Distribution and Logistics

Submitted To: Prof. Asif Zameer

Submitted By: Group 1 FMG-18Y

Akshat Vaid (91004)
Ankur Sharma (91008)
Darrick Arora (91015)
Kuldeep Indeevar (91027)
Manish Kumar Verma (91030)
Nikhil Soni (91038)
Table of Contents
Acknowledgement ........................................................................................................................................ 3
1. Introduction .............................................................................................................................................. 4
2. Profile of the Global Pharmaceutical Industry .......................................................................................... 5
2.1 Indian Pharmaceutical Industry .......................................................................................................... 5
3. The Distribution chain ............................................................................................................................... 6
4. No. of players at each level ....................................................................................................................... 8
5. Role of each intermediary ......................................................................................................................... 8
5.1 Central Warehouse ............................................................................................................................. 8
5.2 Distributors ......................................................................................................................................... 8
5.3 Wholesalers/Stockist .......................................................................................................................... 9
5.4 Sub-Stockist......................................................................................................................................... 9
5.5 Hospitals.............................................................................................................................................. 9
5.6 Retailers .............................................................................................................................................. 9
6. Territory design in NCR ........................................................................................................................... 10
7. Margins at each level .............................................................................................................................. 10
8. Coverage plan followed by distributors .................................................................................................. 11
9. Infrastructure required by distributors ................................................................................................... 11
10. Payment/credit terms given to distributors by company ..................................................................... 12
11. Payment/credit terms given by distributors in the market .................................................................. 12
12. Major problems faced by Distributors .................................................................................................. 12
13. Major points of conflict......................................................................................................................... 12
14. Channel motivation ............................................................................................................................... 12
15. Logistics/Supply Chain Network............................................................................................................ 13
16. Alternative distribution chains.............................................................................................................. 15
17. Opportunities/Issues Identified ............................................................................................................ 16
18. Conclusion ............................................................................................................................................. 18
19. Recommendations ................................................................................................................................ 19
20. References............................................................................................................................................ 19
2

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

Acknowledgement
Any project being done requires the help and support of different people, who through their experience
and guidance show us the correct path and keep guiding us with the correct process.

Thus, we would like to express our gratitude for the help and guidance of Mr. Sanjay Kakkar from
Kashchem Pharmaceuticals (Distributor).

Our acknowledgement extends to our Faculty Prof. Asif Zameer whose expert guidance and knowledge
helped us in getting through with the project successfully.

Date: 10th Sep 2010

Place: New Delhi

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

1. Introduction
Company Profile

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated, research based,
international pharmaceutical company, producing a wide range of quality, affordable generic medicines,
trusted by healthcare professionals and patients across geographies. Ranked amongst the top 10 global
generic pharmaceutical companies, Ranbaxy today has a presence in 23 of the top 25 pharmaceutical
markets of the world. The Company has a global footprint in 49 countries, world-class manufacturing
facilities in 11 countries and serves customers in over 125 countries.

In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies,
Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The
combined entity now ranks among the top 15 pharmaceutical companies, globally. The transformational
deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global
reach and in its capabilities in drug development and manufacturing.

Vision & Aspirations

Ranbaxy is driven by its vision to achieve significant business in proprietary prescription products by
2012 with a strong presence in developed markets. The Company aspires to be amongst the Top 5 global
generic players and aims at achieving global sales of US $5 Bn by 2012.

Strategy

Ranbaxy is focused on increasing the momentum in the generics business in its key markets through
organic and inorganic growth routes. Growth is well spread across geographies with focus on emerging
markets The Company continues to evaluate acquisition opportunities in India, emerging and developed
markets to strengthen its business and competitiveness. Ranbaxy has forayed into high growth potential
segments like Biologics, Oncology and injectables. These new growth areas will add significant depth to
the existing product pipeline.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

2. Profile of the Global Pharmaceutical Industry
The global pharmaceutical industry is one of the richest and most innovative in the world with revenues
of approximately $420 billion in 2003. The lifeblood of the industry flows from its research and
development efforts (R&D) with an annual investment of $49.3 billion, or 10 to 15 percent of total
revenues. As the world becomes increasingly globalized the pharmaceutical industry must respond to
emerging challenges. Currently, the industry faces expiring patents, drying pipelines, lower returns on
investment, urgency to introduce new drugs in a timely manner, and an increased need to access broad
patient populations. This stark reality has prompted a wave of off shoring by top multinational firms.
This section examines the current levels of global pharmaceutical employment and off shoring.

