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MODELING RISK MANAGEMENT IN THE PHARMACEUTICAL INDUSTRY GLOBAL SUPPLY CHAIN LOGISTICS USING ANALYTIC HIERARCHY PROCESS MODEL

A Dissertation Submitted to the Graduate Faculty of the North Dakota State University of Agriculture and Applied Science

By

Chris Iheanyi Enyinda

In Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY

Major Department:

Transportation and Logistics

December 2008

Fargo, North Dakota

UMI Number: 3384580

Copyright 2009 by Enyinda, Chris Iheanyi

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Title

MODELING RISK MANAGEMENT IN THE PHARMACEUTICAL INDUSTRY GLOBAL SUPPLY CHAIN LOGISTICS USING ANALYTIC HIERARCHY PROCESS MODEL

By

CHRIS IHEANYI ENYINDA

The Supervisory Committee certifies that this disquisition complies with North Dakota State University's regulations and meets the accepted standards for the degree of

DOCTOR OF PHILOSOPHY

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Approved by Department Chair:

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Signature

ABSTRACT

Enyinda, Chris Iheanyi, Ph.D., Department of Transportation and Logistics, College of Graduate and Interdisciplinary Studies, North Dakota State University, December 2008. Modeling Risk Management in the Pharmaceutical Industry Global Supply Chain Logistics Using Analytic Hierarchy Process Model. Major Professor: Dr. Won Koo.

Achieving sustainable differentiated advantage in today's ultra-competitive

environment demands supply chain C-level executives to have a clear understanding of

appropriate approaches to managing key risks. Thus, organization should have a

methodology for identifying and evaluating the risks it faces and a process for generating

intervention plans to mitigate the risks to an acceptable level. For the pharmaceutical

industry, pharmaceuticals are crucial input into healthcare treatment, so it is imperative that

risks attached to the sourcing, manufacturing, and distribution of drugs to the ultimate end-

users are identified and proactively managed. Hence in the most regulated pharmaceutical

industry, superior GSCL risk mitigation and management are required for survival.

Pharmaceutical firms that do not mitigate and manage their supply chain risks will risk

failure. But pharmaceutical firms that understand the devastating effects of potential supply

chain disruptions and take proactive steps to plan for contingencies will emerge stronger

and more competitive when surprised.

In this context, the intent of this research is to apply a multi-criteria analysis by a

four-level AHP methodology, to choose optimal mitigation strategies to manage

pharmaceutical global supply chain logistics (GSCL) risks. Level 1 represents the ultimate

goal the decision maker intends to achieve in implementing risk management; Level 2

encompasses criteria (risk categories); Level 3 is composed of sub-criteria (sub-risk

factors); and Level 4 represents the alternative (risk mitigation strategies) reported in the

pharmaceutical industry hierarchy structure. The intent of this model is to rank the

iii

disruption risk in the pharmaceutical GSCL. The model included key risk factors in the

pharmaceutical industry. Hierarchical models can be used to decompose a complex value

like risk into its constituent components. The second level of the hierarchical model

consists of the objectives or criteria that make up this complex value. Thus, the value to be

modeled is the disruption risk in the pharmaceutical GSCL. Because risk can be defined as

the probability of occurrence multiplied by the severity or impact of the event, the criteria

that make up the risk are the criteria that can influence both the probability and the severity

or impacts.

The results based on modeling risk management in the pharmaceutical industry

GSCL using AHP approach indicate that regulation/legislation risk (0.291) is the most

important risk factor, followed by operational risk (0.228) and reputational risk (0.200). For

alternative policy options, risk reduction (0.193) is the most important risk mitigation

strategy, followed by risk transfer (0.150), risk avoidance (0.131), and risk acceptance

(0.127).

This study has demonstrated the applicability of AHP in modeling risk management

in the pharmaceutical industry GSCL. Thus, the major contribution of this research to the

literature is modeling of risk management strategies in the pharmaceutical industry GSCL

using AHP model. Results of this study will help to guide supply chain C-level executives

and/or enterprise risk management executives in the selection of appropriate measures to

control pharmaceutical GSCL risk. Also, supply chain executives will be able to observe

the effect of several major decision objectives in achieving minimization of risk in the

pharmaceutical GSCL.

iv

ACKNOWLEDGEMENTS

There were several individuals who supported me in making this dissertation and proud

moment possible. I would like to thank my committee chairman, Dr. Won Koo for his

guidance and support throughout my doctoral program journey and in completing this

research. I benefitted from his provocative thoughts and discussions. He provided his

perceptive comments and/or constructive feedback in near real-time. My gratitude to the

committee members, Drs. Denver Tolliver, Joseph Szmerekovsky, Kendall Nygard, and

Reza Maleki for accepting to serve and for their support.

Unequivocally, I am very thankful and indebted to Dr. Denver Tolliver, Director of

Ph.D. Program and Associate Director, Upper Great Plains Transportation Institute, for the

opportunity and whose guidance, advice, and altruistic support have been invaluable during

my doctoral program and while writing this dissertation. Dr. Tolliver was very supportive

and helpful in allowing me to use every available resource to enhance my academic

endeavors. Indeed, without him this great academic journey would not have been possible.

My thanks are due to Ms. Jody Bonn, Academic Program Coordinator, for her friendliness,

advice and encouragement, support, world-class professionalism, and willingness to help.

Thanks to Dr. Brian Kalk for his niceness and support throughout my doctoral program.

Furthermore, I acknowledge the financial support from Upper Great Plains Transportation

Institute. Thanks to Mr. Gene Griffin, Director, Upper Great Plains Transportation Institute

and other Staff members for their support and making my stay in the Program a pleasant

experience.

v

Many thanks to Dr. Emeka Dunu, Chair, Department of Management and Marketing,

Alabama A&M University, for his friendship, guidance, constructive advice, and for

supporting and approving my sabbatical leave. My gratitude to special friends, including

Dr. Emeka Dunu, Peter Ifeka, Charles Briggs, Dr. Hortense Dodo, Dr. Emmanuel Obuah,

Dr. Chidiadi Kwellee, and Ms. Patricia Cox, whose kindness, encouragement, and support

during this academic journey and while completing this dissertation are most precious.

To my dearest parents late Mr. Sampson N. Enyinda and late Mrs. Roseline W.

Enyinda and grandmother, late Mrs. Lydia "Ayi" Ogbuche, thanks abundantly for who and

what I am today. Special thanks to my sister, Mrs. Wori "Nne" Oparaodu, my brother in-

law, Maxwell Oparaodu, and my cousin, Mrs. Florence "Ndidi" Kwelle for their altruistic

encouragement throughout the years. Without you, this proud moment would not have been

possible. Above all, I am indebted to my children, Jenny, Chris Jr., Victoria "Tori", Chima,

and Chinyem for their support, encouragement, and understanding while I was away on

sabbatical leave and completing this dissertation. Thanks for being wonderful children,

intelligent, and loving. I love you with all my heart.

VI

DEDICATION

This dissertation is dedicated to my children Jenny, Chris Jr., Victoria "Tori", Chima, and

Chinyem Enyinda. Above all, in memory of my beloved parents, Mr. Sampson Enyinda,

Mrs. Roseline Enyinda, and grandmother, Lydia "Ayi" Ogbuche for the crucial life

foundation, love, and nurturing you gave me. You are missed very solely each and every

day.

vn

TABLE OF CONTENTS

ABSTRACT

 

iii

ACKNOWLEDGEMENTS

v

DEDICATION

vii

LIST OF TABLES

xiii

LIST OF FIGURES

xv

LIST

OF APPENDIX

TABLES

xix

LIST OF APPENDIX

FIGURES

xx

CHAPTER 1. INTRODUCTION

1

 

Statement of the Problem

6

Research Objectives

7

Summary

9

CHAPTER 2. THE PHARMACEUTICAL INDUSTRY

11

 

Pharmaceutical Trends and Challenges

11

Mergers and Acquisition

14

Pharmaceutical Industry Global Supply Chain Outsourcing

20

Pharmaceutical Global Supply Chain Outsourcing Drivers

23

Pharmaceutical Global Supply Chain Outsourcing Activities

27

Merits and Demerits of Pharmaceutical Global Supply Chain

Outsourcing

32

 

Pharmaceutical

Global Supply Chain Outsourcing Risk

33

 

Pharmaceutical Global Supply Chain Logistics

35

Nature of Pharmaceutical Industry Global Supply Chain Logistics

38

Pharmaceutical Global Supply Chain Logistics Security Threats

42

viii

Radio Frequency Identification Imperatives

43

Pharmaceutical Pedigree Requirements Legislation

45

Supply Chain of Custody

48

Sense and Respond Pharmaceutical Supply Chain

50

Pharmaceutical Supply Chain Competitive Intelligence

53

Competitive Intelligence

54

Supply Chain Blind Spots and Competitive Early Warning System

56

Supply Chain Intelligence Cycle

61

Summary

66

CHAPTER 3. LITERATURE REVIEW

71

Risk and Uncertainty

Controversy

72

Global Supply Chain Logistics Risk and Uncertainty

73

Supply Chain Logistics Vulnerability

78

Sources of Supply Chain Logistics Risk and Uncertainty

82

Impact of Risk on Global Supply Chain Logistics

84

Global Supply Chain Risk Management

87

Pharmaceutical Global Supply Chain Logistics

97

Pharmaceutical Global Supply Chain Logistics Risk and Uncertainty

98

Sources of Risk and Uncertainty in Pharmaceutical

GSCL

99

Pharmaceutical Global Supply Chain Logistics Risk Management

102

Summary

103

ix

CHAPTER 4. RESEARCH METHODOLOGY

106

Multi-Criteria Decision Making

108

Analytic Hierarchy Process

109

AHP Application to Risk Management in Pharmaceutical

GSCL

Ill

Construction of the Pairwise Comparison Matrix A

116

Combining Experts' Judgments and Geometric Mean

119

Description of Major Objectives, Sub-Objectives, and

Alternative Options

120

Alternative Options/Risk Management Strategies

125

Summary

127

CHAPTER 5. DATA AND ANALYSIS PROCEDURES

128

Model Development and Problem Formulation

128

Data Source and Description

129

Derivation of Major Objectives, Sub-Objectives, and Alternative

Relative Priorities

132

Pairwise Sub-Objectives with Respect to Major Decision Objectives

133

Evaluation of Alternative Risk Management Options

134

The AHP and Expert Choice Software

136

CHAPTER 6. EMPIRICAL RESULTS

138

Major Decision Objectives

138

Synthesis Results

142

Ideal Synthesis Mode

142

Distributive

Synthesis Mode

143

Sensitivity Analysis Scenario for Major Decision Objectives

144

x

Dynamic Sensitivity

145

Performance Sensitivity Analysis

151

Gradient Sensitivity Analysis

152

Weighted Head-to-Head Sensitivity Analysis

153

Two Dimensional (2D) Sensitivity Analysis

155

Sub-Objectives

156

Regulation/Legislation Risk: Regulatory Approval and

Change in Legislation

158

Operational Risk: R&D and Distribution

158

Reputation Risk: CSR and Disclosure

159

Financial Risk: Exchange Rate and Currency

160

Market Risk: Competition and Key Talent

161

Relationship Risk: Third Party Liability and M&A

162

Dynamic Sensitivity Analysis for

Sub-Objectives

163

Sensitivity for Regulatory Approval and Change in Legislation

Below Regulation/Legislation Risk

163

Sensitivity for Distribution and R&D Below Operational Risk

164

Sensitivity for CSR and Disclosure Below Reputation Risk

165

Sensitivity for Exchange Rate and Currency Below Financial Risk

169

Sensitivity for Competition and Key Talent Below Market Risk

171

Sensitivity for Third Party Liability and M&A Below Relationship Risk

173

Composite Score for Sub-Objectives of the GSCLRM

175

XI

CHAPTER 7. SUMMARY AND IMPLICATIONS

177

Summary and Comments for Future Research

177

Implications

181

REFERENCES

184

APPENDIX A. DETAILS OF SYNTHESIS

206

APPENDIX B. PHARMACEUTICAL INDUSTRY RISK SUPPLY CHAIN LOGISTICS ANALYSIS SURVEY QUESTIONNAIRE

216

APPENDIX C. CURRICULUM VITAE

226

xn

LIST OF TABLES

 

Page

Top Ten Pharmaceutical Organizations

Outsourcing to India

32

Merits and Demerits of Pharmaceutical

Outsourcing to CROs

33

The AHP Pairwise Comparison Scale of Preference Between Two

Elements

115

Saaty's AHP Average Random Consistency or Random Index

118

Expert #1 Judgment - Pairwise Comparison Matrix of Major Risk Objectives with Respect to the Goal

131

Expert #2 Judgment - Pairwise Comparison Matrix of Major Risk Objectives with Respect to the Goal

131

Combined Experts' Judgments - Pairwise Comparison Matrix

of Major

Risk Objectives with Respect to the Goal

132

Pairwise Comparison Matrix for Sub-Objectives with Respect to Regulation/Legislation Risk

133

Pairwise Comparison Matrix for Sub-Objectives with Respect to Operational Risk

133

Pairwise Comparison Matrix for Sub-Objectives with Respect to Reputation Risk

133

Pairwise Comparison Matrix for Sub-Objectives with Respect to Financial Risk

133

Pairwise Comparison Matrix for Sub-Objectives with Respect to Market Risk

133

Pairwise Comparison Matrix for Sub-Objectives with Respect to Relationship Risk

133

Pairwise Comparison Matrix for Alternatives with Respect to Regulatory Approval Risk

134

Pairwise Comparison Matrix for Alternatives with Respect to Change in Legislation Risk

134

xiii

  • 16. Pairwise Comparison Matrix for Alternatives with Respect to Distribution Risk

134

  • 17. Pairwise Comparison Matrix for Alternatives with Respect to R&D Risk

135

  • 18. Pairwise Comparison Matrix for Alternatives with Respect to CSRRisk

135

  • 19. Pairwise Comparison Matrix for Alternatives with Respect to Disclosure Risk

135

  • 20. Pairwise Comparison Matrix for Alternatives with Respect to Exchange Rate Risk

135

  • 21. Pairwise Comparison Matrix for Alternatives with Respect to Currency Risk

135

  • 22. Pairwise Comparison Matrix for Alternatives with Respect to Competition Risk

136

  • 23. Pairwise Comparison Matrix for Alternatives with Respect to Key Talent Risk

136

  • 24. Pairwise Comparison Matrix for Alternatives with Respect to Third Party Liability Risk

136

  • 25. Pairwise Comparison Matrix for Alternatives with Respect to

M&ARisk

136

  • 26. Priorities of Major Objectives

 

140

  • 27. Priority

of Obj ectives with Respect to

Alternative Options

142

  • 28. Priority Pairwise Sub-Objectives with Respect to Major Objectives

157

  • 29. Composite Score of Alternative Option

 

