Pharmaceutical Distribution Structure
For any company that produces or distributes a product to the market, their distribution network is the lifeline via which their products are delivered. As a comparison, the distribution network can be likened to the body’s circulatory system. Our bodies require oxygen to survive, just as our customers require our products to maintain their business. To transport the oxygen the body has blood; the distribution network has trucks, trains and boats.
So if distribution networks are so essential to keeping businesses alive, why do so many companies neglect them? These networks are often outdated, inefficient and not cost effective. To change the network requires detailed analysis, research, planning, and some setup costs. The task is not easy; but, if we were experiencing similar physical problems, we would not take years to visit the doctor. If we did, simple curable illnesses may turn out to be much more serious, and possibly grave.
So what drives companies to examine and change their distribution networks?
Many companies realize that inadequate distribution networks result in inefficient methods of storing and shipping their products. Improving their distribution networks can be an opportunity to reduce costs, while at the same time improve service.
Different industries focus on varying big logistics issues when considering potential changes to distribution networks. Companies manufacturing prescription pharmaceuticals with high margins and small, expedited shipments have traditionally been driven by manufacturing location and by the costs to carry high-valued inventories.
One such company had three U.S. manufacturing locations, supported by manufacturing in Puerto Rico and imports from Europe. Domestic distribution operations were conducted through warehouses located at or near each of the three plants. When the company decided that it wanted to close down its East Coast manufacturing location, it was necessary to evaluate the cost and service tradeoffs associated with non-plant warehouses in several other important markets, California in particular.
Most of the volume shipped in small parcel or LTL shipments, with a few large customers placing truckload orders once a week. A significant amount of product was also shipping via expedited one- and two-day air. This was occurring because of manufacturing issues and a lack of available product, not because of customer requests. The nominal service goal established from a previous customer survey was a three- to four-day total cycle time.
Aside from its role to provide service to an important portion of the customer base, the Northeast plant warehouse was also serving as the entry point for all of the European imports arriving via ocean freight. Without an East Coast facility, the European imports would have to be shipped from an East Coast port to the next closest plant warehouse in the Midwest. This meant that some of the European imports would be sent to the Midwest, just to be sent back to the East Coast.
Despite this significant transportation cost penalty, a computer model still indicated that overall distribution costs would be lower if the Northeast demand was fulfilled from the Midwest plant rather than from a standalone distribution center. The higher costs of space and labor in the Northeast were a major contributing factor to this conclusion.
On the West Coast, the solution was different. The model clearly showed that the California demand could be more effectively served from a West Coast distribution facility. However, the West Coast market was relatively small and would not support full truckload replenishments to the warehouse. Therefore, until volumes grew to a level which could support efficient replenishment, the West Coast market would continue to be fulfilled from the Midwest.
Analyzing and improving the current distribution network is a sound way to improve current service levels and reduce costs. This type of analysis can also be very helpful in planning the strategy for the future.