Executive Briefings

Europe is a Pain for Distribution of Consumer Health Products

Europe's widely differing regulations of the consumer health product industry pose significant obstacles to centralized distribution. For companies trying to build efficiencies into their supply chains, such as health care giant Novartis, it's a real Maalox moment.

The economic unification of Europe was supposed to foster the easy distribution of product across borders. But for companies in the consumer health sector, those borders are still very much in place. Even an industry giant, such as Switzerland's Novartis, finds it impossible to centralize physical distribution within the European Union, let alone beyond its boundaries. Differences in language, labeling requirements and whether products must be sold only in pharmacies are among the problems that give distributors headaches. The health care industry presents "one of the worst cases for a unified Europe," said Wim Verschelden, supply-chain manager for the Benelux countries with Novartis Consumer Health S.A.-N.V.

Centralizing logistics within Europe is hard enough for consumer-products companies in general. Stumbling blocks include a natural aversion to change within an organization, and the paucity of information systems that can manage accounts in multiple countries, said Mark Smale, vice president of marketing-Europe with Industri-Matematik International, the Swedish provider of supply-chain software.

But Novartis and its competitors face a series of unique problems that prevents them from taking full advantage of European unification, at least for now. In addition to the sheer size of the market, they must cope with widely varying regulations in such areas as product content.

Rethinking Logistics
Novartis would appear to be a likely candidate for a streamlining of its logistics program. The product of a merger between Ciba-Geigy Ltd. and Sandoz Pharma Ltd. in 1997, it has since been searching for ways to meld those entities into a coherent global organization. At the same time, it has been restructuring internally. The nutrition and consumer health divisions were merged in January of this year. That led to a rethinking of many aspects of the unit's manufacturing and logistics strategy, Verschelden said.

"The health care industry presents one of the worst cases for a unified Europe."
- Wim Verschelden of Novartis Consumer Health S.A.-N.V.

Consumer Health accounts for a relatively modest part of the Novartis portfolio, which is a dominant player in the fields of agribusiness, biotechnology and life sciences. Yet the smaller unit manufactures some of the best-known brands in the world, including Maalox, ExLax, Gas-X and Triaminic cough medicine. Other products include Nicotinell, the stop-smoking drug; Euceta, a skin creme for bruises, bites and sunburns; Fenistil, an allergy drug; and Theraflu, a cold remedy.

In all, Consumer Health operates through 33 affiliates in 29 countries. It controls some 70 products on the over-the-counter (OTC) side, and around 100 SKUs in nutrition brands.

The merger of consumer health and nutrition products has triggered a shift in corporate offices. Headquarters for Consumer Health, including the management of global and centralized services, has been moved from Brussels to Breda in the Netherlands. From there, Verschelden labors to match product supply with customer demand for multiple countries. Brussels remains a branch office for sales and distribution of product within Belgium.

Still, the merger didn't open up a wealth of opportunities for combining two sets of logistics functions. The supply chains for OTC and nutrition products are distinctly different, Vershelden said. The two sectors conform to different ISO and other kinds of quality standards. And while there is some customer overlap, varying government regulations prevent Novartis from creating a single pipeline for the Consumer Health division.

The Benelux countries - Belgium, the Netherlands and Luxembourg - would seem to offer the best opportunity for regional centralization. Yet not even those closely affiliated neighbors have managed to harmonize their regulation of consumer health products. In Belgium, said Verschelden, over-the-counter drugs can be sold only in pharmacies. In the Netherlands, they fill the shelves of warehouse-sized chain stores. Belgium also has tougher standards for product certification prior to distribution. Luxembourg leans toward a similarly strict regime.

There is a move afoot to standardize regulations within the EU, but it relates only to new drugs. As old products die off, their replacements increasingly will find a single regime for registration. But that scenario remains some years in the future.

Novartis has achieved a degree of centralization, particularly in manufacturing. Three out of 10 factories in Europe have been closed since the company's creation, Verschelden said. In addition, it has set up two main Benelux distribution centers in the Flanders region of Belgium, one in Turnhout and the other in Huizingen. The first handles OTC for the Netherlands and basic nutrition products both for the Netherlands and Belgium. The second is devoted to Belgian OTC products and specific nutrition items, mostly for distribution to pharmacies. Luxembourg is largely supplied through Huizingen.