176

xiv

LIST OF FIGURES

ure

  • 1. Pharmaceutical MNEs by U.S. Sales, 2004

  • 2. Mergers and Acquisitions that Transformed Pharmaceutical for more than 20 Years

  • 3. A Traditional Supply Chain Value Stream for a Pharmaceutical Firm

  • 4. Revised Supply Chain Value Stream - Vertical vs. Horizontal Organization

  • 5. Counterfeit Drug Cases in the U.S

  • 6. Convoluted Pharmaceutical Global Supply Chain Logistics

  • 7. Pharmaceutical Industry GSCL Security Threats

  • 8. An Accountable Supply Chain - Pharmaceutical Pedigree

  • 9. The Competitive Intelligence Warning System Triangle

    • 10. Sources of Global Supply Chain Logistics Risk and Impact

    • 11. Pharmaceutical Firms Disclosures

    • 12. Pharmaceutical

Firms Disclosures in Percentage

  • 13. Hierarchy Structure Modeling of Pharmaceutical GSCL Risk

  • 14. Pharmaceutical Hierarchy with Local and Global Priorities

  • 15. Comparing Priorities of Major Objectives

  • 16. Normalized Priorities

  • 17. Ideal Synthesis with Respect to the Goal

  • 18. Distributive Synthesis with Respect to the Goal

  • 19. Dynamic Sensitivity for Nodes Below-Goal: Minimize Pharmaceutical GSCL Risk

  • 20. Dynamic Sensitivity Analysis with Component Option Selected

Page

12

18

28

30

37

40

42

45

58

85

100

101

113

139

140

141

143

144

145

146

xv

  • 21. Scenario 1 - Dynamic Sensitivity for Regulation/Legislation Risk

147

  • 22. Sensitivity for

Scenario

2 - Dynamic

Operational Risk

148

  • 23. Sensitivity for Reputation Risk

Scenario

3 - Dynamic

149

  • 24. - Dynamic

Scenario

4

Sensitivity for Financial Risk

149

  • 25. Sensitivity for Market Risk

Scenario

5 - Dynamic

150

  • 26. Scenario 6 - Dynamic Sensitivity for Relationship Risk

150

  • 27. Performance Sensitivity Analysis

151

  • 28. Gradient Sensitivity Graph

153

  • 29. Weighted Head-to-Head Sensitivity Analysis between Risk Reduction and Risk Acceptance

154

  • 30. Weighted Head-to-Head Sensitivity Analysis between Risk Reduction and Risk Avoidance

155

  • 31. Two Dimensional Sensitivity Analysis Plot

156

  • 32. Comparing Regulatory Approval/Change in Legislation for Regulation/Legislation Risk

158

  • 33. Risk Management Options' Priorities for Regulatory Approval Risk

158

  • 34. Risk Management Options' Priorities for Change in

Legislation Risk

158

  • 35. Comparing R&D/Distribution for Regulation/Legislation Objective

159

  • 36. Risk Management Options' Priorities for

R&D Risk

159

  • 37. Risk Management Options' Priorities for Distribution Risk

159

  • 38. Comparing CSR and Disclosure for Reputation Risk

160

  • 39. Risk Management

Options'

Priorities for CSR Risk

160

  • 40. Risk Management Options' Priorities for Disclosure

160

xvi

41.

Comparing Exchange Rate and Currency for Financial Risk

161

  • 42. Risk Management Options'

Priorities for Exchange Rate Risk

161

  • 43. Risk Management Options' Priorities for Currency Risk

161

  • 44. Comparing Key Talent and Competition for Market Risk

162

  • 45. Risk Management

Options'

Priorities for Key Talent Risk

162

  • 46. Risk Management Options' Priorities for Competition Risk

162

  • 47. Comparing M&A and Third Party Liability for Relationship Risk

163

  • 48. Risk Management Options' Priorities for Third Party Liability Risk

163

  • 49. Risk Management Options' Priorities for M&A Risk

163

  • 50. Dynamic Sensitivity of Regulation/Legislation Risk with Respect to Regulatory Approval and Change in Legislation

164

  • 51. Sensitivity Analysis Scenario 1 for Regulatory Approval

165

  • 52. Sensitivity Analysis Scenario 2 for Change in Legislation

166

  • 53. Dynamic Sensitivity of Operational Risk with Respect to

Distribution and R&D

166

  • 54. Sensitivity Analysis Scenario 1 for Distribution

167

  • 55. Sensitivity Analysis

Scenario 2 for R&D

167

  • 56. Dynamic Sensitivity of Reputational Risk with Respect to CSR

and Disclosure

168

  • 57. Sensitivity Analysis Scenario 1 for CSR

168

  • 58. Sensitivity Analysis Scenario 2 for Disclosure

169

  • 59. Dynamic Sensitivity of Financial Risk with Respect to Exchange Rate

and Currency

170

  • 60. Sensitivity Analysis Scenario 1 for Exchange Rate

170

  • 61. Sensitivity Analysis

Scenario 2 for Currency

171

xvii

  • 62. Dynamic Sensitivity Analysis of Market Risk with Respect to Competition and Key Talent

172

  • 63. Sensitivity

Analysis

Scenario 1 for

Competition

172

  • 64. Sensitivity Analysis

Scenario 2 for

Key Talent

173

  • 65. Dynamic Sensitivity Analysis for Relationship Risk with Respect to

Third Party Liability and M&A

 

174

  • 66. Sensitivity Analysis

Scenario 1 for Third Party Liability

174

  • 67. Sensitivity Analysis

Scenario 2 for M&A

175

xvin

LIST OF APPENDIX TABLES

 

Page

Details of Synthesis for Regulation/Legislation Risk

206

Details of Synthesis for

Operational Risk

207

Details of Synthesis for Reputation Risk

208

Details of Synthesis for Financial Risk

209

Details of Synthesis for Market Risk

210

Details of Synthesis for Relationship Risk

211

Details of Synthesis by Alternative -

Accept Risk

212

Details of Synthesis by Alternative -

Avoid Risk

213

Details of Synthesis by Alternative -

Reduce Risk

214

Details of Synthesis by Alternative - Transfer Risk

215

Saaty Scale - Pairwise Comparison Values or Scale of Preference Between Two Elements

218

xix

LIST OF APPENDIX FIGURES

Figure

Page

1.

Hierarchy Structure Modeling of Pharmaceutical GSCL Risk

217

xx

CHAPTER 1. INTRODUCTION

The emergence of a combination of forces influencing the global economy, such as

globalization, stock market pressures, a new war economy (terrorism), U.S. global supply

chain trade security protocols, constant changing global competitive landscape, declining

cross-border trade barriers, reductions in transportation and information and

communication technology costs, and progress in embedded technology (radio frequency

identification technology), has transformed how multinational enterprises (MNEs) organize

and coordinate their production into global supply chain logistics (GSCL). As a result,

more than ever MNEs are outsourcing their non-core activities (non-competencies) to

third-party logistics providers, locating parts of their supply chains abroad, and

collaborating and partnering with other economic actors through global strategic alliances

and joint ventures.

GSCL is a worldwide network of many firms and relationships involved in the

activities of adding value to products through the transformation of raw materials to

products and /or services (OECD, 2002, Johnson and Pyke, 2000, Lummus, 1999, Cooper

et al., 1997, Lambert, et al, 1997, Coyle, et al.,

1996, Swaminathan, et al., 1996, Lee &

Billington, 1995, Stevens, 1989) to meet and exceed the value expectations of the ultimate

end-users. Its counterpart, global supply chain logistics management (GSCLM), entails "a

set of approaches to efficiently integrate suppliers, manufacturers, distributors, warehouses

and retail stores so that merchandise is produced and distributed in the right quantities, to

the right locations, at the right time in order to minimize system wide costs while satisfying

[the end-user's value expectations or] service level requirements" (SimchiLevi, et al.,

2003). The ultimate goal of GSCLM entails cost containment, increased customer value

1

and satisfaction, sustaining competitive advantage (Mentzer et al., 2001), enhance the

operational efficiency, profitability of a firm and its supply chain members (Min and Zhou,

2002), integrating business functions and processes to build a cohesive and high-

performing business model (CSCMP, 2005).

Arguably, GSCLM has been acknowledged as a great differentiator to the success

of a variety of firms competing in the new era of fast changing and turbulent business

environments. It has become one of the most discussed disciplines in the popular press

because of such variables as globalization of production and market, competitive pressure,

information and communication technology, consumer behavior, mass customization and

complex supply chain networks that have become increasingly uncontrollable, vulnerable

and susceptible to disruptions (Enyinda, Tolliver, and Szmerekovsky, 2007). Thus,

dominating over rivals in today's global marketplace requires agile and focused supply

chain networks that can sense and respond in real-time to a changing global business

environment and adapt to prolonged disruptions (Enyinda and Szmerekovsy, 2007). GSCL

is not only the linchpin to gaining and sustaining strategic competitive advantage, but also

the key to survival. However, with the increasingly complex business environment that is

the hallmark of globalization and lean strategy, GSCL has been confronted with a slew of

risks ranging from exogenous (environmental) sources, such as terrorist strikes or

vulnerability to political instability in developing countries, to endogenous (organizational)

sources resulting from the pressure to enhance productivity and shareholders value.

For the pharmaceutical industry GSCL, it is the process through which medical

commodities are delivered at the right quality, at the right place, at the right time, and at the

right price to meet and exceed patients' value expectations. While globalization, global

2

outsourcing and sourcing, lean manufacturing, supply chain quality management,

downsizing and rightsizing, and global just-in-time supply chain management initiatives

have enabled organizations to contain costs, focus on strategic core competencies, and

ameliorate operational efficiencies, the same initiatives more than ever before, have

rendered the modern GSCL more vulnerable and/or less resilient to sudden disruptions.

Indeed, organizations are becoming increasingly more susceptible to both high-impact and

low-impact disruptive events (Sheffi and Rice, 2005). They "are vulnerable not only to

attacks on their assets, but also to attacks on their suppliers, customers, transportation

providers, communication lines, and other elements in their eco-system" Sheffi (2001). As

a result, disruptions to GSCL have taken a center stage in private and public discourse.

GSCL risks represent risks that are related to inbound and outbound logistics in

organizations' material, information, and financial flows. Supply chain risk pertains to any

threat of interruption to the functioning of the supply chain (Christopher, 2003).

GSCL risk and uncertainty can have profound implications for global

manufacturing firms. Significant GSCL disruptions can tailspin an organization's revenue,

erode market share, bloat costs and budget, threaten production and distribution, tarnish

credibility with investors and other stakeholders, and skyrocket the cost of capital (Bosman,

2006). For example, Hendricks and Singhal's (2005) study of 800 firms that announced a

supply chain disruption between 1989 and 2000 reported that during a three-year period,

disrupted firms experienced a 33 to 40 percent decline in stock returns relative to

comparable industry counterparts, regardless of industry, disruption cause or duration of

time period. Similarly, share price volatility in the year after the disruption was reported to

be approximately 14 percent higher relative to the volatility in the year before the

3

disruption. Further, in the year leading up to firms broadcasting a supply chain disruption,

they experienced a seven percent reduction in sales growth, an 11 percent increase in costs,

and a 14 percent increase in inventories. Consequently, those firms incurred significant

declines in operating income, return on sales and return on assets.

To eschew the negative implications of disruptions prevalent in the present global

economy organizations must reassess and/or redesign their GSCL in order to survive and

«

remain competitive. And surviving and remaining competitive in such an environment

mandates global manufacturing firms to create a set of robust strategies and resilient supply

chains that can respond to any scenario that can unfold (Simchi-Levi et al, 2002,

Christopher 2003). Simchi-Levi et al (2002) and Christopher (2003) proposed hedging,

flexibility, collaboration and outsourcing, supply base reduction, agility, and "what if

analysis as the systematic and strategic approaches organizations can use to build robust

and resilient supply chains that can deal with the new economic uncertainties and still

remain competitive. Further, becoming a market leader in today's dynamic global business

landscape demands adaptable supply chain networks that are not only able to respond to

compliance with corporate governance reforms, such as the Sarbanes-Oxley Act in the US

but also to risks of counterfeiting, currency fluctuation, exchange rates, political instability,

inflation, and terrorism. Although a large number of other industries have been living up to

this expectation, the pharmaceutical industry is yet to adopt strategies to mitigate and

manage GSCL risks and uncertainties.

Today's pharmaceutical business environment has been characterized by turbulence

and uncertainty. Essentially, the pharmaceutical industry GSCL networks seem to be more

vulnerable to disruption than was the case in the past. For example, pharmaceutical

4

counterfeiting is a critical issue confronting the pharmaceutical industry GSCL worldwide.

For more than two decades, counterfeit drugs were thought to be a problem only in

developing nations and so received little or no attention to curb the nefarious activities that

have continued to harm and/or kill people in both developed and developing countries.

However, in recent years, the lucrative counterfeit drugs have infiltrated the U.S.

pharmaceutical supply chain through Internet pharmacies and a growing number of

unscrupulous secondary distributors (LePree, 2006). Counterfeit pharmaceuticals are those

that have been compromised or tampered with such that they are not what they are

supposed to be.

According to the World Health Organization (WHO), a counterfeit medicine is one

that is "deliberately and fraudulently mislabeled with respect to identity and/or source.

Counterfeiting can apply to both branded and generic products and counterfeit medicines

may include products with the correct ingredients but fake packaging, with the wrong

ingredients, without active ingredients or with insufficient active ingredients." There is no

nation that is exempt from the threat of counterfeit pharmaceuticals. Although counterfeit

or otherwise substandard drugs are prevalent in both developing and developed countries,

the U.S. has not witnessed a similar proliferation due to Food and Drug Administration's

(FDA) tight regulatory protocols in existence. However, in the past few years, the number

of counterfeit drugs flowing into the U.S.'s legitimate supply chain has been growing

steadily. This spate in counterfeit drugs in the U.S. has led to serious concern among

supply chain stakeholders - pharmaceutical manufacturers, wholesale distributors, end-

users/patients, state regulatory agencies, and the FDA. They are concerned because

5

counterfeit drugs can precipitate disease resistance and can kill unsuspecting consumers en

mass.

The remainder of the chapter is organized

as follows.

Section

1 presents

the

statement of the research problem. Section 2 describes the research objectives. Finally,

section 3 presents the chapter summary.

Statement of the Problem

Pharmaceutical GSCL denotes the process through which medical products are

delivered at the right quality, at the right place at the right time, and at the right price to

meet and exceed customers' or patients' value expectations. However, the pharmaceutical

GSCL more than ever has become vulnerable to disruption risks because of such ambitious

initiatives as global outsourcing, lean supply chain, supply chain quality management, and

supply base rationalization. Also, to gain superior advantage over rivals Murphy (2006)

indicates that firms have been pressured to place more of their value chains in low cost

destinations thereby making suppliers more responsible for a growing share of the extended

value chain, diminishing visibility to and direct control over supply risks, and eliminating

much of the margin for error because of leaning inventory out of the supply chain.

