This paper intends to investigate how well the Pakistan pharmaceutical industry’s supply chain system performs. The thesis aims to achieve this purpose by examining the transportation, outsourcing, logistics management, and government regulations, and how these factors influence the efficiency and effectiveness of the pharmaceutical industry of Pakistan. In particular, the paper provides insights into the performance related practices used in the Pakistani pharmaceutical industry. Consequently, it points out the need for more research aimed at capturing dynamics and specific operational characteristics of local networks for development and improvement. Further, by denoting the relationship between system practices and SCM performance, the paper develops a scholarship viewpoint critical in informing policies formation.
This paper proposes that the Pakistani pharmaceutical industry is surviving on underperforming supply chain systems. The argument is based on the assumption that although the sector is growing, the growth is limited by the inefficiencies in the supply chain management models adopted by industry players. Evidence shows that several multinational companies have closed business and moved out of the market, suggesting a gap in the SCM performance. The paper, therefore, will advance knowledge in understanding the structure of the country’s pharmaceutical industry, provide avenues for improvements, and support future inquiries of the subject.
This research paper investigates the performance of the supply chain system in the pharmaceutical industry in Pakistan. The objectives of the study are based on the hypothesis that supply chain systems adopted lack proper structures to deal with the challenges of the business environment they are operating in, and as such are underperforming. Therefore, the objective is to ascertain the nature and the dynamics of the SCM systems used in the drug industry. The objectives of the research are anchored on three factors that include inventory management, time, and working capital. The research data would be collected through questionnaires that will make it possible to analyze and interpret information gathered. The questions will be administered to a sample of the players that represent every sector of the industry (multinationals, local manufacturers, retailers, and regulators). The final results of the study will prove or disapprove that 1) manufacturers are struggling to manage lead-time as a result of factors such as government, 2) manufacturers lack consistent inventory management, and 3) limited working capital as a result of poor regulatory practices, high costs of inputs, bureaucracy, law and order, fake medicine, strict price control, and constant change in rules.
Thesis Elements. 3
Chapter One – Introduction 5
Statement of the Research Problem. 7
Research Questions/Hypothesis. 7
Assumptions, Limitations, and Delimitations 8
Chapter Two - Literature Review.. 8
Chapter Three - Methodology.. 12
Research Design 12
Participant and Data Sets 12
Data Collection, Instruments, and Procedure. 12
Data Collection, Instruments, and Procedure. 13
Data Analysis. 14
Chapter 1 – Introduction
Pakistan has a vast pharmaceutical industry comprising of about 800 manufacturing units, 25 of which are multinational corporations operating in the country. Pakistan has a vibrant pharmaceutical industry that supplies more than 70 percent of the country’s needs. Conversely, the country’s exports contribute immensely to the global supply of medicines. Over the last ten years, the industry has grown at a rapid speed amercing abilities to manufacture not only the basic medications but also the complex biotech, oncology, and the Generic compounds. The generic products dominate the local market, and the share is likely to expand in the future. Pakistani exports pharmaceutical products worth $212 million every year, which is a double growth during the past decade. The Philippines and Sri Lanka provide a huge foreign market for Pakistani’s pharmaceuticals accounting for US$11 million and US$20 million of exports respectively (BusinessMirror, 2016). The demand for the Pakistani-made drugs is increasing globally and locally due to their high quality and affordable prices. The growth also is credited to the availability of local skilled labor and technology.
Recently, the promising pharmaceutical industry has experienced sharp decline resulting from factors that include issues relating to government regulations, high costs of operations, the supply of inputs, and management of distribution. According to the Pakistani Young Pharmacist Association (PYPA), exports have gone down from US$200 million in 2013 to US$167 million in 2014 (Junaidi, 2015). As of June 2015, the growth of the sector had gone down from 16 to 8 percent (Karachi, 2015). In 1997, pharmaceutical companies were making 9.5 percent return on investment as compared to the current 2 percent only.
The pharmaceutical industry is facing critical challenges among them the rising costs of raw materials. Pakistani produces less than 2 percent of primary raw materials and as such the country is highly dependent on expensive importations. The high costs of production also mean that the local producers cannot export to the regional markets China, Taiwan, Eastern Europe, and Korea because of the low prices in these regions. The devaluation of the rupee has significantly increased the costs of importing these crucial ingredients. The increase of fake and generic medicine that are of inferior quality has also affected the prices of the branded drugs in the local market. Conversely, the law order situation in the country especially in dealing with terror plays a major role in hampering the performance of the pharmaceutical industry by creating distribution problems and loss of productivity.
The high price regulation has forced many multinational companies to leave the country. Conversely, multinationals have refrained from introducing research-based medicines in the country’s market, and those I need are forced to import the drugs from other countries after they have been exported from Pakistan. Without forgetting, there is an excessive bureaucracy in the sector especially when introducing or registering a new product in the market. The chronic inconsistency in the implementation of policies does not permit manufacturers to make long-term plans hence affecting the performance of the supply chain systems in the sector (Ravi, 2016).
