ANALYSIS OF GLOBAL CHANNEL COSTS FOR THE PHARMACEUTICAL INDUSTRY

Eric Rimling and Thomas Seoh

Thesis Advisor: Mahender Singh

Thesis Goal2

Identify costs that impact a pharmaceutical supply chain channelDetermine how variability influences these costsCreate a decision model for comparing costs across multiple regions to determine the optimal channel

Agenda3

About the Pharmaceutical IndustryCost IdentificationHard and Soft CostsVariability DriversProduct Type Matrix

Blockbuster ProductsSpecialist ProductsCommodity ProductsUnderperformer Products

Market ForcesUsing the Framework to Make DecisionsConclusion

About the Pharmaceutical Industry4

Cost of R&D: 15% - 18% of salesLow probability of commercializationDevelopment timeframe is longPatent protection lasts 20 yearsLifecycle changes: Patented to Generic

Costs Identification5

Based on interviews with members from our sponsor organization, we identified 30 costs across multiple functions

Costs Identified

Strategic

Financial Operational

Logistic

Hard and Soft Costs6

We identified 22 Hard Costs which can be directly measurable

Costs Identified Type

Ease of Business Soft

Lead Time Soft

Learning Curve Cost Soft

Quality Soft

Regulations Soft

Risk Soft

Safety Costs Soft

Utilization Soft

The remaining 8 Soft Costs were harder to measure and had indirect impact on the Channel

Costs Identified Type Costs Identified Type

3rd Party Logistics Hard Licensing Fees Hard

Cost of Capital Hard Mode Hard

Currency Exchange Costs Hard Other Overhead Hard

Shrinkage Cost Hard Port Charges/Taxes Hard

Environmental Fees Hard Security Fees Hard

Facilities Cost Hard Shipment Liability Costs Hard

Fuel Surcharges Hard Special Handling Hard

Import/Export Fees Hard Stockout Cost Hard

Insurance Hard Taxes Hard

Inventory Holding Costs Hard Technology Hard

Labor Costs Hard Utilities Hard

7

Volume

Value

3. Variability Driver2. Pharma Specific1. Research

Fuel Surcharges

3PL

Processing Fees

Taxes

Insurance

Port Charges/Tax

Risk

Reverse Logistics

Fuel Surcharges

Taxes

Insurance

Port Charges/Tax

Risk

3PL

Variability Drivers

Product Type Framework8

High

Low

Low

High

Pricing Power

Dem

and

Commodity

Underperformer Specialist

Blockbuster

• Fuel surcharges• 3PL costs• Insurance• Labor costs

• Fuel surcharges• Inventory Holding costs

• Labor costs

• Taxes• Inventory Holding Costs

• Risk

• Taxes• Stockout Costs• Risk

Commodity

Underperformer Specialist

Blockbuster

Blockbuster Products9

B

• High demand• High pricing powerVariability Drivers

• More strategic and financial• Influenced strongly by product valueRelevant Costs

• Ensure capacity and maximize utilization• Prioritize service and availability• Tax advantaged production locations

Business Strategy

Specialist Products10

S

• Low demand• High pricing powerVariability Drivers

• Influenced by product value but lacks demand of Blockbuster

• Inventory Holding Costs are more important

Relevant Costs

• Prioritize service and availability• Focus on lean inventory• Tax advantaged production locations

Business Strategy

Commodity Products11

C

• High demand• Low pricing powerVariability Drivers

• More operational and logistic• Influenced strongly by product volumeRelevant Costs

• Optimize operations and logistics• Produce closer to target market or in

regions with lower factor costs• Maximize utilization and economies of scale

Business Strategy

Underperformer Products12

U

• Low demand• Low pricing powerVariability Drivers

• Dominated by Hard costs• Labor and Inventory Holding Costs are

importantRelevant Costs

• Cost, cost, cost• Look to boost demand or exit marketBusiness Strategy

Market Forces13

Commodity

Underperformer Specialist

Blockbuster

Pricing Power

Dem

and

Pricing PressureBarriers to Entry

Mar

ket G

row

thM

arke

t Pre

ssur

e

Using the Framework to Make Decisions14

Risk Importance (1-5) Salience (1-5) Total

Local Conditions 2 3 6

Labor Conditions 4 4 16

Currency Risk 3 1 3

IP Issues 5 2 10

Natural Disasters 2 5 10

Total 45

Adapted from: Global Sourcing Logistics 2006

Channel Attribute Costs1

Quantify Hard Costs Quantify Soft Costs2

Product Attribute Costs3

Conclusion15

A large percentage of costs are driven by fluctuations in volume and valueDecisions can be made using a subset of costs based on Product Type Understanding Market Forces that drive Demand and Pricing Power is important for analysis

16

Thank YouC

U S

B