Arguably, today's pharmaceutical C-level executives are under constant stream of

pressures to meet regulatory compliance, accommodate customers' growing demand for

superior value that is becoming more than ever difficult to reign in, and manage the

prevalence of supply chain risks and uncertainties. According to KPMG's (2005) study, the

pharmaceutical industry is 50 percent riskier than the overall S&P 500; the risks that the

pharmaceutical industry is facing is more than ever changing; although the pharmaceutical

6

firms have a risk framework in place, they have not kept pace with the changing business

environment; risk management is not enterprise wide; and thus, there is a serious need for

the pharmaceutical industry to implement supply chain risk management.

The arrays of risks and uncertainties confronting the pharmaceutical GSCL include

counterfeiting, regulatory approval, foreign exchange rates, legal liability, changes in

competitive environment, political instability, supplier failure, natural disaster, strategic

risk, intellectual property infringement, among many others. As a result, an appropriate

mitigation and management of most these risks are imperative for the pharmaceutical

industry GSCL superior performance. To achieve hyper-efficient GSCL and reign in

superior performance the pharmaceutical industry must safeguard against disruption risks

associated with exogenous and endogenous environments. Because GSCL can and do get

interrupted due to inherent risk and uncertainty of doing business, "

...

an ever-increasing

number of professionals and managers in industry, government, [regulatory agencies,

Sarbanes-Oxley Act], and academia are devoting a large portion of their time and resources

to the task of improving their understanding and approach to risk-based decision making"

(Haimes, 1998). Thus, implementing SCRJVI in the global pharmaceutical firms could mean

a huge difference between prosperity and failure in the offing.

Research Objectives

As more pharmaceutical firms' C-level executives become interested and involved

in outsourcing, co-manufacturing, and other forms of relationships, a guide is imperative to

help these executives in their quest for SCRM. Effective identification of portfolio of risks

to which pharmaceutical GSCL is vulnerable can be mitigated and managed "by

7

considering all real, perceived, or imaginary risks from their multiple decompositions,

visions, and perspectives" (Haimes, 1998). This research leverages the analytic hierarchy

process (AHP) developed by Saaty (1990, 1994) as a valuable approach to model risk

management in the pharmaceutical industry GSCL. Because risk cannot be managed except

it is well assessed and that best assessment must be attained via some form of modeling

process that has become an imperative step in the management of risk (Haimes, 1998). The

AHP method identifies the crucial criteria utilizing valuable information gleaned from the

risk assessment and employs them in the pharmaceutical SCRM.

The goal of this research is to develop an extension of an existing multi-criteria

decision making model such as AHP. The extension involves modeling risk management in

the pharmaceutical industry GSCL using AHP model. The specific objectives are to

  • 1. identify and analyze pharmaceutical GSCL risk sources;

  • 2. generate risk priorities and evaluate them in terms of the most important GSCL risks to manage and selecting appropriate alternative policy options to minimize risk;

  • 3. assess the effects of risks on the pharmaceutical GSCL ; and

  • 4. evaluate the performance of the AHP model with respect to consistencies associated with experts' judgments

Results of this research are relevant to understanding of the pharmaceutical

industry's risk profile. Modeling risk management in the pharmaceutical GSCL will

provide valuable and insightful information to C-level executives for necessary risk

mitigation strategies. Implementing GSCRM is imperative because of its link to superior

performance, profitability, and shareholder value.

8

The next chapter presents detailed background on the global pharmaceutical

industry. Chapter 3 presents an extensive review of relevant literature on non-

pharmaceutical industry GSCL and the pharmaceutical industry GSCL. For non-

pharmaceutical industry supply chains, it focuses on global supply chains; risks and

uncertainty in supply chains; sources of supply chain risks; supply chain vulnerability;

supply chain security and resiliency; impact of supply chain risks; and supply chain risks

management. For pharmaceutical industry supply chains, it focuses on risks; sources of

risks; vulnerability, security, and resilience; impact of risks; risks management; and a

chapter summary.

Summary

This chapter discussed the importance of GSCL and its counterpart, GSCLM in

today's ultra competitive global marketplace. GSCLM has become one of the most

discussed disciplines in the popular press because of factors such as globalization of

production and market, competitive pressure, information and communication technology,

consumer behavior, mass customization and complex supply chain networks that have

become increasingly uncontrollable, vulnerable and susceptible to disruptions. GSCL is not

only the linchpin to gaining and sustaining strategic competitive advantage, but also the

key to flourish and prosper. However, because of increasingly complex business

environment that represents the hallmark of globalization and lean strategy, GSCL has

been faced with growing risks ranging from exogenous sources to endogenous. Although

globalization, global outsourcing and sourcing, lean manufacturing, supply chain quality

management, and global just-in-time supply chain management initiatives helped firms to

9

reduce costs, focus on strategic core competencies, and improve operational efficiencies

significantly, the same ambitious initiatives have exposed GSCL to risks.

In recent years, the pharmaceutical industry has been faced media and public

scrutiny following increase in cases of counterfeits that underscore the challenge of

managing pharmaceutical GSCL and other associated risks. Layers of risks facing the

pharmaceutical GSCL includes, regulatory approval, foreign exchange rates, legal liability,

changes in competitive environment, political instability, supplier failure, natural disaster,

strategic risk, intellectual property infringement, among many others. As a result, an

appropriate mitigation and management of most these risks are imperative for the

pharmaceutical industry GSCL superior performance.

The goal of this study entails developing an extension of an existing multi-criteria

decision making model called AHP to model risk management in the pharmaceutical

GSCL. Some of the specific objectives include identifying and analyzing the

pharmaceutical GSCL portfolio of risks; determining both the local and global risk

priorities and evaluating them in terms of the most important risks to manage; and

selecting the most important alternative policy options to minimize risk. Given the

prevalence of both existing and emerging risks, this study is imperative to understanding

the pharmaceutical industry's risk profile.

10

CHAPTER 2. THE PHARMACEUTICAL INDUSTRY

Pharmaceutical Trends and Challenges

The pharmaceutical industry represents a large global industry that encompasses

processes, operations, and firms engaged in drug discovery, development, and manufacture

(Shah, 2004). The main actors in the pharmaceutical industry include 1) the large, research

and development-based multinationals with a global presence in branded products, both

ethical/prescription and over-the-counter (OTC) as well as manufacturing facilities in

many locations worldwide, 2) the large generic producers, who produce out-of-patient

ethical products and OTC products, 3) local manufacturing firms who operate in their home

country, producing both generic and branded products under license or contract, 4) contract

manufacturers, who do not have their own product portfolio, but manufacture either key

intermediaries, active ingredients or even final products by providing outsourcing services

to other organizations, and 5) drug discovery and biotechnology organizations, often

relatively new start-ups with no significant manufacturing capacity (Shah, 2004). It is one

of the most challenging industries because of the long life time required in discovering and

developing new molecules and drug forms, the regulatory process of clinical testing,

multiple stage production, and distribution issues within the GSCL. The top 10

pharmaceutical firms based on U.S. dollar sales in 2004 are reported in Figure 1.

Besides being the most regulated industry, its challenges and issues are many. For

example, it has been reported that 1) cost of bringing a drug to market from concept stage

is approximately $800 million (according to PhRMA) and can take between 10-15 years, 2)

Tufts Center for Study of Drug Development asserted that this number is in the upward of

about $900 million, whereas Bain & Co. puts the amount at $1.7 billion, 3) out of 5,000

11

drugs tested, only approximately 5 make it to the clinical trial stage, and the approval rate

by FDA is one at best, 4) only three out often marketed drugs generate revenues, 5) R&D

costs are among the highest in the industry (http://www.iproceed.com/blog/2004/07/

pharma-biotech-rd-growth-opportunities.html

Figure 1. Pharmaceutical MNEs by U.S. Sales, 2004.

$40.00

$30.00

$20.00

$10.00

$0.00

<&

c$

o^

#

X ^

-"

r

A 0 >

"°"'

<3>

"°"' ^

A'»'

O w

<S>»

U.S Sales ($billion) • % Growth over Previous year

Source: IMS Health (2005). IMS National Sales Perspective.

During the hail days the pharmaceutical industry was acknowledged for being very

successful in innovation, R&D, and international marketing. However, today, it is facing a

variety of crucial challenges from increasingly competitive global marketplace to

expiration of patents and lack of blockbuster drugs to empty drug pipeline chain. Global

pharmaceutical firms are facing serious challenges over R&D productivity and growth

decline, and the diminished level of new drug approvals in spite of costly investment in

R&D. For this reason and others, these firms are searching for better strategy to stimulate

productivity and growth via the adoption of collaborative logistics, licensing agreements,

and outsourcing partnerships (Datamonitor, 2006). Although R&D investment has been

increasing, the number of drug approvals has been falling over the past decade and

12

increasing drug development costs are leading to lower returns for companies. Further,

pharmaceutical firms and others in the industry are under growing pressure from

consumers, the government, the FDA, groups among others to reduce price for their drugs.

As a result of these changing challenges, there is no doubt that the industry has transitioned

into an era of much lower returns (IBM Global Business Services, 2004). In the same vein,

the FDA is under the gun to ensure that the pharmaceutical industry is in compliance with

set rules and regulations. Indeed, it is being required to update its knowledge of existing

rules and regulations that are often complex and confusing. Worst, it has been besieged

with critical issues such as drug pricing, sales and marketing practice, conducting clinical

trials, growing counterfeiting and diversion and other risks. For the pharmaceutical

industry to shape or adapt to a variety of challenges and changes in today's global business

environment, it must redefine and redesign itself. For example, "the globalization of the

business, the diversity and complexity of new drugs, the increasing tightness of capital, and

the diminishing protection provided by patents are some of the factors driving these

changes. All stages of the business value chain are affected: from the development of new

drugs to the management of the manufacturing and marketing networks" (Papageorgiou et

al., 2001).

Historically, the pharmaceutical industry has done well by discovering, developing,

manufacturing, advertising, and marketing of their drugs. Obviously, however, the same

industry that has done well in the past is being confronted with various challenging changes

including regulatory protocols, risk of counterfeits and other risks, supply chain risk

management implementation, radio frequency identification (RFID) technology to improve

supply chain visibility, R& D technologies, and ever demanding stakeholders (e.g.,

13

shareholders, consumers, government, FDA). For example, the US pharmaceutical industry

which accounts for 49 percent of the global market is under stress due to competitive

pressure, increasing use of generics, difficulty in replenishing their pipeline chains, and

erosion of revenues as many blockbusters patents are expiring (IBM Business Consulting

Services, 2005). Also, Lurquin (1996) puts it that "traditionally the pharmaceuticals

industry was used to stability, reliable profit and a dominant attitude to customers. Overall

it was not prepared for this change. The reaction of the leaders was, however, very prompt

and centered on three axes: 1) mergers and acquisitions; 2) return to core business; and 2)

developing core capabilities." In response to these changes and to survive, pharmaceutical

firms are realigning themselves by acquiring and/or merging with other firms (as shown in

Figure 1); global outsourcing; extending drug shelf life; developing strategic partnerships

and alliances; investing in the biotechnology ventures; and focused R&D , manufacturing,

distribution, and advertising and marketing.

Mergers and Acquisition

When pharmaceutical firms are confronted with intense cost pressures and eroding

productivity, they often respond by restructuring the R&D organization, investing in

technology tools and platforms, and entering into mergers and acquisitions (M&A). M&A

denote a fundamental organizational transformation (Capron, 1999) imperative for

enhancing technical capabilities and innovativeness. Acquisitions are conduit for trading

Ahuja and Katila (2001) assert that organizations tend to depend on acquisitions to procure

technological know-how necessary for enhancing technical capabilities and innovativeness.

M&A represents "the aspect of corporate strategy, corporate finance and

14

management dealing with the buying, selling and combining of different companies that

can aid, finance, or help a growing company in a given industry grow rapidly without

having to create another business entity" (http://en.wikipedia.org/wiki/Merger).

Today, indeed, there is a global trend towards consolidation and going forward, as

pressures on the pharmaceutical industry increase, this trend will continue. The lack of

research and development (R&D) productivity, expiring patents, generic competition and

high profile product recalls are driving the mergers and acquisition (M&A) activity in the

global pharmaceutical and biotech sector. The motive for acquiring a firm or firms is build

shareholder value is much better than the sum of the two firms. However, firms often rely

on M&A during turbulent times and when they cannot adapt and strive alone to build

greater cost-efficient firms and gain greater market share. Acquisition entails when a firm

takes over another firm and establishes itself as the new owner. Indeed, firms acquire other

firms to reach new markets, grow revenues, and enhanced earnings. Firms desire to gain

such benefits as personnel reductions, economies of scale, acquiring new technology, and

improved market reach and industry visibility by merging.

By merging, firms can improve their marketing and distribution, thus providing

new sales opportunities. Also, it can ameliorate a firm's stature in the investment

community in terms of having an easier time to generate needed capital. Incentives for

M&As by pharmaceutical organizations include 1) building critical mass in terms of

marketing, manufacturing and research infrastructure, 2) establishing front end presence, 3)

diversification into new areas, 4) improving product, technology and intellectual property

portfolio, and 5) increasing market share. Further, reasons for M&A include access to

management or technical talent, enhanced reputation in marketplace or with stakeholders,

15

reduction of operating expenses or costs, access to new product lines, growth in market

share (complement/extend current business), quick access to new markets or entry into new

industry, reduction in number of competitors, access to new technology, and manufacturing

capacity or suppliers. Mergers and Acquisitions - key drivers: 1) technology cycles - quick

response to emerging technology needs and divestiture of non-core technology, 2) market

Characteristics - quick access to markets or market segments, compliment or extend access

to markets/segments, added breadth in marketplace or greater market share, and address

need to consolidate market share, 3) intellectual capital - quick access to management or

technical talent, preserve critical mass of core competencies, and successful retention of the

key management/technical talent acquired, 4) capacity management - allows excess

capacity to be eliminated or consolidated into the "best of the best", allows capacity of

acquiring firm to be rapidly increased, and to preserves critical mass.

In the recent years, driven by the forces of increasing cost of R&D and declining

margin, the pharmaceutical industry witnessed a slew of M&As reported in Figure 2.

According to Nilleseni et al, "the argument often put forward for M&A is the desire and

necessity to realize economies of scale and scope that enhance shareholder value by

exploiting underlying efficiency savings when two complementary entities are combined."

With declining returns associated with drug development pipelines and generic drug

market shares decline, there has been an increasing level of M&A activity in the

pharmaceutical sector. As a result, big pharmaceutical firms can have access to novel drugs

without draining costs of R&D (Pharmaceutical Business Review Online, 2007).

However, in an increasingly challenging global business landscape, organizations

are increasingly turning to a variety of strategies in order to enhance sales and bottom line.

