeting local regulatory
requirements add to supply chain complexity. These pressures have significantly
impacted the cost profile of pharma supply chains.
1
IMS Institute for Healthcare Informatics report. Counted in ‘Five steps towards a revitalized pharmaceutical supply chain’ strategy +
business Issue 66, Spring 2013

3. Turbulence,
Volatility and
Uncertainty
Most supply chains today were
designed some years ago when
the world was a different place.
There is evidence2
to suggest that
up until about the year 2000 most
businesses had experienced several
decades of relative stability in
the competitive environment.
The assumption was that the future
would be much like the past and
hence decisions could be taken on
the design of supply chains with
a degree of confidence that they
would still be fit for purpose for
many years to come.
Previously, when designing supply/
demand networks, the focus
was on cost optimisation, i.e. the
objective being to design a supply
chain solution that would minimise
operating costs whilst meeting
pre-specified levels of service.
The emphasis was primarily on
efficiency and working to plans
which had horizons stretching
some way into the future. Because
of the relatively stable conditions
that prevailed across the supply
chain this ‘forecast-driven’ business
model was entirely appropriate.
2
Christopher, M. and Holweg, M. (2011), “Supply Chain 2.0: Managing supply chains in an era of turbulence” International Journal of Physical Distribution and Logistics Management Vol. 40,
No. 1, pp 63-82
Many companies
in healthcare and
pharma are currently
struggling with how
to devise a supply
chain strategy that
can deliver more value
whilst still containing
costs. The answer
lies in a fundamental
re-think of the
architecture of the
supply chain itself.
Hence, rather than the vertical
integration of the past, the company
is part of a network of specialist –
but independent – suppliers utilising
multiple channels to go to market.
These networks are connected by
shared information which itself is
captured in as close to real-time as
possible. This information comprises
demand signals from the marketplace
as well as the current status of supply
conditions across the network. The
aim now is to achieve the ‘economies
of scope’, i.e. to be able to meet the
precise needs of different customers
but with the same resources – a
strategy made possible often by
postponement of the final manufacture
or packaging of the product.
Customer-driven
supply chains
When there is so much emphasis on
cost reduction across the supply chain
it is easy to forget that success in the
market place is largely determined
by the value that a product delivers.
Customer value comes in many forms
and the supply chain might be thought
of as a value delivery system. The
specific ways in which the supply
chain delivers value is through
availability, responsiveness and the
provision of tailored solutions.
As we have already observed, most
traditional supply chains were
designed to optimise the internal
operations of the supplying company.
Thus a manufacturer might be
motivated to establish supply and
distribution arrangements that would
enable production efficiencies to
be maximised. Typically this would
entail manufacturing in large batches,
shipping in large quantities and
buffering the factory – both upstream
and downstream – with inventory.
Whilst this approach was fine from
the perspective of the manufacturing
organisation, it clearly did not come
anywhere close to being ‘customer
centric’, instead of designing supply
chains from the ‘factory outwards’ the
challenge is to design them from the
‘customer backwards’.
To meet this challenge healthcare
businesses need to focus their efforts
upon achieving greater agility so that
they can respond more rapidly both in
terms of volume change and variety
change. In other words, they need
to be able to adjust output quickly to
match market demand and to switch
rapidly from one variant to another.
To a truly agile business, volatility of
demand is not a problem; its processes
and organisational structure as well as
its supply chain relationships enable it
to cope with whatever demands are
placed upon it.
Demand
driven
Yesterday’s model
Vertical integration
Inventory based
Economies of scale
Tomorrow’s model
Virtual networks
Information based
Economies of scope
Forecast
driven
Mass
production
Mass
customisation
However, as we entered the
21st century conditions began to
change. Volatility and turbulence
are now the backdrop against
which business decisions have to
be made. One of the main impacts
of these changes has been the
increase in uncertainty making it
more difficult to plan ahead using
conventional forecasts. If, as some
have suggested, these conditions of
constant and unpredictable change
are to become the ‘new normal’
then supply chain management will
have to change accordingly.
Rather than the forecast-driven
model that has typified supply
chain management for so long, a
new model that is ‘demand-driven’
and responsive to change will
have to be developed.
Figure 1 below highlights the
challenge facing companies as
they move from a world where
mass-production and forward
planning were the fundamental
principles to a world where market
responsiveness and flexibility
become the drivers.
Thus the traditional supply chain
model – the lower left hand
quadrant in figure 1 – was based
around vertical integration -
upstream and/or downstream
- with a high degree of control. It
was based on building inventory
ahead of demand and a production
‘push’ philosophy. Ultimately, the
main objective of the supply chain
strategy under this model was to
achieve economies of scale.
Now as we enter the era of change
and uncertainty, a much more
flexible and responsive capability is
required. This is the world depicted
in the top right hand quadrant of
Figure 1.
Figure 1: Supply chain
transformation

