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Even while cutting the costs of recalls and returns, providers offer new marketing tools to industry
By Suzanne Shelley
Unlike forward distribution in biopharma products, where exacting controls are maintained on shipping processes, purchase orders and inventories, reverse logistics tends to be a messy affair, with unpredictable lots of prescription and OTC products from countless retail pharmacies, chain stores, hospitals and other institutional pharmacies being sent back through a variety of intermediary partners in the reverse supply chain. These third-party agents must then arrange for both the destruction of the product and for all cash or credit reimbursements for unsalable products to be paid by the drug manufacturers. While the volumes returned (consisting of expired product, overstocks, and voluntary or mandated product recalls) are low—around 1-2% of the forward supply chain—the cost can be onerous, and beyond the economics are significant product-liability and regulatory-compliance issues. “All recalls share three basic goals: protect the public, protect the brand, and complete the process as quickly and efficiently as possible,” says Mike Rozembajgier, VP of Recalls & Returns at Stericycle Returns Management Services (Indianapolis).
Routine product returns may be viewed by many as an unavoidable cost of doing business, but they also have a direct impact on the bottom line. According to the 2009—2010 Factbook from the Healthcare Distribution Management Assn. (HDMA; Arlington, VA), an estimated $2.5 to $4.0 billion (excluding recalls and overstock returns) worth of prescription products are returned in the US for manufacturer credit each year.
“In order to reduce the number of returned items to begin with you need to step back and take a more strategic view of the entire supply chain with all the players involved,” says Perry Fri, SVP at HDMA.
When it comes to routine returns, advocates say that partnering with an experienced third-party logistics (3PL) service provider can help to minimize the costs associated with managing the collection, transportation and destruction of unwanted products, and reduce unnecessary or unauthorized reimbursements to trading partners through the more-accurate counting of returned product and close scrutiny of the terms and conditions of the actual returns policy governing the transaction.
“While pharma companies have historically been more attentive to returns issues than some other industries, the idea of putting a solid reverse logistics process in place is still not always given a high priority,” says Dan Raftery, president, Raftery Resources Network (Antioch, IL), a consumer-goods consulting firm. “However, once companies start to experience the pain of a poor returns process, they tend to start developing policies around this.”
When it comes to the need to swiftly remove a given product from the marketplace due to some safety or quality problem, no company in the biopharma industry is immune and “many large, successful companies with otherwise solid reputations have faced recalls in recent years,” says L. David Mounts, CEO of Inmar (Winston-Salem, NC), adding: “Few companies like to think a recall will happen to them, but they do happen —even to the most cautious companies.” The most recent is Johnson & Johnson’s McNeil unit, in a spreading recall affecting a growing number of OTC products.
“Having a formal, comprehensive recall protocol in place prior to an event is an essential element of any reverse logistics strategy and is the best way to minimize the impact and protect public health,” says Mounts. Planning should include everything from how to handle notifications (which may be aimed at the wholesale, retail and/or consumer level, depending on the situation), how to manage the need for urgent rapid product retrieval and long-term warehousing, and how to comply with government reporting requirements and FDA-sanctioned destruction procedures.
For instance, while the tracking and counting of routine returns is essential to ensure accurate financial reconciliation, the tracking and counting of recalled products serves an additional function — enabling the drug maker to demonstrate to FDA the overall completeness of the recall. Only when FDA is satisfied that the collection efficiency has reached some critical threshold — a process that may call for the collected product to be warehoused for months or years — will the agency give the green light for the recalled product to finally be destroyed.
When it comes to putting a recall plan in place, companies should put out an RFP to evaluate competing 3PL service providers in a calm and rational way in the cool light of day. “All of this is best handled before the company finds itself in crisis mode, thrust into a consumer-level recall and thinking ‘How are we going to handle this?’” says Robert Schaltenbrand, director at Guaranteed Returns (Holbrook, NY). “During an actual recall, you need to be ready to go — not rushing around at the eleventh hour trying to cobble together some type of response plan.”
Similarly, experts agree that it is also really important to assemble the entire internal recall team early in the process. “No two recalls are the same, and it’s quite conceivable that in a large organization, many of the players may not even know each other. Once a recall is initiated, the process moves fast so it is critical that key decisionmakers and stakeholders be ready to spring into action,” says Rozembajgier of Stericycle. “Any ability to accelerate the recall process — to get it buttoned up and get the story out of the headlines — is a benefit. This allows the company to get back to business and minimize potential public relations damage to the brand.”
Experts recommend that drug companies carry out mock drills using a combination of simulation tools and real activities, to create a workable template that can then be quickly deployed or adapted as needed when an actual recall situation arises. Similarly, companies should also benchmark their reverse logistics systems against those of their peers. “Such activities, carried out proactively, offer paths for continuous improvement,” says Mounts of Inmar.
