Pharma Supply Chain for Domestic Distribution

1. Pharma Supply Chain Entities and Insights

a. CFA (Carrying and Forwarding Agents) These organizations are primarily responsible
for maintaining stock of companys products and forwarding stock to stockists on
request. Every state has 1-3 CFAs based on the size of the state, the primary reason for
having a CFA structure is to avoid CST (Central Sales Tax). CFAs are paid on the basis of
the percentage of total turnover of products they carry.
b. Stockist These are distributors who simultaneously handle products of multiple
companies. They buy products from the company and generally get credit terms (30-45
days) based on their size.
c. Sub-Stockist They are present to increase the reach of the companys products. They
buy products from the stockist and sell to retailer who are geographically located in
rural areas.
d. Retail Pharmacy They obtain the products from the stockist or substockist and sell
finally to the consumer.

2. Pharma Distribution Channel:

Hospitals

INR 80-85

INR 100

INR 70

Stockist

INR 80

INR 69

Manufacturer

CFA

Retailer

INR 72

INR 100

Consumer

INR 80

Substockist

31% of the MRP is absorbed in the distribution channel

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CFA Margin 1-2%

Stockist Margin 10%
Sub-stockist Margin 8%
Retailer Margin 20%
Percentages as per discussion with MRs and Distributors

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3. Key Findings
The two major challenges faced by the pharma supply chain are:
1. Loss of sales due to non-availability of products
2. Excess Inventory across different points in the supply chain
3.1 Loss of Sales due to non-availability of products

The extent of loss of sales varies from 1% in the metros, 3% in Tier 1 cities and upto 5% in the Tier 2
cities and rural markets. This can be attributed to the reach and service levels, working capital
constraints and net margins to the retailers.
3.1.1

Reach and Service Levels

Metros: Due to intense competition among stockists to get business from the retailers, the
reach and coverage across the cities is very high and every retailer is serviced by multiple
stockists. Also the service levels to the retailers are very high owing to the close proximity of
the stockists and lead times are generally within a day. This leads to very less or negligible
stockout situations and thereby loss of sales

Rural: The number of stockists reduces in the rural setting and therefore the competition
and service levels provided to the retailers. As the distance between the stockist and the
retailer also tends to be higher, this leads to the retailer having higher inventory (1-2
months sale in far flung areas) to service customers. As a result there is a higher chance of a
stockout situation and thereby loss of sales.

3.1.2
-

Working Capital Constraints

The working capital of the stockist determines the amount of credit that he gives to the
substockists and retailers. This has an impact on the amount of stock available at the retailer
and the substockists. This leads to non-uniform availability of products across sub-stockists
and geographies which results in loss of sales. This problem is prevalent in the rural areas
than the metro cities, as in this case one stockist refuses to give products to one retailer
because of working capital problems, the retailer might immediately reach out to another
stockist for the products.

3.1.3 Net Margins to the retailers

-

When the retailer goes to a market where multiple stockists are present, in the event that a
retailer does not get a better price, he tends to wait for the end of the month, when the
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stockist is looking to offload his stock and hence provides a discount or runs a scheme on
the products. This results in a loss of sale at the retailer when the customer visits the retailer
for a product. The extent of this has reduced owing to the Drug Pricing Control Order
(DPCO) of 2013.

3.2 Excess inventory across different points of the supply chain:

The primary reason for this is the lack of visibility of stock holding and movement post the primary
sale.
-

Pharma companies use the primary sales as a metric for setting the targets and most often
these are not reflective of the actual demand of the product in the market, this leads to a
push from the sales force and thereby skewed stockists inventory towards the end of the
month.
This data is then used for forecasting the demand for production at the factory, which leads
to inventory buildup in the supply chain.
On the other hand inventory pileup at the stockists, forces them to discount stock. This will
again lead to retailers waiting for such events and deferring their purchases.

4. Other Problems in the Pharma Supply Chain:

-

Compliance of Product Sampling to doctors: There is little transparency in the number of

products that are provided to the doctors. According to the Good Distribution Practices
(GDP) of Central Drug Standard Control Organization (CDSCO), every sample needs to be
properly documented by the pharma companies and the required to maintain records for
audits. Medical Representatives generally provide much more to the doctors to win favor
from them. Companies would have to understand the scale at which such practices are
being undertaken to keep a check on this issue.

No Singular System to address the FEFO Issue (First Expiry, First Out): Stockists and Substockists are using primitive methods to address the FEFO Issues. These methods include
identifying the batch numbers of near expiry products and pushing the same into the
market with the help of their sales force, Racking products according to their batch
numbers, so that deliveries always happen from the rack that contains products that have
arrived the earliest. The reason for using such methods is that even though the company
reimburses the stockists for expired products, the stockist does not get a reimbursement for
the taxes which are paid to the government for the purchase. Hence the stockist stands to
lose almost 10% on the return of expired products.

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Counterfeit Products (12-15%): Though industry reports suggest that counterfeiting is

prevalent and amounts to almost 10-15%. Channel Stakeholders differ in their view of the
amount of counterfeiting in the market. While some feel that the counterfeit products is
negligible and are only 0.1% of the market, others feel that they are almost 5% of the
market(Usually in popular drugs like Crocin, Paracetamol etc.,)

Product Recalls: Once the primary sale is done to the stockists, pharma companies find it
difficult to track the product in the downward supply chain and in the case of recalls; they
run advertising to help recall the respective batch numbers of the product. As the cases for
recall are few and far between, companies are not very hard pressed to solve this problem.

Degradation of temperature controlled drugs while passing through the supply chain: Due to
time it takes for the product to reach the end consumer, products which are semiperishable tend to degrade(reduction in potency of the drug) during their travel through the
supply chain. This is evident in the case of vaccines and biologics.

Note: The information collected has been from primary sources such as stockists, medical
representatives and depot managers.

Appendix
Value Chain Cost Distribution:
a.
b.
c.
d.
e.
f.

R&D Costs 15%

Primary manufacturing 5-10%
Secondary Manufacturing/Packaging 15-20%
Marketing/Distribution 30-35%
General Administration 5%
Profit Margins 20%

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