2.1 Indian Pharmaceutical Industry

India is the world’s largest producer of generic anti-AIDS drugs and its overall generics industry totals
more than $4 billion. India’s pharmaceutical industry supplies 85 percent of its domestic market and 5
generates approximately $900 million a year from sales in India alone. These figures convey the
importance India’s pharmaceutical sector has attained. India’s prominent pharmaceutical companies
have already achieved a degree of sophistication that surpasses that needed to simply to perform basic

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

tasks. The Indian pharmaceutical industry is welcoming working relationships with leading global firms.
For example, Ranbaxy recently formed an agreement to work with GlaxoSmithKline to commercialize
compounds they develop together, which is interesting because the two were locked into a patent
lawsuit just a few years ago. Deloitte commented on the Indian pharmaceutical industry, stating:

Prospects for the Indian pharmaceutical industry will be bright if it can move beyond the
commodity production model and share in the significant financial benefits stemming
from co-development and ownership of new, patented product.”

At the moment, CROs assume the largest portion of offshore tasks. As more tasks are outsourced, CROs
importance will continue to grow.

3. The Distribution chain

India is a geographically diverse country with extreme climates that make distribution a critical function.
The long channel of distribution and high incidence of brand substitution makes it mandatory for a
company to make all its stock keeping units (SKUs) available at all levels at all times. In India, most
brands have generic versions of drugs and retailers can usually obtain higher margins with generics than
for branded products. To reduce risks of substitution, innovator companies must make sure their
products are made available to the stockist and retail shops.

Drug distribution in India has witnessed a paradigm shift. Before 1990, pharmaceutical companies used
a different distribution system, in which they established their own depots and warehouses that now
have been replaced by clearing and forwarding agents (CFAs). These organizations are primarily
responsible for maintaining storage (stock) of the company’s products and forwarding SKUs to the
stockist on request. Most companies keep 1–3 CFAs in each Indian state. On an average, a company
may work with a total of 25–35 CFAs. Unlike a CFA that can handle the stock of one company, a stockist
(distributor) can simultaneously handle more than one company (usually, 5–15 depending on the city
area), and may go up to even 30–50 different manufacturers. The stockist, in turn, after 30–45 days (a
typical credit or time limit) pays for the products directly in the name of the pharmaceutical company.
The CFAs are paid by the company yearly, once or twice, on a basis of the percentage of total turnover
of products.
Langer
The figure below shows how a product passes through the company-owned central warehouse, which
supplies it to the CFA or super stockist. From the CFA the stocks are supplied either to the stockist, sub
stockist, or hospitals. The retail pharmacy obtains products from the stockist or sub-stockist through
whom it finally reaches the consumers (patients). Certain small manufacturers directly supply the drugs
to the super stockist.

6
In 2006, the market size of India’s pharmaceutical logistics segment (distribution) was valued at around
$200 million and the logistics/distribution industry has been growing at an average annual growth rate
of 4% since 2002. According to the Indian Retail Druggists and Chemists Association, in 1978, there were

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

roughly 10,000 distributors and 125,000 retail pharmacies in India. Today, the total number of stockist
in India is around 65,000 and the number of pharmacies is about 550,000, an increase of around 6- fold
and 4-fold, respectively.

Despite the rapid increase in the number of stockist and pharmacies, there has not been a proportional
increase in the volume of prescriptions distributed. Thus, the efficiency of the current system has clearly
not been demonstrated. Further, it is estimated that more than three-fifths of Indians still do not have
access to modern medicines. This clearly shows that the rural market is largely unattended and
untapped. Central warehouse

Manufacturer

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

4. No. of players at each level
Levels Number of Players
C&F Agents/Central Warehouses 1 (Nangli Poona)
Distributors/Super-Stockist 32 (Only in Delhi)
Wholesaler/Sub-Stockist
Retailers

5. Role of each intermediary

5.1 Central Warehouse
This can be categorized into two, one is depot and other is the C&F agent. The depot is responsible only
for storing the products; the depot has the facility of cold storage for injections and other drugs which
need cold storage.

