That’s right. And it comes from an economic reality that was evident even six years ago. That was when a small group of people with various pharmaceutical supply chain backgrounds had an informal discussion of the relative costs and impacts that each of the three primary business segments in the supply chain would face in a full deployment of Radio Frequency IDentification (RFID). As I recall, this conversation may not have even been part of the official proceedings of the project we were assembled to work on at the time. It may have actually occurred during one of the social hours after a day of meetings, but it stuck with me. Ever since that time I kept meaning to get around to creating the graphs that we envisioned at that time but have never gotten around to it, until now.
The first set of graphs makes the important assumption that all perscription pharmaceutical sellable packages are tagged with GS1 Gen2 RFID tags with a Serialized Global Trade Item Number (SGTIN) encoding. It is further assumed that this is done under some kind of mandate to ensure that the deployment timeframes are kept short and in unison. You can see the relative costs of the deployment phases in each segment and how they might differ, relatively speaking, from the long-term, post-deployment operational phases.
The baseline for all graphs is today’s costs for each segment and assumes no serialization at all. It’s important to note that I have not plotted all three of these lines on the same graph. That’s because I think that would imply too much that the vertical scales are exactly the same. Since this is purely a logic exercise with no actual data behind the graphs I think it’s better to show them as separate graphs. It is my opinion that my vertical scales are close to the same, or at least close enough to allow some form of relative comparison between the three segments. You have to decide for yourself if you think this makes sense or is gibberish. (Leave a comment below and let me know your thoughts on it.)
These graphs are manually constructed to show the following important characteristics:
- The initial deployment cost to the manufacturer is relatively higher than the wholesaler because they would have to deal with Good Manufacturing Practice (GMP) validation of their systems;
- Because the cost of RFID tags is relatively significant, the manufacturer would have a much higher reocurring cost after the initial deployment phase;
- The reocurring cost after deployment drop below the zero line for the wholesaler which indicates a positive ROI. This is due to the the greater efficiencies offered by RFID in the receiving and order fulfillment processes;
- The Chain Pharmacy has the highest initial deployment costs because of the huge number of pharmacies that would need to be outfitted;
- I’m showing the Chain Pharmacies breaking even over the long term because I think they will get a positive ROI in their warehouses, just like the wholesalers, but it will be offset by greater complexity inside their pharmacy operations.
WHAT IF EVERYTHING WERE TO BE SERIALIZED WITH BARCODES INSTEAD OF RFID?
The graphs and discussion above are interesting, but unrealistic. Currently we don’t have a mandate for a specific carrier technology like RFID, so what would happen if every manufacturer decided to meet the California pedigree requirements by applying only 2D barcodes instead of RFID? Of course, this may be equally unrealistic, but I want you to consider what this would look like before we consider a more realistic outcome.
I have manually constructed these graphs to show the following important characteristics on relative comparison:
- The post-deployment costs for a pharmaceutical manufacturer and wholesaler have flipped compared with RFID. With barcodes, a manufacturer’s reocurring costs drop considerably because ink for barcodes is a lot cheaper than RFID tags. But now the wholesaler’s long-term costs are higher because they can’t read every serial number without manually manipulating each unit and aiming a barcode reader directly at the barcode that contains the serial number. This will make the receiving and order fulfillment operations much less efficient. Inference, a business practice that allows trading partners to assume they received and are shipping the right serial numbers, can be used to lower costs but because the risk goes up, not all of the costs will be recouped;
- No segment gets an ROI for the same reason I mention in the bullet above;
- Chain Pharmacies would face the same high on-going costs as the wholesaler but only in their distribution centers (DC’s). I think in their pharmacies they will find that barcodes would be very amenable to their operations and to the software they would have installed in the initial deployment and so that would dampen the negative effects they will experience in their DC’s;
- The greatest cost for the initial deployment is borne by the chain pharmacies again because of the large number of locations that need outfitting.
WHERE IS REALITY?
