If you believed even a slender portion of the hype dispensed by the ICT community you might think that any business involved in wholesale and distribution is a natural candidate for transformational technologies.
The reality is that any process change and introduction of new solutions must not damage business relationships built up over many years. In short, if it isn’t broke you don’t fix it.
To a certain extent this has been the mantra of Johnnie Phillips (pictured), head of business technologies at United Drug. The company’s core business is providing a national wholesale service to more than 1,200 retail pharmacies and 200 hospitals in Ireland from its distribution centres in Ballina, Dublin and Limerick. Processing 100,000 orders a day and delivering to pharmacists on a twice-daily basis, it’s a fast-moving business like no other, according to Phillips.
“Pharmaceutical wholesaling is fiercely competitive. We stock almost exactly the same portfolio of around 12,000 products as our competitors,” he says. “There is no uniqueness in terms of the products we are supplying. A pharmacist will choose to do business with one or other wholesaler based on service.”
While this may sound like an opportunity for a wholesaler to harness technology and reinvent the supply chain, it hasn’t happened because of the way the industry works. “A key point about our sector in comparison to others, particularly FMCG [fast-moving consumer goods], is that we don’t have the power to enforce standards with our trading partners. We just don’t have that sort of relationship with them.”
United Drug is caught between a rock and a hard place. “We have to manage relationships upwards and downwards — we’re piggy in the middle if you like,” explains Phillips. Because it is an ever-changing environment, areas of pharmaceutical wholesale and distribution tend to be very proprietary in terms of business processes and how they operate. One size clearly doesn’t fit all when it comes to IT and some solutions have been slow to evolve.
“Surprising as it may seem, we have not used the web to any great extent for transaction capture. Virtually every pharmacy we deal with is on EDI [electronic data interchange],” Phillips reveals.
EDI is a non-internet transmission standard that United Drug has been using with its pharmacy customers since the mid-Eighties. The system and protocol has remained largely unchanged, much to the chagrin of numerous internet protocol (IP) vendors who come banging on his door. Phillips makes no apologies for using a latter-day technology.
“It’s a proprietary system that works on modem-to-modem communication that comes with relatively little risk. Once you go via a web-based application the security issue becomes far more predominant and you leave yourself wide open if you don’t take appropriate measures,” he says.
Even if United Drug were determined to take the interaction online, the challenge would be in bringing its customers along on the journey. Recent surveys show that the number of retail pharmacists with access to the web in their shop is still quite small. They see little reason to change because the speed and efficiency they experience when placing orders over EDI would be hard to replicate with web-based solutions, according to Phillips.
“EDI is simple and easy to integrate with the pharmacist’s applications. That said, we want to be there and offering new services when they find themselves connected to the web. EDI is only an order transmission system. The web might not necessarily improve efficiencies but it could certainly provide additional services.”
Not all of United Drug’s offices are totally integrated on a single communications platform and there is an ongoing internal debate about whether they need to be. At the moment there is a wide area network that runs over Eircom leased lines linking all the Irish operations. Phillips is exploring the potential benefits of moving over to IP and MPLS but wants to be sure of the business case. “Broadly speaking, we’re operating in a low-margin business so we’re a very cost-conscious operation. Tangible savings are obviously something that go down well with the business, but they need to be very evident.”
For Phillips and his 18-strong IT department the onus is always on business drivers before technology. “What I say to my guys is that technical knowledge is important but business knowledge and the ability to understand business concepts is even more important,” he says. “This is not a business where you could change business practices to suit a system. That’s one of the reasons why we don’t use large-scale ERP [enterprise resource planning] systems.”
According to Phillips, very few people in the sector have gone the ERP route because of the way the business operates. “Our strategy is to use best-of-breed products and integrate them together. It’s so fundamental to the business. We need the agility to be able to unplug one aspect of the business and plug in something better. The concept of doing that in an ERP environment would be horrendously costly and very risky,” he says.
“The likes of SAP have a solution that they have put into pharma manufacturing companies but it is a totally different ballgame to pharmaceutical wholesaling and distribution. Because we service relationships both upwards and downwards in the supply chain we have to be very agile and flexible in the systems we use.”
The technology developments that United Drug typically undertakes fall into three areas: automation, management information systems and compliance.
