Manufacturing and distribution typically account for about 40 percent of the headcount and 60 percent of the capital employed in a large pharmaceutical firm, so they are obvious areas in which to look for savings and short-term productivity improvements in a time of declining growth. But short-term cost and productivity measures are not enough to meet the fundamental challenges the pharmaceutical industry (Pharma) now faces. On the contrary, any company that wants to fend off the risks, and exploit the opportunities, that are currently emerging will need to submit its supply chain to a radical overhaul. The quality of a company's manufacturing and distribution can either impede its progress in getting products to market or accelerate that process and become a means of creating value. The supply chain of the future must be smart, efficient and agile. The challenges facing Pharma After decades of growth, Pharma is under enormous pressure, especially in the U.S. -- which accounts for 49 percent of the worldwide market. Intense competition, increasing use of generics, the might of the managed care providers and government measures to curb soaring healthcare costs have all restricted its financial performance and driven shareholder returns down. Most companies are also struggling to replenish their pipelines and replace the revenues they are losing as numerous blockbusters come off patent. This veritable "sea of troubles" explains why the share prices of the industry leaders languish, despite the fact that global sales grew nine percent in 2003 -- a rate companies in some other sectors might envy. The situation has been compounded by several recent changes in regulations. The Sarbanes-Oxley Act of 2002, the most far-reaching reform of the U.S. securities laws since the 1930s, imposes much stricter reporting requirements on all public companies. The U.S. Food and Drug Administration (FDA) has also issued an edict on current Good Manufacturing Practices (cGMP) for the 21st century, which has more immediate relevance for supply chain executives. Lastly, Pharma is on the brink of a scientific and technological revolution that will ultimately transform both the nature of the medicines it makes and how it makes them. In "Pharma 2010: The threshold of innovation," IBM predicted that a better understanding of the molecular sciences and massive advances in computing power would eventually enable the industry to develop targeted treatment solutions -- or healthcare packages for patients with specific disease subtypes. These targeted treatment solutions will be made using biological methods of discovery and development; they will be aimed at particular patient subpopulations; and they will measurably modify the diseases for which they are prescribed. They will also include biomarkers, devices, preventative medicines and a network of services for diagnosing, treating, monitoring and supporting patients, which will improve persistence and compliance. In the future, then, Pharma will not only make the white powders, creams and tablets it has traditionally produced, it will manufacture a complete mix of biopharmaceuticals, parenterals and diagnostics. Making targeted treatment solutions will generate greater revenues than conventional drugs and offset the increasing competition from generic producers. But it will also require the restructuring of the entire pharmaceutical value chain, including the fixed asset base and downstream distribution. | 
