Jump Starting RFID in Pharmaceutical Manufacturing

By Nick Basta, Contributing Editor

RFID offers significant savings, but connections between drug manufacturers and their business partners need to be ironed out. The Jump Start pilot is starting to sort out and define the challenges ahead.

For pharmaceutical manufacturers and their distributors, the floodgates opened last February, when FDA recommended that RFID be pursued as part of a "layered" counterfeit defense strategy, including better packaging and anti-theft measures. Industry efforts are riding along on the well-publicized "Wal-Mart mandate" and a logistics improvement program started by the U.S. Dept. of Defense.

Pharmaceutical industry executives have two basic beefs with how RFID is playing out right now:

• the technology is not yet ready to launch, even though the need to protect against counterfeiting and diversion is immediate
• manufacturers might be bearing the brunt of the costs,which remain uncertain,of setting up a tagging system, yet it is not clear that they would gain most of the benefit

"The counterfeiting and diversion problem is huge, and it's only going to get worse," says John Dempsey, director of trade relations and brand security at Ortho Biotech Products (Bridgewater, N.J.), which was front and center when counterfeits of its anemia medication, Procrit, hit the supply chain two years ago (Pharmaceutical Manufacturing, Fall 2003, p. 80) "We will be able to use RFID technology, but it will require a heavy investment, and it might be five or more years away from implementation." Dempsey says.

The hard part will be figuring out the appropriate business practices between manufacturers and wholesalers, as well as downstream channels like retail pharmacies. In fact, the business-practice questions posed by RFID, for instance, sharing data among trading partners,promise to dwarf technical problems surrounding chips, scanners and data collection. "RFID is a tool not a solution," notes Leonardo DeCandia, senior VP, supply chain management at AmerisourceBergen (Valley Forge, Pa.), a major wholesaler-distributor and target in a product liability lawsuit involving counterfeit of the drug Epogen.

Jump-Starting the Process

Although pharmaceutical companies usually test the waters with RFID pilot projects within a warehouse or on a manufacturing line, the full potential of RFID for tracking and tracing can only be measured in projects involving multiple parties---the many links on the supply chain.

Attention is now focusing on JumpStart, an effort launched earlier this year to evaluate RFID in the pharmaceutical supply chain. Led by the consulting firm, Accenture (Chicago), the program also involves manufacturers and distributors including Abbott Laboratories, Barr Pharmaceuticals, Cardinal Health, CVS Pharmacy, Johnson & Johnson, McKesson, Pfizer, Procter & Gamble. Supporting the effort are the Healthcare Distribution Management Assn. (HDMA; Reston, Va., which represents the wholesaler-distributor portion of the pharmaceutical supply chain, and the National Assn. of Chain Drug Stories (NACDS; Alexandria, Va.

JumpStart has designed a pilot RFID system, using supply chain execution software developed by Manhattan Associates, Atlanta, Ga., RFID equipment supplied by Matrics (Rockville, Md.), and Dell Computer hardware. Trials began in August, and preliminary results are expected to be reported before the end of the year.

Numbers Look Good

At July's Pharmaceutical Supply Chain Summit in Washington, D.C., preliminary data were released showing that the long-term operating cost savings enabled by RFID can offset high implementation costs. In a "costs versus benefits" analysis of RFID funded by HDMA, analysts from A.T. Kearney (New York) found that the technology offers both manufacturers and distributors substantial long-term savings.

For a large pharmaceutical manufacturer (with over $10 billion in annual sales), RFID implementation is roughly break-even the first year, the study found, but it can enable significant savings in storage and distribution costs thereafter (Table I). Startup costs range up to $60 million initially (reflecting a one-time start-up cost plus the first year operating cost), but are followed by annual operating cost savings of $39 million.

For the wholesaler-distributor, the economics are even more compelling (Table II): In this case, start-up costs would be around $20 million, with comparable annual savings, representing a near 100% rate of return. (Results from the study will soon be available via HDMA's Web site, www.healthcaredistribution.org)

Although the estimates are based on projections rather than actual, demonstrated data, A.T. Kearney partner John Seus, who worked on the study and discussed findings at the Summit, says that benefits for the manufacturer are based on RFID's ability to eliminate well-recognized supply chain inefficiencies such as errors in chargebacks (the discounts that manufacturers offer to certain customers), inventory reduction, and handling pedigree and brand-protection issues that are threatened by counterfeits.

Not a "Four-Walls" Issue

"You can't approach the cost-justification of an RFID implementation as a 'four-walls' issue within your own organization," Seus concludes. "You have to shove the information up and down the supply chain to get value."

Drug distributors, primary targets in legal liability lawsuits surrounding counterfeit drugs, are already embracing RFID. "This industry has a chance to lead all others in implementing this [technology], because it is a life-and-death issue for consumers," says John Gray, the HDMA's newly appointed executive director. "If we don't do it, we will be told we will have to do it by someone else," he proclaimed at Summit.