The C&F agent is responsible for carrying out the drugs from the manufacturing unit to the stockist.

5.2 Distributors
The distributors are also known as super-stockist, they normally places the order with the C&F agents
and sometimes buy directly from the company. The minimum order placed with the C&F/company
should be in acceptance with the following formula:

Order = 1.5*Opening Stock – Closing Stock

Distributors make contacts with the buyers and use various communication strategies to make them
aware of the products. They use the tools like discounts and schemes to attract the channel partners in
the down line.

Distributors generally give order through sales agent, the agent comes to the distributor’s place and
note down the order in a company supplied format, the format has the drug code, the name of the drug
and the quantity. Distributors also place the order on e-mail on the same format provided as a soft copy.

After the order is being served the company generates the invoice and payment is made. Usually some
kind of cold storage is there depending on the quantity of drugs the distributor holds which needs cold
storage, for e.g. some distributors have big containers while others do with only refrigerators.

Selection Criteria for Distributors:

1. Survey conducted by a company representative to know the goodwill and reach of a particular
distributor.
2. Minimum of 4 years of experience in the field.
8
3. License from the State and Central Drug Office.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

5.3 Wholesalers/Stockist
In case of regular party wholesaler the order is placed by wholesaler on call or a salesman of distributor
takes the order from wholesaler and the delivery is done or the same or next day morning.

In case of other wholesalers, the wholesaler has to come in person to take delivery of the drugs.

After the order is served the invoice is being generated by the company and in cases of regular
wholesaler the order is given on credit.

They also use various tools to build up relations with the retailers and especially with the Hospitals, as
this is a more profitable deal, it is a win-win situation for both the supplier and the buyer as Hospital
gets more discounts and the supplier which in this case is the wholesaler gets high sales.

5.4 Sub-Stockist
They are more or less like the stockist; the difference is the inventory they hold and the target segment.
They can place the order with the distributor or the wholesaler.

5.5 Hospitals
Hospitals can place the order directly with the Distributor or through Wholesaler. They act as a retailer
and also supply the drugs to the patients directly which are there in the hospitals for the treatment.

The order is normally placed on call and deal is usually done on credit basis.

5.6 Retailers
Retailers can be classified into three categories:

- Chemists
- Pharmacies (Reliance Wellness, Apollo, etc)
- Mixed product departmental stores
Chemists and Pharmacies get the same benefits from the wholesaler or the channel member providing
with the products. But in case of mixed product departmental stores discount given is lesser as
compared to the other members because they are not the regular buyers and they order only on need
basis.

They supply the drugs directly to the customers. They use tools like discounts and home delivery to
attract the customers.

The order is normally placed on call and also the sales person of some wholesaler comes to take the
order. Credit period is given.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

 6. Territory design in NCR

Select a Control Unit Find location and Decide basic Break Down Method
potential of customer Territories

1) There are 4 control units as decided by the company in Delhi:

a. North Delhi
b. West and Central Delhi
c. South Delhi
d. East Delhi
2) The location and potential of the customer i.e. the distributors is obtained from telephone
directories and doing a market research (Survey of Retailers, etc)
3) The distribution of drugs is intensive so the decision for basic territories is done using the Break
Down method.

Estimate Forecast sales Develop final

Company sales potential for each territories
potential control unit

1) The sales forecast for the total market is done by using the break down approach.
2) Multiply the total sales potential with the buying index of a particular control unit gives sales
potential for a particular control unit.
3) Ranbaxy uses a formula to supply to its customer (distributors) which is a fixed formula and if
the distributor wants to do business with Ranbaxy then it has to adhere to that particular
formula.

Formula: 1.5*Opening Stock – Closing Stock

4) Finally Ranbaxy decides upon the final territory based on who all distributors are ready and
eligible for the distribution of the products.

7. Margins at each level

The prices and the margins of drugs for the wholesaler and retailers are largely decided by the National
Pharmaceutical Pricing Authority (NPPA), which varies depending on whether the active constituent of 10
the product is a scheduled drug or a nonscheduled drug. Scheduled drugs are price controlled whereas
nonscheduled drugs are not. The NPPA is an organization of the government of India established to fix
or revise prices of controlled bulk drugs and formulations. Companies must keep drug prices affordable

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

to the general public. To keep medicines within reach of the poor population, the government has
covered 76 scheduled drugs.