16

Of these, inorganic growth has been used to provide growth through M&A. Thus, allowing

the pharmaceutical firms to expand their geographical presence, while improving the

strength and breadth of their pipelines. The key pharmaceutical M&A deals of 2006

include Bayer's acquisition of Schering AG for $21.6 billion; Merck KGaA's surprise

acquisition of Swiss biotech company Serono for $13.3 billion; and Teva's completion of

its $7.4 billion acquisition of Ivax in January 2006 (Pharmaceutical Business Review

Online, 2007). Pharmaceutical firms are encountering growing competition from generics,

increasingly tough pricing and reimbursement, a clamp down on healthcare spending, and

the need to treat patients longer due to the aging population. A combination of these factors

is threatening both current and future revenues thus motivating pharmaceutical firms to

adopt a variety of corporate strategies to respond to the changing market dynamics.

Arguably, because firms are facing tough time, they are adopting a range of

strategies to reduce costs, maximize efficiency, and explore new opportunities to sustain

historic growth rates. These strategies include M&A and licensing to gain access to new

drug candidates and increased presence in the global markets. However, pharmaceutical

firms are gaining smaller FDA approval for their drugs. One of the factors accounting for

the decreasing number of novel drugs approved each year by FDA is the increasing

pressure that the pharmaceutical industry is facing over drug safety. Also, the FDA

Amendments Act of 2007 has given the FDA more powers to impose additional safety

studies both prior to and post-approval. The implication of this legislation is that it will

increase R&D costs, reduce market penetration, and extend the time required for FDA

approval. And failure to secure FDA/regulatory approval can prevent launching of a drug

in lucrative global market.

17

Figure 2. Mergers and Acquisitions that Transformed Pharmaceuticals for more than 20 Years.

Syntex Genentech Boehringer Mannheim Hoffman-La Roche Chugal

Roche

Ciba

Sandoz

Hoechst

Marion Merrell

Rhone-Poulenc

Rorer

— •

Fisons

Sanofi

Synthelabo

Novartis

Hoechst Marion Rousel

Aventis

Rhone-Poulenic Rorer

Sanofi-

Aventis

American Cyanamid American Home Product Wyeth-Ayerst

Astra

 

Zeneca

Glaxo

Wellcome

Wyeth

AstraZeneca

Glaxo Welcome

GlaxoSmithKline

Smithkline Beckman Beecham

Pharmacia

Upjohn Co.

Smithkline Beecham

Pharmacia

& Upjohn

Monsanto

Pharmaci

a Corp

Warner Lambert

Pfizer

Pfizer

18

Figure 2. Continued.

Abbot Knoll Pharmaceuticals

Johnson & Johnson Alza Corporation Ortho-McNeil Centocor

Bristol-Myers

Squibb

Amgen

Immunex

Abbott

Johnson & Johnson

Bristol-Myers Squibb

Dupot

Amgen

Bristol-Myers Squibb

Source: IBM Global Business Services. Pharma 2010: The Value-Creating Supply Chain.

The level of M&A activity in the pharmaceutical market is continuing to rise, with

the number of deals made in 2007 increasing over the previous year. With Eisai completing

its acquisition of MGI Pharma in January 2008 for $3.9 billion, the M&A trend is forecast

to continue throughout 2008. The primary factor driving the increase in M&A and the

continued growth in the number of licensing deals can be attributed to decrease in the

output from the internal R&D process, price control, reimbursement and regulatory

pressures, patent expiry of countless blockbuster and other high-value products. As a result,

from 2007 to 2012, the top 50 pharmaceutical companies (based on 2007 sales) are facing

patent expiries on $115 billion worth of drugs (Pharmaceutical Business Review Online,

2008).

Building critical mass to fund research and development is one of the most

significant issues in the pharmaceutical industry. However, the critical question is whether

19

pharmaceutical mergers and acquisitions really strengthen the drug pipeline. To surmount

the dwindling R&D productivity that has characterized the pharmaceutical sector in recent

years, firms are under pressure to reassess their R&D strategies. As a result, the

pharmaceutical firms are using acquisitions and use licensing as well as improved

prioritized spending and better decision making to improve value and profit margins. For

the pharmaceutical firms to adapt and thrive, they are employing a variety of inorganic

growth strategies to ameliorate declining returns. By way of acquisitions, the

pharmaceutical firms are expanding their technological know-how, geographical presence

and boosting the strength of their product pipelines.

Pharmaceutical Industry Global Supply Chain Outsourcing

A wide range of reasons or drivers for global outsourcing have been discussed in

the literature, including cost reductions and a strategic shift in managing business

(Winkleman, et al., 1993), search for short-term and direct cost reductions (Kakabadse and

Kakbadse, 2000), increased access to new technology, improved quality and efficiency

(Fill and Visser, 2000), and strategic decision (Mclvor et al., 1997). Through global

outsourcing organizations are complementing their strengths with those of outsourcing

partners to create greater value for customers and stockholders; gain access to unique

technology, R&D, raw materials and intermediate inputs; reduce overall costs; and retain

higher wage jobs, product development, marketing-related activities, and capital-intensive

manufacturing in the U.S. (Fraiche, 2003). India has captured about 80 percent of the

global outsourcing market (Le Monde, 2003) because of its well-educated English speaking

workforce and salaries up to 80 percent that is lower than in developed nations (Liberation,

20

2003). Global supply chain outsourcing has been viewed as an important element of the

new global economy (Financial times, 2001) and as a strategic choice for firms seeking

access to quality services and low-cost predictability while focusing increasingly on core

business (UNCTAD, 2003). Some of the non-core set of activities outsourced can range

from product design to assembly, from R&D and development to marketing, distribution,

and post-sales service (Grossman and Helpman, 2002). Hirschhorn and Gilmore (1992)

reported that outsourcing low-value-added activities can help a firm to focus on activities

key to competitive advantage. Also, it provides firms with the opportunity to focus on their

most value adding activities, thus optimizing the potential effectiveness of those activities

(Kotabe and Murray, 1990; Dess et al., 1995). Bettis et al. (1992) suggested that investment

in facilities, equipment, manpower, and costs decline as outsourcing expands.

However, global outsourcing in the long run can diminish the control of the activity

in question (Gilley et al, 2004), reduce innovation (Kotable, 1992) and attract competition

from the outsourcing partners (Bettis et al, 1992). Organizations outsource activities that

are not strategic and perform in-house core activities that are strategic in nature (Lonsdale

and Cox, 1997, Prahalad & Hamel, 1990). Baron and Kreps (1999) suggested that activities

that are of low strategic value, low risk and social interdependence tend to be outsourced

for the purposes of cost reduction and flexibility. Gilley et al (2004) indicate that

organizations can enhance their performance by focusing on activities that can improve

quality of service or innovation, and outsource all other activities that other organizations

perform better and more efficiently. Milgrom and Roberts (1991) and Gilley et al (2004)

using transaction Cost economics and resource-based argument assume that activities that

are no organization-specific and/or essential to organization's core activities or

21

competencies are candidates to be outsourced. Thus, the growing trend in global

outsourcing has been noted to be common in chip design, engineering, financial analysis,

R&D, and pharmaceuticals (Austin et al., 2003).

For the pharmaceutical industry, after many years of sustained record of growth and

profitability, the pharmaceutical industry found itself well positioned as one of the few

recession proof industries given its performance via numerous business economical cycles.

However, during the past years, there has been challenging time for the pharmaceutical

firms. As a result, to remain viable they are looking toward new business model to improve

their pharmaceutical supply chains and contain costs. And the new business model to

accomplish that is global supply chain outsourcing. For example, estimate has it that the

U.S. market for outsourced pharmaceutical manufacturing is expanding at the rate of 10 to

12% annually.

The Pharmaceutical firms will continue to drive much of this growth as they

outsource large number of products and services http://www.kaloramainformation.com/

Pharmaceutical-Outsourcing-Opportunities-) to emerging economies in Asia. For example,

the pharmaceutical industry is increasingly outsourcing its R&D to Asia in desperation to

tame the rising cost. Indeed, global supply chain outsourcing represents one of the

acknowledged organizational and industry structure shifts of the 21 st century for the

pharmaceutical industry. The pharmaceutical and biotechnology industry is outsourcing at

almost every phase of the supply chain value stream. Developing strategic global supply

chain outsourcing relationships with contract manufacturing partners can afford the

pharmaceutical industry the opportunity to focus on core competencies, have access to

specialized expertise, and enhance cost-saving benefits that can contribute to customer and

22

shareholder values. Because of the cost of drug development, regulatory, pricing, and

changing competitive environment, the pharmaceutical firms are turning to global

outsourcing strategy to secure and improve profit margin.

Pharmaceutical Global Supply Chain Outsourcing Drivers

The pharmaceutical industry has seen its R&D productivity decline significantly

(Dimasi et al., 2003, Grabowski and Vernon, 2000) and the traditional generation of new

chemically based small molecules dwindling (Backman and Segrestin). Driven by the need

to ameliorate R&D productivity and efficiency and to have access to untapped markets,

global pharmaceutical firms have increasingly outsourced operations to contract research

organizations (CROs) in India and China. The nature of outsourcing areas include

information technology (IT) and IT support, human resource, R&D, procurement and

logistics. Arguably, pharmaceutical firms are turning to supply chain outsourcing as a way

to improve product pipeline and gain strategic competitive advantage. Pharmaceutical

global outsourcing has become a viable and a lucrative business strategy that is enabling

firms to transfer non-core activities to external partners in order to restructure their

distribution networks, leverage resources, spread risks, focus on issues imperative to

survival, competitive advantage, and future growth (Sink and Langley, 1997, Wang and

Regan, 2003). Thus, R&D costs, regulatory pressure, patent expiry, declining blockbuster

pipeline chain, among others have caused pharmaceutical manufacturers to focus on their

core competencies by outsourcing supply chain non-core activities to contract

manufacturing organizations (CMOs) and/or CROs. Firms' increasing focus on core

competencies and the need to reduce cost are motivating them to turn to global outsourcing.

23

This trend towards global outsourcing relationships has been strong in various types

of firms and in different parts of the supply chain (Fill and Visser, 2000). It has been

recognized as one of the eight most prominent factors playing a key role in the offing for

superior supply chain performance (Carter and Narasimhan, 1996). And superior supply

chain is one that enables a firm to optimize the value of internal activities and in turn

creating collaborative partnerships that can lead to high value external activities (Lakhal et

al., 2001). Christopher (1999) noted that it is only those firms that can leverage the

collective strengths and competencies of network partners will be able to achieve a faster

responsiveness to changing global marketplace requirements. Although outsourcing started

by transferring non-core activities traditionally executed in-house to CMOs, there seem to

be a growing interest towards outsourcing of fixed assets and/or the whole manufacturing

process (Markeset and Kumar, 2004). For example, Calaf (1995) contends that increasing

number of firms are opting to outsource many of their manufacturing activities to other

firms have manufacturing knowledge base. Although outsourcing to contract organizations

can have both positive and negative impacts on key aspects of pharmaceutical

manufacturing supply chain, "one positive effect is that the manufacturer's supply chain

agility is increased" (Mason, et al, 2002). Lindholm and Suomala (2004) assert that the

goal of outsourcing is to attain optimal performance within a firm and a supply chain. In

today's hypercompetitive global marketplace no one firm can go it alone and become

successful in search of market opportunities in near real-time and cost-effective fashion

because of lack of key talents and knowledge experience bases (Conklin, 1994).

Key pharmaceutical global outsourcing drivers include constraints facing sales

growth, desire for cost containment, rising R& D costs, increased focus on core

24

competencies, rise in the range of services and functions available for outsourcing, cost

pressures, growth of smaller biotechnology firms, pressure to reduce time to market, and

transparency of costs offered by outsourcing companies. According to

PricewaterhouseCoopers LLP (2006), pharmaceutical global supply chain outsourcing

trends and drivers include time to market, cost advantage, risk management, and strategic

focus. Therefore, to adapt and thrive, pharmaceutical firms are under pressure to outsource

array of their supply chain activities to partners in low cost destinations because of the

skyrocketing drug discovery development times, mandated testing regulatory compliance,

convoluted and complex review processes, unrelenting increase in R&D costs and

changing competitive environment. The premier factors driving growth of pharmaceutical

global outsourcing trend include competitive global marketplace, enhancing greater

productivity flexibility, attaining a global manufacturing presence, expanding capacity,

enhancing product quality achieved through costs reduction and better focus on core

competencies, curtailing investments in capital assets, and improved asset utilization.

Although a number of pharmaceutical firms involved in global outsourcing are

growing, some are delaying to outsource due to inherent risks associating with the process.

However, industry's commentators suggest that pharmaceutical firms are willing to

outsource discovery, chemistry, and biological screening activities if they offer quality,

speed, and cheaper services, and can keep proprietary data confidential. The growth of

pharmaceutical global supply chain outsourcing to contract manufacturing and R&D firms

in low cost emerging economies is primarily to gain efficiencies in cost associated with the

screening of compounds and the preclinical testing of compounds, capacity building, real-

time responsiveness to market, and gain a specific knowledge not resident in-house. Also,

25

because the pharmaceutical firms have entered an era of appreciatively lower margins, they

are focusing their attention to marketing drugs or products and outsourcing drug discovery

process and manufacturing to contract manufacturing and R&D firms in low cost emerging

economies such as India and China in order to free up precious in-house resources.

The pharmaceutical firms are flocking to these firms because of the process and

production know-how they can bring to bear. This growth in global outsourcing to these

firms is estimated to catapult their global revenues to approximately $168bn by 2009

Further, global outsourcing is expanding because the pharmaceutical firms are realizing

"

...

that

the cost of setting up and maintaining facilities - with a workforce of highly-skilled

operators with more than just the knowledge to run them but also the expertise necessary to

continually update and improve them - does not always provide a good return on

to-show). The increasingly global nature of the pharmaceutical/biotech industry endorses

outsourcing, as most companies tend to exploit the market by gaining competitive

advantage. Pharmaceutical firms have recognized that possessing the entire skill range

required within an industry is not feasible. As flexibility has become critically vital within

the industry, firms are realizing that concentrating on core competencies is an efficient and

effective way to create optimum value. Indeed the expansion in the pharmaceutical contract

service industry in recent years has contributed to a significant boost in the number of

services and functions available for outsourcing to contract manufacturing and R&D firms.

In the recent years, the pharmaceutical firms have aggressively been reassessing their

26

financial position and worst engaged in mergers and acquisition because of the mounting

cost pressures and the need to survive.

The critical factors driving the pharmaceutical industry to seek global outsourcing

are the search for efficiencies in the drug development cycle, extending a company's

capacity, consolidation of the pharmaceutical industry, access to specific therapeutics

expertise and globalization of the market within USA, Europe and Asia (Srivastava, 2002),

and exploit new individualized drugs. According to Srivastava, "as outsourcing in the

industry matures, pharmaceutical manufacturers should select their outsourcing partners

strategically and consider their partnerships to gain competitive advantage". The growth in

the number of alliances and outsourcing are increasing. The use of contract manufacturing

is expected to increase in the future, as companies rationalize their manufacturing facilities,

many of which currently operate below capacity. It is expected that pharmaceutical

manufacturing firms may shift towards direct distribution as the role of large pharmacies

for both payers and manufacturers becomes more established.