4. The foundations
of agility 3
It will be apparent that agility is not a single
company concept but rather it extends from
one end of the supply chain to the other. The
concept of agility has significant implications for
how healthcare organizations and their suppliers
relate to each other and how they can best work
together on the basis of shared information.
To bring these ideas together, a number of basic
principles can be identified as the starting point
for the creation of the agile supply chain.
Synchronize
activities through
shared information
Synchronisation implies that all parties in
the supply chain are ‘marching to the same
drumbeat’. In other words, through shared
information and process alignment there is
in effect one set of numbers and a single
schedule for the entire supply chain. This
somewhat utopian vision is increasingly
becoming reality as web-based technology
and cloud computing enables different entities
in a network to share information on real
demand, inventory and capacity in
a collaborative context.
Global logistics providers, such as UPS,
maintain sophisticated inventory management
systems for their contract logistics operations
that can be fully integrated with their
customers’ Enterprise Resource Planning (ERS)
software to ensure that the title holder has full
visibility on stock levels, and logistics provider
full visibility on incoming deliveries.
By improving the visibility of downstream
demand, healthcare companies can move
towards the goal of continuous replenishment
whereby as products are consumed they are
automatically replaced thus dramatically
reducing the need for safety stocks. This
principle of ‘substituting information for
inventory’ holds good for any industry but
has a particular resonance for the healthcare
sector where the cost of holding inventory
can be high.
Work smarter
not harder
Many processes in the supply chain
are lengthy because the constituent
activities are performed in ‘series’, i.e.
in a linear, ‘one after the other’ way.
It is often possible to reduce lead times
by conducting a supply chain mapping
exercise and re-engineer processes
where activities are performed ‘in
parallel’, i.e. simultaneously.
For pharmaceutical companies, it is
essential to map the current supply
chain from end-to-end, not simply
the transportation of goods, but the
flow of materials and data within
the organisation, both upstream
from its suppliers and downstream
to its customers, all the way to care
providers and their patients. Almost
without exception, this exercise
uncovers logistics processes that are
based on the organisation’s history
rather than its current reality or its
strategic vision.
1
2
Many opportunities exist in the healthcare sector to
establish procedures for information sharing so that a
greater level of synchronisation across the supply
chain can be achieved.
3
This section draws on material from the author’s book Logistics and Supply
Chain Management (5th
Edition) Pearson, 2016

5. Seek to reduce
complexity
Complexity comes in many guises in supply chains.
Complexity may be generated by multiple variants
of the same product, e.g. different pack sizes, or by
each product in a family having greatly different Bills
of Material, or by frequent product changes, and
so on. Complexity can also be generated through
cumbersome processes that involve many different
stages and hand-offs. Simplification is an obvious
remedy for complexity but one which may not
always be available. However, there will often be
opportunities to reduce complexity by questioning
the reasons why things are the way they are.
For example, is the level of product variety greater
than the customer actually requires? Often product
proliferation is driven by sales or marketing
departments and may not actually achieve additional
sales but spread the same total demand over a
Postpone the final
configuration/assembly/
distribution of products
The philosophy of postponement ideally would
begin on the drawing board so that products are
designed with late configuration in mind. The
longer that products can remain as generic ‘work
in progress’, the more flexibility there will be to
ensure the ‘right product in the right place at the
right time’.
Postponement may not always be feasible in terms
of late configuration but there may be scope for
spatial postponement through holding inventory
in just a few locations with the ability to ship the
product rapidly to the location required when an
order is received. In the pharmaceutical industry
many companies have started to explore the
opportunities for delaying the final packaging of
the product until it is known which country the
product will be shipped to. The idea here is that
products are produced with a standardised primary
packaging at global packaging sites and shipped to
regional distribution centres exploiting economies
of scale. And only after receiving a specific
customer order, will the product be customised
with a designated secondary packaging containing
relevant country information.
4
5
Partner with
suppliers to reduce
in-bound lead times
Conventionally, firms have maintained an arm’s-
length relationship with suppliers. Suppliers have
often been chosen on the basis of price rather
than their responsiveness. A major opportunity
exists for reducing in-bound lead times through
working closely with key suppliers. Because in the
past there was often a view that suppliers should
be held at ‘arms length’, many opportunities for
improving responsiveness have been missed. Since
supplier agility is one of the main requirements in
the creation of a more responsive supply chain, it is
perhaps surprising that some businesses even now
have few collaborative programmes with suppliers
in place.
Often suppliers may well be able to transfer
knowledge and best practice from their operations
to their customers – and vice versa. In either case,
the opportunities to reduce in-bound lead times
by closer partnership across the supply chain
are considerable.
3
greater number of stock keeping units (SKUs).
The greater the fragmentation of demand, the
harder it becomes to manage availability in that
the variability of demand at the individual item
level will tend to be higher.
Simplification can sometimes be achieved through
seeking greater commonality of raw materials,
components or sub-assembly across a family of
products. For example, in automobile design these
days it is increasingly the case that several different
models of car are built on the same platform and
‘under the skin’ share common components and
sub-assemblies. Similar opportunities should be
available in the medical device industry but may
require product design changes to make it possible.
The point about complexity is that it provides a
barrier to agility as well as generating cost.

