Reverse engineered

Logistics is a major point of focus for the pharma industry. If you don’t closely monitor your supply chain, you can fall prey to all kinds of problems, ranging from product counterfeiting and tampering to temperature excursions. It’s no wonder that investments in this area are rising year-on-year. According to Pharmaceutical Commerce, total global biopharma logistics spending will hit $91.7 billion by 2022, up from $79.3 billion in 2016.

Of course, much ink has been spilled over the best ways to optimise the pharma supply chain, making sure it’s compliant and cost-effective. In essence, you should be thinking about these issues from manufacturer to end user and at every juncture along the way.

What is less widely discussed is the flip side of the equation – namely, the reverse supply chain. As the name implies, reverse distribution involves taking inventory out of the supply chain and either moving it elsewhere in the supply chain – to another dispenser or wholesale distributor – or removing it altogether.

What this means in practice can vary widely. It might involve a disgruntled customer wishing to return a product or a recall of faulty stock. It might mean the collection of expired medication or the redistribution of unsold inventory. All in all, it’s a big job, and one that merits close attention.

“Just like in the forward supply chain, safety and security in the reverse supply chain is paramount,” says Perry Fri, executive vice-president of industry relations, membership and education at the Healthcare Distribution Alliance (HDA). “While only about 3.5% of units move through the reverse supply chain, this percentage still represents up to 120 million saleable and unsaleable products that must be handled in a complex operating environment governed by multiple levels of regulatory oversight.”

Put the industry in reverse

The HDA – along with its charitable wing, the HDA Research Foundation – considers reverse distribution a critical part of healthcare distribution. Last August, the HDA Research Foundation published a report called ‘The role of reverse distribution’, which aims to fill in some common gaps in knowledge around the subject.

The report takes a detailed look at different types of product returns. It highlights opportunities to enhance current returns practices and delves into recent regulatory changes. Based on research by two consultancies – Kindler & Crimmins Associates, and Bradford Rx Solutions – it aims to function as a single resource describing the intricacies of the process.

“Our goal was to provide a resource where none existed that spoke to the value of, and processes involved in, pharmaceutical reverse distribution,” says Fri, who is also the COO of the HDA Research Foundation.

The report could not have been timelier. In recent years, the laws surrounding reverse logistics have come under scrutiny, with a host of new requirements.

“The timing of the project was related to an evolving regulatory landscape that specifically impacted reverse distribution,” says Fri. “This included the Drug Supply Chain Security Act (DSCSA), administered by the US FDA; the DEA’s regulations on the disposal of controlled substances; and Department of Transportation’s rule-making on hazardous waste in reverse logistics.”

As discussed in the report, some of these regulatory changes could have a negative impact on the ability to process pharmaceutical returns, as well as adding to the overall cost burden.

For instance, the DSCSA will eventually require unit-level traceability. This will result in new business processes that could increase the number of unsaleable returns. According to present estimates, even a 1% increase in return volume would mean $60–80 million in extra annual product costs across the supply chain.

It is not surprising, then, that the reverse distribution industry should be seeking new ways to cut unnecessary costs. As the report notes, while the current supply chain is effective, it is facing uncertainties that may pave a rocky road ahead.

“As regulators, such as the Environmental Protection Agency, reassess the process of disposing and handling pharmaceutical waste, the foundation report is a useful primer for those unfamiliar with the supply chain to understand the steps and stakeholders involved to efficiently manage pharmaceutical returns,” said HDA president and CEO John M Gray in a statement.

$7 billion
Saleable returns total annually, or 2.1% of sales volume.
HDA

Of course, when we talk about reverse distribution, we aren’t talking about one single process, but rather a number of different functions. Essentially, though, reverse logistics providers help dispensers and wholesale distributors to manage their excess inventory.

While demand forecasting has improved in recent years, it is impossible to get the predictions right all the time, and there will often be unsold stock. This can be divided into two categories – saleable products, which could be redeployed elsewhere, and unsaleable products, which have reached the end of their commercial life or, less commonly, have been damaged or recalled.

According to HDA estimates, saleable returns total more than $7 billion annually and make up 2.1% of sales volume, comprising around 59 million units a year. Unsaleable returns cost more than $6 billion annually, or 1.5–2% of sales volume, and comprise 60–80 million units a year. However, since there are so many different stakeholders involved in reverse distribution, it’s hard to get a sense of the true figures.

