Publication Date
Advisor(s): Jarrod Goentzel
Topic(s) Covered:
  • Healthcare

Pharmaceutical supply chains are strictly regulated and work within unique constraints. Traditionally, innovator companies that are manufacturing the product have no direct interaction with the end users (treatment sites or individual patients); rather, over 90% of the orders go through intermediary wholesalers and distributors. However, with the introduction of new technologies for patients to manage their own health, federal regulations coming into effect on supplier responsibility for tracking drugs down to the user, and ever more pressure to cut costs and justify the high cost of medicine, manufacturers are actively reshaping their role in the pharmaceutical supply chain. 

Our objective in this thesis project was to support our Sponsor Company, a “Big Pharma” company with a wide range of medicines, to understand the key cost drivers of their current distribution channel and to explore the impact that a shift to an alternative distribution channel would have from a financial and operational standpoint. We first conducted a literature review to examine the existing research on costing methodologies, the impact of home delivery for clinical care and the drug distribution landscape. The literature shows some evidence that home delivery improves patient adherence and reduces inventory costs for suppliers. 

We then analyzed a targeted product’s distribution network within the US by building a cost-to-serve model, which maps out the end-to-end service components conducted by the Sponsor Company. With this model we were able to test the supply chain impacts of volume change and a gradual shift to alternative distribution channels. The results of the model showed that for this particular product, working capital was a key cost driver, shifting volume to incorporate alternative distribution channels is highly beneficial; even some significant increases in operating costs are effectively neutralized by reductions in working capital for the entire channel. 

Aside from the model results, we recommend validating the assumptions and suggest that this ‘bottom-up’ costing model be extended for other products and geographies and used to inform the company’s overall corporate strategic planning exercise. The cost-to-serve model framework can also be extended beyond the pharmaceutical industry to benefit consumer facing industries considering an omni-channel strategy.