In addition to the above mentioned margins, wholesalers and retailers are also compensated with
additional trade offers. Hospitals and large institutions sometimes directly negotiate with the
manufacturing company and get the drugs in their pharmacy at lower costs. Stockist competes with
each other in a given city. Generally, hospitals order large quantities and can negotiate with stockist,
who provide payment terms, credit periods, and margins.

Further, retailers and distributors form associations locally and nationally, and manufacturing companies
must comply with their terms. For example, in many states when a company launches a new product
(either branded or generic), to make that product available in the pharmacy, the company has to pay
commissions to the chemist (pharmacy) association. On receiving the commission the association will
issue a no-objection certificate, which is mandatory for any company to make their product available in
the market. Margins at various levels of distribution system:

Levels Margins
C&F Agents/Central Warehouses 1–10% on the total turnover + other expenses
Distributors/Super-Stockist 8% on scheduled drugs
10% on nonscheduled drugs
Wholesaler/Sub-Stockist 10% on scheduled drugs
12% on non scheduled drugs
Hospitals 16% on scheduled drugs
20% on nonscheduled drugs
Retailers 16% on scheduled drugs
20% on nonscheduled drugs

8. Coverage plan followed by distributors

Pharmaceuticals distribution is pretty competitive and there is no specific coverage plan for the
distributors. The area is open to all and it’s up to the distributor as to how acquire a particular area, or a
particular client.

9. Infrastructure required by distributors

1) Cold Storage: This shall be there in the store/warehouse of the distributor and also in the vans
or the transport used by the distributor to deliver the drugs from his store to the customer
(wholesaler or retailer)
2) Supply and Booking Persons: Adequate number of supply as well as booking persons should be
there with the distributor. 11
3) IT infrastructure: A minimum requirement is that a distributor should a have computer installed
with any financial accounting software for all the transactions with the company or to the
customers.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

 4) 10*4*1.5 sq ft. Rack: This is a standard measurement of the compartment which needs to be
installed at the distributor place to carry the Ranbaxy drugs.

10. Payment/credit terms given to distributors by company

1) None in case of new distributors.
2) 7 days in case of distributors having more than 3 year relationship with the company.

11. Payment/credit terms given by distributors in the market

1) None in case of new retailers, wholesaler.
2) 30-100 days in case of other retailers and wholesaler.

12. Major problems faced by Distributors

1) Territory Acquisition
2) Fierce Competition
3) Other distributor offering high margin or more cash discount.

13. Major points of conflict

There are many sources of channel conflicts. They can originate from competing roles, clash of domains
and differing perceptions of reality. Marketing channel strategies and channel structures are also
important sources of conflict. Channel conflicts can be of different types. They can be primarily divided
into pre-contractual and post-contractual conflicts and conflicts based on channel levels. Based on the
timing of conflicts, they are divided into conflicts that arise before channel members enter into
agreements and those that arise after channel members enter into agreements. Channel level conflicts
may be vertical, horizontal or multi-level. Specifically the conflicts can be categorized as:

1) Expiry Issues
2) Margins Issues
3) Credit periods

14. Channel motivation

There are three basic facets involved in motivation management:
Finding out the needs and problems of channel members
Offering support to the channel members that is consistent with their needs and problems. 12
Providing leadership through the effective use of power

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

 Before the channel manager can successfully motivate channel members, an attempt must be made
to learn what the members want for the channel relationship.
Manufacturers are often unaware of or insensitive to the needs and problems of their channel
members.

Distributor Advisory Councils

Three significant benefits emerge from the use of a distributor advisory council.
- It provides recognition for the channel members.
- It provides a vehicle for identifying and discussing mutual needs and problems that are not
transmitted through regular channel information flows.
- It results in an overall improvement of channel communications, which in turn helps the
manufacturer to learn more about the needs and problems of channel members, and vice
versa.

