group project merck

Merck: Leading pharmaceutical supply chain initiatives

Merck: Leading Pharmaceutical Supply Chain Initiatives 1

1.0 Abstract

Merck is a pharmaceutical company that strives for strict quality standards and effective

supply-chain management to ensure the efficacy, safety and supply of their products. They

sustain an interdependent, flexible supply chain that works to take into account global and local

market supply needs while engaging and investing in local and regional partnerships to enable

market access. Within this document is an analysis of the Merck supply chain and an evaluation

of how Merck is maintaining their supply chain performance while upholding a high level of

customer service and providing profits to the shareholders. Additionally, the pharmaceutical

industry and their customers’ needs will be assessed. The paper will look at how Merck has

changed its supply chain structure from a centralized model to duplicating a structure deploying

partnerships locally and what implications that has. Their pricing and inventory management

structures will get discussed as well as their distribution and supply chain. Merck is concerned

with product serialization and security which is specific to the pharmaceutical world and food

supply chains. In conclusion, suggestions will be made on how Merck may improve their

current efforts or what changes would be more efficient.

2.0 Merck Value

The concept that the customer experience is vital to the success of an organization is not a

new theory. Pharmaceutical companies do not have a good reputation when it comes to being

customer driven (Michels, Rebhan, & Ghosh, 2014). Because health care policies are changing,

the pharmaceutical companies have to adopt more customer driven strategies to insure future

performance in a volatile market. Pharmaceutical companies are making production and supply

chain changes leaner in an effort to regulate costs. (Benke, Retterath, Sangster, & Singh, 2014).

Merck specifically is bringing value to the table by updating their supply chain system and


partnering with United Parcel Service to improve the supply chain management, safety and

delivery times (Dunn, 2011).

Figure 1 shows consumer frustrations with the pharmaceutical and medical community

(PWC, 2013). For this reason, the pharmaceutical companies are changing focus to service and

demand strategies (PWC, 2013). Consumers like the convenience of being able to purchase

prescriptions straight from the company and delivered to their home, much like doing their retail

shopping online. In fact, baby boomers with numerous lifelong conditions are willing to pay up

to 21% more for home delivery of their meds (PWC, 2013). Some of these concepts affect

Merck but others do not because of the specificity of the Merck market.

Figure 1, Cost and Side effects dominate consumers’ top frustrations regarding their treatment.

Reprinted from “Customer Experience in the Pharmaceutical Sector: Getting closer to the

Patient, by PWC, 2013


Merck Supply Chain is different than dealing with a supply chain that deals with the

production of soap or ice cream, items that do not carry a high risk of personal harm if not used

or handled appropriately. Merck produces medicines and vaccines that they distribute to 140

different countries (Merck, 2015). Merck has changed its supply chain structure recently by

going from a centralized model to duplicating a structure more like Coke-Cola, and deploying

partnerships locally (Fernie, 1995). Merck key performance indicators (KPIs) are shown in

Figure 2 (Merck, 2013).

Figure 1 Merck Key Performance Indicators. Reprinted from Corporate Responsibility 2013

Annual Report by Merck, 2013

The suppliers, 3PL firms, distribution centers, and retail stores may be better understood if

we look at Merck's products. Merck makes vaccines and produces medications that support

women's health including prescription and many oncology drugs used in the battle against

cancer. The company as a whole uses their research in veterinary sciences to advance in both

human and animal medicinal fields.

Part of the Merck business plan is to assist in making the world healthier. Vaccines are

needed in the "developing countries" where 1.3 billion people do not have adequate access to

essential healthcare needs (Oschman, 2015). Merck’s faces many challenges distributing

products to these countries representative on the map below in Figure 3 (Merck, 2013).


