An evaluation of Direct Drug Delivery model with current distribution model in Indian Drug Distribution

1. Direct Drug Distribution
- Evaluation on Indian Pharma Distribution
Authors:
Balachandru G
g.balachandru@gmail.com
Surendran P
surendran.ece@gmail.com
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Department of Management Studies, IIT Madras
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2. Indian drug distribution system
Current state Trends
– Multi-layered and regulated • Growing rapidly – Estimated to become $1 billion
– highly fragmented nature industry by 20201
• Next wave of revolution in Indian pharmaceutical is
• High distribution margins for
middlemen (25-40%) expected to be in distribution (as it accounts for 35%
• High distribution costs (distribution cost of the total cost3 & because of explosive growth of
constitutes 35% of total cost) organized pharmacy retail chains)
• Ineffective controls of inventories • Rural pharmaceutical growth rate far exceeds
– Demand-supply mismatch: Bull whip effect industry average growth (new distribution model is
(primarily due to lack of information required to reach out rural India)
sharing)
• Entry of MNCs in to Indian pharmaceutical markets
– High expiry cost and lost sales cost
(demanding for organized drug distribution)
• Sub-optimal penetration of rural
• Growing export market (demand for global standard
market
– pharmaceutical companies fails to access supply chain infrastructure including cold chain
65% of market (out of which 70% is rural infrastructure)
market)2 • CFA system becoming redundant due to introduction
– regular stockiest do not supply to interior of Goods and Service Tax – GST
areas
– only 20 to 30 percent of the sales force is • Growing health insurance (Public and private
deployed in Tier two markets and rural schemes) demands for integrated supply chain
markets1 mechanisms
– difficult to reach many parts of the country, • Increase in demand for high value drugs & drop in
either because of inadequate
transportation or insurgency in some places demand for common drugs
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DoMS, IIT Madras

3. Direct drug distribution
Direct Drug Distribution, is the supply of drug directly from Drug Manufacturer to
either Drug Retail stores or End Customer
ADVANTAGES DISADVANTAGES
• Closer relationship with •High resistance from
customers wholesalers, stockists and other
• Control prices / discounts to stakeholders
pharmacy •Considerable setup and support
• Full visibility of stocks and cost
demand data •Highly complex and system
dependent
• Full supply integrity against
•Increased debt risk
counterfeit drugs
•Supply integrity policy Impact is
• Control volume quickly unclear (Liability depends on
• Increased agility across the contracts)
supply chain •Loose stock holding value when
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change over occurs 3

4. FACTORS AFFECTING DIRECT DRUG DISTRIBUTION MODEL
• Lead time • Implementation of GST
Internal factors
• Inventory holding cost • Vast geography and strong domestic
demand
• Substitution/lost sales
cost • Generics-driven nature of the Indian
pharmaceutical market
• Expiry cost (Push-pull
cycle management) • Growing institutional sales (government
schemes)
Macro factors
• Credit cycle
• Increasing health insurance coverage
• Cold chain infrastructure
(public schemes)
• Increasing net disposable income and
spending on health
External factors
• Opposition from • Rural market growing at a faster pace (8%
stakeholders more than the industry growth)
• Margin sharing • Explosive growth of organized
pharmaceutical retail chains
• Regulation by central and state
governments
• Rising export market (primarily US and
Europe)
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DoMS, IIT Madras

5. Logistics contingencies
During establishing new distribution network:
• Inadequate infrastructure (power, telephone, rail, road, airport)
• Lack of connectivity in case of several rural areas of India
• Difficulty to establish required cold-chains
• Difficulty in getting skilled professionals and labor
• Lack of IT infrastructure and connectivity ( E.g. Internet connectivity in
rural and remote areas)
• Legal regulations on drug distribution
Contingencies that can disrupt business continuity:
• Disruption in some/all modes of transportation
• Unexpected extrinsic factors: Natural calamity/Strike
• Failure of IT system
• Demand exceeding capacity: Due to sudden spike in demand
• Failure of Cold-chain infrastructure
• Shutting down of distribution partners: Courier service/postal department
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6. IS C&F System replaceable?
 All the roles of C&F agent can be performed effectively and efficiently
by proposed direct distribution model
 Implementation of GST would simplify the taxing system and would
eliminate the need for a C&F in every state.
 Consolidated distribution centers could achieve better economies of
scale
 Direct shipping to pharmacist through courier service providers and
postal department of India eliminates the necessity of C&F agent
Despite the technical feasibility, replacing C&F system would be difficult ,
gradual and slow
• Resistance from Pharmaceutical Wholesaler Association & All India
Organization for Chemists and Druggist
• Regional political parties are more likely to support the local
warehouse dealers and C&F agents
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DoMS, IIT Madras

