Flexibility is a key to mastering volatility and designing a patient-centric supply chain. To optimize flexibility, companies must carefully balance the costs and benefits. The Market Flexibility Index (MFI) and Postponement Flexibility Index (PFI) enable pharma companies for the first time to fully quantify the value of flexibility in pharma distribution. They enable precise calculation of how much flexibility is needed and what type of flexibility is optimal for each product.

Flexibility strategies
Many pharma companies (PharmaCos) have been consolidating their rather fragmented European logistics networks and building regional distribution centers in recent years. Likewise, regional hubs have been introduced to centrally replenish markets in Asia and the Middle East. These changes have increased efficiency, often significantly, but have not brought greater flexibility to pharma distribution.
A key reason for this lack of flexibility is the limited means available for distributing a single stock keeping unit (SKU) in more than one country. Since most SKUs have market authorization for just one market, their inventory cannot be distributed flexibile across markets even if supply were centralized in a single regional hub or distribution center. However, such regional hubs can provide the basis for successfully executing two strategies that enable flexible inventory deployment: market flexibility and postponement flexibility.

Market flexibility: Multi-market packs can serve multiple markets directly. A key prerequisite is that leaflet and packaging artwork meet the regulatory requirements of the local authorities in each market. In this case, the inventory of a product (a SKU) can be allocated flexibly to patients in multiple markets depending on actual demand.

Postponement flexibility: A postponement strategy in pharma distribution shifts product differentiation closer to the patient by postponing packaging to the farthest possible downstream supply chain location (e.g. a regional distribution center or hub). Secondary packaging materials designed according to the vanilla box principle contain only generic information. Depending on actual demand, this generic product inventory is distributed to many countries after customization that includes country-specific leaflets and late-stage labeling activities.

Assessing the costs and benefits of flexibility
To develop successful flexibility strategies, PharmaCos must carefully balance the costs and benefits of flexibility. Both market and postponement flexibility allow companies to benefit from flexible drug deployment and rapid response to government tenders. Furthermore, inventory savings and lower complexity in secondary packaging can reduce costs lead to substantially (see Fig. 1).
Along with these benefits, however, come additional costs. Although postponement flexibility reduces direct manufacturing costs, late-stage customization of packs shifts the cost of postponement to another link along the supply chain. Multi-market packs are often associated with increased risk of parallel trade, which affects the prices and margins of drugs for the manufacturer. Furthermore, companies should consider that one national change affects inventory for all countries sharing that pack.
It is important to emphasize that companies should assess the costs and benefits for each individual product (SKU). Otherwise, there is a high risk of implementing flexibility for the wrong products and even jeopardizing supply chain performance.

Segmentation and flexibility optimization with MFI and PFI
Data-driven approaches to flexibility optimization have been applied successfully in many industries. For instance, the automotive industry has transformed its manufacturing strategies using such approaches. The ongoing digital transformation has further increased demand for powerful business analytics in the pharmaceutical industry. Two flexibility metrics, the MFI and the PFI, were developed together with industry experts to help PharmaCos devise flexibility strategies:

• The Market Flexibility Index (MFI) quantifies the financial impact of introducing shared packs to selected markets in comparison with maintaining the status quo (as-is profit or costs vs. profit or costs with market flexibility).
• The Postponement Flexibility Index (PFI) quantifies the financial impact of introducing postponement for a product (e.g., conducted in a hub) in comparison with maintaining the status quo (as-is profit or costs vs. profit or costs with postponement flexibility).

The financial calculation of the two metrics is based on inventory data, fixed and variable manufacturing costs, as-is market and network structures, and increased impact of regulatory artwork changes as well as revenue changes due to higher risk of parallel trade.
The level of detail of the required data can be adjusted depending on data availability and desired insights.

Applying MFI and PFI in PharmaCos: A Case study
We consider a portfolio of prescription drugs that vary in product value and demand characteristics. In scope of the study are 340 separate SKUs, which are sold in four markets in Central Europe. Except for seven SKUs which are sold in multiple markets (shared packs), the supply chain lacks both market flexibility and postponement flexibility. The calculation of MFI and PFI is based on inventory data, demand data, price and cost (COGS) information, and the existing network structure, which are available in standard ERP systems. Both metrics are calculated in the Pharma Flexibility Analyzer, a tool that is developed in Excel or Microsoft Access and Tableau.

The right flexibility for the right product
The two metrics can be used to segment the product portfolio to identify suitable flexibility strategies for each product (SKU). MFI and PFI values greater than 1 indicate that it is beneficial (lower cost/higher profit can be achieved) to introduce market or postponement flexibility for the product (see left-hand side of Fig. 2). The results clearly show that introducing flexibility is not advantageous for every product, as 49% of the considered SKUs cannot benefit from flexibility. Instead, the supply chain would have to bear the additional cost. Furthermore, the results show that the choice of the right type of flexibility is crucial. For most products, either market flexibility or postponement flexibility is beneficial, but not both. Although a few products can benefit from implementing both strategies, it is usually not beneficial to introduce both types simultaneously; one should make a choice here.

A little flexibility goes a long way
Besides determining which type of flexibility is beneficial for which product, PharmaCos need to know how much flexibility they need. Both MFI and PFI can also be used to quantity financial impact per product and even enable breaking this impact down into distinct cost and revenue components. The results of the case study show that introducing flexibility for 16% of the considered SKUs achieves 90% of the possible maximum total benefits (see right-hand side of Fig. 2). That reconfirms that selecting the right products for flexibility is essential. In contrast, implementing total flexibility (whereby all SKUs are flexible) is not beneficial and can even harm supply chain performance. Companies can use MFI and PFI to introduce flexibility for the right products and quantify the associated financial benefits.

Author: Prof. David Francas, Heilbronn University, Germany