A simulation-based study of distribution strategies for pharmaceutical supply chains

Abstract

This paper studies the impact of direct-ship distribution strategies in pharmaceutical supply chains. The typical supply chain for branded prescription pharmaceuticals consists of manufacturers, wholesalers, and pharmacies. A direct-ship strategy, also known as disintermediation, entails shipping directly to customers and is under consideration in the pharmaceutical industry. A direct-ship strategy can encompass partial or complete disintermediation of wholesalers, both of which have been successful in other industries. The goal of this work is to determine the impact of different delivery frequencies and degrees of disintermediation on pharmaceutical supply chains. Four direct-ship models with varying levels of disintermediation are compared. The operating policy under consideration is the frequency of deliveries to direct-ship customers. A simulation model is constructed to represent a pharmaceutical supply chain and distribution data is collected from an industry collaborator. The results show that a significantly lower total cost can be achieved with a hybrid strategy that sends 55% of volume directly to customers that operate their own distribution centers and customers that meet minimum order quantity requirements. Impact of delivery frequencies on transportation and inventory costs is also studied. Sensitivity analysis of the transportation: inventory cost ratio and truck utilization is performed to determine whether and when the best direct-ship distribution strategy should be changed.