Offering Support to Channel Members

Support for channel members refers to the manufacturer’s efforts in helping channel members
to meet their needs and solve their problems. Such support for channel members is all too often offered
on a disorganized and ad hoc basis. The attainment of a highly motivated cooperating “team” of channel
members in an inter-organizational setting requires carefully planned programs. Such programs can
generally be grouped into one of the following three categories:
(1) Cooperative
(2) Partnership or strategic alliance
(3) Distribution programming.

15. Logistics/Supply Chain Network

Companies today are finding it extremely difficult to maintain their competitive advantage over others
purely on the basis of innovative strategies pertaining to the product, price, place, or promotion. Since
competitors can easily imitate each of these competitive advantages, the emphasis on building a
sustainable competitive advantage has made companies focus their attention on logistics, which
provides such a means for companies to successfully differentiate themselves from competing firms.
Logistics is a complex process by which companies transport products, parts, and materials from the
place where they are manufactured to the place where they are required. There are several reasons for
the overriding importance being given to logistics by businesses across the world. These reasons include
wider availability of alternatives to maintain cost and service standards, need for location of retail
outlets closer to the market, the growing complexity of product lines, the increasing shortage of raw
materials, and the perceived need for an effective system of computerized inventory control.

Logistics is a complex process and involves several functions such as procurement or purchasing, inward 13
transport, receiving, warehousing, stock control, order picking, materials handling, outward transport,
physical distribution management, recycling, and returns & waste disposal functions. Facility of cold
storage containers and units are provided at the Manufacturing unit, C&F and Depots.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

In logistics, Ranbaxy was able to address major challenges in areas such as surface transportation, air
and sea freight. Ranbaxy rationalized its vendor base and qualified a pool of vendors (including new
vendors) keeping in view the service level requirements and negotiated long-term contracts with these
vendors. Ranbaxy was able to derive significant savings across its entire portfolio of logistics spend
categories through this exercise.

In the highly competitive space of generic pharmaceuticals, efficiency is the key to survival. Efficiency in
reaching out to the customers across the globe within the stipulated time frame is a challenge in itself.
Ranbaxy, with its extending horizon, has taken up this challenge head on. The Company has embarked
on globalizing its supply chain in line with the best institutional practices of the industry.

Planning & Implementation

The Company launched a special project called SPECTRUM (Supply Chain Planning for Enhancing
Customer Service to Ranbaxy's Universal Markets) in 2003 with a clear objective to, 'Transform the
Supply Chain to substantially improve customer service levels whilst maintaining optimal levels'.

Over the last 26 months significant ground has been covered in terms of implementing processes in
different plants and markets across the globe. This effort has been ably supported by deploying the APO
(Advanced Planner Optimizer) tool. Following its implementation, the supply chain has been converted
into a seamlessly integrated end-to-end function, starting from forecasting demand to meeting demand, 14
in the most efficient way. The tool helps manage each function separately from demand planning,
supply planning, procurement of input materials to logistics.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

Customer is the King

Thousands of Ranbaxy customers from more than 104 countries are served more than 4000 SKUs (Stock
Keeping Units), manufactured either at Ranbaxy's manufacturing facilities spread across the globe, or at
various other outsourced locations including sourcing from several Principal to Principal (P2P) vendors.
Using thousands of input materials from a large number of vendors makes Global Supply Chain (GSC)
function that much more complex.

In line with global best practices the supply chain at Ranbaxy has evolved a seamless planning process,
which starts from forecasting demand for each market and ends with the delivery of goods to the
customer in full and at the required time. This process driven approach has helped in substantially
improving service to the end customer.

Ranbaxy provides services as per customer needs by bringing in many new products each year. During
2004, over 700 SKUs were launched. A large number of products are filed in various countries every
year. Our Global Supply Chain ensures that these products are manufactured well in time and reach the
market on the day of the launch. GSC works relentlessly to ensure day one launches of the generic
formulations in advanced markets like USA & Europe.

Making Way Ahead

The well defined KPIs (Key Performance Indicators) for each aspect of supply chain and periodic review
of these KPIs by the company's management, ensures that there is improvement, month on month, and
processes are strictly adhered to.

The Global Supply Chain is supported by SAP, which acts as the digital backbone of the chain providing
on line information to the customers and the organization. In order to help service dynamic market
requirements, technology is leveraged to ensure that vendors get to know about the changes online and
can track the movement of their consignments till the time they are received by them.

