Inventory Management in Pharmaceutical Supply Chains

Operational success in the pharmaceutical industry is considerably dependent on effective inventory management. Successful inventory management ensures the on-time supply of medicines and medical products to patients and allows pharma companies to reduce product loss due to overstocking or understocking. However, as the global reach of pharma companies increases due to expansions, mergers & acquisitions, and partnerships, inventory management will become more challenging.

In the race to become the biggest, the most well-known, and the largest, pharma companies need to focus more on inventory management than production or even sales. The underlying reason is simple: inventory management decides whether a pharma company can provide the right product to the right customer at the right time. But how does this work? What’s the exact role of inventory management in pharmaceutical supply chains? 

Let’s explore insights with Pharma Now!

The Underlying Role of Inventory Management

Effective inventory management affords the following advantages to pharma companies:

It ensures accurate product supply.

Product supply is critical in the pharma industry because, ultimately, a patient’s health depends on it. Overstocking and understocking are two primary challenges pharma companies face in their quest to determine the accurate product supply. Overstocking can lead to product loss because overstocked products—be it in warehouses or pharmacies—can expire before being sold, or they can be damaged on shelves. By contrast, understocking can lead to stockouts, which means patients may not get the product when they need it. Consequently, both scenarios lead to financial loss for the pharma company. Hence, effective inventory management techniques are required to ensure the right quantity of products is made, transported and stored across all locations.

It ensures regulatory compliance.

Regulatory guidelines not only dictate how pharmaceutical products are manufactured but also how they are stored. Pharma companies—and, by extension, their suppliers and distributors—have to ensure all their products are stored under appropriate conditions at all times or face the consequences of regulatory non-compliance. Ineffective inventory management means there is a higher chance of failing to adhere to storage guidelines, which increases the chance of non-compliance and regulatory audits.

It increases transparency.

Effective inventory management ensures transparency across the supply chain by allowing companies to track products by batch and lot numbers. This simplifies the product recall process as the pharma company can easily track the distributors responsible for particular product batches. This transparency also benefits during regulatory audits. For example, if the company is audited after customer or healthcare professional (HCP) complaints because their product is not of the desired quality. In that case, the company can easily determine whether the quality loss was a result of poor manufacturing or due to distributor negligence, which further allows the company to black-list distributors who don’t follow guidelines.

These are the three most basic (and, by extension, well-known) advantages of inventory management in pharmaceutical supply chains. Ultimately, the role of inventory management is simple:

• Inventory management ensures an uninterrupted supply of products across the supply chain.
• Effective inventory management ensures all products maintain their quality and efficacy during transportation from the manufacturing plant to patients.
• Inventory management reduces financial loss by avoiding product expiry and shortages.
• Successful inventory management ensures the product can be tracked throughout its cycle—from the manufacturing plant and batch to the patient or HCP who purchased it.

However, despite the simple role it plays in pharma supply chains, inventory management is riddled with a lot of challenges. Here are some key challenges faced by pharma companies in inventory management. Don’t worry, we’ve provided a list of solutions as well!

How Does Inventory Management Work in the Real World?

Most pharma companies use either of two approaches: Just-in-Time (JIT) or buffer inventory approaches. Here’s how they’re different:

Just-in-time inventory management: In the JIT strategy, goods are ordered and received only as needed for production/sales. It uses accurate demand forecasting to predict the amount of goods required within a certain period. Hence, extra goods won’t have to be produced or stored, reducing inventory costs and minimizing waste.

Buffer inventory management: In the buffer strategy, extra goods are stored to protect the company against unexpected demand or supply changes. This strategy allows the company to create a cushion to prevent stockouts. It reduces the risk of production stoppage and ensures product availability for customers, which improves customer satisfaction.

However, both strategies have different disadvantages. For example, the JIT strategy makes the company sensitive to market demand. If the company is unable to predict an unexpected increase in demand, they may not be able to cope with the market pressures. By contrast, the buffer strategy increases investment in inventory and may lead to overstocking if not appropriately managed. 

This is only the tip of the iceberg. Companies have to face many other inventory management challenges!

Key Challenges in Inventory Management & Their Solutions

The pharmaceutical industry faces unique inventory management challenges due to the rigid regulatory environment and product importance. Here are some key challenges pharma companies tackle in their efforts to realize successful inventory management.

Expiry and waste management

The demand for pharmaceutical products is difficult to track because it depends primarily on patients and diseases. An unexpected outbreak can rapidly double, triple or even quadruple the quantity of product required. Hence, pharmaceutical companies need to accurately track their production schedule and inventory (in their warehouses as well as that shipped off to distributors and pharmacies). However, managing such a comprehensive inventory while ensuring that the available product quantity is just right is challenging. As discussed above, overstocking and understocking can have serious consequences.

