3PL Service Providers Aim to Please
Published by Pharmaceutical Commerce
The “bright line” distinction between traditional wholesale-distribution, and third-party logistics (3PL) for biopharma has traditionally been very simple: wholesaler-distributors take ownership of product, and handle downstream distribution, while 3PLs do only the latter under the direction of the manufacturer. But today’s picture of the industry shows that while wholesaling is even more prevalent than before, manufacturers are growing increasingly comfortable with outsourcing some part of their distribution to 3PLs to maintain better control over some of their market channels.
The line also blurs because some wholesaler-distributors offer 3PL services themselves. AmerisourceBergen has its Specialty Group (ABSG, Frisco, TX); Cardinal has the Specialty Pharmaceutical Services unit (LaVergne, TN), to name two. For another, there are many logistics services that pharma companies need besides delivery of finished product. These include sample management programs, clinical trial logistics, product returns and more.
Special handling
Healthcare products represent about 5% of total 3PL volume globally, and within that, perhaps 15-20% is pharmaceuticals,” says Evan Armstrong, president of Armstrong and Associates, which has just published its annual. “Still, it’s a good business for 3PLs that have the special handling expertise, equipment and storage capabilities; they can command higher prices than more commodity-type logistics.”
“There are pharma companies outsourcing transportation, distribution and order processing, and sometimes all three,” notes John Menna, a director at UPS (Atlanta), whose Supply Chain Solutions unit has 3 million sq. ft of dedicated warehousing capacity for healthcare products in 22 facilities, mostly in North America. While noting that “we’re primarily a transportation company,” Menna says that UPS has expanded its services into non-transportation areas mostly to meet broadening customer needs. “It really depends on the channel strategy of the manufacturer,” he says, adding that “wholesalers are themselves great customers of ours.”
The other component that defines relationships between manufacturers and the Big Three wholesalers is the establishment of fee-for-service (FFS) agreements. FFS agreements compel wholesalers to limit inventories (to minimize speculative buying) in return for defined payments by manufacturers. As part of the agreements, wholesalers now report sales and distribution data back to manufacturers, which gives them new insights into what is occurring in their distribution channels.
“Manufacturers have acknowledged the value that wholesalers provide through the FFS agreements, and I don’t expect that brand companies will change this aspect of the supply chain,” says Ross Bjella, president of DDN Pharmaceutical Logistics (Milwaukee, WI), a 3PL.
Indeed, the Healthcare Distribution Management Assn., in its recent Role of Distributors report, found that the volume of pharmaceuticals handled by its members had risen from 70 to 80% of all production from 2003 to 2006, “reflecting their role as a valued partner to the industry,” (What blurs this line, though, is cases where a wholesaler will deliver product to a 3PL to handle the ultimate distribution).
While the agreements reinforce the collaboration between manufacturers and wholesalers, they also set a price tag on the relationship, and that opens the door to bidding for parts of the service or channel-specific activities by 3PLs and others. A prime example of this is cold-chain services, especially for temperature-sensitive vaccines and biotech products. Wholesalers have extensive cold-chain capabilities, but 3PLs are aggressively broadening their service offerings to win some of this business.
“We’re involved in a variety of high touch, custom handling solutions for biotech and specialty products,” says DDN’s Bjella. “These solutions may include cold-chain management, scheduled deliveries, controlled or high value product tracking, Envirotainer management, and managing special ship-via requests through specialized carriers, such as FedEx Custom Critical,” he says. [Envirotainer leases or sells customized temperature-controlled containers for high-volume air freight.]
Samples, close-outs and more
Cold chain is but one of many services available from 3PLs. In fact, 3PLs seem to have taken the classic business-model approach of finding out what your clients need—whatever it might be—and then providing it.
A case in point comes from Priority Solutions International (Swedesboro, NJ), now a subsidiary of Thermo Fisher Scientific. Priority Solutions has traditionally provided warehousing and transportation services with a combination of expedited air and local delivery. “Knowing our capabilities in sample distribution and product returns, a client recently approached us to manage a sales-rep close-out process,” says Danette Dezelski, client manager at Priority. “Their obstacle was that to retrieve samples inventoried with the reps, who are all over the country, as well as product literature and office equipment, their business managers had to spend considerable time at the rep’s office, and the overall close-out process took days.”
Making use of its forward-delivery capabilities, along with a national network of trained field representatives, Priority could arrange for one or two of its reps to close out an office in a day or less, and then inventory and return the materials within 48 hours. “We’re reducing the administrative burden considerably for pharma companies engaged in these close-outs,” says Dezelski, “while meeting the business and regulatory requirements for maintaining control over sample inventories and company-owned office equipment.”