Figure 2 Developing countries were Merck is present with vaccines from Corporate

Responsibility 2013 Annual Report by Merck, 2013

In the US, Merck is structured based on the Food and Drug Administrative licensing. Plants

are located in Durham, North Carolina, West Point, Pennsylvania, Elkton, Virginia and Carlow,

Ireland. Vaccines from those plants need to be distributed worldwide and timing would become

crucial in epidemic situations were vaccines would be needed quickly. The Merck supply chain

network needs to be able to respond to these worldwide needs if an epidemic was to occur.

3.0 Merck Supply Chain Network

Pharmaceutical companies have similar networks to everyone else but the end customer is

pharmacies and hospitals, or pharmaceutical mailing houses. A Merck network may look like the

following as shown in Figure 4 (RX Response, 2104).


Figure 3: Pharmaceutical Supply Chain Network Example, From

http://www.rxresponse.org/resources by RX Response, 2014

Figure 4 shows a practical network with raw material inputs from suppliers, finished product,

packaging, distribution to hospitals, pharmaceuticals and patients. Because Merck deals in

vaccines, they fall more on the development side of the supply chain, and would distribute direct

to pharmacy, as opposed to wholesale. Figure 5 shows how the supply chain would break down

as far as people, skills, and collaboration (Price Water House, 2014). The information systems is

a critical part of the network. Automation will be a factor in numbering or serializing the

product for tracking through the entire network from manufacturing until the time the seal is

broken at the pharmacy, by the doctor, or the patient (Merck, 2014). Pharmaceutical companies

must maintain traceability and be able to maintain efficiency in supply chain networks while

providing regulation of controlled substances. Choosing 3PLs that can maintain the traceability

needed for moving controlled substances is critical for pharmaceutical companies (Price Water

House, 2014).

http://www.rxresponse.org/resources


Figure 4: Pharmaceutical Supply Chain Planning. From Pharma Supply Chain 2020 by Price

Water House, 2014.

Merck personally takes responsibility for global serialization of their product and has a

public commitment to the following (Merck Global Serialization Public Policy, 2015):

1. GLOBAL STANDARDS: Merck will provide product serialization consistent

with the GS1 Data Matrix, the Electronic Product Code Information Services (EPCIS),

the Global Trade Item Number (GTIN), and the Global Location Number (GLN) as the

unique trading partner identification number. Products will be traceable to the point of

production, facility, time and date of production, as well as that the seal was not broken

through transport.

2. PRODUCT AUTHENTICATION at each supply chain node: Merck will have

each point in the supply chain verified so that the product is secure in transport.

3. SIMPLIFIED REQUIREMENTS: Merck encourages governing policies to

consider simplification and flexible requirements for the consumer and the needs of the

business.

4. GLOBAL HARMONIZATION: Merck favors global standardization on

serialization to simplify business practices on a worldwide level.


5. NATIONAL REQUIREMENTS: Merck favors national level policies on drug

transportation and serialization. Public Policy Statement: Supply Chain Security - Global

Product Serialization. As an example, the United States legislation enacted in late 2013 -

The Drug Supply Chain Security Act which establishes uniform federal standards to

improve the security of the drug supply chain and reduces the impact of the burdensome

patchwork of state laws related to pedigree requirements for drug distribution by

establishing a national system for tracing pharmaceutical products through the supply

chain. Merck supports such measures.

6. DATA SECURITY AND ACCESS: Merck is dedicated to securing the data

generated by serialization so that authenticity of product is not compromised in any form.

7. ITEM LEVEL SERIALIZATION: Merck believes serialization should be at the

closed item level. This means the package being opened by the consumer or the seal on

the bottle at the point that the syringe takes the product (Merck Global Serialization

Public Policy, 2015).

Serialization and security are major factors that Merck considers when choosing supply chain

partners. Merck has chosen to partner with United Postal Service due to their relentless track

record in providing services. UPS was chosen by Merck because of UPS's global reach, and

their understanding for secure distribution of pharmaceutical products. UPS is also familiar with

the import and export needs of Merck's business and would be able to handle the issues

involving the transport of vaccines and drugs.