EDI 180 and EDI 812
“Greater adoption of standardized electronic communications related to returns is key to improving reverse logistics planning and execution,” says Fri of HDMA. Over the past few years, HDMA’s Returns Task Force (RTF), a working group of executives from manufacturing companies, distributors, and service providers, has helped to identify numerous opportunities for process improvements that could help all trading partners to reduce costs associated with product returns. According to Fri, “advances in technologies for product tracking, data management and enhanced communications between industry trading partners will ultimately drive reverse logistics to the next level.”
One area where the RTF has made significant progress is in reducing and automating the paperwork that accompanies returned goods — returns authorizations, debit memos and so forth. “Faxes, mailed documents and even e-mail are mature approaches that are both time-consuming and error-prone,” says Fri. “The opportunities for improvement via electronic automation have been readily apparent and this continues to be fertile ground for improving returns handling and reducing cycle times.”
In particular, as the use of electronic data interchange (EDI) standards — such as EDI 180 and EDI 812 — has grown in recent years in forward logistics, many companies are now starting to leverage the benefits of these protocols to improve reverse logistics as well.
EDI 180 provides a standardized, multi-directional electronic format for the transaction set that is used when trading partners need to issue a request for, or notification of, a return and manufacturers need to respond to this request or notification and issue the return authorization. EDI 812 is a bi-directional transaction set that aims to automate and standardize financial elements of a return, requesting and authorizing debits and credits between trading partners. Such standardization makes the resolution of the credit-reimbursement process faster and more transparent. “Historically, the value of a return has been estimated and the actual dollar value is reconciled later once the product has been counted. Industry-wide adoption of EDI 812 will allow us to report actual return values back to all parties so that the reconciliation can be done more quickly,” says Schaltenbrand of Guaranteed Returns.
“The clock starts ticking as soon as the pharmacist pulls the item off the shelf, and it stops ticking when the pharmacy gets its money,” says consultant Raftery. “Historically, that can take four to six months. The goal of EDI 812 is to shorten that process.”
EDI 180 and EDI 812 have both been around for a while but both were revised last January by the HDMA Returns Task Force. The most recent revision added additional data fields, to capture the reason codes for the return, and additional characterization details and other serialization information associated with the product.
HDMA and others have been supportive of efforts to develop standard practices for serializing pharma packages with barcodes or other unique identifiers; many studies of the subject point to substantial savings in managing returns, recalls, and credit reconciliation when individual products can be tracked up and down the supply chain. But these track-and-trace programs currently await either federal legislation, or the target date of 2015 when the “e-pedigree” standards of the state of California are scheduled to come into force.
Several reverse 3PLs already employ barcodes or RFID tags internally to track returns as they are processed. “We provide shipping bags to pharmacies with RFID tags to streamline and safeguard the return of Schedule II controlled substances, whose movements must be documented in accordance with US Drug Enforcement Agency requirements),” says Larry Hruska, president of Genco Pharmaceutical Services (Pittsburgh). “Our ability to scan these RFID tags right at our receiving dock lets us immediately segregate these products at our facility for maximum security and proper accounting, and gives our customers more-immediate access to the volume and value of Schedule II products being returned.”
Putting advanced business insight to work
“There’s a lot of information and data generated in the reverse supply chain and it can and should be collected and analyzed to create business-improvement opportunities for all trading partners,” says Hruska. “Anything we can identify from the process, in terms of what’s coming back can help the parties to carry out their forecasting and purchasing more effectively so that purchasing practices can be more closely aligned with actual consumer demand.”
The introduction of a generic product often leaves pharmacies and agencies with a large stockpile of branded product that is typically pulled from the shelves and left to age so it can be returned as expired product. “Considering that the introduction of generics never comes as a surprise, any event resulting in pharmacies being left with large stockpiles of past-expiry branded products should be treated as a forward-supply-chain, inventory-management issue,” says Raftery. “Of course it requires a blend of art and science, but all trading partners should be paying close attention to forecasting signals and timing their ordering to minimize the amount of branded stock that will be left in inventory when a generic launch is about to happen.”
“Products or partners with particularly high returns can be identified, and the data can be crucial to assist with inventory optimization and trading partner negotiations, as well,” adds Mounts of Inmar.
The main reason for pharma product returns (both prescription and over-the-counter) is because the product has expired, so increased insight can help the manufacturers in many ways. Automated access to expiration dates (through the use of advanced barcodes or RFID) can help pharmacies to be more rigorous in maintaining a consistent first-in/first-out (FIFO) strategy for dispensing products — a proven way to reduce the volume of expired products on their shelves.
Similarly, drugmakers can assist their pharmacy clients to use their own return trends to identify optimal selling windows for certain products, to improve sales forecasting and purchasing practices in order to reduce their unsold inventory levels, and to promote the importance of patient-adherence to improve product utilization.
Meanwhile, in response to more-rigorous analysis of returns-related signals for a given product, the company may opt to plan its own manufacturing batch-production schedules to more closely match actual consumer demand. This can help to reduce the amount of aging inventory the manufacturer itself keeps on hand from each production run.