A reverse-logistics provider will be able to move the saleable stock to elsewhere in the supply chain. They will also be able to manage the unsaleable returns, disposing of the products in a safe and eco-conscious manner.

“Reverse logistics providers in the pharmaceutical space typically handle unsaleable product,” says Fri. “They have developed specialised skills due to the complexity of the operating environment. Not only do they have to safely and securely handle products in a similar way to forward distributors, they must understand and apply the manufacturer’s returned goods policies to identify what products might be eligible for credit, and provide access to data and analytics to reduce future unsaleable volume.”

The logical logistics solution

It’s a challenging task and beyond the scope of most non-specialists. While some pharmacies and other stakeholders do take care of the job themselves, the vast majority choose to outsource. As of February 2019, there are 68 reverse-logistics providers registered to the DEA.

A good reverse-logistics provider will take care of multiple processes, freeing you up to focus on your core competencies. As the HDA report explains, their job includes product count and inspection, determining credit eligibility, invoicing the manufacturer and product disposition.

With regard to the latter, the requirements vary depending on the type of waste; for instance, whether it is a controlled substance, non-controlled substance or hazardous. The rules in this area are being constantly re-evaluated.

To give just one example, in 2016 the Environmental Protection Agency (EPA) proposed new rules around the handling of hazardous waste, with a view to streamlining the process. The final rule, signed in December 2018, is expected to save up to $15 million annually once it becomes effective in June. It will also prevent an estimated 1,600–2,300t of hazardous pharmaceutical waste from entering the waterways each year. Despite these benefits, it will pose new challenges for reverse distributors.

“The final rule fundamentally changes EPA’s longheld position on the point at which a pharmaceutical product is considered a solid waste under RCRA,” said attorneys at Foley & Lardner, speaking in January. “That change will create significant regulatory uncertainty and potential liability for entities in the pharmaceutical distribution chain that suddenly find themselves evaluating compliance with the new rule.”

As well as keeping abreast of changing regulations, reverse logistics providers also need to generate and handle prodigious amounts of data. This information – which may include product details, disposition details and product credit eligibility – is generally made available electronically, through online portals and websites.

68
Reverse-logistics providers registered to the DEA.
DEA

It is used by multiple groups across the supply chain, and may be used to inform future inventory management or accounting decisions.

It may be worth mentioning here that the concept of reverse distribution also applies at the level of the consumer. The FDA recommends that consumers and caregivers should remove expired or unused medicines from their homes as quickly as possible, to reduce the risk that someone might accidentally take (or intentionally misuse) the medicine.

While most medicines can be thrown in the household waste, or flushed down the toilet, takeback options are the preferred means of safe disposal. The DEA periodically hosts events where temporary collection points are set up in communities. There are also permanent collection points in certain pharmacies.

However, these types of practices fall under the banner of health and safety rather than commercial necessity. For pharma companies, and stakeholders in the supply chain, the more salient aspects of reverse distribution have to do with bulk inventory. The HDA estimates that around 80% of the units returned to reverse-logistics providers originate from dispensers, with the rest coming from wholesale distributors.

Soft return

Working within these parameters, their report recommends a few ways that reverse distribution can be made more efficient. Most obviously, improving inventory management would cut the amount of excess stock that needs returning in the first place. (The HDA estimates that up to 25% of dispenser inventory is nonproductive and may be considered excess inventory. It should be possible to reduce this proportion.)

Furthermore, better data-sharing practices would be helpful to trading partners, eliminating redundancies, while many manual processes would be cheaper if conducted electronically.

“The industry is always seeking ways to reduce costs and streamline processes,” explains Fri. “Access to comprehensive benchmarking data would help identify ways to make changes. Redundant product handling, where multiple reverse-logistics providers must handle certain products, has also been an issue.”

Of course, with the regulations in the area changing so quickly, today’s models of reverse distribution are likely to be subject to change. The HDA suggests that collaboration is key here, and that stakeholders can work together to avoid disruption. Especially at a time of such uncertainty, nobody in the pharma supply chain can afford to ignore these issues.

“Ultimately, the ability for saleable and unsaleable returns to move through the reverse distribution channel is critical because these products have value and the process reduces cost,” says Fri.

The HDA Foundation report is free to registered HDA website users. It was sponsored by two reverse distribution vendors, PharmaLink and Guaranteed Returns, and was based on interviews with key industry stakeholders as well as a survey of reverselogistics providers.