India’s pharma market is on a rapid growth trajectory, projected to reach $130 billion by 2030, driven by increasing affluence, improved healthcare access and rising income levels. However, despite this significant opportunity, pharma companies struggle to ensure consistent product availability at chemists across the country.
The cost of inconsistent quality
A survey by Vector Consulting Group (n=934 chemists) revealed that even top pharma firms have only 60-85 per cent brand reach at chemists, leading to frequent prescription substitutions.
The study also found that one in four prescriptions go unfulfilled, resulting in substantial financial leakage for pharma firms due to stockouts and substitutions. This is despite companies carrying high inventory in the supply chain to prevent this. To address these issues, it’s crucial to grasp the root cause, which creates these inefficiencies. Understanding the intricacies of the multi-tier distribution system is the first step towards identifying and solving the problem.
Understanding the multitier distribution system
Pharma companies in India are typically structured into distinct therapeutic areas, each managed as a quasi-business unit with dedicated sales teams and tailored marketing strategies. Products from each division reach chemists through a network that includes company central/regional warehouses, carrying & forwarding agents (C&F), and stockists/substockists. While central and regional warehouses and C&Fs may serve multiple divisions, the further distribution channels are customised to meet the specific needs and dynamics of each therapeutic segment. Additionally, each therapeutic division works with a unique set of stockists across the country. There may be some overlap, but not all stockists handle all therapeutic divisions, and not all divisions engage with every stockist.
There are two kinds of stockists in India:
- Stockists in wholesale (Mandi) markets (e.g., Dawa Bazaars) – Chemists order from these stockists, who are primarily counter-sellers, by visiting or on phone call, to purchase medicines and arrange for delivery.
- Distribution-driven stockists – Stockists actively take orders from chemists and then provide door delivery to them. Medicines move through this distribution chain—from pharma plants to stockists and chemists—based on sales forecasts and targets. However, when stock faces expiration or obsolescence in the channel, it is typically returned up the supply chain and destroyed by the company, resulting in significant losses.
Medicines move through this distribution chain—from pharma plants to stockists and chemists—based on sales forecasts and targets. However, when stock faces expiration or obsolescence in the channel, it is typically returned up the supply chain and destroyed by the company, resulting in significant losses.
In spite of this risk, companies maintain high inventory levels across the entire distribution chain, including with stockists, to mitigate the cost of unavailability, particularly the loss of sales as doctors stop prescribing unavailable brands.
However, despite these precautions, availability issues persist, as observed in the study.
Why is ensuring availability a challenge?
Ensuring 100 per cent availability of all medicines at chemists remains a challenge, even if pharma companies hold high inventory in the distribution system, due to the very design of this multi-tier distribution system.
Chemists, whether sourcing medicines from wholesale or distribution-focused stockists, typically work with a limited number of stockists, which restricts their product availability to what these stockists can supply.
Stockists themselves, however, are not able to offer the full range of products from all the companies they represent as they are limited by the therapeutic areas they handle. Stockists face significant costs related to manpower, transportation, handling, and frequent deliveries (such as same-day or multiple shipments). Expanding their product portfolio can help boost sales and offset these expenses. Therefore, ideally, stockists would want to offer a broader range of products across multiple therapeutic areas. However, doing so requires them to maintain substantial inventory, which is challenging due to their limited working capital. As a result, stockists are forced to focus on specific divisions, restricting their ability to provide a full product range and limiting chemists’ access to a wider variety of medicines. Additionally, logistical and credit constraints make it difficult for stockists to serve all chemist customers, further reducing product availability in the market.
What should companies do?
Pharma companies can address this issue by allowing stockists to maintain a full range of products across various therapeutic divisions without requiring additional working capital. This can be achieved by reducing the amount of inventory stockists need to hold for each SKU, enabling them to carry a broader product range without increasing their overall inventory investment. This creates a mutually beneficial situation, where stockists benefit from better returns on inventory investments and improved cost recovery, while companies enjoy a broader product presence at stockists, enhancing their market reach at chemists.
However, lowering inventory levels comes with the risk of stockouts. To prevent this, companies should adopt a demand-driven distribution system which involves the following steps:
- Build frequent supply capability: Companies should aim to supply stockists same SKUs more frequently, ideally at least once a week or two to three times a week in some markets. With frequent deliveries of same SKUs, the maximum stockholding could be reduced from two to seven weeks to one to two weeks, thus minimising overstocking and capital tied up in inventory.
- Ensure inventory limits: Not only should deliveries be in small quantities, companies should set a maximum inventory level for each SKU at the stockist level and prevent exceeding this limit.
- Enable inventory limits that are adaptive to market signals: Demand for some products fluctuates seasonally. A system should be in place to regularly assess and adjust the inventory levels accordingly.
- Implement Automatic Replenishment System (ARS): The amount delivered prioritising SKUs as per risk of stockouts based priority and the dynamic limit adjustment based on real-time data can be automated.
- Ensure warehouse availability: However for this to work companies must ensure near 100 per cent availability of all relevant SKUs in their warehouses. For this they have to build a highly responsive supply chain.
- Demand-driven supply chain: Ensuring warehouse availability involves abandoning fixed monthly forecasts and adopting demand driven inventory movement. Lead times can be reduced and the supply chain protected from variability by using strategic buffers of finished goods and raw materials. Finished goods buffers help schedule production efficiently, while raw material buffers provide flexibility to produce needed products.
Proven results: A win-win-win model
By implementing these demand-driven strategies, companies can address availability issues effectively. The following results demonstrate the benefits of adopting such an approach:
◆ For chemists: Consistent product availability ensures higher prescription fulfilment rates, driving sales growth. As stockists broaden their product range, chemists benefit from a wider selection, further boosting fulfilment rates and sales.
◆ For stockists: With increased sales at the same service cost, stockists enjoy improved returns on investment. Additionally, freed-up capital enables stockists to expand market coverage, reaching more chemists, including those in remote areas, thus increasing sales further.
◆ For the company: The company can maintain near 100 per cent product availability at CWH, RWH, and C&FA depots. Frequent, smaller deliveries reduce inventory levels, mitigating month-end stock build-ups and sales skew. This allows for faster market feedback and quicker responses to demand shifts. A responsive supply chain reduces lead times and lowers working capital requirements, potentially reducing inventory holding costs by up to 30 per cent. Additionally, minimising excess stock reduces the risk of obsolescence. Broader coverage and increased sales lead to higher company profits, with minimal added logistics costs due to increased delivery frequency.
Why pharma companies must act now
Revamping the current multi-tier distribution system is no longer optional, it is essential for maximising sales, improving market reach, eliminating inefficiencies and unlocking the full potential of the market. Pharma companies that proactively shift to a demand-driven distribution model will achieve:
◆ Higher prescription fulfilment rates
◆ Motivated stockists with increased ROI with optimised inventory
◆ Improved cash flow by reducing expired stock losses.
These companies will unlock the untapped potential of India’s rapidly growing pharma market. And companies that fail to address these challenges risk losing market share to competitors that can guarantee consistent product availability.
However, this is not just a business challenge. Ultimately, a smarter multi-tier distribution system is also key to ensuring a more reliable healthcare experience for millions of Indians.