Pharmaceutical Global Supply Chain Outsourcing Activities

With the globalization of the pharmaceutical markets, firms are outsourcing a range

of drug development functionalities to emerging markets particularly in Asia. These

include numerous stages of drug development, as well as manufacturing active

pharmaceutical ingredients, and intermediate and final stage drugs. These strategies

alleviate the pressures of rising costs of drug development, competition for participants and

clinical trial investigators, brand revenue erosion due to generics and cost-containment

issues driving down prices (Pharmaceutical Business Review Online, 2007).

27

To remain viable, pharmaceutical firms must continuously innovate and develop

new blockbuster drugs through global supply outsourcing. Although innovation and

development of new products are necessary, they are no longer sufficient to achieve

superior performance and grow revenue. For vertically integrated pharmaceutical firms,

different activities historically used to be executed within the firms. Today, however, to

achieve greater costs savings and enhance profit margins, the pharmaceutical firms have

been outsourcing some of the activities shown in Figure 3.

Figure 3. A Traditional Supply Chain Value Stream for a Pharmaceutical Firm.

Managing

Developing

Managing

Manufacturing

R&D

Product

Supply Chain

Product

Performing Managed Healthcare Services

Performing Marketing & Sales

Source: IBM Business Consulting Services: The Global Pharmaceutical Industry

As a result, from 1999-2004, the pharmaceutical industry catapulted the volume of R&D

outsourced due to high costs of clinical trials (mhtml:file:\The Global Pharmaceutical

Industry.mht). Bain and Company (2003) study reported that the cost associated with drug

discovery, developing, and lunching has skyrocketed to $1.7 billion. As a result,

pharmaceutical industry can incur high-risk if the high cost associated with R&D does not

produce the expected high-reward. This is often the case with drug pipeline chain that has

28

inordinate high attrition rate. For example, the pharmaceutical Research and Manufacturers

of America reported that out of 250 drugs that are tested, only five will make it to clinical

trials, only one will receive the approval to be produced and marketed to the public health

community.

In Figure 4, it shows the revised supply chain value stream of the vertical versus

horizontal organization. The vertical integrated organizations consist of mainly the Big

Pharmaceutical firms (e.g. Johnson & Johnson, Pfizer, Bayer, GlaxosmithKline, Norvastis,

Sanofi-Aventis). The Big pharma is often used to describe pharmaceutical firms with

revenue in excess of $3 billion, and/or R&D expenditure in excess of $500 million. Wang

and Regan (2003) assert that "

...

outsourcing

has increasingly become an effective way to

reduce costs and spread risks for traditional, vertically integrated firms." For the

horizontally integrated firms, they are small biotechnology firms and universities, CROs,

CMOs, and sales organizations. The pharmaceutical firms utilizing these organizations not

only save costs but also acquire innovative ideas, technologies, and ingredients that can be

used to develop more innovative products. The way contracting/outsourcing works is that

the pharmaceutical firms will transfer research and discovery/R&D to smaller

biotechnology organizations or universities at home or low cost foreign locations such as

India and China. Increasing costs of R&D, cum low productivity and decline bottom lines,

have compelled major pharmaceutical firms worldwide to outsource part of their research

and manufacturing activities to low-cost countries to save costs and time in the process.

The global pharmaceutical outsourcing market was worth USD57.2 billion in 2007 but

expected to grow to USD76 billion by 2010.

29

Figure 4. Revised Supply Chain Value Stream -Vertical vs. Horizontal Organization.

Discovery

Product

Manufacturing

(Research)

Development

(Design)

Biological

Pre-clinical &

identification,

clinical trials,

Validation,

Submission for

Screening,

regulatory

Optimization

approval

Marketing

Supply chain/distribution & Sales to end- users

The big Pharmaceutical firms (e.g., Johnson & Johnson, Pfizer, Bayer, GlaxosmithKline, Norvastis, Sanofi-Aventis)

Vertical Integrated Organizations

i r

Small Biotech,

Research

Manufacturing

Sales

Universities

Organizations

Organizations

Organizations

Horizontal Contracting/Outsourcing Partners

Source (Adopted and Modified): IBM Business Consulting Services: The Global Pharmaceutical Industry.

Besides, global market for Contract Research and Manufacturing Services

(CRAMS) in 2007 was estimated to be USD55.48 billion. Out of the total global CRAMS

market, contract research was USD16.58 billion, and contract manufacturing was

30

USD38.89 billion accounting for the major share of the total global pharmaceutical

outsourcing market http://www.researchandmarkets.com/reports/c86978). Indeed, the

market for outsourcing more than ever continues to grow unabatedly (Economist, 2002).

Lambert et al (1999) note that about 60 percent of Fortune 500 companies reported having

at least one contract with a 3PL provider. Also, with more than 80 US FDA- approved

manufacturing facilities in India, it represents one of the most preferred low destinations

for outsourcing manufacturing services by pharmaceutical industry. Table 1 shows global

outsourcing of R&D, IT and manufacturing to India by top ten Pharmaceutical

organizations, including Pfizer, GlaxoSmithKline, Bristol-Myers Squibb, Aventis, Eli Lilly,

Merck, Wyeth, Novartis, and AstraZeneca. Roche firms started in late 1990s and early

2000, while business process outsourcing began in 2005 (Zinnov LLC, 2006).

Given the growth in pharmaceutical global supply chain outsourcing, the number of

pharmaceuticals discovered and developed through outsourcing partners has been

estimated to out number the number of pharmaceuticals discovered and developed in-house

in the long run. Already, Pfizer has invested more than $13 million in R&D, while

AstraZeneca has invested more than $10 million and plans to spend $40 million by 2010 in

India (Zinnov LLC, 2006). A survey conducted by Datamonitor asserted that most

pharmaceutical firms acknowledge that outsourcing represents the most effective approach

to reduce R&D costs. Because technologies such as high-throughput screening are

becoming a progressively essential part of the drug discovery and development processes,

firms more than ever are looking toward outsourcing partners who can leverage their

superior technology and launch quality products in the market in real-time. And the areas

that can be outsourced by pharmaceutical firms include 1) research in biotech industry, 2)

31

development

in

contract

research

organizations,

3)

manufacturing

in

contract

manufacturing

organizations,

and

4)

distribution

in

co-marketing

&

contract

sales

organizations.

Table 1. Top Ten Pharmaceutical Organizations Outsourcing to India.

Late 1990s

 

Early 2000

Late 2000

GlaxoSmithKline

 

Pfizer,

Novartis, Eli Lilly,

Merck,

Bristol-Myers-

Contract manufacturing

Wyeth

Squibb

Clinical

trials

management

&

site

Contract manufacturing

Contract manufacturing

Clinical

data

management

 

GlaxoSmithKline, AstraZeneca, & Wyeth • IT services Pfizer, GlaxoSmithKline, & Eli Lilly • Discovery

Pfizer & GlaxoSmithKline •

IT services

Novartis & Wyeth Discovery

Aventis,

 

Pfizer,

Novartis & Merck

AstraZeneca, & Eli Lilly

 

Clinical

trials

&

site

Clinical

trials

&

site

management

management

 

Wyeth

 

Pfizer and GlaxoSmithKline

Content development

Clinical

data

management

 

Source: Zinnov LLC, 2006.

Merits and Demerits of Pharmaceutical Global Supply Chain Outsourcing

Merits and demerits associated with pharmaceutical global supply chain

outsourcing to CROs (Piachaud, 2002) are reported in Table 2. Further, Datamonitor (2006)

suggested that the advantages linked to pharmaceutical global supply chain outsourcing are

1) opportunity to drive productivity and efficiencies across a variety of business functions,

2) boosting long-term R&D productivity, 3) financial benefits, 4) shortening drug

discovery stage, 5) access to additional drug discovery expertise and technologies, 6)

32

flexibility, and 7) focusing free-up resources for core competencies, while the

disadvantages include 1) level of returns on compounds generated through outsourcing

agreements tend to be lower than in-house, 2) reduced opportunity to develop internal

expertise, 3) loss of control and issue of confidentiality of proprietary information.

Table 2. Merits and Demerits of Pharmaceutical Outsourcing to CROs.

Perceived Outsourcing Advantages

Perceived Outsourcing Disadvantages

Obtain greater flexibility Buy in specialized knowledge and skills

 

Dependence on the supplier Lack of shared vision and objectives

 

Facilitate

the

rapid

exploitation

of

Loss of control over suppliers

technology Gain a window on a new technologies

Loss of critical skills

Freedom to concentrate on core functions

Problems of evaluating supplier

Spread risks

performance Need for a new management mind set

Reduce costs

Problems

of

monitoring

supplier

Increase time to market

 

performance Class of culture

 

Source: Piachaud, B. S. (2002). Outsourcing in the Pharmaceutical Manufacturing Process:

an Examination of the CRO Experience." Technovation, 22(2), pp. 81-90.

Pharmaceutical Global Supply Chain Outsourcing Risk

An increasing numbers of pharmaceutical firms are realizing the potential economic

advantages of outsourcing their supply chain non-core activities to external partners.

Besides the advantages of outsourcing at the strategic, financial, organizational, and

operational levels, there are a number of outsourcing risks which can greatly affect the

quality of the relationships (Salma et al. 2007). Although many benefits associated with

pharmaceutical outsourcing have been acknowledge, the same initiative has risks that must

be mitigated and managed. Wang and Regan (2003) and Eyefortransport (2005) reported

that outsourcing risks include potential inefficient management; latent information

asymmetry; loss of logistics innovative capacity; hidden costs; dependence on the third

33

party logistics (3PL) providers; loss of control over the 3PL providers; problems of

evaluating and monitoring 3PL provider performance; and incompatibility of participating

firms' cultures. Also, pharmaceutical outsourcing problems and risks include transaction

costs; increased monitoring costs; loss of direct control over product launch; loss of

internal competency and capacity; possible loss of key intellectual property; potential after-

market competition; increased legal compliance and reputation costs.

Global outsourcing by its very nature deprives the outsourcing firm the opportunity

of control (control risk). This implies that activities historically executed within a firm's

factory floor and would have been visible to the firm are now resident in the factory floor

of extended supply chain actors managed via contractual agreements and documented

business processes. Thus, as firms race to incorporate global sourcing [and outsourcing]

strategies, integrate contract manufacturing relationships, and deal with the increasing

number of events that can cause supply chain disruption, managing risk in the supply

network is an increasingly critical capacity" (Hillman and Keltz, 2007). Nonetheless, a

great number of challenges exist for the successful implementation of outsourcing within

the pharmaceutical industry. The industry is characterized by inherently high risk; only one

in 5,000 compounds actually becomes a product, commercial drugs cost $300 million to

develop, and less than 50% of new products return the development cost. Tight

governmental regulations compound this risk. Unlike other industries, there have been no

transformational developments to drive outsourcing—even marginal performers can

succeed (Srivastava, 2002).

As pharmaceuticals outsourcing continue to grow, risk associated with it is as well

growing. Some of these risks include error that can lead to FDA disapproval, long lead

34

time, satisfying regulatory compliance, meeting the demands of Sarbanes-Oxley Act,

maintaining proprietary confidentiality.As the pharmaceutical industry supply-chain

strategies evolve, managing the associated risks in global outsourcing has assumed greater

dimension. Because discovery and development of new pharmaceuticals involve more risks

and expensive, leading pharmaceutical MNEs are entering into risk-sharing outsourcing

partnerships in order to minimize operation risks by sharing management and financial

responsibilities. Through appropriate risk management, outsourcing can help firms to

expand their R&D pipelines and provide a greater opportunity for a drug to ultimately

reach launch phase (PricewaterhouseCoopers LLP, 2006).

Pharmaceutical Global Supply Chain Logistics

Today's pharmaceutical supply chain must under undergo aggressive

transformation in order to safeguard patient safety, drug integrity, value chain security, and

product revenue streams. The cases of counterfeit pharmaceuticals reported in the global

pharmaceutical supply chain are on the rise and represents serious threat to patients' health

and safety. As a result, pharmaceutical and biotechnology firms, wholesale distributors,

pharmacies and other drug retail outlets have been challenged in terms of reduction in

decline in revenue and profitability. The pharmaceutical industry is vitally important to the

social, economic and political stability of both developed and developing nations. Indeed,

there is no other industry that is more dependent on public confidence and today is more

vulnerable to disruptive risks. Because of the nature of the disruptive risks the industry is

faced with nowadays it is under intense pressure to safeguard supply chain security and

integrity. Pharmaceutical firms must not only ambitiously seek new opportunities to gain

35

competitive advantage but also aggressively mitigate and manage supply chain risks.

Although supply chain risk management implementation in other industries has been

remarkable, the same is not true in the pharmaceutical industry to ensure that its global

supply chain is resilient to disruptive risks.

Global supply chains outsourcing enables pharmaceutical firms to take advantage of

global relative advantages, as well as increase product variety. However, there are many

risks inherent in outsourcing relationships. Pharmaceutical outsourcing has been growing

as a business process for more than a decade. Although the micro-procedures for

identifying and evaluating outsourcing partners, negotiating and executing appropriate

contracts and executing day-to-day operations have reached a stable level, macro-processes

of clarifying objectives and expectations of outsourcing relationships, understanding

principles of managing such relationships, monitoring partners' performance and

monitoring risks and vulnerability are yet to attain a stable level.

The pharmaceutical industry supply chain security, vulnerabilities, risk and

uncertainties have become critical issues of interest in the public arena in the recent years.

GSCL is critically important for the pharmaceutical industry. Pharmaceutical firms that

pursue efficient and responsive GSCL will achieve strategic competitive position, create

shareholder value, and meet Wall Street value expectations. However, the growing

prevalence of counterfeit pharmaceuticals looms as a major security threat to world's

legitimate pharmaceutical healthcare supply chain. For example, cases of growing

counterfeit pharmaceuticals have been reported by the FDA to be threatening the already

ailing and debilitated U.S. healthcare supply chain. The costs through the actions of

counterfeiters and diverters include more sick patients, loss of life, erosion of public health

36

confidence, loss of brand image, reduced profit and reduced shareholder value. These costs

are compounded by the costs of product recalls and the growing threat of counterfeiting

and diversion. Compromised or untrustworthy drug supply chains can create uncertainty,

decrease investment and research and development. Indeed, increased pharmaceutical

supply chain risk and security threats perceptions can hamper investors' confidence thereby

discouraging them from investing their capital in new drug research and development.

Although the claim is that the U.S. drug supply chain is among the safest and secure in the

world, counterfeit drug cases in the U.S. (see figure 5) are increasing steadily due to

growing threats from technological savvy drug counterfeiters. Counterfeiters sell

counterfeit pharmaceuticals to unsuspecting patients at high risk, by exposing them to

unknown contaminants and thus denying them medicines known to be safe and effective at

treating their medical ailments (Lutter, 2006).