Choosing a 3PL provider requires high scrutiny over their business practices, capabilities,

credentials, and track record for storing, handling and distributing products safely (Marcum,

2007). Traditional 3PL’s are not adequately trained to handle these materials and could lead to


the loss of millions of dollars. They must select a partner that specializes is pharmaceutical

supply chain; this will allow them to leverage their best practices in (Marcum, 2007):

Just In Time (JIT) inventory

Streamlined supply chain

Tighter control and better documentation

Increased customer confidence

Enhanced focus on core business competencies

Over 3.5 billion prescriptions are filled annually in the United States. Even though Merck

only has a small percentage of that market, Merck does not have time to allow mistakes in the

supply chain to jeopardize customer’s health. (Follow, 2005). Merck has a public commitment

to provide security and serialization throughout the manufacturing and supply chain process

(Merck, 2015).

4.0 Pricing Management

Pharmaceuticals are priced based on when they are released by the Federal Drug

Administration (FDA) after development. This decides on the time line that a drug may be

considered a named brand and when the patent expires and other people are allowed to make it

under other generic names. Economically this creates competition against the branded

pharmaceutical, which gives the customer a choice (Winegarden, 2014). How new a drug is,

will determine its saturation in the market based on availability.

However, the newer a drug is, the more expensive it will be due to engineering research and

design costs, as well as testing before going to market. The FDA process to market alone, can

take up to 14 years. An example of a Merck tested product is the Herpes Zoster Vaccination that


is a response to the influx of what is commonly called “shingles”. A 3.5 year random study was

done with the Veterans Administration to verify the validity of the drug after the vaccine was

developed by Merck (Simberkoff, et al. 2010). Testing is costly and directly affects the price of

pharmaceuticals. The shingles vaccine is around $200 to the consumer. Lu explains some

general issues with pharmaceutical pricing.

The pricing is typically driven by costs of production with little or no consideration given to

demand (Lu, 1998). Patents in the pharmaceutical world tend to be given based on the chemical

composition of the drug which leads to the over saturation of the market of many different drugs

that in the end provide the same therapeutic relief to the patient (Lu, 1998). Two different

strategies that historically have been used are skimming and penetration. Skimming is the

process of setting a high initial price and then lowering it over time with a focus on new products

that significantly have advantages over the products already on the market (Lu, 1998).

Penetration is releasing products at lower prices that increase over time and benefits drugs that

are being released into a saturated market (Lu, 1998).

In addition to market saturation and drug release phases, pharmaceutical companies price

differentiate their products in regards to customers based on geographical and socio-economic

segments. This type of differentiation falls into the grouping strategy that is defined as providing

discounts or lowered pricing to specific groups of customers (Simchi-Levi, Kaminsky, &

Simchi-Levi, 2008). This method of pricing establishes the tiered pricing system that is so

common in the pharmaceutical industry. Three drivers push differential pricing in the

pharmaceutical market: social responsibility, new market openings, and competition (Yadav,

2010).


5.0 Inventory Management

To keep up with the urgent needs of patients in a dynamic healthcare marketplace,

pharmacies and pharmaceutical companies partner up to have an accurate and efficient inventory

management system in place. Upon interviewing Walmart pharmacy manager, Kay Lemmerman,

Merck supplies data via electronic systems on refill orders of stock through use of a pharmacy

inventory management software program (personal communication, March 20, 2015).

Due to market variability caused by generics and named brand drugs, Merck keeps

inventories levels high enough to fulfill 98% of all orders placed. Having the policy of the

availability of all drugs, inventory levels increase and consequently so does cost. In order to

move away from this supply structure Merck instead has set sales targets. If they do not have

enough inventories on hand to fulfill an order it then determines if a generic version is available

or if a competitor can easily supply a similar or generic version of the drug. “This requires data

from other drug companies, which is supplied by the North American Supply Chain Project,

started in 1996-1997. Each month, the project collects from, and supplies to, the major drug

suppliers a standard set of data on physician prescriptions over the previous 24 months” (Rapp &

Lair, 2002, pg. 84). Based on this information, Merck then sets productions and drug availability

by the region.