Neither the RFID-only nor the Barcode-only supply chain’s depicted above will happen in the U.S. supply chain. That’s because there exists no mandate to force everyone to use one carrier technology or the other. Instead, we are most likely to find that most manufacturers will choose to comply with the California pedigree law by applying 2D barcodes-only to their units. The reason is easy to see by comparing the two manufacturer’s graphs above. If there is to be no mandate, would any public company choose to apply RFID to their products considering that cost difference? In my thinking, their stockholders won’t allow it.
Of course, if the wholesalers had it their way then everything would be RFID. I can’t tell you how many RFID hardware vendors have asked me why the wholesalers don’t just demand it of the manufacturers. They look at how Wal-Mart gets away with mandating RFID of their suppliers and how those suppliers jump to it (well, sort of…). Why can’t the wholesalers in the U.S. pharma supply chain do the same thing? For one reason, there is no single 800-pound gorilla like Wal-Mart in our supply chain, and the “big three” U.S. wholesalers are not likely to get together and make joint demands like that for anti-trust reasons.
But I think there is a secondary reason and it has to do with fee-for-service (FFS). Now, before I explain my theory, I have to tell you that I have nothing to do with any FFS negotiations. I don’t even know people who do that negotiation, so this is just a theory based purely on logic. See if you agree.
FFS is an agreement worked out between individual wholesalers and individual manufacturers every few years. Essentially, the two parties agree on a fee that the manufacturer pays to the wholesaler for the distribution-related services they provide to the manufacturer. These negotiations are very sensitive and the results are a closely guarded secret. I know I’m making certain people a little nervous right now just by my writing these few words about it here. My point is this, if a wholesaler were to tell a manufacturer that they must use RFID instead of barcodes to serialize their products, even if communicated outside of the FFS negotiations, the next time FFS is negotiated, the manufacturer would likely be able to draw that requirement into the cost calculation and the wholesaler would probably lose in the end.
But there are a few manufacturers who see value in RFID beyond compliance with serialization regulations like those in California. Those few manufacturers will be more willing to pay the additional cost to apply RFID to the units of all of their products. A few others may choose to apply RFID to the units of some of their products and barcodes to the others. Still others will apply both.
In reality, I think it’s pretty obvious that the supply chain will end up seeing a mix of RFID and barcodes. Here is my opinion of the relative costs for that scenario:
- The steady-state relative costs to the manufacturer will depend on whether they choose to apply barcodes or RFID tags;
- Wholesalers will have a higher cost of initial deployment because they will have to deploy RFID readers and 2D barcode readers everywhere a unit may be read. The steady-state relative costs to the wholesaler will reflect the higher costs of the barcode-only scenario because they will have to maintain two or more processes for each step where unit-level ID’s are needed. The added confusion about which technology a user needs for each individual product will eliminate any incremental benefit that might be achieved because of the partial inventory of RFID tagged Stock Keeping Units (SKU’s);
- Like the wholesaler, the initial deployment costs of the chain pharmacy will be higher because of the investment in the hardware and software of two technologies. The steady-state relative costs are similar to that of the wholesaler now too because their DC’s will face the same issues, and also because their pharmacies will now have to deal with added confusion about which technology must be used for each SKU. In the previous scenarios, the efficiencies gained in the pharmacies offset the negatives experienced in their DC’s, but in this scenario, the negatives are additive.
Unfortunately, if my logic is correct, this is the most costly of all possible scenarios when viewed across the the entire supply chain.
RFID IS ALIVE AND WELL IN PHARMA AT THE CASE-LEVEL
The pharmaceutical supply chain should not be considered a total loss for RFID enthusiasts because it appears that many pharma manufacturers agree that the cost of one RFID tag per case is reasonable considering the return they expect. This even includes many of the manufacturers who appear poised to use barcodes at the unit-level. But here again, nothing requires them to use RFID, and I know of a few manufacturers who have decided not to use RFID on anything, opting for 2D barcodes on cases as well as their units, so the supply chain will have to deal with dual technologies on cases (and pallets) too.
And RFID may yet take hold with wholesalers for use in tracking their returnable assets (totes). We’ll have to wait and see on that one.
This post contains a lot of speculation and I’m sure there will be other opinions out there. I encourage you to tell us what you think by leaving a comment below. Don’t be shy now.