Supply Chain Challenges in Pharmaceutical Manufacturing Companies: Using Qualitative System Dynamics Methodology


Recently, firms have been increasingly interested in efficient supply chain management (SCM), because they have met extreme competition. This is because of decreasing product life cycle time, varying customer demands, as well as increasing cost of manufacturing and shipment (1). This condition has led many companies to recognize the critical role of SCM to reach organizational goals via speeding up innovations and product launching to the dynamic market, improving customer value, optimizing utilization of resources, decreasing different types of costs such as production, inventory, transportation, and so on, and increasing profitability (2). A supply chain as a dynamic process is usually described as a forward flow of materials and a backward flow of information and funds among multiple operating units both within and between chain members (3). Because of rapid growth rate of technology development, basic supply chain structure has been changed to supply chain network with more complex structure including a higher level of interdependence and collaboration between more entities. Supply chain networks can be used to highlight interactions between organizations; they can also be used to show the flow of information and materials across organizations. Supply chain networks are designed with five key areas: inbound logistics (suppliers), internal logistics (production), outbound logistics (distributors), demand sectors, and shipment assets (4).

In generic pharmaceutical industry, typical supply chains consist of the following components: manufacturing raw material, manufacturing pharmaceuticals, distributing centers, retail pharmacies/hospitals, and patients (5). Because of the economic changes, pharmaceutical industry member companies have been trying to restructure their supply chains. The pharmaceutical business is a multipart enterprise accompanied by conflicting purposes and several troublesome limitations. A highly regulated setting combined with the life changing nature of the products describe the pharmaceutical industry as a special challenging system (6). As Wang said: “the crucial aim of SCM in pharma industry is to make the right product, for the right customer, in the right amount, at the right time” (7).

Complicated activities in industrial processes are because of existing a multitude of variables and their non-linear dynamics. Also, developing a systematic model to define such these processes behavior is generally difficult or unfeasible (8). Several different methods have been suggested for modeling supply chains. Most of them are steady-state models based on constant conditions; however, static models are not enough for dynamic specifications of the supply chain due to oscillations, lead time delays, sales forecasting, etc. Owing to this reality, system dynamics (SD) method could be a proper technique for displaying interactions between several factors used in modeling tool.

In this study a wide spectrum of pharmaceutical supply chain (PSC) challenges are discussed and tried to determine the internal PSC problems and the interrelationship between variables which affect PSC performance. The supply chain operations reference (SCOR) model criteria was used for classifying challenges and complicated relationships among various variables are shown using qualitative SD modeling.

Literature Review

Pharmaceutical supply chain challenges

With the increasing changes in business environment, firms have to supply high quality products, deliver fast responses, and make their dynamic competencies better. Particularly, the pharmaceutical industry is facing the same challenges that many other industries have experienced in the past. Only the firms that are eager to accept changes and improve their strategies will achieve long term success (9).

The challenges that pharma companies are involved in are complicated and have an extensive range including political, economic, social, technical, and legal considerations. The pharmaceutical industry is characterized as a group of organizations, processes and actions, engaged in the invention, and innovation of pharmaceuticals; furthermore PSC is made up of corporations to supply and deliver medications which have an important effect on customer satisfaction (10).

Today, efficiency of R and D processes, products’ declining life cycle and patent life exclusivity, increasing generic competition, production compliance, and costs, are some of the major complications that pharmaceutical companies encounter with them (9, 11). A study by Oliver Eitelwein shows that many pharmaceutical companies have to enhance the main supply chain sections including customer satisfaction, forecasting accuracy, inventory level, and total supply chain costs. Also, he states that the complex nature of products and processes are other important matters which can emerge from various number of causes: the large finished good portfolio, wide variety of materials needed, distribution networks, high investment cost and time of developing new products, capacity constraints, and regulatory restrictions (12).