Setting drug availability and production requires intricate calculations and formulas in order

to improve sales forecast accuracy, manufacturing planning to drive production efficiency, as

well as to reduce inventory levels. To do this the company looked at JDA's industry-leading

Demand, Fulfillment, Collaboration and Master Planning solutions to achieve this. JDA

advertises their inventory management solution (JDA Inventory Optimization, n.d.) to “provide

companies with end-to-end capabilities for managing inventory strategy, planning and execution,


enabling them to achieve superior service levels, gain market share and reduce costs” (Inventory

Management, n.d.). This is accomplished by:

Quickly adapt inventory policies and stocking strategies to address changing market

conditions, business objectives, supply chain constraints, customer segmentation and

buying behavior.

Eliminate excess inventory and reduce obsolescence costs while maintaining customer

service levels.

Develop inventory strategies that maximize the profitability and volume of key

materials, components and products.

Reduce stock-outs and excess exceptions through early warning and performance

analysis.

This order and inventory management system conforms to Merck’s analysis of needs and

regulates shipments to each pharmacy with information regarding actual patient demand for

prescriptions. The organization has less orders lost due to the inventory management system

provided by JDA as it has decreased back orders and increased the availability above Merck’s

98% target (Rapp, et al 2002). The system has also reduced inventory and waste from drugs that

have passed discard or expiration dates as the drugs are held in stock for shorter periods.

6.0 Minimizing Bull Whip Effect

Information exchange is important to improving the efficiency and effectiveness of all supply

chains and the same holds true for the Pharmaceutical industry (Schwarz and Zhao, 2011).

Improved production planning, reduced stock levels, and reduced total costs are all positive

outcomes of allowing for information about downstream inventory replenishment policies to


flow upstream (Scwarz, et. al, 2011). Two approaches must be taken to ensure proper

information exchange. In the short run, Merck inventories should either decrease or increase in

the short run with the net effect dependent on the opposing forces (Scwarz, et. al, 2011). In the

long run, Merck can take advantage of information sharing in their planning which would lead to

reduced inventory and increase turnover (Scwarz, et. al, 2011).

7.0 Merck Distribution Strategies

Merck US distribution is different than Africa distribution strategies and distribution of

vaccines varies depending on the type of vaccine. One distribution example for Merck of an

older drug was Ivermectin used to stop the transmission of worms (Waters, 2004).

Merck donated the drug to the World Health Organization and distribution was organized in

Africa based on passive components, mobile teams, community based, and community dictated.

Waters says that economically it benefitted communities by decreasing the spread of worm

related diseases.

Passive distribution is when someone goes to a clinic and a doctor prescribes medication

based on the symptoms. Mobile teams are medical teams sent to problem areas to disseminate

drugs. Community based distribution is like when the military requires all members to get shots

before deployment or flu shots every winter. Community dictated is the same as public schools

requiring vaccinations to attend facilities. Merck products are disseminated in each of these

situations.

At times, distribution can depend on agreements between companies and regional restrictions

based on marketing. For instance Merck and Johnson and Johnson went to court over the

distribution of Remicad and Simponi. It was decided in 2011, that Merck would market specific


regions and the other regions would belong to Johnson and Johnson (Merck vs. Johnson and

Johnson, 2011).

In the US, the Federal Drug Administration must license vaccines for them to be distributable

in the US. A list of those vaccines is available on line. It may sound simplistic, but licensing to

be able to distribute would have to happen before marketing and could be a major issue in the

pharmaceutical supply chain when things go wrong. Licensing also affects non-vaccine

products.

Part of the tracking between drug manufacturers and pharmaceutical distribution companies

and hospitals is keeping up with the government regulations of the controlled substances. This is

where contracting obligations would be critical, not only with supply chain distribution, but

execution of raw materials, and serialization processing, as well as communication of these

needs to impact pricing and marketing.