Figure 5. Counterfeit Drug Cases in the U.S.

70

-

60

50

-

40

30

-

20

10

*--^

0

-I

,

^*~~^

,

r

  • 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Source: Combating Counterfeit Drugs, a Report of the FDA, 2004.

37

Nature of the Pharmaceutical Global Supply Chain Logistics

Increasingly, the global marketplace presents more daunting challenges to the

pharmaceutical industry. Whereas the supply chain network in the past was mainly

performed in a limited geographical area, the various elements of pharmaceutical

production are now increasingly being outsourced to low cost destinations. This means that

raw materials may be sourced in one country, active ingredients produced in another

country, the actual drugs manufactured in a third country, and packaging drugs for

distribution purposes in a fourth country. These multiple logistics processes expose the

entire extended industry supply chain to threats of counterfeit pharmaceuticals. The

complexity of pharmaceutical GSCL network processes demands that firms efficiently

control and employ any relevant information to counteract the menace of fake

pharmaceuticals.

Normally, drug manufacturers deliver pharmaceuticals to wholesale distributors,

who in turn deliver them to pharmacy retail outlets and/or hospitals. However, in today's

global pharmaceutical commerce, this is not the case. Essentially, the primary wholesale

distributors may sell drugs to secondary wholesale distributors or to re-packagers, and the

secondary wholesale distributors can sell to both re-packagers and pharmacy outlets. These

multiple transactions can go back and forth before reaching the dispensing point. Also,

these multiple transactions often render the supply chain vulnerable to disruption risk from

counterfeit and fake drugs. In addition, counterfeit medicines can easily enter the legitimate

medicine supply chain if the seller intentionally hides the medicines' original source from

unsuspecting consumers by not providing a pedigree or even worse, providing consumers

with counterfeit pedigree (Rudolf and Bernstein, 2004).

38

The point in the supply chain that is most vulnerable to counterfeit and fake drugs

infiltrating the distribution system is through the secondary wholesale distributors

(European Generic Medicines Association, 2006, Spies and Dusen, 2003). Both the

manufacturers and primary wholesale distributors have the responsibility for guarding their

supply chain against the entry of counterfeit drugs. Counterfeit drugs can also be prevented

from being introduced into legitimate pharmaceutical supply chains by certifying

stakeholders. According to the Europena Generic Medicines Association (2006), "an

important contribution to the fight against counterfeiting is to secure the supply chain by

introducing safer business processes through a variety of measures ranging from business

certification and market surveillance to electronic pedigrees."

Traditionally, pharmaceutical GSCL is populated with both legal and illegal

secondary wholesalers or "gray market" wholesalers who source for medicines at low-

priced destinations worldwide. The acquired low-priced medicines are often resold to

primary wholesalers for a premium profit. These secondary wholesalers often buy

counterfeit and fake medicines from well organized criminals (Patton, 2006) and

technologically savvy international counterfeiters in Asia (e.g., India and China). Both

legitimate and illegitimate pharmaceuticals regularly pass through numerous stakeholders

within and between supply chains before reaching the pharmacy retail outlets. As a result,

this action can create a supply chain that is complex, convoluted, and vulnerable. Thus, the

more medicines change hands, the greater opportunity for counterfeit drugs to be injected

into the legitimate supply chain (Patton, 2006). Although the pharmaceutical industry is

one of the most regulated industries, rules and prices vary cross national borders, thus

creating a network of legitimate, quasi-legitimate and illegitimate drug GSCL trade. A

39

prescription drug normally travels from manufacturer to several distributors as well as re-

packagers before reaching a pharmacy or retail outlet.

A good number of these secondary wholesalers are legitimate businesses that can

help improve the efficiency of the supply chain performance. Arguably, however, these

small secondary wholesalers tend to impose additional layers that diminish visibility and

thereby creating opportunities for counterfeits to infiltrate SCL network (Patton, 2006).

Figure 6 shows the convoluted nature of GSCL.

Figure 6. Convoluted Pharmaceutical Global Supply Chain Logistics.

Supplier

Source: Enyinda and Szmerekovsky (2007).

40

The Primary distribution channel represents the normal process for distribution of

product from the manufacturer to the provider or end user. The secondary distribution

channel is the movement of products purchased from an authorized distributor, or source

other than the manufacturer, to another intermediary. These products are then sold to the

healthcare provider or the end user. The secondary distribution channel represents one

method for the infiltration of counterfeit or otherwise adulterated drugs into the legitimate

pharmaceutical supply chain.

To reverse this trend and to enhance the security and integrity of the supply chain,

major US-based pharmaceutical firms recently announced they would no longer sell their

medical commodities to US wholesalers who also buy the manufacturers' commodities

from other sources than the drug manufacturers (HIGPA, 2004). Within the secondary

distribution channel, drugs often change hands many times before reaching the provider or

the end user. Achieving a safe and secure pharmaceutical industry GSCL is an imperative

and daunting task for manufacturers, governments, and international health agencies.

Because of this concern, pharmaceutical firms are under intense pressure to close the gaps

in their supply chains, particularly in the distribution network that extends from

manufacturer to customer. Thus, the need to build security and integrity into the

pharmaceutical supply chain has never been greater because of technologically savvy and

well-organized criminals or international health terrorists.

41

Pharmaceutical Global Supply Chain Logistics Security Threats

Pharmaceutical supply chain threats are shown in Figure 7.

Figure 7. Pharmaceutical Industry GSCL Security Threats.

1. Normal Drug Flow

O

o

2. Disruption (Interruption)

o>

4. Modification

3. Diversion dnterceDtion)

5. Fabrication (Counterfeiting)

Source: Enyinda and Szmerekovsky (2007).

Panel 1 represents the normal drug flow starting from raw material source to drug

manufacturing and to drug final destination. Panel 2 is disruption or interruption to the

availability of legitimate drugs. Panel 3 represents diversion or interception of legitimate

drugs. For drug modification in panel 4, it is any action that compromises drug security and

integrity. Finally, fabrication in panel 5 represents any action that compromises the drug

authenticity. The pharmaceutical GSCL security goals are to ensure the confidentiality

42

associated with a pedigree record of drugs, authentication, availability, and integrity.

Therefore, supply chain network measures are needed to protect supply chain flows

(product, information, and funds) during their transmission.

However, a critical variable missing from the preceding set of strategies is the RFID

technology imperative which has been touted as the preferred tool to counteract

counterfeits in the legitimate GSCL. Leveraging RFID technology will not only mitigate

counterfeit pharmaceuticals, it will also reduce GSCL security threats. This action in turn

will significantly drive business value in terms of reduction in theft and shrinkage,

enhanced information visibility, improved efficiency and effectiveness, enhanced quality

customer service, improved inventory management, reduced cycle time and shipping time,

and overall cost reduction (Peleg-Gillai et al 2006). To mitigate and manage the

pharmaceutical GSCL security threats reported in Figure 7, information visibility is vitally

important. It is only when information visibility is deployed can the pharmaceutical

industry be successful in minimizing counterfeit pharmaceuticals prevalence in GSCL.

Radio Frequency Identification Imperatives

Radio frequency identification (RFID) technology can give a firm real-time

visibility into supplier capacity so that supply chain managers will be aware of shortages in

time to take corrective action and keep production on schedule. Improving visibility to

demand and supply information can enable the SCL actors to position the right amount of

inventory at the right location within the SCL, at the right time to meet the ultimate end-

user's demand. Leveraging RFID can help to avert the traditional Bull whip (or Whiplash

Effect) phenomenon that is a common problem when upstream supply chain actors do not

have information visibility regarding downstream supply chain actors/customers actual

43

demand level. The Bullwhip Effect is an observed phenomenon in forecast-driven supply

chains (Lee et al, 1997) which can result in inventory risk. Because of the mindset that

forecast errors are bound to happen, organizations often hold an inventory buffer. Driving

up the SCL from the end-consumer to the raw materials supplier, each SCL actor observes

a greater variation in demand and, hence, greater need to carry safety stock.

Indeed, in periods of increasing demand, downstream actors will increase their

orders. And in periods of declining demand, orders will decrease or stop in order to reduce

inventory levels. As a result, variations are amplified as one move upstream in the SCL or

further from the downstream customer. The appropriate countermeasure to reduce this

variation risk is RFID technology which can provide information visibility to demand and

supply. Certainly, "better visibility to supply enables the supply chain to overcome some

disruptive events without impacting customers. The more open supply chain participants

are about providing early warnings about supply chain disruptions, the more likely the

supply chain can either avoid them altogether or at least reduce their duration" (Murphy,

2006). Industry leaders have recognized that GSCL disruption have become a great threat

to remaining competitive in the global marketplace. As a result, their mitigation and

management have become an important agenda in the boardroom. This agenda can be

achieved if firms can successfully implement RFID in their GSCL operations. With RFID

in place, supply chain managers can afford to transmit crucial data back to corporate

headquarters to extract useful information many times in a given day. This information can

enable managers to gain near-perfect visibility of customer demand, enhance inventory

positioning, lower costs throughout the SCL, and accelerate time to market.

44

Pharmaceutical Pedigree Requirements Legislation

The purpose of the pharmaceutical pedigree paper legislation is to safeguard drug

supply chain integrity and security. Accountable pharmaceutical supply chain depends on

paper or RFID-enabled pedigree that tracks, traces, and recall medical commodities if

necessary. Pharmaceutical pedigree is an information authentication mechanism that tracks

and traces all the transactions involving a product (as shown in Figure 8), starting 1) from

the active ingredients suppliers, 2) to the drug manufacturers, 3) to the

wholesalers/distributors, 4) to the end-users such as the pharmacy retail outlets, hospitals,

clinics, and doctors' offices), and 5) to the ultimate end-users, patients.

Figure 8. An Accountable Supply Chain - Pharmaceutical Pedigree.

Pharmaceutical

Manufacturer

i

i

A

CI

tive

Ing

re

dient

Su

PI

)lier

 

T

Wholesaler/

End-user

Distributor

i

k

 

"

Ultimate

End-User

The FDA and the U.S. pharmaceutical industry's mission critical must be to prevent

both local and foreign counterfeiters from compromising global drug supply chains. That

means not only safeguarding drug SCL at home, but also globally in collaboration with the

international health community. Safeguarding the global pharmaceutical supply chain from

disruptive risks such as fake drugs requires multilayered mitigation measures. The

45

multilayered mitigation measures against counterfeiting widely recommended include the

traditional measures (e.g., holograms, overt and covert techniques, harsh criminal penalties

and steep fines), supply chain pedigree, and RFID technology-enabled tracking and tracing.

Indeed, the introduction of counterfeit drugs into the legitimate GSCL poses a great

challenge for the global pharmaceutical industry. The pharmaceutical industry can employ

a variety of embedded technologies such as RFID to track packaged pharmaceuticals. As

counterfeiting is on the rise, increasing number of countries are mandating the

implementation of RFID and meeting pedigree compliance. For example, in the U.S.,

several states are requiring pedigree compliance for both the pharmaceutical manufacturers

and wholesalers as one of the measures to safeguard drug supply chains integrity and

security. However, to prevent the proliferation of differing state pedigree requirements, the

FDA is assuming the leadership role in establishing clear federal guidelines and

implementation of pedigree requirements under the Prescription Drug Marketing Act.

A pedigree enables a reasonably controlled pharmaceutical supply chain. An

effective pharmaceutical pedigree can track product movement from regulated firm to

regulated firm until it reaches the ultimate end-user, the patient. A pharmaceutical pedigree

paper must be maintained through the entire SCL back to the manufacturer. For example,

Florida enacted a pharmaceutical pedigree papers law that went into effect in 2006. Also,

about eleven states are adopting the Florida statute as template for their proposed pedigree

legislation. The required pedigree information includes 1) drug/product identification, 2)

lot number, 3) quantity and distribution, and 4) pharmacy licensure for each change of

possession.

46

Further, pedigree requirements can help in reducing the prevalence of counterfeit

drugs in the pharmaceutical SCL. RFID can reduce drug counterfeits; improve tracking of

the distribution of legitimate drugs and at the same help to interdict substandard and

adulterated drugs before they reach unsuspecting consumers/patients. Other attendant

implications of RFID include enhanced safety and supply chain security; improved

traceability of products, particularly if there is a drug recall; product authentication; and

improved patient safety (American Chamber of Commerce to EU, March 2006). The FDA

believes that counterfeiting is not widespread within the system of manufacturing and

distribution of pharmaceuticals legally in the United States because the extensive system of

federal and state regulatory oversight and steps to prevent counterfeiting undertaken by

drug manufacturers, distributors, and pharmacies. However, the agency has recently seen

an increase in counterfeiting activities as well as increased sophistication in the methods

used to introduce finished dosage into the otherwise legitimate U.S. drug distribution

system. FDA counterfeit drug investigations have increased to over 20 per year since 2000,

after averaging only 5 per year through the late 1990's. Increasingly, the reported cases of

counterfeits involve well-organized criminal groups who seek to introduce finished drug

products that may closely resemble legitimate drugs yet may contain only inactive

ingredients, incorrect ingredients, improper dosages, sub-potent and/or super-potent

ingredients. To ensure supply chain integrity and security of the pharmaceutical GSCL,

attention must be paid to RFID technology, business practices, legislation, regulation,

public awareness and education, creation of an alert network, and international cooperation

(FDA, 2004).

47

Counterfeits drugs can be mitigated from entering the legitimate supply chain by

ensuring that manufacturers are in compliance with Good Manufacturing Practice (GMP)

at the manufacturing point and by improving surveillance and vigilance by other authorized

stakeholders. The FDA's counterfeit drug initiative has called for multilayered measures to

deal with counterfeit drugs: securing the product/packaging, securing the movement of

drugs throughout the supply chain, securing all business transactions, ensuring appropriate

regulatory oversight and enforcement, increasing penalties, and increasing vigilance and

awareness through RFID. A pedigree-enabled RFID can enhance pharmaceutical supply

chain integrity and security by insisting on transparency and accountability from the

stakeholders who handle legitimate drugs throughout the supply chain network.

Supply Chain of Custody

Supply Chain of custody provides visibility into the movement of a product as it

migrates through the value chain network. As the product moves through the value chain

stream, a record of its location and ownership can be captured. Supply chain of custody

allows companies to answer questions such as where is the product now, where was it on a

specific date, and who had access to the product and at what points in time? This is

important information in addressing complex supply chain issues such as product

tampering, counterfeiting, diversion, and shrinkage. Product pedigree provides visibility

into the composition of a product through all stages of manufacturing. As a finished

product is packaged, information on its materials and components can be recorded,

including the sources of those materials and components, and the pedigree of the product.