To enhance Global Supply Chain capability RFID (Radio Frequency Identification) technology was
initiated in 2003. RFID is an advanced bar coding system and tracks the stocks automatically. This was
first implemented in the US in 2004 and soon will reach out to other markets.

The GSC team is geared up to take on the challenge of converting our Global Supply Chain into a source
of competitive advantage for the company while providing enhanced quality service to customers.

16. Alternative distribution chains

Direct distribution

Ranbaxy provides the direct distribution channel also; a patient can directly place the order with the 15
company (in special cases).

Mail order

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

A distributor/super-stockist can place the order via e-mail directly to the C&F agent or the company. The
order is placed in a format provided by the company.

Self-distribution

The sales representative also provides free samples to the wholesaler and the retailer to generate a
latent demand.

Agency distribution

The areas in which the coverage of the company products is not proper for e.g. 2-3 years back in Badli
(near Rohini Sec-16) area the supply of Ranbaxy products was not at par, so the company people did a
survey of the chemists in that area and found out the distributors which were having good hold on that
locality, then the company contacted those distributors and then based on their financial standings and
interest offered the agency to a particular distributor.

Pharmacy benefit managers

Pharmacy benefit management (PBM) companies combine retail pharmacy claims processing, formulary
management and home delivery pharmacy services to create an integrated product offering to manage
the prescription drug benefit for payers. Some PBMs now provide specialty services to provide
treatments for diseases that rely upon high-cost injectable, infused, oral or inhaled drugs which provide
a more effective solution than many retail pharmacies. PBMs also have broadened their service
offerings to include compliance programs, outcomes research, drug therapy management programs,
sophisticated data analysis and other distribution services. Knowledge Source's report Pharmacy Benefit
Management Market Overview examines the competitive landscape of the pharmacy benefit industry.
It’s not prevalent in India but some retailers like Apollo pharmacy have started this.

17. Opportunities/Issues Identified

Organized Retail
Organized retail pharmacies are in a nascent stage in India, but have started making inroads in the
distribution system. The first retail pharmacy chain was started by the Subiksha Retail Services Pvt. Ltd.
The Medicine Shoppe, one of the largest retail drug stores in the US, opened two retail outlets in
Mumbai and has franchised three more in Mumbai, Calcutta, and Baroda. Others have also entered the
field including Health & Glow, Pills & Powders, and Reliance that has set up units under the brand name
of Reliance Wellness.
Nitin Gokarn, senior manager of supply-chain management (SCM) at Merck India, is optimistic for the
growth of organized retail. He says that, “Though organized retail faces strong resistance from the
traders lobby, it has a great potential.” He also opines that, “It will take a great deal of political will and 16
reforms to make this happen.” With an organized retail system, pharmaceutical companies would be
able to offer medicine at higher margins, and some speculate that retailers may even be able to pass on
cost benefits to the end-users as well.

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

Long Channel Inventory Management
The multilayered distribution channel and lobbying at all layers has been successful at preventing
pharmaceutical companies from bringing in significant reforms toward higher trade margins, and at
bypassing the multiple distribution layers to reach customers directly. Because pharmaceutical
companies do not have direct access to retailers’ data on sales (tertiary sales), most pharmaceutical
companies depend on stockists’ sales data to monitor sales (secondary sales). The primary sale involves
transferring stock from the central warehouse to its CFA. The medical representatives are given
predefined sales targets. To meet these targets they push inventory on the stockist to levels that exceed
the actual demand. When the next level of sale does not take place, the stockist will either return goods
to the company or the stock expires.

IT Adoption
IT adoption in healthcare has grown drastically. Pharmaceutical companies have realized the need for
integrated solutions in SCM to keep inventories at optimum levels, to improve distribution, to provide
for liquidation of stock, and to streamline interconnectivity between manufacturing facilities,
warehouses, and CFAs in different states. The use of software like SAP and SAS, apart from other
customized software, is increasing. However, the adoption of technologies such as radio-frequency
identification (RFID) has been slow.

