The High Cost of Selecting a Low-Cost 3PL Provider

Putting cost over quality can damage the supply chain

By Dwayne Marcum and Bryan Hudson

Across the globe, companies spend anywhere from 40% to 50% of every logistics dollar on third party logistics (3PL) services.1 The opportunity to reduce this spend is a priority for organizations that are trying to drive down operational costs and increase their bottom line. However, for pharmaceutical and biotechnology firms, selecting a 3PL provider isn’t as simple as comparing costs. It requires a careful examination of a vendor’s credentials, capabilities, business practices, technology and track record for safely storing, handling and distributing valuable pharmaceutical products. Just because a 3PL provider has experience transporting and handling books, CDs or food products, does not mean it is adequately equipped to contend with both deliberate and accidental threats commonly encountered in the global pharmaceutical supply chain.

In a recent study, the World Health Organization estimated that as much as 10% of pharmaceuticals worldwide are counterfeit and nearly 2% of U.S. drugs are stolen or diverted.2 These risks impact large and small companies alike, and are responsible for pharmaceutical companies losing approximately 50% of their associated revenue. Even though large pharmaceutical developers invest heavily in supply chain security, dominant brands are more vulnerable to counterfeiting than their niche counterparts because counterfeiters typically target top brands that cost $800 million or more to develop.3

In addition to external threats, internal deficiencies such as inexperienced employees and inadequate systems can lead to serious quality-control concerns, including temperature excursions, expired materials and compromised products. Finding a 3PL that has the people, systems and technology in place to protect drug products is not a simple undertaking. The average 3PL does not employ staff with the specialized training and knowledge required to handle valuable and sensitive pharmaceutical and biotechnology materials. This inexperience, coupled with the resulting inefficiencies, can lead to losses of millions of dollars. Furthermore, facilities and equipment need to be designed, validated and rigorously checked to comply with the pharmaceutical industry’s stringent requirements for chain of custody, pedigree, product integrity and security.

While pharma companies can probably save money on the front-end by selecting a traditional 3PL rather than a vendor-partner that specializes in pharmaceutical supply chain management, this decision may compromise the long-term success of a drug discovery and put the entire business in jeopardy. Among the risks in choosing an inexperienced 3PL provider:

• Lost revenue and brand erosion due to counterfeiting, theft and diversion
• Expired products due to lack of advanced tracking and reporting systems
• Compromised products due to improper storage and handling techniques
• Poor inventory management due to lack of visibility and control of stored materials
• Endangered consumer safety due to inferior security throughout the chain of custody

Alternatively, choosing a 3PL provider qualified for pharmaceutical supply chain management can enable drug developers to realize significant financial returns. Profitability is positively impacted by leveraging the best practices of a pharma industry 3PL partner in the following ways:

• Just In Time (JIT) inventory levels resulting from greater visibility into the stored materials
• Streamlined supply chain processes that result in decreased operational costs
• Tighter control and better documentation resulting in a reduced risk of fines and product recalls
• Increased customer confidence resulting in brand loyalty and higher margins
• Enhanced focus on core business competencies resulting in greater efficiencies

Whether one is in the process of selecting a new 3PL provider or evaluating existing supply chain partners, there are several critical areas you need to assess:

Credentials

Ensure that the vendor-partner you are evaluating has pharmaceutical industry expertise in all aspects of Good Manufacturing Practices (GMP) and complies with international regulations surrounding supply chain practices, including the Federal Pedigree Requirements, which are outlined in the FDA’s Prescription Drug Marketing Act. Additionally, it is important to verify that that 3PL provider holds the appropriate local, state and federal licenses and accreditations to safely and securely handle and transport regulated drug products. An example of a state-level certification is Verified-Accredited Wholesaler and Distributor (VAWD). A 3PL with this particular designation demonstrates it is abiding by the most stringent industry regulations and implementing best practices as defined by several industry stakeholders including state and federal regulators, pharmacists, manufacturers and wholesaler distributors.4 To earn this certification, 3PLs undergo extensive compliance reviews by the National Board of Pharmacy across multiple facets of operations including licensure verification, facility inspection, and personnel and company background checks.

Inventory Management Systems

Inventory management systems are another critical component to evaluate when selecting a 3PL partner. Due to increasingly stringent industry regulations, it is more important than ever that vendors utilize advanced tracking systems that document the drug’s entire chain of custody as well as provide real-time, on-demand access to inventory records, product temperature history during transport, audit trails and product handling, including materials’ arrivals and departures. State (as well as federal) legislation specifically outlines what information needs to be tracked and carried along with the history of the drug. For instance, the FDA’s Prescription Drug Marketing Act’s Federal Pedigree Requirements state that all wholesale distributors of prescription drugs must provide the recipient with a statement identifying each prior sale, purchase or trade of such drug.5 3PLs must be equipped with the necessary inventory management procedures and technologies to meet this requirement and authenticate a drug’s pedigree.