8.0 Merck Product Supply Contract Strategies

Current pharmaceutical production systems are costly and have shifted towards more of a

creating value for the business as opposed to just “optimizing” the current system (McKinsey &

Company, 2012). In order to accomplish this, companies like Merck must look past just efficient

production but look at a major overhaul that is driven by innovation (McKinsey & Company,

2012). Merck started the process in 2008 by looking towards the future by establishing a

production system that is focused around the customer (Arnum, 2008). They improved their

processes and innovation levels to bring products to the market faster than ever before while

reducing overall capital spending and allow for better understanding of the magnitude of market

penetration (Arnum, 2008).


Merck has increased their focus on keeping and innovating essential elements of their

internal production to maximize and ensure the quality level of these core items (Arnum, 2008).

While the goal is to outsource non-core elements, the core-elements of their supply chain will be

maintained in house and they focus their time and energy into improving these elements turning

them into their core business values (Arnum, 2008).

As with any supply chain but more predominately a healthcare supply chain, the governing

parties must ensure high level of quality when it comes to its suppliers and the associated

contracts that go along with such a relationship (MSH, 2012). Although Government agencies

play a big role in regulation of the medical industry, pharmaceuticals tend to fall into the private

sector with much of the supply chain being contracted to outside sources (MSH, 2012). The

basis to move forward with the decision to go with the contract takes into account how the

contract as a whole will affect the whole system not just one individual item (MSH, 2012). The

main reason for contracts or outsourcing of production is because internal manufacturing

processes are too expensive and the cost savings can be applied to research and development

(MSH, 2012).

Trade terms are the first element of establishing pharmaceutical supply contracts establishing

the division of the costs and responsibilities between the supplier and the buyer. Trade terms

have been the standard as defined by the International Chamber of Commerce (MSH, 2012).

The terms tend to be established by the buyer and the risk of the contract is established in regards

to damage or loss goods (MSH, 2012). At this point common trade terms are defined that

include establishing the knowledge of transportation costs etc. (MSH, 2012). As part of the

process, the supplier additionally establishes that they can financially accomplish what is

expected out of them through the contract (MSH, 2012).


Purchase quantities are established within the contract and whether or not minimum order

quantities will be required are decided upon at this time (MSH, 2012). The supplier does not

benefit from the contract if the discounted price is not tied to a guaranteed order quantity (MSH,

2012). Suppliers usually set buffers in pricing to account for changes in pricing of raw materials

(MSH, 2012). Once the contract is signed, prices proceed through a validation period where the

prices are maintained until the terms of the initial contract are completed (MSH, 2012). The

standard for contract terms is one year but can vary in environments that experience high

inflation fluctuations (MSH, 2012). High variability or uncertainty on the end of the supplier

will be incorporated into the overall final price (MSH, 2012).

Currently, Merck, like many of the other industrial leaders practice what is called Investment

Buying Model contracts. Investment buying is defined by distributors buying large amounts of

product to avoid future price increases that are typical in the pharmaceutical industry (Zhao,

Xiong, Gavireni, and Fein, 2004). This type of process leads to many disadvantages as high

levels of inventory at the distribution level and big fluctuations in orders making planning and

inventory at the supplier level difficult (Zhao et al, 2004). The ideal contract situation for Merck

to move towards that has been the trend is a move towards Fee-For-Service where the revenue at

the distribution level is driven by fees that are charged to the supplier for specific services that

are provided to them (Zhao et al, 2004). The main service provided is proper inventory

management agreements that control and maintain the inventory levels are both the supplier and

distributor at predetermined levels (Zhao et al, 2004). The main focus of this agreement is to

ensure that the distributor has a level of inventory to maintain its service level while still low

enough to eliminate investment buying (Zhao et al, 2004). Although investment buying still

occurs to reap the benefits of a lower price it is controlled by a pre-determined maximum level of


inventory per the contract terms (Zhao et al, 2004). Overall this contract is ideal because it

reduces investment buying, provides production stability for the supplier, and establishes proper

transparency for both the supplier and the distributor (Zhao et al, 2004).