Novartis did investigate the possibility of centralizing logistics during the merger of Consumer Health and Nutrition. One scenario called for a single warehouse in Germany that would service that country as well as Benelux. Another might cover France, Italy and Spain.

The 'Harmonized' Market
In the end, the company decided that Europe was too vast, and its various consumer markets too diverse, to make the plan feasible.

Economic unification, along with the removal of customs formalities, couldn't make up for the vast number of languages and product requirements that characterize the "harmonized" European market.

Product packaging, both inside and out, remains a major obstacle. Novartis can squeeze three or four languages into its user instructions and indications. "Beyond that, you'd need either extremely small print or a book," said Verschelden. Belgium alone requires three languages - Flemish, French and German.

What's more, different countries have vastly different rules on labeling content. Belgium doesn't require manufacturers to list the active ingredients of cosmetic products; Luxembourg does.

"Organizations are looking at the idea of managing Europe almost as a singleentity, but the reality hasn't been there up to this point."
- Mark Smale of Industri-Matematik

Depending on where it is sold, the same product may be marketed under different names. Or a single familiar brand name may contain different ingredients. For example, a product sold over the counter in Belgium might be classified as a pharmaceutical drug in Luxembourg because its active ingredients exceed a certain percentage of the whole.

That state of affairs extends to many consumer products sold globally; even the contents of a box of cornflakes differs between the United Kingdom and Italy, Smale noted. But with governments insisting on tight control over pharmaceuticals, the differences in that sector are especially critical. And while some locations are turning out multiple versions of a single product, Novartis prefers not to take on the headache of total centralization - with the potential for degrading customer service.

When the dust from the merger settles, Novartis Consumer Health will likely retain two distribution centers in the Benelux region, along with two each in Germany, Italy, France, and the United Kingdom. Two facilities in Spain and Portugal will have been reduced to one. Switzerland will have one for distribution and one for production. Denmark and Finland will be served by one or two others. Still another distribution network will be maintained for Eastern Europe, which currently is receiving product directly from Switzerland. For the most part, each warehouse will specialize in one distribution channel, Verschelden said.

Things are likely to get easier in years to come, as the EU expands in size and absorbs its nascent common currency, the euro. Until then, Novartis and others will continue to distribute throughout Europe on a semi-piecemeal basis.

"Organizations are looking at the idea of managing Europe almost as a single entity," said Smale, "but the reality hasn't been there up to this point."

Government orders to keep tabs on drugs creates
logistics hurdles for distributors
The worldwide movement of pharmaceuticals and over-the-counter drugs is fraught with obstacles for logistics managers. Health-care products tend to be expensive, delicate and highly regulated - with precious little margin of error for missed deliveries or damaged goods.

It's no different in the U.S. Government licensing, required for the purchase and movement of all pharmaceuticals, falls into two categories, according to Ed Henne, eastern regional vice president of sales with Renaissance Software Inc. in Lake Success, New York. Controlled substances, such as heroin, morphine and marijuana, require permission from the Drug Enforcement Agency. The more common prescription drugs are licensed by the various states. In each case, licenses bear expiration dates and must be periodically renewed.

The drugs themselves, both prescription and over-the-counter (OTC), also carry expiration dates and unique lot numbers. They help manufacturers and distributors to control drug potency, while expediting recalls of faulty product. Henne said drug wholesalers are mandated by federal law to keep lot number data and sales histories on file for seven years.

The need to track product by lot number and expiration date extends throughout the supply chain. Warehouse managers must know exactly which product is to be stored or shipped. Often the process is dictated by algorithms built into sophisticated warehouse-management software. Drugs moving under DEA license, meanwhile, need to be caged and segregated from other items in the warehouse. They can be handled only by certified individuals.

Wholesalers and distributors also keep close tabs on goods in transit. In the U.S., the expedited forwarder BAX Global can trace domestic shipments on a real-time basis, said John Trutt, global account manager in Valley Stream, New York.

Globally, the task is more difficult. Trutt said shippers lack similar capabilities beyond U.S. borders because of the number of service partners typically involved in an international movement. Cargo 2000, the industry-wide program for standardizing the electronic transfer of data between forwarders and airlines, should solve that problem once participants' work is complete, he said.