7. Evaluation of Direct Drug Distribution Model
Transportati
return/recal
Credit Cycle
reduction*
Chain lead
l of Goods
reduction
reduction
Inventory
TOTAL
Holding
on cost
Favorability of operational Parameters
Supply
Easing
RATING
time
Cost
parameter of “Proposed” Supply
Chain over “Existing” supply chain
Rating H H M H M H
Technological
Availability of
Investment
manpower
TOTAL
Return on
capability
Parameters
required
Feasibility of executing the RATING
“Proposed” Supply Chain
Rating H M H M
Financial risk (locking
up of capital/ high
Resistance from
Dependency on
external factors
existing players
(Courier/postal
cost of capital)
(PWA,AIOCD)
Legal issues
Time delay
services)
TOTAL
Risk Level associated with the Parameters RATING
execution of “Proposed” supply
chain model
Rating M H H L L M
L M H Refer Appendix (attached excel sheet) for complete analysis
LEGEND
Low Medium High 7
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8. Suitability to Retailer Manufacturer
Macro factors perspective perspective
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LEGEND
Traditional model
Traditional model
Traditional model
L
Direct drug distribution
Direct drug distribution
Direct drug distribution
Low
Market
Growing rural Credit
L
H
H
H
M
M
Penetrating
market cycle
ability
Demand for Inventory
Bargaining
H
H
H
M
M
M
high value cost
M
power
Medium
drugs reduction
Strong growth Recovering
Retailer
H
H
H
M
M
M
in export supply chain
margin
market margins
H
Internet Ordering
L
L
L
High
H
H
H
demand data
penetration Flexibility
Growing
Suitability to
health
L
H
M
M
new tax system
insurance
(GST)
coverage
Emergence of supply integrity
L
H
M
M
pharmaceutica against
l retail chains* counterfeit
L
H
Agility
H
M
Export market
Evaluation of Direct Drug Distribution Model
H
H
M
M
M
M
TOTAL
TOTAL
TOTAL
Refer Appendix (attached excel sheet) for complete analysis
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RATING
RATING
RATING

9. Direct Drug Distribution Model
Risk – Reward Analysis
• Financial
• Huge initial investment • Financial
• Locking up of capital • Decreased distribution cost
• Business/operational • Better margins
• Dependency on small number of • Better control of end prices
distribution partners
• Decreased expiry cost/ lost
Reward
• Straining existing partner relationships
• Employees and pharmacist sales cost
unwilling/slow to change • Business/operational
Risk
• Political • Supply chain visibility
• Political parties supporting local
wholesalers
• Matching demand-supply
• Legal • More control in supply chain
• Licensing • Control sales promotion and
• Competition/ fair trade act discount
• Technological
• IT unable to meet the specifications
• Unable to integrate new system with
existing IT systems
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DoMS, IIT Madras

10. Evaluation Cube model
Analysis of the proposed Evaluation
system Model
“Favorability” of operational
factors - HIGH
“Feasibility” of execution- Accept
MEDIUM
“Risk” Level - MEDIUM Neutral
The proposed system falls in
the “Neutral” category in Reject
project evaluation.
If some of the risks identified
can be mitigated, then the
proposed venture can be
accepted
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11. Final call – Is it worth it? Putting pieces together
•The proposed direct drug distribution venture
Direct drug distribution venture is
Favourability of operational parameter of Feasible
Promising
Intrinsic factors
“Proposed” Supply Chain over “Existing” H
supply chain Profitable
•However, It is important to mitigate the
identified risks* before starting the new venture
Feasibility of executing the “Proposed”
Supply Chain
M •One of the essential step is to partner with
PWA and AIOCD to reduce extrinsic risk before
rolling out the new venture
Risk Level associated with the execution of
Risk
M
“Proposed” supply chain model
Value for other
Manufacturer perspective H
stakeholders
Retailer perspective M
Extrinsic
factors
Suitability to macro factors H
*Refer Appendix, Risk factors
PWA - Pharmaceutical Wholesaler Association
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AIOCD - All India Organisation for Chemists and Druggist
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12. Appendix
• Attached Excel sheet contains the details of analysis
Thank you
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