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Accenture

Individually and collectively, pharma innovators are addressing a variety of challenges through RFID technology and the use of electronic product codes.

Radio frequency identification (RFID) is not a recent innovation. In fact, it’s been in use for decades, primarily using proprietary technologies in closed loop systems, such as asset tracking and security applications. Over the years, RFID has continued to evolve: New developments include open standards, lower costs, broader scope, wider commercial viability, and significantly greater potential to improve business performance. Leveraging electronic product code (EPC) technology to communicate information, RFID has evolved to the point where the size, economics, reliability, and applicability of tags have produced numerous commercial applications – particularly in markets with a preponderance of medium- and high-value products. One such area is pharmaceuticals.

To some extent, RFID’s recent metamorphosis was spearheaded by Wal-Mart, which insists that its top 100 consumer packaged goods suppliers attach RFID tags to cases and pallets by 2005. Such a move could benefit Wal-Mart by enhancing order accuracy, inventory control, operational efficiency, and materials management. Target recently announced similar plans with its core suppliers, as have U.K. retailer Tesco, and Germany’s Metro. Metro has also unveiled an RFID Future Store in Germany that showcases the technology’s benefits for shoppers

However, RFID implementations also have the potential to help manufacturers and other nonretail entities improve inventory performance, cut warehouse/transportation costs, and reduce lead times. One heavyweight driver in this category is the U.S. Department of Defense, which is requiring all of its suppliers to put RFID tags on their shipping pallets and cases by January 2005.

Trade channel requirements like those noted above will help most manufacturers, wholesalers/distributors, and retailers enhance track and trace, reduce theft and shrink, and generally improve inventory management activities. The directives will also help to lower price points for RFID tags and scanning equipment, which should make the overall business case more attractive as RFID adoption increases. But for pharma specifically, embedding electronic product codes in memory chips will facilitate patient safety and support anticounterfeiting programs. Such implementations may also make it easier to confirm the composition, batch number, and genealogy of a chemical or pharmaceutical subcomponent prior to use. Industry players also may experience fewer line clean-downs and less scrapped product. All in all, pharma’s relatively higher margins and unique product composition and security needs make RFID/EPC a particularly appealing investment (see Figure 1). The industry also represents somewhat of an isolated supply chain, with largely separate picking, shipping, and instore positioning. This characteristic also makes the piloting and implementation of RFID more attractive.

Moving Ahead

With respect to RFID/EPC technology, the pharmaceutical industry also differs in another important way: Its leading players have taken an exceptionally rational, collaborative approach to understanding RFID’s potential. In fact, some of the world’s largest manufacturers, wholesale distributors, and major chain drugstores are working together as a group to identify key uses for EPC applications, such as:

• Returns management – improving expiration date management, lot and batch tracking, returns management, and recall expediting;
• Operational productivity – monitoring and controlling shipping accuracy, receiving accuracy, and operational productivity; and
• Product security and consumer safety – supporting anticounterfeiting measures, product security, consumer safety, and theft and shrink management.

The pharma industry group has also created three working teams to build a whole-industry perspective on issues relating to counterfeiting, shrink, and theft. The mission of the Regulatory and Enforcement Measures Group is to refine and gain agreement on legislative and regulatory changes that will be required to enhance counterfeit prevention across supply chain segments. The Business Policies and Practices Group (to the extent allowed by antitrust laws) strives for agreement on the strategic and procedural actions that ought to be taken by each supply chain segment. Lastly, the Technology Prevention Measures Group is investigating high-potential technologies that could be implemented to combat counterfeiting. All three factions will work together to develop points of view concerning realistic short- and longer-term approaches.

The group already has reached several milestones. For example, it has identified several specific business challenges that can be addressed by RFID technology. It also has developed an adoption road map that describes how industry players might approach RFID adoption (see Figure 2).

Why Pharma?

Several characteristics unique to the pharmaceutical industry explain why its members are working so diligently and effectively to harness the advantages of RFID/EPC.