Large Untapped Rural Market

The growth of institutional sales had little impact on the accessibility of medicine in rural areas,
according to an analysis by the Indian Retail Druggists and Chemists Association. A large proportion of
the rural population still does not have access to proper medication and the situation may take long to
improve. Rural areas contribute around 21% to the total pharmaceutical market. Nearly 70% of India’s
population lives in rural areas where healthcare infrastructure is poor. With increasing rural household
incomes, the rural market is becoming more attractive. According to estimates by the Planning
Commission, rural households now spend 12% of their income on healthcare.

Increasing Competition between Wholesalers and Retailers

Today, with so many mergers and acquisitions in the Indian pharmaceutical industry, the number of
stockist for each company has increased. No two stockist of the same company may be competing
against each other. Retailers take advantage of this situation by prolonging the credit period and asking
for more discounts, which has an adverse effect on stockist, because they have to comply with the
retailers to sustain their business.

Value Added Tax (VAT) Impact 17

With the introduction of VAT, medicine prices have been standardized and price discrimination, in which
different states pay different prices for the same products, has reduced. VAT has also helped reduce the
illegal interstate transfer of goods and the unethical interstate trade for higher margins. Per the new

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

rules, sales tax is levied at each stage of value addition and credit for the tax paid on the inputs can be
obtained.

Brand Substitution
The emergence of generic drugs has also taken a toll on Indian pharmaceutical company sales, as prices
can be almost 2 to 15 times less for the same drug. Moreover, to capture market share generics,
companies offer higher trade margins at the retail level. Sometimes generic drugs provide up to 500%
trade margins, which are a lucrative offer for a retailer to pass up, and this leads to brand substitution.

International Competitiveness and Cold-Chain Management

Indian pharmaceutical companies are increasingly seeking opportunities to supply drugs to the world
market. More developed cold-chain management practices will be required to achieve this goal. This is
one of the major challenges faced by the industry if they are to retain product quality during shipment.
Companies like Ranbaxy, Eli Lilly in India have implemented initiatives such as having their own vehicles
equipped with cold-chain management systems.

18. Conclusion
Manufacturers must ensure that their drug reaches customers with uncompromised quality. In India,
because manufacturers do not retain control over the multi layered distribution system, the cold-chain
management process continues to be difficult and expensive. However, manufacturers are increasingly
realizing the importance of an effective distribution system, all the way to the end-customer. Coping
with the challenges of streamlining the systems in India will ultimately benefit the patient and the
healthcare system.

The pool of 'Pharmaceutical Company' is dominated by generic manufacturers. Although, some first line
companies are slowly shedding 'Generic' tag and dawning 'Innovator' tag to get a global footage, but still
generic drugs accounts for 80% of revenue. Pharmaceutical Companies in India are getting
technologically strong and self reliant. Pharmaceutical Companies in India are armed with:

Low costs of production & R&D costs (around 70% less than their Western counterparts).
Highly innovative scientific manpower.
Hosts of national and private laboratories.
A strong IPR regime following WTO and WIPO norms.

Strengths of Channel
• Offers flexibility in sales policies across regions
• Provides speed to penetrate new geographies
• Increases sales productivity in existing geographies 18
• Provides opportunities to commercialize multiple brands across therapeutic segments
• Reduces the fixed cost component of sales
• Allows RGCL to focus on core strengths of medico-marketing and business development

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.

 • Provides opportunity to the local outsourced teams to employ local relationships to the fullest

19. Recommendations
- Should implement the online order taking mechanism.
- Implement ERP solution between distributors, wholesalers and retailers rather than a
mechanical system.
- Invest more in R&D
- Invest in Biological Sciences Research (particularly genomics and proteomics)
- A retailer should deal with only one wholesaler or distributor in case of one company products.
- The distributors and wholesalers should provide the injections and other drugs which need
special care with a coolant or cooling kit.
- The adoption of the RFID technology should fasten up.
- The company should target the rural market and they can also open company owned stores in
the rural areas.
- Should focus on pull strategy rather than the current push strategy.

20. References
Websites:

http://www.ranbaxy.com/

www.biopharminternational.com

Magazines:

Ranbaxy World

India Today

Papers:

Professor Amar Gupta, “Offshoring in the Global Pharmaceutical Industry: Drivers and Trends”
ENTR573:Professional Outsourcing, August 30, 2005

19

Group 1 (FMG-18Y) | Distribution and Logistics of Ranbaxy Ltd.