The sheer volume of many drug-distribution systems presents its own set of challenges. Norsk Medisinaldepot A/S (NMD), Norway's largest whole distributor of drugs and hospital supplies, carries 2,500 drug types and 8,000 hospital-supply products. That number is expected to climb by 50 percent under a new pan-European trade agreement that sets low tariff rates for non-members of the European Union. Already, NMD processes more than 15 million order lines each year.

In the high-service world of pharmaceuticals, rapid distribution is essential. Software purchased by NMD from Industri-Matematik International allows the distributor's warehouses to process 100,000 transactions per hour. The Netherlands-based Interpharm Group employs similar software to guarantee product delivery to retail chemists within 24 hours, and to pharmacies within four hours.

Government reporting rules present another potential headache for drug wholesalers, distributors and retailers. Often they must submit periodic reports on exactly what was purchased and by whom.

The detailed information allows DEA to identify suspicious orders or controlled substances. For DEA-controlled substances in transit, the carrier or forwarder must obtain signatures each time product changes hands.

Global supply chains are faced with government regulations that can vary sharply from country to country - even within the supposedly harmonized European Union. Regulations tend to differ as to how consumer-health products must be classified, labeled and sold to the end user, said Larry Zylstra, vice president of Benelux with Industri-Matematik International.

Supply chains to various countries may differ as well, particularly where separate distribution channels are required for pharmaceuticals (sold by apothecaries or chemists) and OTC (sold by pharmacists or druggists). No such distinction exists in the U.S.

In Europe, said Zylstra, pharmaceutical and OTC suppliers are torn between two apparently conflicting requirements: the need to reduce distribution costs, so that drugs paid for by government programs are cheaper, and the need to get product to the buyer at a moment's notice. A drug manufacturer seeking a license must demonstrate that it can supply all hospitals in a particular country within a specified time. It also must prove its ability to continue distributing product in the event of an infrastructure breakdown, such as a power outage.

Such reliability tends, of course, to drive distribution costs higher. To prevent this from happening, many shippers rely on the operating efficiencies and scale economies of third-party logistics providers. A few 3PLs have become experts in the movement of time-sensitive pharmaceuticals.

Returns are an everyday reality of the consumer-health supply chain. While some expired products are simply discarded by retailers, others are returned to the seller on a regular basis.

Certain distributors and wholesalers permit partial returns, even the unused portions of single bottles by pharmacists. The system allows both retailers and the government to keep track of product throughout its lifecycle. It also presents fresh opportunities for logistics chaos within companies that lack the proper controls and monitoring capabilities.

A substantial number of drugs are highly perishable and require temperature-controlled handling. That might mean refrigeration, freezing or the maintenance of product at ambient temperatures while in transit. Trutt said forwarders must be prepared to rush a product into protected storage in the event of an airport closure - something that occurs with regularity in cold climates during winter.

Solutions to the problem of temperature control include the Envirotainer, a special container for the movement of cargo by air, and airlines' own refrigerated units, said Trutt. Dry ice is another popular means of protecting temperature-sensitive drugs.

Medical test kits are especially fragile. Most permit a temperature tolerance of no more than five to seven degrees, said Trutt. Beyond that, the kits could show incorrect results, leading to faulty diagnoses. Drug distribution includes some highly specialized service niches. One is the supplying of limited quantities for clinical trials.

Norwalk, Conn.-based International Pharmaceutical Research Inc. sets up and evaluates the safety and integrity of trials on a global basis, according to company president Peter A. Fratarcangelo. Clinical trials entail many of the same processes - secure packaging, labeling, temperature control and the tracing of lot numbers - as the distribution of drugs that already are on the market, said Fratarcangelo. But companies that specialize in the movement of trial drugs face additional challenges. They must keep close tabs on the doctors who are participating in the trials.

Every single dosage must be accounted for, right down to its use, return or disposal. Software programs may trigger automatic reorders for test sites that have run out of the drug, or have enrolled additional patients in testing.

