'Leaky' Channel Management Costs the Pharma Industry 4.5% of Revenue

Pharmaceutical Commerce, Pharmaceutical Commerce - May 2009,

Poor reconciliation of chargebacks, plus faulty product-returns crediting, are the sources, says Health Industry Insights. Product serialization will provide invaluable tools, but industry shouldn’t wait for widespread adoption

A new survey by Health Industry Insights, an IDC company, puts some numbers on problem areas in channel revenue management that nearly everyone acknowledges exist, but for which few are in a position to correct. The survey, based on responses from 153 pharma manufacturers ranging from more than $12 billion to $5 million in revenue, also found some troubling weaknesses among IT solutions meant to address these leakage problems.

For one thing, the systems are on average 6.5 years old, and in many cases exceeding 10 years. For another, IT vendors have somewhat overpromised their solutions and underdelivered on results. “Manufacturers are well aware that revenue leakage exists but are tired of the same old ‘if our solution saves you just 1%, it will pay for itself 10 times over’ vendor sales pitch,” says Eric Newmark, senior research analyst at Framingham, MA-based Health Industry Insights.

More generally, the entire channel management process will be vastly improved by product serialization and tracking through the supply chain, the goal of various RFID and supply-chain management systems (see p. 18). While this technology is moving ahead gradually, the company says that industry should not wait for widespread adoption of this technology. “Widespread revenue-leakage relief from item-level tracking is still a few years away,” says Newmark.

Five leak points

According to Health Industry Insights, manufacturers currently spend up to 4% of cost of goods sold (COGS) on non-value-add distribution functions like returns and reverse logistics; this money is spent knowingly for necessary customer support. Survey respondents, to the extent that they can estimate non-recorded lost revenues, believe that their unaccounted costs range from less than 1% to 20% or more (see Fig 1); the mean percentage lost is 4.53%.

There are five critical areas in the chargebacks/returns processes where revenue can be lost:

1. Chargeback discrepancies, where there are differences between quantities shipped, quantities sold and chargebacks applied for; 2.Duplicate chargebacks, where product has been sold with a chargeback, is returned to a wholesaler, then sold again generating a new chargeback; 3.Omitted reverse chargebacks, where a refund should have been generated but wasn’t; 4.Return discrepancies, where it is hard to account for the appropriate original pricing of a returned product; 5.Concealed shortages, caused by overstating return quantity, or understating original volume shipped.

Current IT tools address many of these problems, but the difficulties remain in physically handling returned product, or manually reconciling origin shipments with chargebacks. A resounding 83% of survey respondents believe that their current reconciliation-software capabilities could be improved. Making more extensive use of EDI Forms 852 and 867 are a pathway forward; ultimately, item-level tracking will provide an exact reconciliation capability, provided its use is widespread and agreed-on reporting mechanisms are developed.

A more-detailed article on the Health Industry Insights report will be published in the May issue of Pharmaceutical Commerce.