In a similar fashion, RxCrossroads (Louisville, KY), which also offers traditional 3PL services to a wide range of biopharma companies, has carved out a niche handling the patient assistance programs (PAPs) operated as charitable functions by the industry. While conceding that the Medicare Part D program, which brought many elderly and indigent patients under federal drug reimbursements, has constrained the growth of this activity, David Hileman, VP at the firm, says that it can be an administrative quagmire for pharma companies, but one that his firm is well-equipped to handle.
“The challenge is not in getting the medicine to the PAP patients, although that is real,” he says, “it is in getting the prior authorizations, and handling the paperwork for reimbursements.” RxCrossroads has a call center and back-office order processing departments—it is also set up to have a qualified retail pharmacy under its control—and can handle the paperwork and reimbursements, thereby relieving its manufacturer clients from setting up their own administrative offices.
In another opportunity-knocks example, RxCrossroads’ cold chain delivery capabilities have been used by several clients to deliver blood-plasma products in one region of the country; now it is also providing the front-end logistics for picking up raw frozen plasma from donor centers, and delivering that to the clients for processing.
Managing the money
Beyond such specialized services, many of the leading 3PLs seem to have focused strongly on the order-to-cash component of the logistics business, complemented with chargebacks processing and product returns—all of which have been nagging “revenue leaks” for the pharma industry for years.
“In selecting ICS, our clients focus on the speed of our processes and the visibility they have to the total returns process,” says David Cheetham, president of the ICS unit of AmerisourceBergen Specialty Group. “While a client may rely on us for everything from order handling to distribution to accounts-receivable, the goal is to have them feel like it’s all right next to them at all times.” This goes beyond merely reporting; in the past couple years, the company has built up a data warehouse that clients tap into via the Web to get a picture of what their products are doing in the marketplace.
At Cardinal Health SPS, the company has recently invested in a new distribution center in Reno, NV, as well as a hosted version of the Axway Trade Activity Manager from Axway (Scottsdale, AZ). “This is a tool that provides analytics and reporting to our clients,” says Rob Brown, VP of sales. “Trade Activity Manager provides visibility to a manufacturer's downstream customer inventory levels and sales activity which enable the manufacturer to gain a deeper view into their supply chain. This view, combined with the 'four walls' data available through our web reporting system, allows the manufacturer to make more informed business decisions than in the past."
(When acting as a 3PL, Cardinal, AmerisourceBergen and most other major wholesalers who provide 3PL services treat the wholesale part of their company as a customer of the manufacturer; as Brown puts it, “as the manufacturer’s distributor, we ship to Cardinal, we ship to McKesson, or any other customer of the manufacturer.”)
“It can make a lot of sense for pharma or biotech companies to offload order processing, accounts receivable and even collection to us,” says UPS’ Menna. “It might not be a core competency of the manufacturer, and with us, they can leverage the shared-services network that we have built.”
DDN says that its latest enhancement of its back-office services is contract management, monitoring agreements between manufacturers and their wholesale or retail customers so that contract terms have been met. “We offer a full suite of business services, including customer service and receivables. We have a few clients who have outsourced just chargeback management and reporting to us, but nearly half of our customer base is full-service customers.” DDN has also recently installed the Axway IT platform, in this case for managing pedigree data.
Mention of pedigree brings up the hot topic of pharmaceutical distribution for 2008, as manufacturers and their service providers all gear up for the expected January, 2009 implementation of pedigree rules in California. All of the 3PLs contacted for this article have either already set up a system, or are in the final stages of selecting an IT platform.
In the overall context of how pharmaceuticals go to market, 3PL services pop up whenever the discussions swerves into manufacturer “direct distribution”—thereby avoiding many wholesaler charges altogether. Pharma companies in the U.K. are gravitating toward this model, generating considerable friction with existing wholesalers, and with retail pharmacies (who are sometimes the same thing there—see Pharmaceutical Commerce, Jan/Feb, p. 9). But the U.K. is a very different market from the U.S., smaller and with essentially one paying customer, the nation’s National Health Service. There continues to be discussion of alternatives to conventional wholesaling in the U.S., but as the HDMA data cited above demonstrate, if anything, the industry is becoming more wholesaler-focused here.
“The heart of the 3PL model is, we don’t buy and sell,” says RxCrossroads’ Hileman. “From the perspective of the manufacturers, they want clarity in their channel strategies, and the 3PL arrangement allows them to compartmentalize the channels that wholesaling works for and the channels where direct distribution works.”