As the product migrates through the supply chain, the manufacturer, trading partners and

48

regulators such as the FDA can have access to the pedigree information. This information

can be valuable in addressing issues such as defective or tainted ingredients, product recalls

and product authentication. The ability to track pedigree allows legitimate supply chain

stakeholders to determine not only which lots of the drug contained the tainted component

but which specific units. Indeed, visibility into chain custody can help firms to identify the

owners of the products subject to a recall. Thus, allowing only the contaminated drugs to

be recalled as opposed to all the drugs.

A drug supply chain that is not secure will create patient safety issues on top of

significant costs to manufacturers and wholesalers working to address criminal activities.

Therefore, it is in the best interest of the pharmaceutical industry to look for viable

solutions to their supply chain issues now, rather than face continued media criticism for

the profits reported by successful companies, contrasted with the growing concerns over

the safety and integrity of drugs. Supply chain visibility-enabled RFID that tracks the

location and movement history of pallets, cases and item-level products is an important

first step on the path to a more secure drug supply. By leveraging RFID technology, the

pharmaceutical industry can gain supply chain knowledge regarding lead times, inventory

levels, warehouse space, shipping costs and sourcing options.

Indeed, chain of custody can facilitate the verification of each item, case, pallet, and

object uniqueness and possession of each serial number. And each change of custody will

require a transaction between the current owner and the existing master database.

Counterfeit pharmaceuticals can be identified immediately since each serial number can

exist only in one location at a time.

49

Sense and Respond Pharmaceutical Supply Chain

Charles Darwin once said "it is not the strongest of the species that survives, or the

most intelligent, but the one most responsive to change." The pharmaceutical supply chain

can create and preserve value through its ability to sense and respond (S&R) to changes in

environmental conditions and threats in order to meet customers' value expectations. This

can be achieved by delivering product in the right quality and integrity at the right time to

the right point of use at the least cost. Arguably, S&R supply chain will become a matter of

adapt or perish. Adaptability invokes the ability of organizations to sense early (anticipate)

and quickly respond to sudden changes in environmental conditions (Haeckel, 1999,

Heinrich and Betts, 2004, Lee, 2004). Lee (2004) emphasized that in order for

organizations to handle abrupt changes in environmental conditions they must build 'the

triple A- supply chain' encompassing 1) agility - the ability to handle sudden changes or

external disruption smoothly through such means as promotion of information flow among

stakeholders, developing collaborative relationships with suppliers, having dependable

stakeholders, develop contingency plans and crisis management team, etc, 2) adaptability-

the ability to adjust supply chain's design to meet structural shifts in markets and modify

supply network to strategies, products, and technologies through monitoring world

economies to identify new supply bases, developing new suppliers and logistics

infrastructure, evaluating needs of customers and ultimate end users, etc, and 3) alignment

- the ability to develop incentives to enhance performance through exchanging information

and knowledge freely with stakeholders without delays, lay down roles, tasks,

responsibilities for suppliers and customers, among others.

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In today's global business environment that is driven by panoply of risks and

uncertainties, pharmaceutical firms "that quickly embrace this new operating model will be

the winners well into the twenty-first century [and]

...

ultimately [will] become more

nimble, focused, and competitive. The inability to [sense and] respond rapidly to changing

market conditions will undermine their economic viability" (Heinrich and Betts, 2004). For

the pharmaceutical firms, it is the ability to sense and respond swiftly to changing business

environment will be required for firms to survive in the twenty-first century global

economy and gain competitive advantage. Thus, "adapting quickly to today's constantly

changing business environment is an absolute must. Creating an adaptive supply network

will promote tighter linkages between companies and their suppliers, allowing greater

flexibility and responsiveness in serving the needs of the ultimate boss - the consumer"

(Jake Barr, Associate Director, Global Logistics, Procter & Gamble).

The pharmaceutical firms can leverage S&R supply chain to defend against many

portfolio of threats. Every adaptive system survives by making sense out of its exogenous

and endogenous environments and responding with appropriate preemptive actions.

Pharmaceutical firms can manage portfolio of threats by proactively sensing what is taking

place in its exogenous and endogenous environments. Adaptive supply chain networks are

communities of customer-centric organizations that must first sense what is going on in

those environments, share knowledge, rapidly manage threats and seize new business

opportunities and responding to them by judiciously adjusting to changing environmental

conditions (Haeckel, 1999)

Arguably, S&R pharmaceutical supply chain can provide near perfect real-world

awareness of information regarding threats and opportunities. And the real-world

51

awareness is the firm's capability to sense information in real-time from its environment,

including stakeholders and other relevant sources through embedded technology, agent-

based distributed decision making, dashboards, event management, intelligent analytics and

business processing integration and automation (IBM Business Consulting Services, 2005)

to respond preemptively to unusual variations. With RFID technology, the pharmaceutical

industry can identify threats and opportunities in its operating environments by 1)

monitoring and sensing threats, 2) detecting and interpreting early warning signs, 3)

analyzing data for actionable intelligence/information, 4) making decisions based on the

actionable intelligence, and 5) responding and executing the actionable information to

manage the threats.

Because both the retail and pharmaceutical firms lacked the S&R supply chain

capabilities, they received more than $2 billion in product returns annually due to excess

inventory or obsolete commodities (Philips Semiconductors et al., 2004). Saddled with

about 1,300 recalls in 2001 due to one form of britches or another, the industry must look

for better means of having visibility into its global pharmaceutical supply chain from

manufacturing floor to medicine cabinet through S&R -enabled RFID. The ability to sense

threats and respond proactively in real-time is imperative (Ferrari, 2006). And the key

enabler to S&R supply chain model is RFID technology that has been touted as the "holy

grail". Because of the significant promise that RFID has, FDA has recommended that it be

adopted by the pharmaceutical industry to safeguard drug supply chain integrity and

comply with the electronic pedigree requirement. In essence, FDA is requiring a sweeping

adoption of RFID technology as a form of electronic track and trace. Because the

pharmaceutical firms can no longer meet today's challenges with their current business

52

models, there is a need to look toward developing S&R supply chain capabilities. The

advantages of S&R supply chain capabilities include 1) less vulnerable - no single node

failure, no unit supply isolation, 2) less massive - less redundancy, and more efficient, 3)

more robust - more supply sources, options, and transport, and 4) more effective - faster

adaptation and smoother flow (Proceedings.ndia.org/4af6/Blaker.pdf).

Pharmaceutical Supply Chain Competitive Intelligence

The desire for organizations such as the pharmaceutical firms to attain sustainable

competitive advantage is moving supply chain issues up the corporate agenda. In current

day operating environment, cost competitive advantages associated with outsourcing,

alternative supplier base, lean supply chain, just-in-time supply chain, transferable

technology, and acquisitions and mergers are rarely sustainable because they are easily

replicated by competitors. As a result, the means to gaining sustainable competitive

advantage may lie in supply chain competitive intelligence. By leveraging supply chain

competitive intelligence pharmaceutical firms can build and maintain sustainable

competitive edge. Because pharmaceutical supply chain C-level executives are more than

ever facing turbulent operating environment, a guide is needed to aid them in their quest for

agile and sense-and-respond supply chain.

Indeed, supply chain competitive intelligence is no longer an option, it is a growing

imperative for those organizations desiring to flourish and prosper. As a result,

pharmaceutical industry C-level executives must mandate the adoption of supply chain

competitive intelligence from their top supply chain leaders to stay ahead of competitors as

well as having appropriate framework to manage risk. This means they must understand

53

panoply of critical challenges that may hinder their abilities to gain sustainable competitive

advantage. Those pharmaceutical firms that lack the ability to properly manage their supply

chain activities will run the risk of disrupting their materials and information flows which

in turn can wreak havoc on near real-time responsiveness, loss of consumers' confidence,

poor financial performance, and decrease in shareholders' value.

Competitive Intelligence

The field of CI has its root in military intelligence as documented in The Art of War

by Sun Tzu (Griffith, 1971). In the 1990s, CI became an integral part of the "learning"

organization (Prescott, 1999) for a significant number of organizations (Kahaner, 1996;

Fuld, 1995; Goshal and Westney, 1991) because of the continuous change in global

competitive landscape, quality management initiatives, and the view that actionable

intelligence can be the key to achieving sustainable competitive advantage (Prescott and

Gibbons, 1993). Prescott (1999) described CI as an organizational process designed to

develop actionable intelligence pertaining to competitive dynamics (e.g., moves and

countermoves of competitors, suppliers, customers, alliance partners, and potential

competitors), non-market factors (e.g., government regulation, tariffs, culture of a country),

and to serve such important roles as early alert of opportunities and threats (risks), decision

making support, competitor monitoring and assessment, and strategic planning support.

Also, CI focuses on the various aspects of an organization's environment, including

political, social, economic, technological, competitive, and ecological (Prescott, 1999).

McGonagle Vella (2002) emphasized that the two important aspects of CI are mainly the

utilization of legally and ethically sources to extract data on environmental conditions,

54

competition, competitors, trends and scenarios; and the transformation of data into

actionable information that can support real-time organizational decisions.

Moorman (1995) noted that organizational information process encompasses

information acquisition, information transmission, conceptual utilization, and instrumental

utilization. The goal of CI is to provide data that can respond to questions about

opportunities and threats. Burwell (2004) described the advantages of using CI to include

the transformation of a firm weaknesses into opportunities, predicting competitors' next

strategic moves, gaining knowledge of environmental changes before it is too late to

respond, mitigating and managing potential threats/risks proactively, achieving sustainable

advantage, and dominating rivals in the marketplace. Two key factors that can influence

the competitive advantage of any firm are endogenous and exogenous environments.

Although majority of the business intelligence capability are built around the endogenous

environment, in order to gain sustainable competitive advantage, organizations are

expected to understand both the endogenous and exogenous environment (Oguz, 2002).

According to (Oguz, 2002), if understanding endogenous and exogenous environments is

the prerequisite to achieving strategic advantage, then the business intelligence capabilities

must capture both the endogenous and exogenous data. Doner (2005) note that business

intelligence capabilities are vital to enhancing forecast accuracy, operational productivity

and customer demand management.

Because the current day operating environment has become very turbulent and thus

risky, supply chain executives must rely on the external environment to access critical data

to achieve actionable intelligence. However, Dugal and Prescott (1998) contend that access

to information can only lead to an advantage if an organization is able to compile, interpret

55

and disseminate that information to the decision makers on real-time fashion. Essentially,

the collected data is compiled to develop information which is analyzed to generate

knowledge. And when that knowledge is communicated to decision makers it becomes

intelligence necessary for action and results (Society of Competitive Intelligence

Professionals, www.scip.org; Vibert, 2000). Porter (1998) asserted that "gathering data is a

waste of time unless they are used in formulating [corporate] strategy." Prescott (1999)

emphasized that "a value-adding competitive intelligence process is a series of systematic

organizational activities that are driven by specific [actionable] intelligence needs within

the firm with the objective of achieving [sustainable] competitive advantage. Thus, supply

chain executives who base their decisions on actionable intelligence will gain positional or

differential advantage over rivals who do not use CI process as a core capability. It can

help an organization identify managerial blind-spots (Gilad, 1994; Zahra and Chaples,

1993; Zajac and Bazerman, 1991).

Supply Chain Blind Spots and Competitive Early Warning System

Gilad (1994) describes business blind spots as unchallenged postulations, corporate

myths, and corporate taboos that can cause competitive disadvantage. Unchallenged

assumptions are those associated with the social, political, economic, competitive, suppliers,

consumers' expectations, etc. Corporate myths represent the assumptions of how an

organization feels about itself such as the feeling of invisibility which can be harmful to its

competitiveness. Corporate taboos can entail a situation where a firm assumes it

understands its operational environment, supply chain partners in particular. Supply chain

blind spot represent unconscious behaviors and negative actions that can be driven by

56

external events. To gain advantage, organizations must correct competitive blind spots that

can lead to disaster to their operational efficiency and effectiveness. Organizations

neglecting intelligence and complacent to the supply chain blind spots, do so to their

detriment. For the pharmaceutical industry, surprises can be a disruptive event when it fails

to understand what is happening within and across the supply chains.

Brown and Weiner (1985) described early warning as a radar that constantly scan

the environment and alert the new, the unexpected, the major and the minor surprises or

threats. Thus, supply chain competitive intelligence serves as early warning system or

alerts to environmental threats. The competitive early warning system as shown in Figure 9

acts like a dashboard that is constantly monitoring, analyzing, and responding proactively

to patterns and trends that can lead to potential opportunities and/or preempting potential

supply chain disruptions.

The competitive early warning system framework encompasses the identification of

potential supply chain threats and opportunities; intelligence monitoring for warnings signs;

and supply chain risk management action. The interdependent and convoluted nature of

global supply chains in the current day operational environment has become vulnerable to

disruptive risks. To carryout a successful risk management, identification of portfolio of

risks is imperative (Norrman and Lindroth, 2004; Hallikas et al., 2002; Zoya and Russell,

2003). Although risk identification exercise is difficult because of the complexity and

robustness of the global supply chain network, "unidentified risks may misguide supply

chain risk management process (i.e., risk mitigation plan development), leading to

inadequate or no appropriate strategies to control these risks and it could lead to major lost"

57

(Karningsih et al, 2007). Risk management entails identification of sources of risk types,

risk analysis, risk evaluation and risk mitigation.

Figure 9. The Competitive Intelligence Warning System Triangle.

 

Feedback

Management

Monitoring

action/response

intelligence

Alerts/Early

Warning System

Adapted from Gilad, B. 2004. Early Warning - Using Competitive Intelligence to Anticipate Market Shifts, Control Risk, and Create Powerful Strategies. Amacom, New York.

Risk identification. To effectively mitigate and manage risks a firm must identify

portfolio of risks. Some streams of research on identification of portfolio of risks include

(Wu et al., 2006; Kiser and Cantrell, 2006; Christopher and Peck, 2004; Cavinator, 2004;

Chopra and Sodhi, 2004; Gaonkar, 2004; Hauser, 2003; Juttner et al., 2003; Harland, et al.,

2003; Zsidisin, etal., 2000)

58

Intelligence monitoring/risk analysis and evaluation. The essence of supply

chain intelligence monitoring is to make sense of the identified threats to avert any supply

chain disruptions.

Management response/risk mitigation. In this phase actionable information must

be handed over to the appropriate decision makers to be able to respond proactively near

real-time to the warning signs emanating from the environmental intelligence monitoring.

Arguably, the current day tumultuous market conditions and competitive environment have

raised the stakes for supply chain C-level executives, and managing supply chain CI is

poised to change the battleground for gaining competitive edge. To be successful,

organization must radically change the way they sense, think, interpret and react (IBM

Business Consulting, 2003) to potential opportunities and threats.