“Historically, returns handling has been viewed simply as a cost center, but today, it’s possible for drug manufacturers to use insight gathered during returned-goods handling to their benefit,” says Schaltenbrand of Guaranteed Returns. “Good planning and execution in the reverse supply chain goes hand in hand with better planning and execution in the forward supply chain.”
‘One-touch’ returns management
In an effort to reduce non-value-added activities and redundant handling (and associated costs) in the reverse logistics supply chain, many of the today’s major 3PL service providers have developed so called “one-step” or “one-touch” programs, by which they are able to function as the single intermediary between the manufacturer and downstream trading partners. In the traditional scenario, upstream manufacturer and the downstream trading partners would each engage their own 3PL partners to handle routine returns; using the newer approach, a single intermediary handles the entire return from initiation to final product destruction, acting as a partner to both drugmaker and the pharmacies or other retail partners. This approach has its pros and cons.
“One of the most important and effective ways to reduce costs and minimize individual handling steps in reverse logistics is for all trading partners to agree to accept a one-count process that eliminates redundant processing and unnecessary transportation,” says Mounts of Inmar. Inmar already processes returned pharma products for more than 25,000 retail pharmacies and for several major wholesalers. “As a result, most pharmaceutical manufacturers find that a majority of their product is already being processed in Inmar’s facility on behalf of these retail clients.” Rather than reshipping the products to the manufacturer’s facility or to different 3PL processor designated by the manufacturer, the manufacturer accepts Inmar’s count and then allows the company to carry out the product destruction.
Proponents say that their ability to essentially reduce the number of parties handling each return shipment has many benefits. For instance, by reducing the times the product is picked up and transported, a one-touch approach helps to both reduce redundancies in handling and processing (which reduces the risk of counting or data-entry errors), minimizes opportunities for theft or diversion, too, and helps to reduce the carbon footprint of the product returns by reducing both the cardboard packaging and transportation fuel required for reshipping returned products to multiple intermediary partners before final product destruction.
The counter-argument is, simply, that there is a conflict of interest between the manufacturer and the retailer. In the traditional scenario, the interests of the manufacturer are represented by one 3PL partner, while the interests of downstream trading partners are represented by a different 3PL partner, the distinct needs of all parties are protected by dedicated intermediary agents. By comparison, in a one-touch scenario, a single 3PL intermediary acts concurrently on behalf of both the upstream manufacturer and its trading partners to handle the entire reconciliation process.
“The various parties in any reverse supply chain have very different financial and material motivations,” says Rozembajgier of Stericycle. “From the manufacturer’s perspective, the accuracy of the returns data and refund-policy information must not be compromised. Otherwise they may end up over-reimbursing a trading partner because the count was off or because the wrong pricing scheme, such as the manufacturer’s price, the wholesale price or the contract-purchase price, was applied during the credit reconciliation.”
“The reason the two-step approach has initially emerged is that the two separate intermediary agents can clearly represent the interests of the two trading partners — who, by nature, have an adversarial relationship — without the potential for conflict of interest,” says Raftery. “Any one-step reverse logistics process has the potential to create a Catch-22 of sorts — both parties are looking at the single-source middleman to best represent their interest in the returns process, so who’s best interest does the single intermediary have in mind?”
For instance, while pharmacies often rely on their own pharmacy technicians to collect out-of-date, rejected, returned or damaged inventory and ship them to the 3PL partner for return, larger institutions (such as HMOs, mail-order PBMs, hospitals) often rely on their 3PL partner to comb through the facilities looking for expired and other inventory to be returned.
“The 3PL person sweeping the shelves has a vested interest in collecting the largest amount of product since their compensation is based on the money that comes back to the retailer in the returns process; this may create a conflict of interest if that 3PL partner is also supporting the interests of the drug manufacturer,” says one industry insider.
Others disagree, saying that a singular intermediary is in a perfect position to shepherd the returns process in the most appropriate and ethical way. “Manufacturers who select a trusted 3PL partner — one who brings rigorous scrutiny to product counts in all return situations — will be protected against fraudulent situations, such as branded bottles that are sent back filled with aspirin tablets,” says Hruska of Genco. “Without the close scrutiny of a trusted intermediary partner who has access to the specific terms and conditions of the applicable returns policies, the manufacturer might end up paying full credit to the pharmacy for such a return.”
Similarly, he cites a situation in which a pharmacy may be seeking credit for the return of a mixed lot containing 50 vials of an injectable medication, with different vials having different lot numbers and expiration dates. “If the formal policy clearly specifies that the manufacturer only pays credit for a sealed package with 50 vials with the same lot number and expiration date, then the pharmacy would get no credit for returning such a mixed lot of vials,” says Hruska. “If the 3PL partner does not have such close ties to both retailer and manufacturer, and does not exert this level of scrutiny throughout the counting and reconciliation process, then the drugmaker may end up paying for that unauthorized return.”
Historically, a lack of trust between manufacturers and their trading partners has hampered efforts to improve supply chain efficiencies. But in an era where every wasted dollar of working capital and expense is being questioned, developing these trusted relationships might have a new emphasis. PC