That same level of care and controllability exists across all pharmaceutical supply chains. Logistics providers are under relentless pressure to maintain high levels of service. Said Henne: "The single biggest issue with pharmaceuticals, aside from the logistics of handling product, is meeting customer requirements."

The economic unification of Europe was supposed to foster the easy distribution of product across borders. But for companies in the consumer health sector, those borders are still very much in place. Even an industry giant, such as Switzerland's Novartis, finds it impossible to centralize physical distribution within the European Union, let alone beyond its boundaries. Differences in language, labeling requirements and whether products must be sold only in pharmacies are among the problems that give distributors headaches. The health care industry presents "one of the worst cases for a unified Europe," said Wim Verschelden, supply-chain manager for the Benelux countries with Novartis Consumer Health S.A.-N.V.

Centralizing logistics within Europe is hard enough for consumer-products companies in general. Stumbling blocks include a natural aversion to change within an organization, and the paucity of information systems that can manage accounts in multiple countries, said Mark Smale, vice president of marketing-Europe with Industri-Matematik International, the Swedish provider of supply-chain software.

But Novartis and its competitors face a series of unique problems that prevents them from taking full advantage of European unification, at least for now. In addition to the sheer size of the market, they must cope with widely varying regulations in such areas as product content.

Rethinking Logistics
Novartis would appear to be a likely candidate for a streamlining of its logistics program. The product of a merger between Ciba-Geigy Ltd. and Sandoz Pharma Ltd. in 1997, it has since been searching for ways to meld those entities into a coherent global organization. At the same time, it has been restructuring internally. The nutrition and consumer health divisions were merged in January of this year. That led to a rethinking of many aspects of the unit's manufacturing and logistics strategy, Verschelden said.

"The health care industry presents one of the worst cases for a unified Europe."
- Wim Verschelden of Novartis Consumer Health S.A.-N.V.

Consumer Health accounts for a relatively modest part of the Novartis portfolio, which is a dominant player in the fields of agribusiness, biotechnology and life sciences. Yet the smaller unit manufactures some of the best-known brands in the world, including Maalox, ExLax, Gas-X and Triaminic cough medicine. Other products include Nicotinell, the stop-smoking drug; Euceta, a skin creme for bruises, bites and sunburns; Fenistil, an allergy drug; and Theraflu, a cold remedy.

In all, Consumer Health operates through 33 affiliates in 29 countries. It controls some 70 products on the over-the-counter (OTC) side, and around 100 SKUs in nutrition brands.

The merger of consumer health and nutrition products has triggered a shift in corporate offices. Headquarters for Consumer Health, including the management of global and centralized services, has been moved from Brussels to Breda in the Netherlands. From there, Verschelden labors to match product supply with customer demand for multiple countries. Brussels remains a branch office for sales and distribution of product within Belgium.

Still, the merger didn't open up a wealth of opportunities for combining two sets of logistics functions. The supply chains for OTC and nutrition products are distinctly different, Vershelden said. The two sectors conform to different ISO and other kinds of quality standards. And while there is some customer overlap, varying government regulations prevent Novartis from creating a single pipeline for the Consumer Health division.

The Benelux countries - Belgium, the Netherlands and Luxembourg - would seem to offer the best opportunity for regional centralization. Yet not even those closely affiliated neighbors have managed to harmonize their regulation of consumer health products. In Belgium, said Verschelden, over-the-counter drugs can be sold only in pharmacies. In the Netherlands, they fill the shelves of warehouse-sized chain stores. Belgium also has tougher standards for product certification prior to distribution. Luxembourg leans toward a similarly strict regime.

There is a move afoot to standardize regulations within the EU, but it relates only to new drugs. As old products die off, their replacements increasingly will find a single regime for registration. But that scenario remains some years in the future.

Novartis has achieved a degree of centralization, particularly in manufacturing. Three out of 10 factories in Europe have been closed since the company's creation, Verschelden said. In addition, it has set up two main Benelux distribution centers in the Flanders region of Belgium, one in Turnhout and the other in Huizingen. The first handles OTC for the Netherlands and basic nutrition products both for the Netherlands and Belgium. The second is devoted to Belgian OTC products and specific nutrition items, mostly for distribution to pharmacies. Luxembourg is largely supplied through Huizingen.