These factors have profoundly influenced the ability of the industry’s supply chain systems to perform better. Multinational pharmaceutical players in the country have indicated that it is difficult to make a single one-year plan for production and other related activities due to the lack of consistency in government policies, price controls, changes in drug rules, and delays in registration of new medicines (Ravi, 2016). The current manufacturers are operating at 80 percent capacity, which means that 20 percent of the demand is not entirely serviced (Ravi, 2016). The demand exceeds the capacity of the pharmaceutical to satisfy the market in terms of quality and quantity.
Statement of the Research Problem
Understanding how well the supply chain system in the Pakistani pharmaceutical industry is performing.
Approving or disapproving that the supply chain models used in the sector are underperforming.
Providing evidence that the performance issues in the industry are responsible for the declining exports of the country’s pharmaceuticals.
This research will serve an imperative purpose in increasing the pool of knowledge in the field pharmaceutical industry in Pakistan. There are limited scholarly literatures that have sought to advance knowledge in the field. As such, the study will help policy makers (organization management and government administration) in making business decisions and regulatory rules. Conversely, the results of the research will inform other similar studies in the future while adding knowledge to the SCM in the pharmaceutical industry.
This paper supposes that the Pakistani pharmaceutical sector is struggling as a result of underperforming supply chain systems. The hypothesis is based on the theory that although the sector is growing, the growth is restricted by the inadequacies in the SCM models used by industry players. Expressed concerns show that several multinational companies are considering shifting their business to other markets, an indication of a serious gap in the SCM performance. The inquiry, therefore, will develop an understanding of the structure of the country’s pharmaceutical industry, provide avenues for improvements, and support future research endeavors.
H1: As a result of the inefficiencies brought about by constraints such as regulations, bureaucracy, and high cost of inputs among others, the supply chain systems in the pharmaceutical industry is struggling to perform.
H2: The underperforming SCSs are using bad SCM practices
H3: Poor performance of the SCSs is affecting the profitability of pharmaceutical companies in the country
Assumptions, Limitations, and Delimitations
This study is based on the assumptions that the industry needs a good supply chain system to function in a maximum capacity. The methods used are limited by the assumption that the chosen sample will be representative of the whole sector. Conversely, in the analysis of the performance issues of the sectors supply chain structures, the study will not cover factors relating to global market dynamics that affect the pharmaceutical industry in general.
Definition of Terms
There are numerous definitions of supply chain performance proposed by different scholars (Van Hoek, 2001; Gunasekaran et al., 2001; Thakkar et al., 2007). In this paper, supply chain performance is defined as how well an organization manages it lead time, working capital, and inventory in realizing strategic production, profits, and market goals.
Chapter 2 - Literature Review
Measuring Supply Chain Performance
Inventory, time, and working capital are measured based on the supply chain activities and processes that include 1) planning, 2) sourcing, 3) assembling, and 4) delivery. Planning activities involve various methods that are used to determine the customer/market specifications. Other planning approaches and processes include order lead-time, the client order path, evaluation of supply links, and strategic level measures. This approach borrows from the three broad performance measurement metrics that include customer perspective, financial perspective, innovation and learning and internal business process perspective (Santos, Gouveia, & Gomes, 2006). In inventory management, a pull system is preferred over a push system because of its ability to keep the inventory levels at a minimum. Inventory measurement helps determine the return on assets at a given time, and it is important in the pharmaceutical industry whose primary business is to manufacture and sell drugs.
A working capital between 6 and 10 percent of the overall revenue is considered an attribute of a well-performing supply chain system (Deloitte, 2012). Companies with a working capital of between 23 and 39 percent of overall revenue record the poorest performances. Time is also an important measurement indicator of the performance of a supply chain system. Time includes transit time, distribution time, processing time, lead time, cycle time, quality assurance time, turnaround time, and promise time. Realizing efficiency in these sectors is highly dependent on market information, financing, personnel, and logistics. A study by Jafar et al. (2009) shows that variation in lead-time increases the impact of the bullwhip effect on the supply chain. The inventory variances go up steadily through the supply chain system hence leading to inventory fluctuations. Understating the strategies employed by Pakistani pharmaceuticals to reduce the lead-time uncertainties will help determine supply chain performance (Nieto, 2011). Practices aimed at managing time influences uncertainties and flexibility in the supply chain.
Transportation, Distribution, and Outsourcing
An efficient transportation management system is considered as one of the back-born of an operative supply chain system (Mitra, 2006). Transportation affects both lead-time and inventory management hence affecting planning of the production cycle and sales activities. Movement of inputs to manufacturing plants and end products to the market also has a double effect on the working capital in the sense that one reduces and the other increases the working capital. Transportation of materials and other soft resources is often achieved through outsourcing services from agencies that have specialized in such activities (Laarhaven & Graham, 1994; Lieb & Randall, 1996). Terminologies such as operational alliance, distribution contract, contract logistics, third-party logistics, and logistics alliance are some of the expressions that are synonymous with transportation and outsourcing management in the supply chain system.