Technology Infrastructure

A 3PL that utilizes inventory-based bar coding or radio frequency identification (RFID) will offer greater efficiencies and product tracking accuracy as compared to providers that do not implement these types of technologies. For example, these systems automatically scan labels and electronically store the information without manually entering data, a process that can lead to errors. RFID is superior to bar coding because it does not require line-of-sight scanning, allowing inventory levels to be calculated in real time and virtually eliminating drug counterfeiting. Sophisticated logistics and product tracking technologies such as Enterprise Resource Planning (ERP) software and document management systems are extremely useful in creating operational efficiencies. 3PL providers with these technologies are better equipped to provide a complete history of the handling, status, transfer and overall management of pharmaceutical and biotechnology products. Additionally, 3PLs should be evaluated on overall strength of their IT infrastructure. Minimally, a firm should have redundant servers with a solid data backup strategy.

Cold Chain Facility

In order to store and distribute biopharmaceutical products, a 3PL’s storage facilities must be specifically constructed to support the cold chain. Additionally, facilities should be compliant with applicable industry regulations such as Good Manufacturing Practice (GMP), as well as guidelines provided by the Department of Health (DOH). To ensure that products are protected against extended power outages, buildings should be wired with backup electricity from different power grids and linked to additional, independent backup power sources (such as a diesel-fueled generator). A GMP storage facility with a Highly Protected Risk (HPR) designation will offer further safeguards for drug products and materials. HPR signifies that the facility meets higher-than-average safety standards and complies with the industry’s most-stringent level of risk protection.

Security Protocols

A 3PL with a focus on pharmaceutical and biotechnology supply chain management will have comprehensive security procedures and systems in place to protect drug products. You should look for:

• Documented hiring processes: Stringent background checks and drug screening of all employees
• Physical security systems: Controlled facility access (card entry, biometrics, etc), validated alarm systems (door/window contacts, motion sensors, sound monitoring, etc), closed circuit television (CCTV) surveillance and facility perimeter fencing
• Advanced freezer and refrigeration systems: Sophisticated temperature monitoring systems that include alarms in case equipment falls outside acceptable temperature ranges
• Fire protection: Smoke detection and fire suppression systems
• Redundancy for critical systems: Backup measures for power, cooling, data storage, temperature, etc.

Trained Personnel

An ideal 3PL will retain employees trained not only in the business of logistics, distribution and shipping, but also pharmaceutical and biotechnology supply chain management. This is a specialty that requires extensive experience and knowledge of current industry regulations and best practices. Operating a 24/7 global pharmaceutical and biotechnology supply chain requires a team with diverse functional expertise in cold chain storage and logistics, contract manufacturing, quality assurance, commissioning, qualification and validation, pharmaceutical packaging and kitting development services. Dedicated, qualified personnel must be available to calibrate, validate, maintain and test all critical systems to ensure they are working properly even in the event of power loss, emergency situation and/or security risk.

Quality Assurance

Look for a provider that employs a full-time quality assurance staff that is dedicated to developing and regulating internal protocols and monitoring changing industry regulations. A qualified 3PL will offer established and documented Standard Operating Procedures (SOP) for handling, storing and transporting pharmaceutical and biotechnology products and materials. A well-qualified 3PL’s SOPs will include a detailed disaster recovery plan that documents the internal procedures for crisis situations such as natural disasters, terrorist threats or other emergencies.

It is important to remember that not all 3PL providers are created equal. The pharmaceutical industry requires a highly intricate supply chain to support the storage, packaging and distribution of valuable, yet vulnerable drug products. By making the distinction between a general 3PL and a specialized vendor-partner experienced in pharmaceutical supply chain management, you can reduce the potential risks to your business.

As one evaluates the options, one should seriously consider selecting a 3PL that has proven industry-specific experience, credentials, infrastructure and processes to protect pharmaceuticals throughout the drug manufacturing and distribution processes. Finding a partner that meets all of these criteria may cost a little more, but the expense is worth the result. When considering the very-real risks for counterfeiting top brands, the constant threat to consumer safety and the high cost of poor inventory management, the liabilities far outweigh the savings associated with using a traditional 3PL that is inexperienced in the unique ins and outs of pharmaceutical supply chain management. By choosing a partner that specializes in pharma cold chain storage and distribution, you can help ensure your products’ integrity and protect your position as a reputable drug developer.

References

1. Hudson, Scott, “Trends and Services Offered in the 3PL Industry,” Supply Chain Management, September 1, 2004

2. “Counterfeit Medicines,” World Health Organization, November 14, 2006.

3. “Within the Counterfeiting Threat, a Major Opportunity,” Intel Corporation, www.unisys.com/eprise/main/admin/micro/doc/Intel_Unisys_Solution_Brief10_06.pdf, accessed July 19, 2007.

4. “The Verified-Accredited Wholesale Distributors (VAWD),” National Association of Boards of Pharmacy, www.nabp.net/vawd/intro.asp, accessed July 19, 2007.

5. “Prescription Drug Marketing Act (PDMA) Report to Congress,” Department of Health and Human Services, U.S. Food and Drug Administration, June 2001

Dwayne Marcum is chief operations officer of Sentry Logistic Solutions. Bryan Hudson is manager of quality assurance and information technology at Sentry Logistic Solutions.