Novartis did investigate the possibility of centralizing logistics during the merger of Consumer Health and Nutrition. One scenario called for a single warehouse in Germany that would service that country as well as Benelux. Another might cover France, Italy and Spain.

The 'Harmonized' Market
In the end, the company decided that Europe was too vast, and its various consumer markets too diverse, to make the plan feasible.

Economic unification, along with the removal of customs formalities, couldn't make up for the vast number of languages and product requirements that characterize the "harmonized" European market.

Product packaging, both inside and out, remains a major obstacle. Novartis can squeeze three or four languages into its user instructions and indications. "Beyond that, you'd need either extremely small print or a book," said Verschelden. Belgium alone requires three languages - Flemish, French and German.

What's more, different countries have vastly different rules on labeling content. Belgium doesn't require manufacturers to list the active ingredients of cosmetic products; Luxembourg does.

"Organizations are looking at the idea of managing Europe almost as a singleentity, but the reality hasn't been there up to this point."
- Mark Smale of Industri-Matematik

Depending on where it is sold, the same product may be marketed under different names. Or a single familiar brand name may contain different ingredients. For example, a product sold over the counter in Belgium might be classified as a pharmaceutical drug in Luxembourg because its active ingredients exceed a certain percentage of the whole.

That state of affairs extends to many consumer products sold globally; even the contents of a box of cornflakes differs between the United Kingdom and Italy, Smale noted. But with governments insisting on tight control over pharmaceuticals, the differences in that sector are especially critical. And while some locations are turning out multiple versions of a single product, Novartis prefers not to take on the headache of total centralization - with the potential for degrading customer service.

When the dust from the merger settles, Novartis Consumer Health will likely retain two distribution centers in the Benelux region, along with two each in Germany, Italy, France, and the United Kingdom. Two facilities in Spain and Portugal will have been reduced to one. Switzerland will have one for distribution and one for production. Denmark and Finland will be served by one or two others. Still another distribution network will be maintained for Eastern Europe, which currently is receiving product directly from Switzerland. For the most part, each warehouse will specialize in one distribution channel, Verschelden said.

Things are likely to get easier in years to come, as the EU expands in size and absorbs its nascent common currency, the euro. Until then, Novartis and others will continue to distribute throughout Europe on a semi-piecemeal basis.

"Organizations are looking at the idea of managing Europe almost as a single entity," said Smale, "but the reality hasn't been there up to this point."

Government orders to keep tabs on drugs creates
logistics hurdles for distributors
The worldwide movement of pharmaceuticals and over-the-counter drugs is fraught with obstacles for logistics managers. Health-care products tend to be expensive, delicate and highly regulated - with precious little margin of error for missed deliveries or damaged goods.

It's no different in the U.S. Government licensing, required for the purchase and movement of all pharmaceuticals, falls into two categories, according to Ed Henne, eastern regional vice president of sales with Renaissance Software Inc. in Lake Success, New York. Controlled substances, such as heroin, morphine and marijuana, require permission from the Drug Enforcement Agency. The more common prescription drugs are licensed by the various states. In each case, licenses bear expiration dates and must be periodically renewed.

The drugs themselves, both prescription and over-the-counter (OTC), also carry expiration dates and unique lot numbers. They help manufacturers and distributors to control drug potency, while expediting recalls of faulty product. Henne said drug wholesalers are mandated by federal law to keep lot number data and sales histories on file for seven years.

The need to track product by lot number and expiration date extends throughout the supply chain. Warehouse managers must know exactly which product is to be stored or shipped. Often the process is dictated by algorithms built into sophisticated warehouse-management software. Drugs moving under DEA license, meanwhile, need to be caged and segregated from other items in the warehouse. They can be handled only by certified individuals.

Wholesalers and distributors also keep close tabs on goods in transit. In the U.S., the expedited forwarder BAX Global can trace domestic shipments on a real-time basis, said John Trutt, global account manager in Valley Stream, New York.

Globally, the task is more difficult. Trutt said shippers lack similar capabilities beyond U.S. borders because of the number of service partners typically involved in an international movement. Cargo 2000, the industry-wide program for standardizing the electronic transfer of data between forwarders and airlines, should solve that problem once participants' work is complete, he said.