6. Manage processes not
just functions
For centuries organisations have followed an
organisational logic based upon the ‘division
of labour’ whereby activities take place within
functions or departments. Whilst this functionally-
based organisational concept may ensure the
efficient use of resources it is actually inwardly
focused and tends to lead to a ‘silo’ type mentality.
It also seems to be the case that these functionally-
based organizations are slow to respond to changes
in the market or business environment. Because
there are often multiple ‘hand-offs’ as things get
passed from one function to another, there is an
inevitable lengthening in the time to respond.
Companies that are able to respond rapidly to
changing customer requirements tend to focus
more upon managing ‘processes’. Processes
are the horizontal, market-facing sequences of
activities that create value for customers. They are
cross-functional by definition and are usually best
managed through the means of inter-disciplinary
teams. The critical business processes that cut
across the organisation would include innovation,
customer relationship management and supplier
relationship management.
Healthcare companies, often because of long
development lead-times and burdensome
regulatory regimes, are accustomed to lengthy end-
to-end supply chains and may not have considered
how they could increase the ‘clockspeed’ of their
processes. Even with the constraints specific to the
sector, significant improvements to critical supply
chain processes, such as procure-to-pay and order-
to-cash, could be achieved by borrowing ideas on
time compression from other industries such as
automotive and consumer electronics.
Utilize appropriate
performance metrics
It is a truism that performance measurement
shapes behaviour. This is particularly the
case in business organisations where formal
measurement systems drive the business.
In functionally-based organisations these
measurements often are based upon
departmental budgets and are underpinned
by objectives such as cost minimisation, asset
utilisation and efficiency and productivity
improvement. Whilst on the face of it these
objectives may appear to be desirable, they
will not necessarily encourage agile practices
within the organisation. If, for example, a
manufacturing facility is measured on, say,
unit cost of production, then the incentive will
be to go for big batch sizes to take advantage
of economies of scale. However, such actions
will probably lead to a loss of flexibility and
the creation of additional inventory. If, on the
other hand, time-based metrics were to be
employed, then the focus could be on cycle-
time reduction, set-up time reduction and other
measures that encourage agile practices.
A fundamental tenet of agility is customer
responsiveness, hence the need to ensure that
the primary measures of business performance
reflect this imperative. ‘Time to market’
and ‘time to volume’ are powerful metrics
employed by companies where short life
cycles dictate a focus on rapid response to
fast-changing markets and volatile customer
demand. This is particularly true for the
healthcare industry where the pressures
from the marketplace are making ‘time-
based competition’ a critical differentiator.
Unfortunately, many companies, whilst they
may recognise the need for higher levels of
agility, still retain the traditional, inwardly-
focused and efficiency-based metrics. Any
business that is serious about becoming a
demand-driven organisation needs to ensure
that the performance measures it employs are
encouraging the right behaviour.
6 7