Solutions for successful inventory management:

• Pharma companies must enforce first-expired-first-out (FEFO) policies across the supply chain. These policies can reduce product wastage by ensuring distributors are specifically pushing products nearing expiry. The FEFO policy is generally implemented at the company’s warehouses and storage. However, implementing it with distributors or external partners will ensure products don’t go to waste from the point of view of sustainability.
• Implement tech-driven inventory monitoring. Many companies are implementing these technologies, as we’ve discussed in our previous article. For example, the Internet of Things (IoT)-enabled monitoring devices can track and monitor inventory. These devices can be integrated in warehouses to keep track of how many units of each product are available. AI and predictive analytics can be used to determine whether overstocking is likely.

Regulatory compliance

As mentioned previously, pharma companies and their associates (suppliers, distributors, and pharmacies) need to adhere to strict storage guidelines. However, the implementation of these guidelines while managing large inventories is challenging, and even one product falling through the crack can have serious consequences, like batch recalls. Furthermore, the storage of sensitive products during transportation is challenging because exposure to the wrong stimulus, temperature, or even humidity can result in product loss and, by extension, expenditure. However, maintaining these conditions during transport is also expensive. Cold chain failures are often associated with both high costs and product loss.

Solutions for successful inventory management:

• Implement the Internet of Things (IoT)-enabled monitoring devices to track and monitor storage conditions. These devices can be integrated not only in warehouses but also in transport devices. Remote monitoring can be used to ensure the required conditions are maintained throughout, and they can also be used to track failures and assess the severity of these failures. The data from these systems can also be used to identify potential hurdles faced every time; for example, if the condition is not maintained for the exact same shipment type, solutions can be integrated.
• Develop contingency plans. Transportation and storage or large inventory are challenges, and realistically, there’s no way to avoid all problems. However, contingency plans can be created. For example, in warehouses or storage units, backup freezers or humidifiers can be installed. By contrast, alternative routes to the same location can be developed during transport, or alternative partners willing to take last-minute products can be built. Such contingency plans can avoid product loss in extreme scenarios.

Counterfeit medication

Pharma companies have to deal with a significant risk of counterfeit drugs. In 2023, there were approximately 2,300 counterfeit incidents concerning pharmaceutical products in North America alone. In the same year, Asia-Pacific noted 1,900 counterfeit incidents concerning pharmaceutical products. Poor inventory management increases the risk of these incidents because it is easier to sneak in counterfeit medications. The sale of counterfeit medication results in safety issues and loss of brand trust among patients.

Solutions for successful inventory management:

• Pharma companies can integrate blockchain technology to record every transaction regarding the product, from the raw materials purchased via the supplier to the pharmacy that made the sale. Blockchain creates a ledger in which stakeholders have to verify the authenticity of the product at every stage. This simplifies the process of identifying at which point the product was switched. This technology has already been implemented by several companies. Pfizer, McKesson Corporation, AmerisourceBergen Corporation, and Premier Inc. integrated blockchain in their supply chains as far back as 2019!
• Serialization can also be used to track products. It assigns a unique code to each product, allowing the accurate tracking and authentication of all products across the supply chain. For example, QR codes and RFID tags can be used for serialization, and all stakeholders can scan them to verify that the correct product has been received and sold by comparing them with a centralized database managed by the pharma company.

Cold chain considerations

Cold chain inventory management is quite critical and challenging. Such products are sensitive to environmental stimulus and even minor deviations can result in cold chain failures. Furthermore, these products must also adhere to strict regulatory conditions, which makes inventory management more challenging. Finally, inventory management for cold chains is expensive because of the specialized equipment required to store and transport products.

Solutions for successful inventory management:

Implement real-time tech-driven inventory management solutions like IoT that can easily predict or inform you of cold chain failures. These solutions can also help pharma companies better comply with regulatory requirements for the transportation and storage of cold chain products. Other technologies like blockchain can also be used to prevent tampering with inventory logs, and predictive analytics can be used to identify demand, which can be used to tune production, reducing inventory costs.

What’s Next?

Successful inventory management remains the backbone of pharma supply chains but is—and will probably always be—filled with challenges. The reason is simple: you’re dealing with products that save people’s lives every day, and to save these lives, the product has to have the exact efficacy, safety, quality and quantity desired. Maintaining all of this while predicting demand for upcoming months and manufacturing is challenging. This article has highlighted the underlying role of inventory management in pharmaceutical supply chains. We’ve also discussed some key challenges faced in inventory management and provided solutions that will mitigate or even overcome these problems. But, at the end of the day, we’re not the only experts who can provide solutions. If you have any additional solutions we’ve missed out on, don’t forget to write to us.

FAQs

How pharma companies manage inventory risks?

Pharma companies can manage inventory risks by implementing cutting-edge technologies like IoT and AI to simplify inventory management. This will help them identify demand changes and adapt to them.

Which technologies can improve pharma inventory?

Specialized inventory management tools, AI, predictive analytics, IoT, blockchain ledgers, and ML can be used to improve pharma inventory management.

Can AI be used in effective inventory management in pharma?

Yes, AI can be used to effectively manage inventories. AI can enhance efficiency, reduce costs, improve accuracy, and ensure compliance with regulations.