How to ensure the continuous “supply chain” of drugs & medical devices?

In recent years, drugs and medical devices are key industries related to national economy and people’s livelihood. China has launched a series of combination policies for reform and optimization, striving to improve the circulation efficiency of supply chain and reduce the circulation cost. We have observed that the pattern of the whole pharmaceutical industry has undergone qualitative changes, and the concentration of circulation has been further improved. At the same time, as the profit level of the industry decreases year by year, more and more pharmaceutical equipment manufacturers spare no effort to promote the localization of product production, strive to obtain enterprise import and circulation qualifications, or relocate global factories to China, all these measures will further enhance the influence of Chinese manufacturing and market.

However, the outbreak of COVID-19 coincides with the Chinese New Year, which has exerted a huge impact on the “production, circulation and terminal” of the entire pharmaceutical supply chain in China. The smooth operation of the supply chain is in urgent need of masks, protective clothing, first-aid equipment and diagnostic reagents, long-term medication for chronic patients such as hypertension and diabetes, and even the continuous operation of drugs in some foreign regions.

This paper aims to analyze the important risks existing in the “production” and “circulation” links of the supply chain, and put forward our thoughts and suggestions based on the actual operation of enterprises.

I. Import and production of raw materials/finished products

“Even a clever housewife can make bricks without rice” — raw material cost and supply

The first step in medicines and medical devices is raw materials. Take medicine as an example, large and medium-sized domestic pharmaceutical factories generally have stable raw material supply channels or their own raw materials, and usually the supply can remain stable in special periods, but they still suffer from the pressure of rising raw material prices. And because terminal prices cannot rise, firms have to absorb the rising cost of raw materials themselves. However, for domestic products and imported sub-packaged products of imported joint ventures, there is pressure of supply: due to the strengthening of health inspection and quarantine, the reduction of flights and sea voyage, it may lead to the shortage of raw materials and the situation of “no rice can be cooked”. In addition, import joint ventures generally have a long supply chain communication cycle and distribution cycle, which makes it difficult to cope with sudden demand such as surging raw materials. At the same time, the Spring Festival, the production factories are generally located in the first and second tier cities, large quantities of Spring Festival travel back to the home will lead to the reduction of transportation personnel, will also affect the distribution of raw materials.

Operation Suggestions:

Optimize the supply system of raw materials. In case of emergency, the stable supply guarantee system of the manufacturing enterprise will be broken, and the raw material source cannot be changed according to the quality control and legal requirements. Manufacturing enterprises should set up contingency plans to perfect and optimize the existing supply guarantee system. There is room for improvement in the following aspects:

Reevaluate raw material stocks. Sales before the holiday is a peak in the annual sales curve, and due to internal settlement and other reasons, enterprises will end production earlier, so they will not reserve sufficient raw material inventory. We suggest that companies optimize their API reserves and reevaluate their inventory readiness.

Establish our own logistics team. Pharmaceutical equipment enterprises usually rely on third-party logistics transportation companies to provide transportation services for their products, and the same is true for the procurement of API. Therefore, appropriate retention of self-owned transportation vehicles and localized drivers in line with national quality regulations can also alleviate the shortage of API transportation capacity in emergency situations.

“Rice, no kitchen” — resumption and gathering of production personnel

After all, the raw materials arrived at the factory, but there was a thorny problem: a shortage of workers. Restrictions on logistics and migrant workers under special circumstances, as well as approval for resumption of work during emergencies, have added to the difficulty of resuming production. According to public reports, the early resumption of work in some areas requires the approval of at least five administrative departments before resuming work. After the factory resumed work, there was a problem of people gathering. How to ensure the safety of employees is a problem that enterprises need to solve. In terms of industry, factories of some import joint ventures follow the principle of unified supply chain management of the global headquarters, and factories of some foreign enterprises in China report directly to the global team, which increases the cost of internal communication. At the same time, drugs and medical devices are subject to strong national supervision, from pills to finished product packaging, every link has an impact on the normal sale of products.

Operation Suggestions:

For the daily management of factory personnel, it is also necessary to take into account emergencies:

Usually large pharmaceutical enterprises manufacturing plants are mainly set up in the first and second tier cities, the employee localization ratio is low. The new coronavirus coincides with the Spring Festival, and the assembly line work was finished early. As a result, some pharmaceutical equipment companies have not been able to fully resume work due to the lack of assembly line staff. Therefore, we suggest appropriately increasing the proportion of localized employees, and establishing an emergency mechanism with local HUMAN resource service agencies and corresponding government agencies in special cases, so as to quickly acquire short-term production personnel.

In the face of staff gathering, staff dormitory arrangement, staff movement control and daily disinfection equipment reserve, enterprises need to pay high attention to. In addition, communication with government departments should be strengthened to speed up the approval of the resumption of work and the lifting of logistics distribution, so as to ensure the early resumption of production. For more information, please refer to deloitte’s article, “Fight the epidemic, resume work calmly”.