Supply Chain challenges related SCOR Perspectives

Like other industries, the supply chain in pharmaceutical industry initiates with the sourcing of material for production. Active pharmaceutical ingredient (API) along with other inactive materials are planned to formulate in to the standard dosage forms and filled into primary and secondary packages with different configurations. Finished products are transferred from manufactures’ warehouses to distributors, retail/hospital pharmacies, and finally to consumers. In contrast, the flow of data and funds starts from end-users to producers through several channels (13). As mentioned earlier, there are a lot of factors that can affect pharmaceutical industry performance. Discussing all supply chain related variables is not the purpose of this study. Thus, in this research, the Supply Chain Operations Reference (SCOR) is used as a conceptual model to focus on the crucial variables. SCOR model proposed by the Supply Chain Council in makes a helpful structure for performance evaluation and offers standardized definitions for measures and metrics for all members in the supply chain in various industries (2, 14) . Many analytical models in business and engineering fields, have been suggested to handle supply chain operational and design matters (15). While, there are a few holistic models for strategic decisions. Based on Huan survey, “the most promising model for supply chain strategic decision making is the SCOR model developed by the supply chain council” (16). For the assessment and improvement of supply chain management and performance, the SCOR can creates a cross industry structure (17). In the SCOR model, the function of SCM from operational perspective is considered. Recently, several studies have looked over SCOR model and have tried to measure the impact of this model on organization performance (16, 18-20). In the study was conducted by Zhue, the relationship between supply chain process in the SCOR model were proved (21).

Therefore, this comprehensive model verified by many academics and experts in both academic and business area, was chosen as a frame work in this research to study supply chain problems in pharmaceutical manufacturing companies.

In the SCOR model, supply chain activities are a series of connected inter-organizational processes containing five echelons: plan, source, make, deliver, and return. Each supply chain echelon has individual intra-organizational processes evaluated with five strategic attributes including “supply chain reliability, responsiveness, flexibility, costs, and assets”. The first three attributes are related to customer orientation measures (effectiveness) for example delivery performance, while the other two are internal efficiency measures of a company like cash-to-cash cycle time (22).

Customer orientation perspective

In this perspective, supply chain capabilities including SC reliability, SC responsiveness, and SC flexibility are considered. Reliability is related to delivery performance when the right product with the right quantity, packaging, and documents is delivered to the right place and customer, at the right time. SC responsiveness is defined as how fast the supply chain can respond to customer demand. The flexibility of SC is the ability to effectively increase or decrease aggregate production or switch rapidly from one product to another in response to customer demand changes to achieve or sustain competitive advantage. This ability can reduce the risk of products destocking arising from unexpected increase demands. Additionally, will render companies needless of stocking up on large quantities of inventory (23).

Nowadays, the common strategy for maintaining competitive advantages is the time-based competition strategy. Supply chain must compress the time required to propose, develop, manufacture, market and deliver its products to provide a respond to customer demands in as short as possible delivery times. Indeed, responsiveness to the market demand is a prerequisite of reliability. Responsiveness can be defined as the ability of the supply chain to respond purposefully and within an appropriate timeframe to customer requests or changes in the marketplace which is also referred to as agility (24). Agility paradigm can be noteworthy in the pharmaceutical industry because of many reasons such as reducing the product life cycle, increasing merge and acquisitions, changing customer behaviors, and competitive actions which enforce companies to respond faster (12).

Internal perspective

Supply chain efficiency is important in this perspective in terms of cost and asset management. With efficient SC management, cost of production as well as inventory and transportation are reduced, and customer service levels are enhanced. All costs related to operating the supply chain such as cost of processes to plan, source, make, deliver, and return, cost of goods sold, direct costs (labor, materials), and indirect costs (overhead) are considered to reach productivity. Cost of operation greatly affects profitability thereby affecting the whole firm performance; hence, it is one of the most important indicators to evaluate efficiency. The more the companies optimize the costs, the higher efficiency they gain (25). Cost reduction is a way in which excellent companies try to create more efficient relationship with partners and other firms to reduced cost of their products, reduce internal lead times and work in process inventories, increase forecast accuracy and repeatability, and adopt just in time delivery strategies for their high cost raw materials. By doing these activities indirect costs have been significantly decreasing (26).

Supply chain assets management is evaluated by three important variables, cash to cash cycle time, return on SC fixed assets, and return on working capital. Cash to cash cycle time is the time period between the point at which a company pays for purchasing material and gains incomes from the products sale in cash. This factor is used to calculate the financing requirements for current and future operations (14).