ANALYSIS OF GLOBAL CHANNEL COSTS FOR THE PHARMACEUTICAL INDUSTRY. Eric Rimling and Thomas Seoh Thesis Advisor: Mahender Singh

Transcription

1 ANALYSIS OF GLOBAL CHANNEL COSTS FOR THE PHARMACEUTICAL INDUSTRY Eric Rimling and Thomas Seoh Thesis Advisor: Mahender Singh

2 Thesis Goal 2 Identify costs that impact a pharmaceutical supply chain channel Determine how variability influences these costs Create a decision model for comparing costs across multiple regions to determine the optimal channel

3 Agenda 3 About the Pharmaceutical Industry Cost Identification Hard and Soft Costs Variability Drivers Product Type Matrix Blockbuster Products Specialist Products Commodity Products Underperformer Products Market Forces Using the Framework to Make Decisions Conclusion

4 About the Pharmaceutical Industry 4 Cost of R&D: 15% - 18% of sales Low probability of commercialization Development timeframe is long Patent protection lasts 20 years Lifecycle changes: Patented to Generic

5 Costs Identification 5 Based on interviews with members from our sponsor organization, we identified 30 costs across multiple functions Financial Operational Strategic Costs Identified Logistic

6 Hard and Soft Costs 6 We identified 22 Hard Costs which can be directly measurable The Costs remaining Identified 8 Soft Costs Type were harder Costs Identified to measure and Type had indirect impact on the Channel 3rd Party Logistics Hard Licensing Fees Hard Cost of Capital Hard Mode Hard Costs Identified Type Currency Exchange Costs Hard Other Overhead Hard Ease of Business Soft Shrinkage Cost Hard Port Charges/Taxes Hard Lead Time Soft Environmental Learning Fees Curve Cost Hard Security Fees Soft Hard Facilities Quality Cost Hard Shipment Soft Liability Costs Hard Fuel Surcharges Regulations Hard Special Handling Soft Hard Import/Export Risk Fees Hard Stockout Soft Cost Hard Insurance Safety Costs Hard Taxes Soft Hard Utilization Inventory Holding Costs Hard Soft Technology Hard Labor Costs Hard Utilities Hard

7 Variability Drivers 7 1. Research Fuel Surcharges 2. Pharma Specific 3. Variability Driver Volume 3PL Processing Fees Taxes Insurance Port Charges/Tax Risk Fuel Surcharges 3PL Taxes Insurance Port Charges/Tax Risk Value Reverse Logistics

8 Product Type Framework 8 Demand High Low Fuel surcharges 3PL costs Commodity Insurance Labor costs Fuel surcharges Inventory Underperformer Holding costs Labor costs Taxes Stockout Blockbuster Costs Risk Taxes Inventory Specialist Holding Costs Risk Low High Pricing Power

9 Blockbuster Products B 9 Variability Drivers High demand High pricing power Relevant Costs More strategic and financial Influenced strongly by product value Business Strategy Ensure capacity and maximize utilization Prioritize service and availability Tax advantaged production locations

10 Specialist Products S 10 Variability Drivers Low demand High pricing power Relevant Costs Influenced by product value but lacks demand of Blockbuster Inventory Holding Costs are more important Business Strategy Prioritize service and availability Focus on lean inventory Tax advantaged production locations

11 Commodity Products C 11 Variability Drivers High demand Low pricing power Relevant Costs More operational and logistic Influenced strongly by product volume Business Strategy Optimize operations and logistics Produce closer to target market or in regions with lower factor costs Maximize utilization and economies of scale

12 Underperformer Products U 12 Variability Drivers Low demand Low pricing power Relevant Costs Dominated by Hard costs Labor and Inventory Holding Costs are important Business Strategy Cost, cost, cost Look to boost demand or exit market

13 Market Forces 13 Demand Commodity Underperformer Market Growth Market Pressure Blockbuster Barriers Pricing Pressure to Entry Specialist Pricing Power

14 Using the Framework to Make Decisions 14 1 Channel Attribute Costs 2 Quantify Hard Costs Quantify Soft Costs 3 Risk Importance Product (1-5) Attribute Salience Costs (1-5) Total Local Conditions Labor Conditions Currency Risk IP Issues Natural Disasters Total 45 Adapted from: Global Sourcing Logistics 2006

15 Conclusion 15 A large percentage of costs are driven by fluctuations in volume and value Decisions can be made using a subset of costs based on Product Type Understanding Market Forces that drive Demand and Pricing Power is important for analysis

16 16 Thank You C U B S