“Food out of the pot, not enough plates” — finished product transportation

According to current industry management, pharmaceutical equipment enterprises have limited storage space in their own warehouses and highly rely on third-party warehousing and logistics to reduce their own operating costs and improve product inventory turnover. Due to the logistics control during the special period, the third-party logistics cannot timely deliver the finished products due to factors such as personnel resumption of work and transportation control. Not only are supplies urgently needed for the epidemic, but also the transport of medicines for chronic diseases, which cannot be cut off. At the same time, due to the limited space of own inventory, and it is difficult to find a warehouse in accordance with national quality and laws and regulations in a short period of time, after the production line starts working in “three shifts”, it is easier to cause the embarrassing situation of products piling up in the warehouse.

Operation Suggestions:

Reconfigure the new “virtual” regional distribution center. With the implementation of “two-ticket system” in the pharmaceutical and medical device industry, the overall logistics distribution efficiency has been greatly improved, and the high distribution cost and low efficiency caused by multiple levels have been reduced, but the number of regional distributors has also been greatly reduced. In addition, after the production of pharmaceutical equipment enterprises, they need to take the factory as the center to carry out radiation to the whole country or even overseas, so there are challenges in storage and transportation under special circumstances. Therefore, make good use of the policy dividend of “multi-warehouse operation”, cooperate smoothly with the third-party logistics company, and build a “regional distribution center” of its own, in order to optimize the response speed of the overall product distribution and improve the efficiency of logistics distribution;

Evaluate the capacity of the third party logistics companies currently in use, select a better third party for logistics and transportation, so as to ensure timely delivery of products to first-level distributors in case of emergency, and add special provisions such as emergency plans in the agreement, so as to ensure effective implementation of the emergency mechanism;

We observe that since the implementation of “two-ticket system”, many pharmaceutical enterprises are actively exploring the possibility of “one-ticket system” : through the optimization of their own logistics system and reconstruction of regional distribution centers, the exploration of “one-ticket system” will be promoted.

Circulation of drugs and medical devices

Public data show that at present, China has about 14,000 drug wholesale enterprises, which are responsible for daily drug import and distribution to more than 30,000 medical and health institutions, 900,000 primary medical and health institutions, more than 5,000 chain enterprises and 250,000 retail pharmacies. According to the management of the circulation industry, the sales before the Spring Festival are also in a sales peak due to the preparation of goods before the festival and the preparation of injections in cold areas in winter, resulting in dealers’ inventory during the holiday is lower than the usual level. According to the statements of listed companies and industry practices, the inventory turnover days of distributors and medical institutions are usually 15-20 days and 10-15 days, so normal clinical use of drugs can be basically guaranteed. Due to the different models and business models of medical devices, the overall inventory of dealers varies greatly according to the product characteristics of first, second and third class medical devices.

However, the system of product distribution and procurement in emergencies is completely broken. The procurement of medical institutions will undergo extreme changes: due to the epidemic, products such as masks, protective suits and goggles, which are generally in low stock by dealers, will be purchased in large quantities. However, due to the decrease of hospital patients and the tilt of medical resources, the purchase volume of chronic diseases drugs and other products with large daily purchase volume will be greatly reduced. Demand for products such as LVP, which has a large footprint and low value, has become unstable. In addition, the increasing purchasing power of pharmacies, the influx of online orders and the inability of upstream supply of goods to replenish in a timely manner have brought tremendous pressure to circulation enterprises.

Sales and distribution pressures

Usually, large distributors will keep a small number of logistics personnel on duty during the long holiday to respond to the distribution of first-aid drugs in medical institutions. Medium – and small-sized distributors generally only keep inventory, which makes it difficult to respond and deliver quickly to a large number of hospital orders in emergency situations. At the same time, due to the change of sales habits, the proportion of retail sales has increased and the inventory of retail pharmacies has decreased, which have put forward new requirements for distributors from distribution frequency to distribution volume, and also brought challenges to distribution efficiency and cost.

Operation Suggestions:

Route planning is an important part of distributor’s logistics distribution. The main considerations of route planning include timeliness, rationality and distribution cost. At present, most of the route planning is based on daily routes and experience. We suggest that enterprises make use of big data and artificial intelligence algorithms to accurately plan distribution routes, which can effectively cope with the situation of increasing distribution objects and dispersed goods category and quantity. At the same time, we strengthened communication with government departments, made full use of the advantages of localization of distributors, and tried to solve the distribution obstacles caused by traffic control and other factors.

In recent years, the government and enterprises are vigorously promoting the “last mile” distribution service. Due to the large increase of orders under the emergency situation and the Spring Festival holiday, the current delivery personnel is further short. Through coordination with qualified traditional express delivery companies, “contact-free delivery” of drugs and medical devices is adopted to ensure that patients continue to take medicine. At the same time, it is also crucial to improve the epidemic protection of distribution personnel to avoid the large-scale spread caused by the movement of people.