7. A routemap to responsiveness
As we observed earlier, conventional supply chains are
typically designed from the factory outwards. In other
words, they tend to be structured to enable the company’s
internal efficiencies to be optimised. So, for example, in a
manufacturing environment the objective has often been
to achieve low-cost production with high levels of capacity
utilisation with the consequent need to warehouse products
which are manufactured in economic batch sizes.
By contrast, a customer-driven supply chain recognises the
primacy of the needs of the customer. Rather than the ‘one
size fits all’ philosophy of the conventional supply chain, the
implication of adopting a customer-driven approach is that
there will be a high level of tailoring and customisation of
the service offer to respond quickly to market changes
and meet customer demands.
The responsive business will have agile suppliers and
will work very closely with them to align processes
across the extended enterprise. It will also be very close
to its customers, capturing information on real demand
and sharing that information with its partners across the
network. Internally the business will also be focused on
agility through the way it organises – breaking through
functional silos to create process teams. In terms of its
manufacturing and sourcing strategy, the responsive
business will seek to marry the lean and agile paradigm
through de-coupling its upstream and downstream
processes, utilising the principles of postponement wherever
possible. Figure 2 summarizes the key elements.
Those companies that can follow this routemap will be more
likely to be the leaders in their field. More often than not,
when we look at the successful companies in any market,
they tend to be the ones that have demonstrated their
ability to respond more rapidly to the changing needs
of their customers.
Whatever the supply chain solution
that is adopted, ultimately its
‘architecture’ must be market driven.
Generic
Inventory
Capacity
management
Set-up time
reduction
Visibility
of real
demand
Quick
response
Demand
driven
The
responsive
business
Design
for late
configuration
Vendor
managed
inventory
Sychronized
production
Process
management
Cross-
functional
teams
Postponement
strategies
Agile
suppliers
Organisational
agilityFlexible
response
Figure 2. Routemap to the
responsive business

8. Conclusion
As is the case for many industries, the ‘centre of gravity’ of the
pharmaceutical and healthcare supply chain is shifting. With the
growth of emerging markets new challenges emerge as existing
supply chain solutions will probably no longer be adequate.
The likelihood is that more ‘local-for-local’ manufacturing and
logistics strategies will be applied rather than seeking to serve
these markets through existing western-centric supply chains.
If this is the case, companies in the sector may struggle with
issues such as the protection of intellectual property, product
security, counterfeiting and compliance with different regulatory
environments as they seek to develop their presence in
these markets.
Partnerships with logistics service providers who have developed
specific knowledge and capabilities in the sector and with the
experience of operating in different geographies may provide a
way forward. Again, the need for sophisticated tracking tools to
monitor products as they move through complex supply networks
also makes the idea of partnerships with specialist logistics service
providers an attractive proposition.
One thing is clear and that is that yesterday’s solutions will not
work in tomorrow’s world. The turbulent economic conditions and
the heightened uncertainty that have characterized the recent past
are likely to prevail for some time. As a consequence healthcare
companies must be prepared to re-engineer their supply chains to
build in greater levels of flexibility and adaptability. Typically, many
current supply chain arrangements are not able to be reconfigured
rapidly if conditions change. Rather than seeking to optimise
supply/demand networks in terms of cost – as has usually been the
case in the past – smart companies are optimising their networks
with flexibility and responsiveness in mind. Over one hundred and
fifty years ago Charles Darwin provided us with an insight which
should be the guiding principle underpinning the development of
future supply chain strategy:
“It is not the strongest of the species that survive, nor the
most intelligent, but the one most responsive to change”
Supplychaintransformation:
How UPS can help…
Historically, the design of pharmaceutical supply chains was determined primarily
by the achievement of high delivery reliability as well as high delivery readiness.
Companies have achieved these objectives by keeping a large inventory of
finished goods close to the customer in addition to executing reliable
production and logistic processes.
However, looking at the healthcare industry’s growth trajectory, companies are
advised to constantly re-evaluate their supply structures and put in place the
right resources, technologies and processes to meet supply chain demands.
A number of leading global healthcare corporations have found that the most
effective, timely and efficient means of success is to work with a global logistics
integrator that can provide turnkey, scalable solutions for end-to-end supply chain
management, from upstream supplier to ultimate customer.
UPS provides solutions for many of the elements outlined in Professor
Christopher’s ‘Routemap to a responsive business’ - from postponement services,
to demand visibility and process improvement. We work collaboratively with
our customers to understand their business and help them redesign and optimise
their supply chain using a tried and tested approach. We consider key criteria that
includes sourcing, manufacturing, distribution, delivery, fulfilment and returns—
analysing the entire network. We look at service levels, distances, operating
costs, inventory levels etc. to develop a “what if” planning exercise on which
logistics decisions can be based. We manage thousands of sensitive healthcare
shipments every day and have helped numerous clients across the life science
industry perform better and realize greater efficiencies.
If you are facing a logistics problem or want to rebuild your supply chain to be
agile and more responsive to customers’ needs, I invite you to contact UPS.
We are here to help.
Jan Denecker
Director Healthcare Marketing and Strategy
UPS Europe
Visit solvers.ups.com/gb/healthcare
About
the author
Martin Christopher has
been at the forefront of the
development of new thinking
in logistics and supply chain
management for over thirty
years. His contribution to the
theory and practice of logistics
and supply chain management
is reflected in the many
international awards that he has
received. His published work is
widely cited by other scholars
and he has been invited
to participate in academic
and industry events around
the world.
www.martin-christopher.info

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