Automation is about trying to take as much cost out of the warehouse operations as possible. The company has reached the point that when an order comes in 60pc of products are picked (selected) from the warehouse automatically.
Technology is prevalent even when automation doesn’t work. Items are identified manually using RF (radio frequency) terminals with warehouse staff scanning every product to verify it’s the right one. This is where barcoding is crucial and why Phillips has been working closely with the GS1 standards body to encourage the adoption in the healthcare sector of global standards governing the transmission of data between RFID tags and readers.
“If you can’t scan a product in a warehouse you have to scan the shelf, which has inherent risks because products are occasionally placed in the wrong location,” he says. “Barcodes make the supply chain much more secure and our operations more efficient.”
He also points out that barcodes have the ability to provide additional information, which is important because distributors like United Drug are coming under regulatory pressure to check authorisation numbers to confirm product authenticity. At a distribution level it is also obliged to track batch numbers and expiry dates. “We’d love those elements to be in a machine-readable form but very few if any of our suppliers are providing them,” he admits.
Once again he puts the slow adoption down to the power of the big drug companies and the inability of distributors and wholesalers to insist on standards. “In the FMCG sector Tesco can decide it won’t stock products unless they have barcodes. Nobody in the pharma supply chain can do that. The upshot is that suppliers are slow to redesign packaging and allocate coding. We still have products in our warehouse that don’t even have barcodes in an era when we’re talking about RFID.”
Another big area of IT investment has been around management information systems. This has arisen to meet another business need brought on by the changing role of pharmaceutical manufacturers who are under increasing pressure to maintain revenues and profitability. There is not the same number of ‘blockbuster’ drugs coming on to the market that there were 10 years ago, and a leaner pipeline of product shipments has prompted manufacturers to outsource anything that is considered to be a non-core activity.
Distribution has been one such outsourced component with United Drug as a beneficiary. This has presented additional challenges, as Phillips explains. “It is very important when a manufacturer chooses to outsource its distribution that it doesn’t lose the ability to access business information.”
To address this need United Drug built a supply chain portal where clients can access a sophisticated information analysis solution that provides them with the ability to log on from anywhere and access their own sales and stock data. PARIS (provision of analytical reporting and information system) is a tool to let clients perform their own interrogation and analysis. “In many cases they now have a superior information analysis capability that is available to them within their own organisation,” says Phillips.
The third and final area is around compliance, which has become more significant as pharmaceutical manufacturers outsource services to United Drug. “They consider our systems to be an extension of their own so we are regularly audited by them to make sure we are compliant with their regulatory needs,” Phillips explains. The company has to have the ability to trace batch numbers through its systems and operate to distribution practice standards.
Although United Drug is inextricably tied to its partners in the supply chain and sometimes constricted in the technologies it can harness, Phillips keeps a keen eye on IT developments. “We’re closely following virtualisation, but it’s early days yet,” he says.
Over the years, as hardware prices fell, the company deployed more and more application-specific servers. The desktop environment is built on the Windows platform, predominantly with Dell and HP servers, but for main business applications United Drug has been a long-standing Sun customer. “We were the first Irish organisation to deploy Sun in a commercial business environment back in 1994,” he recalls. “Prior to that it was almost exclusively in the engineering and CAD environment. We evaluated Sun and found it to have unrivalled price performance. Performance is very important when you are processing 100,000 orders a day.”
Three years ago the company invested in its first storage area network. “That’s been very successful in terms of reducing cost and easing the management of large volumes of data. Server consolidation is an area where we may be able to achieve further savings and reduce complexity in the future.”
When it comes to IT outsourcing Phillips says there is low-hanging fruit where it makes sense, such as security and network management, but bigger engagements do not fit easily with pharma distribution. “The business expects me to keep tight control of the head count and costs while at the same time it looks for a very responsive service from IT. Therefore, it’s a question of balancing the in-house resources with what we can usefully and confidently outsource.”
He describes the mix at United Drug as a combination of ‘insource and outsource’ but has little truck with the concept of a full outsource. “A lot of what we do as an internal IT department relates to a knowledge of the business processes. There is a high degree of uniqueness in what we do and that mitigates opportunities for full IT outsourcing. To bring in someone like IBM and HP wouldn’t be practical because they don’t have the intimate knowledge of what is unique about our business. The likelihood is that they couldn’t achieve the sort of responsiveness that we can do internally.”
By Ian Campbell