Pressure to purchase goods

Under normal circumstances, the upstream is responsible for the distribution of drugs to the distributor’s warehouse. Therefore, for the primary distributor purchasing from the manufacturer, the manufacturer usually carries the products to the distributor’s warehouse by car or air. In case of emergency, due to the uncertainty of the capability of logistics and transportation enterprises for manufacturing enterprises, it is difficult for distributors to replenish inventory products in time after consuming inventory products. Meanwhile, in response to emergencies, each circulation link and terminal will improve their inventory level correspondingly, which will also lead to the rapid consumption of inventory of distributors.

Operation Suggestions:

At present, the examination and approval of third-party logistics storage and transportation qualification has been delegated to the corresponding provincial government departments. Regional large distributors can make full use of mature logistics storage and transportation system and experience in multi-warehouse operation, work closely with manufacturing enterprises to build regional distribution centers, and assist pharmaceutical enterprises in daily management, in order to meet daily supply needs and improve logistics efficiency in emergency situations.

Pressure on inventory management

The sales category will also change greatly in the special period, leading to further increase the pressure of inventory management of dealers. Large distributors usually use three-dimensional storage and flow operations to complete the daily shelves and shelves, this kind of logistics means in the daily distribution can be very handy, for the same product, the same customer a large number of storage and delivery efficiency improvement is obvious. However, during the special period, the delivery object often changed from a large third-class a hospital to more than 20 retail pharmacies. From a single variety of whole pallet procurement in large quantities, into a variety of flexible quantity procurement, and even a large number of “LCL” generation, these have completely overturned some daily inventory management habits. Due to daily working habits, large dealers usually bind pallets with bar codes or two-dimensional codes, which leads to scattered shipment and even insufficient pallets in some enterprises, greatly affecting the efficiency of inventory management.

Operation Suggestions:

Under the emergency situation, the inventory management pressure faced by enterprises is huge. The localization degree of employees in circulation enterprises is relatively high. Therefore, how to give full play to the subjective initiative of employees in the whole company and strive to replenish warehouse staff in time is of great importance. At the same time, the corresponding preplan and welfare guarantee mechanism should be set up to ensure the super-efficient operation of the warehouse.

Third, enterprise cost control

Pharmaceuticals and medical devices are industries that affect the national economy and people’s livelihood. However, during the same period, the rapid rise in raw material prices and overtime pay for extended working hours have virtually increased corporate costs.

Operation Suggestions:

The government has launched a series of financial subsidies and tax preferential policies for enterprises. Pharmaceutical enterprises should fully understand and communicate with the competent fiscal and tax authorities to maintain appropriate profitability. At the same time, it can also communicate with the corresponding medical and political departments, medical institutions and pharmacies to shorten the account period and solve the financial pressure that enterprises need to face after the public health event is relieved. For details, please refer to deloitte’s article “Frontline Quick Comment”. In the face of the epidemic, enterprises can make good use of government support policies to “increase source and reduce expenditure”.

However, in the medium and long term, the establishment of regional distribution centers, the development and maintenance of emergency mechanism, the optimization of the overall supply chain, and the exploration of one-ticket system will increase the additional operating costs of enterprises. At the same time, in the trend of further price reduction of drugs and medical devices, the importance of cost control is increasingly prominent.

Operation Suggestions:

Through the introduction of big data and artificial intelligence algorithms, improve the overall logistics operation efficiency, rationalize the use of multiple warehouses, and effectively cooperate with third-party logistics and primary dealers, all of which help to reduce the circulation cost of the whole supply chain;

At the same time, the performance evaluation mechanism of third-party logistics distribution enterprises should be strengthened to improve the efficiency of logistics transportation and reduce unnecessary extra expenditures.

Iv. Ensure that patients continue to take medicine and actively fulfill their social responsibilities

The efficient operation of the supply chain as a whole has only one goal: to ensure that patients have access to the drugs and devices they need in a timely manner. The special period is the key moment for enterprises to fulfill their social responsibility.

Distance patient education

In the case of a public health event, patients’ and the public’s concerns will spread to other areas of disease due to information asymmetry. Therefore, the importance of distance patient education is increasingly prominent. Pharmaceutical equipment enterprises can make full use of advanced technology and platform advantages, through the distance education platform, make full use of their own medical department, market advantages of professional resources, better to provide safe, correct and scientific guidance for patients, improve social influence;

At present, due to the high infectivity of the epidemic and the support of medical resources in special areas, the general outpatient department of medical institutions has been affected to a certain extent. However, the treatment of common diseases, as well as daily dressing change, nursing and other matters will not be terminated due to the outbreak of the epidemic, and the needs of home nursing of the majority of patients can be intensified. Through the introduction of patient education platform and professional medical and nursing teams to provide remote professional guidance for patients with chronic disease monitoring and health management, treatment and simple daily care can be more effectively transferred from the original medical site to home, so as to improve the accuracy of medication, which can also relieve the pressure of outpatient service in medical institutions.

Telemedicine and medical education are inseparable from the delivery of the last mile. Traditional DTP pharmacies, distributors, chain pharmacies and retail pharmacies all need to play their own advantages and work together to ensure the distribution of drugs and devices

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