Counterfeit Drugs

The World Health Organization has estimated that perhaps 7 or 8 percent of drugs worldwide are counterfeit, and reports from some countries suggest that as much as one-half of those countries’ drugs are counterfeit. ¹ Moreover, a recent FDA investigation found that counterfeit drugs at U.S. postal facilities are virtually indistinguishable from the real thing.² Since 2001, counterfeit drug cases logged by the FDA have more than tripled. Fortunately, it is actually easier to counterfeit the actual pharmaceutical product than it is to create a fake RFID identity, so the technology has great potential to winnow counterfeit drugs from checkpoints across the supply chain. The FDA is already investigating new methods to secure the pharmaceutical supply chain by examining technologies that utilize RFID, and the pharma RFID industry group has met with the FDA to assist with the latter’s anticounterfeiting task force.

Florida’s Pharmaceutical Pedigree Papers Act

Pedigree papers require histories identifying previous sales and product information that date back to the drug’s manufacture. Required information includes prescription name, manufacturer/distributor name, dosage form, prescription strength, container size, lot number, quantity, prescription owner’s name/address, prescription shipment location, and transaction dates. RFID technology routinely and automatically captures this data.

The Challenges of Track and Trace

Because purity and accuracy of ingredients and dosages is crucial, being able to monitor flow of inventory through the supply chain is hypercritical. During a recall, for example, it is vital to know the exact location of all products, and to be sure that all defective merchandise has been brought back to a destruction or return point. Approximately 1,300 recalls were processed in 2001.³ Applying RFID will make it possible to manage recalls and outdates more effectively.

Order Fill Problems

Pharmaceutical distributors and manufacturers blame out-of-stocks and manufacturing problems for the 8 percent of orders that can’t be filled. RFID has the potential to engender revenue increases of up to 2 percent by reducing out-of-stocks.

Concerns About Returns

Pharma experiences about $2 billion in returns annually across the industry. The estimated typical percentage of a facility’s total monthly Rx volume returned by customers is 4 percent for distributors and 2 percent for manufacturers. RFID technology is estimated to cut product returns in half.

Georgia’s Credit for Returned Expired Drugs Regulations

All wholesale drug distributors must make adequate provisions for the return of expired prescription drugs for up to six months after the labeled expiration date for prompt credit or replacement (to be received within 60 days). These regulations place the financial burden of expired product entirely on wholesale drug distributors. Regulations went into effect on February 18, 2003, but apply to all drug orders placed after July 1, 2002. The task of tracking/tracing expired drugs is significantly simpler with RFID.

Mandate From the HDMA

The Healthcare Distribution Management Association has launched an initiative to establish a position on case and pallet identification within the pharmaceutical industry.

Lessons From a Leader

Members of the pharmaceutical industry clearly have taken a leadership role in RFID by working together to examine the technology’s potential to improve its members’ operating performance. Although pharma may gain insights in advance of other industries, these prospective RFID benefits are certainly not limited to only a few industries:

• Significant reductions in the cost of goods sold, resulting from increased labor productivity and reduced shrink;
• Drops of up to 30 percent in working and fixed capital – the result of reduced inventory levels and improved asset utilization;
• Improved inventory visibility for wholesalers/distributors, thus creating an environment conducive to better planning;
• The opportunity for manufacturers to more accurately ascertain product and pricing information;
• Less need for all supply chain parties to (re)check, (re)audit, or (re)verify product correctness and quantity;
• Lower personnel expenses, since less labor and time are needed to complete tasks; and
• Improved in-stock positions for replenishments and refills.

Despite RFID’s broad applicability, pharma currently is moving ahead because its companies are looking critically at where the value is and how they might harness it in a rational way. By taking a pan-supply chain view, they also are well-positioned to recognize key benefits and avoid focusing on the wrong aspects.

Pharma companies have also been careful about priorities. Although the buzz is focused on compliance with retailer mandates, they have tended to look for additional value, such as optimizing supply chain performance, improving trading relationships, and increasing patient safety.

Lastly, the industry has succeeded in forming a cogent view about benefits, rather than setting up an us versus them scenario that fosters suspicion and hordes the rewards. In pharma, real insights are being born of collaboration.

Endnotes

1 FDA Announces Initiative to Heighten Battle Against Counterfeit Drugs,” U.S. Food and Drug Administration (July 16, 2003)

2 Fuller, Craig, “Counterfeit Drugs Threaten the Safety of Our Drug Supply,” National Association of Chain Drug Stores (December 15, 2003).

3 Fuller, Craig (December 15, 2003).