9.0 Merck Performance and Executive Strategy

Merck sets their standards based on ISO 9000, company expectations, FDA expectations,

customer expectations, shareholder expectations, and international pharmaceutical standards.

Above everything, Merck must provide good science. Part of the way that Merck measures

supply chain performance is setting up expectations at the start of a contract and then doing

periodical reviews of those standards. Merck expects its suppliers to perform according to Merck

standards set up in their contracts. Key performance indicators (KPIs) are used in each of the

Merck groups. Executives then tie those KPIs to the company goals. Merck has been rebuilding

in the last few years. Evidence of this is that they sold off non-pharmaceutical research items

and their veterinarian medicine divisions to streamline their performance. This is discussed in

their 2012 and 2013 annual reports that are publicized since Merck is a publicly traded company.

Figure 5 Merck Supplier Standards Retrieved from Manufacturing & Supply Chain - Merck

Responsibility by Merck, 2014


Annual Report 2013

Merck Group | Key figures

€ million 2013 2012 Change in %

Total revenues 11,095.1 11,172.9 -0.7

Sales 10,700.1 10,740.8 -0.4

Operating result (EBIT) 1,610.8 963.6 67.2

Margin (% of sales) 15.1 9.0

EBITDA 3,069.2 2,360.2 30.0


EBITDA pre one-time items 3,253.3 2,964.9 9.7


EPS (in €) 5.53 2.61 111.9

EPS pre one-time items (in €) 8.78 7.61 15.4

Business free cash flow 2,960.0 2,969.3 -0.3

Figure 7, Merck Group Key Figures From from Corporate Responsibility 2013 Annual Report

by Merck, 2013


Figure 8 Merck Product Pipeline From from Corporate Responsibility 2013 Annual Report by

Merck, 2013

2014 is also expected to show a decline due to the rearranging in assets that are going on.

Corporate strategy is to continue focusing on what Merck is good at which centers on research

and development in the vaccine markets as well as some other targeted medications.

Executive strategy would be to employ the means to market and deliver the medications

coming down the Merck pipeline as efficiently and quickly as possible. This means maintaining

good relationships with suppliers, understanding licensing and patent agreements, as well as

marketing to the people and physicians that need the medications. Figure 2 shows that Merck

has increased the number of local and regional partnerships in the manufacturing and supply

chain markets to make this happen. In 2011, regional and local partnerships were at 0. In 2013,

the regional and local partnerships were at 354. Future success means keeping these partnerships


that coincide with future developments and communicating those developed products as they

occur.

Adding goals to maintain or gain market presence in specific medical areas will keep Merck

moving forward and profitable. If Merck can be ahead of the game in the cancer medications

and continue to derive drugs for HIV and AIDS patients then they can be a major market

provider in critical health prevention areas. Mathew Herper of Forbes ranked Merck number 8

among the fortune 500 pharmaceutical companies (Herper, 2015):

1. Total return: +16.9%

2. Market capitalization: $162 billion

3. Quarterly sales: $10.5 billion

4. New drug approvals: 3

5. Five-year total return: +89%

One of the reasons why Herper gave Merck a higher grade this year was because they beat

Bristol Meyers to the punch on bringing new drug approvals to market. Merck also improved

their antibiotic line.

Merck is keeping their plans realistic in markets that are being used and are on the forefront:

AIDS, Cancer, Hepatitis, Antibiotics, Mycobacteria’s, and Herpes. These health issues are also

worldwide issues. Part of Merck’s success, if not all is dependent on maintaining their supply

chain, keeping drug authentication and serialization under control with supply chain security, and

being able to respond to health needs in the US, Europe and developing countries. Merck has

done this by making their suppliers hold to standards, modernizing their information systems,


and making their supply chain as lean as possible, while increasing presence locally and

regionally.


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group project merck

Documents

merck supply chain

supply chain management

supply chain performance

supply chain structure

supply chain system

flexible supply chain

merck market

supply chain changes