According to Sun Tzu's Art of War, "If you know the enemy and know yourself,

you need not fear the results of a hundred battles. If you know yourself but not the enemy,

for every victory gained you will also suffer a defeat. If you know neither the enemy nor

yourself you will succumb in every battle." This statement is very relevant today for the

forward-thinking organizations who must gain actionable intelligence through real-time

knowledge to proactively respond to potential opportunities and threats in their operating

environment. Thus, supply chain c-level executives "

...

have to be able to see past curves

in the road to successfully maneuver around what lies ahead" (IBM Business Consulting,

2003) because those who "

...

have been hugely successful

...

are

great not because they

were focused on cost or flexibility or speed, but because they have the ability to manage

transitions, changing market conditions, evolving technology, and different requirements as

a product moves through its life cycle. The companies that can adapt are the ones that will

59

be here for the long term" (Scott et al, 2003). With supply chain CI firms can afford to

respond with agility and speed to business environment opportunities and threats. Because

supply chains have become more global and complex, supply chain CI is critical to a firm's

ability to attain positional advantage. Gilad (1988) noted that the possible areas of CI

coverage include competitors, growth opportunities, markets, technological, political,

economic and social environments, demographics, suppliers and acquisition candidates.

Although CI tool has been used for supporting risk management endeavors in other

fields, there is little or no application in supply chain management. Based on review of

relevant literature, only two studies discussed risk management using competitive

intelligence. For example, Froilan used Fuld's intelligence cycle model as well as risk

diagnostic hypothesis tree to examine financial risk management in banking industry in the

Philippines. Vibert (2006) discussed leveraging online competitive intelligence to identify,

assess and map organizational risks in order to develop actionable intelligence necessary

for decision makers to achieve actionable results. Karningsih et al (2007) discussed using

knowledge based systems to assist in identifying potential risks and establish the

interrelationships between risks in a supply chain network. There have been quite a number

of other studies that have knowledge base system to identify and management risks in

projects (e.g., Niwa 1989; Ramamoorthy et al., 1993; Zoyza and Russel, 2003). Similarly,

to enhance risk identification and management in construction management, Ashley and

Perng (1987) created an intelligent risk identification system through the integration of

expert system, database management, and influence diagram representation.

To decrease costs, grow revenues, and achieve positional advantage, supply chain

CI is imperative. Essentially, supply chain CI is vital to reducing overall supply chain costs,

60

inventory carrying costs, order fulfillment, and supply chain risk that can come in many

different forms and from a variety of sources.

Supply Chain Intelligence Cycle

Intelligence is the process of gathering, processing, reporting, and disseminating

finished, actionable intelligence to decision makers. The goal of intelligence is to provide

guidance that depends on appropriate and available information within a timeframe that can

support purposeful action (Willis, 2007). The intelligence production process or the so

called intelligence cycle (IC) contains all the variables needed to develop actionable supply

chain CI. Miller (2000) identified the four phases of CI, including identification of key

decision makers (e.g., supply chain risk managers, chief risk officers, enterprise risk

management officers) and their intelligence; information acquisition; analysis of

information and upgrading it to actionable intelligence; and dissemination of the actionable

intelligence to decision makers. According to Froilan, "the most important aspect of

[supply chain threats and opportunities] is to provide [supply chain] risk managers and risk

takers an effective system, that will help them understand the nature of risk, communicate

the risk, ways to monitor the cause and effects of risk and

..

.create strategic plan on how to

prevent or manage risk." Because identification of threats and opportunities in modern

global supply chains are daunting challenges, there is a good chance that some of them will

be left unrecognized. The supply chain IC cycle is used to identify and manage threats and

opportunities in supply chain. Indeed, following Froilan, a combination of Fuld's

intelligence cycle and threat diagnostic hypothesis to identify, mitigate and manage supply

chain threats are used. Kahaner, 1996; Ashton and Stacey, 1995; and Flud, 1995 consider

61

CI process to consist of planning and direction, collection of data or information, process

analysis, dissemination, and securitization. Thus, IC-based supply chain encompasses

planning and direction of intelligence collection of data/information (phase 1) that results

in collection of new information (phase 2) that must be processed (phase 3), analyzed

(phase 4), disseminated (phase 5) (Willis, 2007), and decided/acted on.

The primary purpose of CI in forward looking organizations is to enable continuous

intelligence assessments concerning the strengths and weaknesses of competitors. Thus, the

application of CI within supply chain management will be organized around the core

intelligence process, the IC. The IC describes the steps used to create intelligence product.

It is an iterative process of planning and direction, collection of data, processing, analyses,

and dissemination of actionable supply chain CI. Intelligence processes exist to meet the

actionable intelligence/ information requirements of supply chain managers. Information

gaps are identified and collection assets are tasked to collect the necessary information.

While some of the information that is collected may be fed directly from sensor to shooter,

the supply chain manager's intelligence requirements can only be met by processing the

collected information to produce actionable/information intelligence assessments. The

resulting intelligence assessment can then be disseminated in a real-time and appropriate

fashion through suitable means to supply chain leaders who need it. Indeed, the speed of

transmission and ease of comprehending disseminated information on receipt are critical

factors. According to Willis (2007), "intelligence is more valuable if the [IC] operates

faster than the [competitors']. More rapid intelligence enables faster recognition of new

threats and adaptation to shifts in [competitors'] strategies. Thus, methods to improve the

62

accuracy and speed of the process provide a strategic advantage in efforts to combat ..."

supply chain blind spots.

Phase 1: planning. Froilan suggests that the planning phase begins with threat

identification to delivering intelligence product to an end user for the purpose of

identifying, evaluating, monitoring, and controlling threats. Further, planning encompasses

the entire intelligence process, beginning with threat assessment phase and culminates with

the delivery of the finished intelligence products. It formulates the appropriate actions to

address specific portfolio of threats and prioritizing actions for integrated supply chain

strategy. The supply chain strategy can be in the form of mitigating and managing threats

through business or supply chain contingency planning, avoidance, transfer, compromise

and/or accepting the risk. Plans that are generated must be responsive real time to the

anticipated intelligence requirements. Planning at this phase integrates personnel, processes

and tools using multiple information sources and collaborative analysis to build shared

knowledge of the environmental factors. Information can be sourced from a wide range of

sources, including intelligence, academia, industry, the public domain and other such non-

traditional sources.

Phase 2: data collection. Effective data collection and real-time responsiveness to

intelligence requirements is vital to supply chain decision makers. The capacity of the

intelligence system to support decision makers effectively will depend on detailed initial

analysis and the comprehensive planning of intelligence collection operations. The

collection requirement specifies exactly how the intelligence agent will go about procuring

the intelligence information the supply chain manager requires. Collection requirements

management requires analytic skill to evaluate how well the end-user has expressed the

63

need; whether the collection assets are able to procure the identified information, and how

the collected information reaches the supply chain intelligence analyst.

Information from open sources are often a valuable in the public domain and global

business environment, including internet, corporate publications, advertising, newspapers,

trade associations, periodicals, academic journals, foreign and domestic, official documents

and other published materials. Arguably, in today's ultra competitive global business

landscape, acquiring information from environmental sources has become increasingly

important for supply chain C-level executives interested in seeing their organizations

flourish and prosper.

Phase 3: supply chain information processing. Supply Chain actionable

information must be easily understood to enhance real-time decision making in a rapidly

changing global business environment. Intelligence processes must meet the actionable

information requirements of the supply chain managers.

Phase 4: analyze. Analysis is the transformation of supply chain data into

actionable intelligence or supply chain decision-making information. Analysis provides the

opportunity for the supply chain manager to pursue the appropriate and most critical threats

and opportunities. The collected information or data must be analyzed to determine the

degree to which they confirm, supplement, or contradict each other, and thus establish

probabilities/frequencies and likely impacts, relationships, conclusions and/or implications.

The collected information is organized into a responsive intelligence product. The purpose

of intelligence analysis is to provide the underlying significance of selected target

information. The analysis typically involves forecasting which requires supply chain

analyst to make explicit statements about the degree of confidence held in a certain set of

64

judgments. Essentially, in intelligence analysis, the supply chain manager gathers

information from a variety of sources and then proceeds to generate tentative explanations

for threats and opportunities. Each scenario is examined for answers and compared against

the procured information for decision making.

Phase 5: disseminate supply chain intelligence. Dissemination of supply chain

actionable intelligence emphasizes its pervasiveness and imperativeness in operating

business environment. Supply chain blind spot cannot be managed without effective

dissemination of actionable intelligence regarding potential threats. For supply chain

threats and opportunities to be analyzed and decisively managed, they must be

disseminated within and across supply chain partners. The production of intelligence is

valueless unless it is disseminated in real-time time to the supply chain manager and in a

form that permits exploitation of the actionable intelligence. For actionable intelligence, it

demands expedited production and dissemination of that intelligence for action.

Nevertheless, the intelligence process never terminates with the product delivery to the

decision maker. Rather, the intelligence process dialogue continues between producer and

the decision maker. However, for the product to be of value, dissemination must involve

just-in-time feedback. It is crucial because supply chain leaders need to know what is

important in order to meet the intelligence requirements necessary to respond to potential

opportunities and threats.

Phase 6: decide/act. Supply chain threats and weaknesses must be identified before

they can be managed. Essentially, every type of threats must be identified before

attempting managing them. In this phase, there is a requirement to "monitor the

performance measures, record incidents and outcomes, and track changes in business or

65

risk landscape. The information feeds back into step [or phase] one to complete virtuous

circle. Monitoring serves as the "watchdog" that tracks the situation of supply chain threats

and the strategies deployed to manage them. In essence, portfolio of threats can be

identified and monitored in order to enhance the evaluation of mitigation plans. Further,

control is vital in this phase in order to correct deviations from mitigation planned actions.

Threats control relies on supply chain managers to have action plans, correcting for

deviations from plans, responding to threat drivers, and improving supply chain processes.

Summary

In an atmosphere of declining R&D productivity, increase pricing pressure and

changing regulatory requirements, global pharmaceutical firms are under increasing

challenges to improve profit margins. To deal with these challenges, pharmaceutical MNEs

are pursuing consolidations in the form of M&A and global outsourcing. Pharmaceutical

firms outsource their R&D functions to CROs to increase productivity, drug discovery and

development, and research capabilities. Increasingly, Asia has become the choice

destinations for drug manufacturing because of 1) cost reduction strategy, 2) more

flexibility with manufacturing and capacity, 3) lower labor costs, 4) capital does not need

to be invested in machinery or plant capacity, and 5) not a core competency (Sun, 2006).

Nevertheless, as these firms for better or worse shift their emphasis from sourcing and

producing their products internally to outsourcing to low-cost destinations risks and

uncertainty will continue to be prevalent. Although risk management is an issue of great

importance in global outsourcing due to the demands of supply chain strategies, it has

received limited attention from pharmaceutical firms engaged in outsourcing relationships.

66

Arguably, given the array of risks associated with supply chain logistics outsourcing, it is

imperative that the pharmaceutical industry embrace risk management.

Although there exist in the literature strategies for addressing numerous supply

chain vulnerabilities and risks, nowadays environment demands S&RL model that can

offer a better preemptive strike against PSC disruption risks. The pharmaceutical industry

executives are facing the hard reality that risk of disruptions in the form of counterfeit to its

legitimate drug supply chain can devastate public health, patient safety, and the bottom line.

Indeed, supply chain managers must understand that inability to plan, measure, mitigate

and manage risk elements in their supply chains can adversely impact drug quality,

customer retention/confidence, brand strength, and financial performance. Regrettably,

many pharmaceutical firms fail to recognize risk throughout all tiers of their supply chain.

Hence the pharmaceutical industry's risks are now compounded by the number of external

providers it depends on for its raw materials, ingredients, and sometime finished products

for its patients.

To survive and thrive in the twenty-first century global economy, pharmaceutical

firms must learn how to adapt to today's environment that is faced with daunting

challenges. This means that organizations such as pharmaceutical organizations "need a

new way of operating that gives them the flexibility to respond quickly to unexpected

changes. Transforming your business to succeed in this rapidly accelerating environment is

not optional. In short, it' adapt or die" (Heinrich and Berts, 2003). Therefore, to succeed,

pharmaceutical firms must look towards the adoption of sense and respond logistics model

that can help them to adapt and resilient to sudden disruptions in their supply chains.

Indeed, by becoming an adaptive enterprise, pharmaceutical stakeholders can afford to

67

leverage the network's cumulative capabilities to sense events that hamper the plans as

those events occur, and analyze them for impact; and respond to and learn from ever-

changing business landscape (Heinrich and Betts, 2003).

Because of the ever changing regulatory requirements, Sarbanes-Oxley Act, drug

pedigree laws (track and tracing) and their compliance means firms must learn to sense and

respond. And failure to do so means that firms may see their brands damaged by negative

publicity or a major product recall or de-listing, banks can view firms as too high an

investment risk, significant regulatory penalty, increase in legal costs and insurance

premiums (IBM, 2004). "Consumer-driven supply chain networks must be able to respond

quickly to the compliance demands and regulator pressures placed upon them by

consumers, retailers and governments. A common and key capability that companies need

to develop to meet various compliance requirements is traceability-the ability to identify

the location of a finished product after it has entered the distribution network, to trace

backward to identify the source of its constituent raw materials and to trace the route of raw

materials through the conversion process. Companies may also need to identify other

finished products that may have shared a raw material or conversion process" (IBM, 2004).

The key ingredient to improving security and integrity of the pharmaceutical supply

chain is strong regulatory oversight combined with due diligence stakeholders when

choosing primary and secondary distributors (HIGPA, 2004). To safeguard public health,

the FDA must continue to advocate for protocols or systems that can ensure the security

and integrity of U.S. PSC. Such protocols can include 1) establishing the integrity of the

source of medical commodities; 2) requiring that stakeholders provide a pedigree back to

the previous source, certify that it is not a diverted product, certify that actions by the

68

source will not change any original manufacturer warranties or guarantees, certify that the

product has been stored and handled consistent with product labeling requirements; and

develop a list of key pharmaceuticals that will not be purchased from sources other than the

manufacturer, or authorized distribution channel (The Health Industry Group Purchasing

Association (HIGPA), 2004).

In today's competitive environment, organizations' performance and profitability

strength are hinged upon their ability to sense and respond to consumers' changing demand

behavior, changing government regulations, and constant threat of disruptions. Arguably,

Wall Street is more than ever demanding visibility into supply chain operations because the

traditional sales forecasts and quarterly profits are providing less trustworthy insights into

an organizations' long term competitiveness than their ability to move things well.

Achieving a safe and secure drug supply must be based on transparency and accountability

by supply chain shareholders who handle the prescription drug throughout the PSC. As

counterfeit drugs continue to make their way into the U.S. PSC, the legitimate supply chain

stakeholders need to adopt electronic track and trace technology-enabled S&RL to mitigate

them. By adopting S&RL the PSC shareholders can deprive counterfeiters and diverters the

opportunity of infiltrating the nation's prescription drug supply chain with counterfeits,

substandard and/or contaminated drugs. Without any doubt, unless pharmaceutical firms

start taking action now to adopt S&RL model, their prosperity will be at stake. Hence

prosperous pharmaceutical firms will actively seek to position themselves for strong

financial performance and operational strength by anticipating or sensing and responding to

drug counterfeiting and diversion that can tarnish their brand image and lost of public