Outsourcing transportation and procurement of raw materials help companies reduce strain on the management of the supply chain system by delegating that aspect to external organizations. Various studies, such as those commissioned by Lambert, Cooper, and Pagh (1998), Vokurka and Lummus (2000), and Gammelgaard and Larson (2001) indicate that outsourcing transportation of inputs improves the agility of a supply chain system. Outsourcing enhances SCM by decreasing capital investment and increasing effectiveness of the service (Peter, Embleton, Philip, & Wright, 1998). To capture the relationship between outsourcing and transportation in the Pakistani pharmaceutical sector, it is necessary that a comprehension of how companies are using outsourcing strategies as viable opportunities for improving supply chain management (SCM) performance is achieved.
The Pakistan government still regulates the prices of drugs with the aim of protecting the consumers, the majority of whom are lower income earners. The pricing ceiling of some drugs has been set so low forcing companies to abandon their production altogether. This means that manufacturers are not able to make significant returns for the inputs invested in their production. For example, the drug thyroxine used to treat thyroid gland malfunction is scarce in the country because the price fixed by regulators is low forcing pharmaceutical manufacturers to stop production (Ahmad, 2016). A few of the drug companies in the country have the permission to produce the drug, but only one multinational company produces the drug in limited quantities just to fulfill their corporate social responsibilities. The same problem also persists in the production and distribution of inhalers for asthma patients.
The commercially unavailable drugs create a significant deficit in the local market forcing some traders to smuggle drugs at very high rates. The apparent effect of the regulator’s policies on the performance of pharmaceutical SCM is anchored on the leadership’s lack of capacity to conduct evaluations and research to make independent decisions, but rather heavily relies on external sources such as the European and the American standards. The immediate effect of this problem is prolonging of the price approval process, a factor that significantly affects the supply chain cycle. When the costs of inputs increases, companies have to halt production altogether and wait for the regulators’ approval before they can make adjustments to the prices, a process that sometimes takes months.
The delay in decision-making affects the SCM of pharmaceuticals in Pakistan leading to lack consistency in numerous areas of production. Corruption persists in some parts of the administration, and as such, unscrupulous manufacturers use unapproved cheaper inputs to manufacture drugs. Drug regulatory agency of Pakistan (DRAP) has 14 inspectors only tasked with monitoring more than 700 manufacturing facilities (Haq, 2015). This means that they are incapable of regulating quality standards and only focus on setting price limits (Ahmad, 2016). As a result, the market dynamics affected mainly for the organizations that are keen on adhering to the government regulations.
Chapter 3 – Methodology
Data will be collected through questionnaires that will facilitate quick analysis and interpretation of information gathered. The questions will be administered to a selected sample of the players that represent every sector of the industry including the multinationals, local manufacturers, retailers, and regulators. The results of the study will prove or disapprove that the manufacturers are not managong lead-time properly due factors such as government regulations, manufacturers lack consistency in inventory management, and that there are limited working capital as a result of poor planning practices, high costs of inputs, bureaucracy, law and order, fake medicine, strict price control, and constant change in rules.
This paper will take a field research approach to collect primary information from the field particularly among the pharmaceutical manufacturers in the country. This approach is informed by the realization that there exist limited literatures that have explored the subject matter in Pakistan. Based on the objective of the study to ascertain the nature and the dynamics of the SCM systems used in the drug industry, data collection will focus on three factors that include inventory management, time, and working capital. Collection of data will be achieved through questionnaires that will provide standardized responses that can be compiled for qualitative and quantitative analysis.
Participant and Data Sets
The study will focus on the main players in the pharmaceutical manufacturing sectors in the country. As such, the respondents will comprise of managers, marketers, pharmaceutical retail outlets, and independent distributors. Through the questionnaires, the respondents will provide information that measures the three aspects that will be used to gauge the performance of the SCM in the sector, that is, time, inventory, and working capital.
Data Collection, Instruments, and Procedure
The research team will gather primary information from the field through standardized questionnaires designed to capture the state of the supply chain structures adopted in the sector. The questions will be pointed towards gathering information that is both figurative and opinionated. Sample survey questions include:
How does the uncertainty in government regulation affect the planning of the sourcing of raw materials?
Do you outsource services to procure and transport raw materials?
What supply chain structure is your organization using?
On a scale of 1-5 rate the significance of a strategic supply chain system.
How much does it cost your company to transport raw materials and distribute end products to final consumer? What is the return on investment?
How much inventory do you have currently? How long do products take before they can be ready for market from the time when the order for raw materials is placed?
What the period between the time drugs are packed and when they get into the markets?
Although the data collection model is designed to capture both qualitative and quantitative information, the analysis will place greater emphasis on quantitative methods. This is because it is easy to analyze and interpret data using figures that can be easily presented to provide definitive results and conclusions.
Threat of Validity
The research intends to use questionnaires to collect information, and thus responses will be limited because the respondents have to read and respond to the questions asked while limiting inclusion of other information not covered by the questions. Thus, the data collected may not be extensively concrete as desired.
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