Jump Starting RFID in Pharmaceutical Manufacturing

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.

The industry is already using RFID to track and trace Class 2 pharmaceuticals, which, in most cases, are narcotics that the U.S. Drug Enforcement Agency (DEA) oversees. Earlier this year, H.D. Smith Wholesale Drug Co. (Springfield, Ill.), selected Matrics, Inc. (Rockville, Md.) to install an RFID system at one of its Class 2 pharmaceutical distribution centers (DCs).

Currently, controlled substances are barcoded and tagged with an RFID tag as they are brought into the DC vault. With barcoding alone, warehouse staff still had to scan each product. Now, with the RFID system, a tote bag containing all the products in a shipment can be passed through an RFID reader, speeding up the tracking process.

In a second stage of Smith's RFID program, to be started up later this year, similar scanners will be employed at retail pharmacies that H.D. Smith supplies to complete the tracking process between the two. "RFID scanning will allow us to greatly improve our efficiencies by scanning the entire tote instead of the individual product," says Robert Kashmer, VP, information technology.

The prime contractor for the H.D. Smith project, Matrics, has developed a variety of passive RFID tags and related equipment, all following the evolving standards of the EPCGlobalnet organization, which is developing communication standards for RFID tagging (Box).The project also involved the systems integrator Franwell, Inc. (Plant City, Fla.) and a software company called GlobeRanger (Richardson, Tex.) for infrastructure communications software.

Vendors Strengthen RFID Offerings

Major bar code players, such as Zebra Technologies (Vernon Hills, Ill.), Intermec Technologies Corp. (Everett, Wash.) and Symbol Technologies, Inc. (Holtsville, N.Y.) are making the leap from an emphasis on barcodes to a broad product base including RFID. Illustrating this trend, Symbol Technologies bought Matrics this Summer for over $230 million.

MeadWestvaco Intelligent Systems (Laurel, Md.) has been developing "intelligent packaging" for retail security and pharmaceutical patient compliance for several years. It worked with FDA's Anti-Counterfeiting Task Force, and has announced a full-blown RFID inventory system tailored for pharmaceutical applications. Last year, it implemented RFID systems in retail settings in the U.K. Paul Rasband, chief scientist at the firm, says that the group has developed novel antenna-networking technology that enable an RFID system at, for example, a retail pharmacy to monitor an entire aisle through a few antennas.

At the same time, the company is working with a sister division, MeadWestvaco Healthcare Packaging, to incorporate RFID technology into what it calls "electronic compliance packaging." In addition to tracking the distribution of a pharmaceutical package, this technology would enable pharmacists or other healthcare professionals to monitor the proper dosages and drug regimens of patients.

In one version, a package (which has been designed according to a unit-dose format for, say, once-a-day dosages) would record when the package was opened and a pill removed. The package's electronics could then be linked to a computer to record the event. MeadWestvaco Healthcare Packaging announced a partnership in January with a Swedish company, Cypak AG (Stockholm) to develop this technology for clinical-trials and patient-compliance applications.

DIY Options

It is not hard to at least dabble in RFID systems on a pilot or experimental basis. Manhattan Associates came out last year with "RFID in a Box," a packaged, off-the-shelf solution for implementing RFID in a warehouse or manufacturing setting. The kit includes hardware, software and integration resources for setting up a system.

Such systems will help companies tackle the microscale challenges that RFID poses within their own operations, but pharmaceutical companies must also address broader questions. In the HDMA study, A.T. Kearney's Seus found that the implementation path ("who goes first?") ranks highest in both importance and degree of difficulty. An equally troubling concern is cost- and value-sharing ("who benefits from the implementation?").

The consumer goods market has a head start, and a major advantage in implementing RFID. "Wal-Mart alone represents 20-40% of the market for some consumer packaged-goods manufacturers," says Seus, "which gives it enormous clout.

"There's no one pharmaceutical company or distributor with that ability to make unilateral decisions. It's going to take leadership from many companies and the trade associations in this field."

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