The sheer volume of many drug-distribution systems presents its own set of challenges. Norsk Medisinaldepot A/S (NMD), Norway's largest whole distributor of drugs and hospital supplies, carries 2,500 drug types and 8,000 hospital-supply products. That number is expected to climb by 50 percent under a new pan-European trade agreement that sets low tariff rates for non-members of the European Union. Already, NMD processes more than 15 million order lines each year.

In the high-service world of pharmaceuticals, rapid distribution is essential. Software purchased by NMD from Industri-Matematik International allows the distributor's warehouses to process 100,000 transactions per hour. The Netherlands-based Interpharm Group employs similar software to guarantee product delivery to retail chemists within 24 hours, and to pharmacies within four hours.

Government reporting rules present another potential headache for drug wholesalers, distributors and retailers. Often they must submit periodic reports on exactly what was purchased and by whom.

The detailed information allows DEA to identify suspicious orders or controlled substances. For DEA-controlled substances in transit, the carrier or forwarder must obtain signatures each time product changes hands.

Global supply chains are faced with government regulations that can vary sharply from country to country - even within the supposedly harmonized European Union. Regulations tend to differ as to how consumer-health products must be classified, labeled and sold to the end user, said Larry Zylstra, vice president of Benelux with Industri-Matematik International.

Supply chains to various countries may differ as well, particularly where separate distribution channels are required for pharmaceuticals (sold by apothecaries or chemists) and OTC (sold by pharmacists or druggists). No such distinction exists in the U.S.

In Europe, said Zylstra, pharmaceutical and OTC suppliers are torn between two apparently conflicting requirements: the need to reduce distribution costs, so that drugs paid for by government programs are cheaper, and the need to get product to the buyer at a moment's notice. A drug manufacturer seeking a license must demonstrate that it can supply all hospitals in a particular country within a specified time. It also must prove its ability to continue distributing product in the event of an infrastructure breakdown, such as a power outage.

Such reliability tends, of course, to drive distribution costs higher. To prevent this from happening, many shippers rely on the operating efficiencies and scale economies of third-party logistics providers. A few 3PLs have become experts in the movement of time-sensitive pharmaceuticals.

Returns are an everyday reality of the consumer-health supply chain. While some expired products are simply discarded by retailers, others are returned to the seller on a regular basis.

Certain distributors and wholesalers permit partial returns, even the unused portions of single bottles by pharmacists. The system allows both retailers and the government to keep track of product throughout its lifecycle. It also presents fresh opportunities for logistics chaos within companies that lack the proper controls and monitoring capabilities.

A substantial number of drugs are highly perishable and require temperature-controlled handling. That might mean refrigeration, freezing or the maintenance of product at ambient temperatures while in transit. Trutt said forwarders must be prepared to rush a product into protected storage in the event of an airport closure - something that occurs with regularity in cold climates during winter.

Solutions to the problem of temperature control include the Envirotainer, a special container for the movement of cargo by air, and airlines' own refrigerated units, said Trutt. Dry ice is another popular means of protecting temperature-sensitive drugs.

Medical test kits are especially fragile. Most permit a temperature tolerance of no more than five to seven degrees, said Trutt. Beyond that, the kits could show incorrect results, leading to faulty diagnoses. Drug distribution includes some highly specialized service niches. One is the supplying of limited quantities for clinical trials.

Norwalk, Conn.-based International Pharmaceutical Research Inc. sets up and evaluates the safety and integrity of trials on a global basis, according to company president Peter A. Fratarcangelo. Clinical trials entail many of the same processes - secure packaging, labeling, temperature control and the tracing of lot numbers - as the distribution of drugs that already are on the market, said Fratarcangelo. But companies that specialize in the movement of trial drugs face additional challenges. They must keep close tabs on the doctors who are participating in the trials.

Every single dosage must be accounted for, right down to its use, return or disposal. Software programs may trigger automatic reorders for test sites that have run out of the drug, or have enrolled additional patients in testing.

That same level of care and controllability exists across all pharmaceutical supply chains. Logistics providers are under relentless pressure to maintain high levels of service. Said Henne: "The single biggest issue with pharmaceuticals, aside from the logistics of handling product, is meeting customer requirements."