In part IV of our series on tomorrow’s pharma logistics, we take a closer look on how you can optimize supply chain cost through partnering with logistics services providers (LSP).
Part IV: LSP: The value of a partnership approach
In the past, costs for logistics services such as transport rates, warehousing and order fulfillment, were never a major part of negotiations between logistics service providers (LSP) and pharmaceutical companies. The focus was instead on quality and reliability. However, falling reimbursement levels and a growing competition of generics companies forced the industry to take a different perspective on supply chain cost – even beyond the OTC segment.
Price versus quality
Lower shipping charges obviously can be realized by selecting the forwarder with the lowest rates, but is this suitable for a pharma company that needs to perform and comply with many regulations? Quality, product safety and security are still key in pharma and can easily justify some extra cost, if an LSP is able to provide valuable experience and solutions. The obvious challenge is to find the right balance between cost and quality.
Avoiding processual waste
Besides looking for the lowest price for the best service, cost can be lowered by process optimization, horizontal synergies, shipment consolidation, transport mode shifts or process automation both in warehousing and transport. Avoiding processual waste allows to focus on core competencies. Besides selecting the best supplier considering product and service quality as well as price, other valid questions are: Can transport cost be optimized? Which Incoterm should be selected, and which customs code is best suited for the specific product? Do I have the respective expertise inhouse or should I combine efficient shipping with specialized brokerage services? Specifically when it comes to smaller pharma companies experience shows that often inhouse services can be professionalized by making use of third-party providers even at a better cost-benefit-balance. Still, in the context of change management, the required enablement and development of the selected service provider should not be underestimated. ‘Make or buy’ decisions require an end-to-end understanding of the pharma value chain.
Once one or more freight forwarders have been selected, shippers can either decide for a fixed rate card for the next 3 years (paying a little extra to cover the risk of increasing cost for the provider) or run year after year a new tender process. However, the latter does not only take your procurement team tremendous time and effort. It also does not allow you to build a trusted partnership with your provider. You don’t care about partnership? Well, then they don’t do neither! Only a trusted partner with the perspective to make a suitable margin will be willing to invest time and resources to help you optimize processes and facilitate savings that can easily exceed the assumed (as only planned) savings of a tender process. The solution, offering continuity in partnership without paying higher rates, can be found in linking your freight rates for a time window of e.g. 3 years to a lane- or business-specific freight rate index and agree upon a quasi-automated, annual freight rate renewal process that goes beyond fuel price floaters.
Although a partnership agreement is more than a rate agreement and therefore more complex and full of “pit holes”, working with a selection of 3-5 global partners can be very rewarding. First, let’s be clear, there is no single provider that can seriously cover all global regions. Therefore, outsourcing to the best regional 3PL or LLP not only fosters global centralization and harmonization of processes, but also improves cost efficiency by making use of respective market strengths and benchmarking.
However, the key to drive significant cost savings is the selection of a suitable commercial agreement, incorporating a realistic and motivating gain sharing component within a partnership approach and ideally linking your freight rates to an available Freight Rate Index.
In our next blog article, we will briefly wrap up this series and investigate how digitalization can help you further improve margins.