Data-Driven Insights

Can Pharma Do VMI or CPFR

April 1, 2014   |   Josh Halpern

CPFR & VMI in Life Sciences?

Over the past fifteen years, concepts like Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR) have become commonplace in many verticals. But propose VMI or CPFR at a Life Sciences channel management brainstorming session and you will get some interesting looks. The order management/supply chain folks in the room chuckle. Trade shakes its head from side to side, as if to say, “Not in my lifetime…” Pretty much everyone else wonders what VMI and CPFR mean.

So I’ll ask the provocative question – why not VMI and/or CPFR in Life Sciences? Life Science companies sell through demand networks, just like the many consumer product companies who have made VMI and CPFR well-honed business processes. In this post, I’d like to examine what I think the reason is – and ask whether the logic still applies.

First rewind the clock fifteen years. Life Science companies used to have a mix of direct chain business and wholesale business. The wholesalers made much of their margin off of inventory price appreciation. Then came two trends: the channel embraced inventory management (and then pay for performance) agreements, and chains increasingly moved to purchase product through wholesalers rather than direct from manufacturers. This trend has only accelerated in recent years, with major chains such as Wal-Mart, Walgreens, and Rite Aid no longer warehousing brand pharmaceuticals and being completely tied into the supply networks of their wholesale partners.

In this wholesale dominated model, the wholesaler’s core value proposition to its brand suppliers (who pay for performance) and its brand buyers (pharmacies who desire good service levels) is to deliver inventory to demand as efficiently as possible. So things like VMI and CPFR raise some questions in the context of pay for performance – what am I paying for, as a brand supplier, if I’m the one controlling re-orders and inventory efficiency in the DC networks of the wholesalers? It no doubt raises the inverse question for leadership and buyers at the wholesalers.

But I wonder. Wholesalers deliver more and more of their value to pharmacy customers through two things: vertically integrated generic supply networks, and the ability to just in time deliver Rx supply to the pharmacy 5+ days per week. Think about the second of those value props – it matters more than ever that wholesalers be able to sustain a robust service level to their chain customers, who are more dependent than ever on the wholesalers’ FDCs. And Life Sciences companies care more than ever about product availability in these FDCs. Why? Because pharmacy in stock rates, as IntegriChain’s benchmark research has shown, are very low for brand products, less than 50% for most dosages.

As for those pay for performance fees…I’m no attorney, so take this speculation for what it’s worth (you didn’t pay to read this). But as best I can tell, there is already a sizeable portion of the payment tied up in “base fees” which are not metric bound, and fees which are associated with inventory data (EDI 852) and distribution data (EDI 867). Only a subset of the fee is associated with measures of wholesaler inventory and demand management value such as average days on hand, service level, and demand variability.

Let’s say the manufacturer and wholesaler negotiated a new agreement in which they implemented VMI. Wouldn’t the wholesaler’s data have inherently become more valuable, since it is the key to VMI? And is it possible that the value attached to the base fee could also go up, to offset a reduction or elimination of fees for inventory and service level? I merely suggest that we should not assume that VMI, or especially CPFR, dictates that the fee and value level associated with pay for performance would change in a way that is unacceptable to the channel.

Meanwhile, Life Science companies (including some generic companies) sell more and more of their volume through specialty pharmacies. Specialty pharmacies are not complex logistics networks like the wholesalers. Their value is getting patients initiated and adherent on expensive therapies with benefit complexity – not inventory management. Manufacturer fees paid to specialty pharmacies are an evolving area, but they are often tied more to data than to the types of logistics value propositions commonplace in wholesale channel agreements. How does CPFR or VMI create a value issue for the manufacturer/specialty pharmacy relationship? And given the value of each script (and inventory unit!) for a specialty product, is there not a value to the manufacturer in ensuring the utmost inventoy efficiency in the specialty pharmacy channel?

Here’s my bottom line: imagine a world where CPFR and VMI have no net negative impact on any channel participant’s profit interests. Why, then, would anyone object to a model that improves product availability to the retail pharmacies that depend on wholesaler FDCs and the patients that depend on specialty pharmacies?

The most likely remaining objection would be a lack of channel confidence that the manufacturers can properly execute CPFR or VMI. In my next post, I’ll take a look at this concern.

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