Vikas Argod, Manager, Supply Chain Operations, Chainalytics
Asking “How agile is your supply chain?” is similar to asking “How much stress you can take?” The answer is, of course, the proverbial “it all depends”. It depends on the timing of the question and severity of the issue. The need for supply chain agility manifests during not so common events, like the one facing Indian pharma supply chains right now.
India’s pharma supply chains are generally set up to handle a 3-4 percent monthly returns rate, and a few batch recalls per year. But the order of magnitude of recalls is much different since March 10, 2016, when the Indian Health Ministry, announced a ban on 344 fixed dose combinations (FDC), effective immediately. This move banned the manufacturing, sale and distribution of close to 2,900 SKUs related to over 500 pharma companies. Many of these SKUs are over-the-counter medications, including popular cough syrups like Phensedyl, which enjoys a third of cough syrup market share. Pharma companies are legally required to recall all their stock from all points of sale as soon as possible.
Fragmented ownership of Indian pharmacies, lack of inventory systems in stores and danger of counterfeiting pose a high risk to pharma supply chains in managing this particular recall. Yet failure to comply will not only have legal consequences but may also create a PR disaster.
Without special processes in place to handle large recalls, typical pharma supply chains can’t rely on their reverse logistics processes. Here are five guidelines these impacted companies should follow:
- Make it easy to return the recalled product: A good portion of the stock remaining in the supply chain will be at pharmacies and in customer homes. To increase compliance of recalls from these locations, it will help to provide multiple return options/locations – whether to pharmacies, special collection centers (in places like malls) or via shipments to a warehouse, quickly processing refunds to end customers via cash vouchers or replacement products. And while distributors often follow an easy-to-use percentage based allocation strategy to issue returns credit this is NOT something you want to do during a recall process-especially one of this magnitude.
- Outsource the product recalls process: Sudden recall peaks disturb current operations, forcing missed customer deliveries that create additional financial losses. Rather, outsource the process of issuing return merchandise authorisation (RMA), receiving, sorting and final product destruction to a third party. This may very well be your existing 3PL, but avoid using the same facility to process recalls that you use for current operations to reduce disruptions. Often returns processing costs are higher (given the low volume) vs. those of current operations. But keep in mind that using the same fulfillment contract with your 3PL will not be cost effective during a recall like the one we are examining.
- Make distributors and pharmacies accountable: Since the actual legal risk only extends to the pharma company, distributors and pharmacies must be incentivised to help in returns. Make them accountable by making it part of a key metric until the recall process is complete, explaining the consequences of not complying with the law.
- Assign destruction sites using a quick transportation analysis: To stop counterfeiting, it’s imperative to destroy the returned product. Also, every drug has prescribed destruction procedures. Whether the process is outsourced or insourced, destruction sites must be assigned for every distributor minimising transportation costs. We recommend running a quick analysis to determine optimal destruction sites.
- Aim for compliance rather than cost cutting: When confronted with many options, pick the one that will secure you the highest compliance and customer safety. It may be tempting to focus on cost savings, but it is simply not worth it. Focus on getting the recalled products from customers and pharmacies. Once they are in the hands of distributors, there will be opportunities to follow the least-cost approach.
Agility is not an operational metric, it’s a strategic one. There has to be a bridge connecting operational requirements to a company’s “agility strategy”. We advise relying on a partner with strong reverse logistics experience, one that can use the five guidelines above to help busy supply chain managers deal with escalating or recall volumes that leave little time for planning exigencies.
Vikas Argod is manager of the Supply Chain Operations competency at Chainalytics. Vikas specializes in warehouse operations, transformation program management and service delivery processes in project-based business environments.