I wrote this essay on Vendor Managed Inventory (VMI) back in 2013 which was aimed at what would likely happen to VMI under the California pedigree law (see “Vendor Managed Inventory Under California ePedigree”). But even though that law is now obsolete (see “The California Pedigree Law Is Now Officially Inoperative“), surprise, some of the same issues crop up when VMI is performed under the DSCSA. So I converted the original essay to speak to VMI under the DSCSA. I think you will agree, it is still pertinent…
One of the complexities of the modern pharmaceutical supply chain occurs when a pharmaceutical dispensing organization “outsources” the management of their on-premises inventory to their supplier, or “vendor”. This is known as Vendor Managed Inventory, or VMI. There are several good reasons this might be done, including eliminating the need to deal with issues that have more to do with supply chain execution mechanics and fluctuating supply and demand than they do with the core competency of dispensing drugs.
When VMI is used in the pharma supply chain the supplier is typically a wholesale distributor whose core competency is in dealing with those exact issues. That’s just what they do. The wholesaler benefits from the VMI relationship because they become the exclusive supplier to the VMI customer. VMI can be a “win-win” proposition as long as costs are kept in-check.
But what will happen to VMI relationships now that the Drug Supply Chain Security Act (DSCSA) is in effect? The DSCSA itself does not have anything to say about these business relationships so we just have to follow the logic of the law to figure it out on our own. The main thing to look for when applying the DSCSA is any change of ownership of a drug. Those are the times when a seller must provide Transaction Information (TI), Transaction History (TH) and a Transaction Statement (TS) to the buyer.
In a VMI situation, the drugs sitting in inventory at the dispensing organization’s location are usually owned by the supplier. The change of ownership to the dispenser usually occurs only at the moment when a drug is administered or dispensed to a patient. The “sale” from VMI supplier to dispenser occurs on paper (or electronically anyway) as the drug is being “resold” (dispensed) to the patient. In this way the dispenser never actually carries any inventory of the VMI product. This is true even though a casual observer—or the FDA, or a Board of Pharmacy inspector—would see lots of inventory sitting on the dispenser’s shelves. The dispenser has custody of the drugs, but does not own them.
HOW DOES THE DSCSA IMPACT VMI?
Interestingly, the DSCSA does not mention any need for Third-Party Logistics (3PLs) providers to hold or provide DSCSA transaction documents. Third-Party Logistics providers also hold a large amount of inventory that they do not own and will therefore not have DSCSA documentation for. Using that as an example, I think we can assume that pharmacies that use VMI will not need to hold DSCSA transaction documents for drugs held on their shelves but are still owned by the VMI supplier.
However, at the moment of dispense, the dispenser would become the owner (momentarily) so TI, TH and TS updates will be required to show that ownership change. Presumably as a result, after July 1, 2015, the VMI supplier would have to immediately provide the dispenser with updated TI, TH and TS showing the new ownership transaction. That way the TH that the wholesaler retains, and the copy the dispenser receives, would accurately reflect the new ownership reality that has just occurred. These are just assumptions since VMI is not really discussed in the DSCSA directly.
Any dispensing organization that has decided to shed all of the pharma supply chain hassles by paying someone to manage their inventory for them probably won’t want to deal with the DSCSA transaction data either. In that case they may want to rely heavily on the VMI supplier to take as much of that work off their hands as possible. The DSCSA allows third-parties—“which can be an authorized wholesale distributor”—to provide transaction data storage services to dispensers so it is logical that VMI suppliers would include that service.
How vendor managed inventory may be handled under the DSCSA is subject to some speculation, as this essay shows. Companies who want to continue using that business process may want to confirm these assumptions with the FDA and/or the local Boards of Pharmacies involved.
Can you think of any other business processes in use today where a company has custody of a drug but does not own it (other than a courier/delivery company)? Do you think these same assumptions would apply to it, or would different assumptions make more sense? Leave a comment below.
4 thoughts on “Vendor Managed Inventory Under the DSCSA”
Well said, Dirk. This will surely be a significant gap that must be addressed. Fortunately for me, my current clients do not have such requirements; I will have to wait for the experts to weigh in on this one.
Would be useful to hear your thoughts on CMO. Specifically toll manufacturing, where the pharma outsources production but legally owns the components and finished goods. Perhaps drop shipment direct to the wholesaler/customer from the CMO would be a good topic as well.
Thanks again for all your work. I eagerly await your posts every Monday morning!
This is not a happy path scenario, but how would you handle damaged product that the customer sends to destruction company directly which is part of VMI inventory.?
The VMI customer is under contract to document the sale and disposition of all product. That would certainly include any destruction. It would be a serious error for the VMI customer to do anything with the VMI supplier’s product without their knowledge and consent, and the customer should be well aware of those obligations. In the end, the supplier normally reserves the right (and actually follows through with) to do a full physical inventory of their product in the customer’s location on a regular frequency. Any missing product would normally be the responsibility of the customer.
Thanks for reading,
It would be interesting to flow out the events to support VMI in Pharma. I imagine, due to latency issues, trading partners would want to decide on an event prior to dispensing that would trigger the transfer of ownership (and transfer of DSCSA info). From a VMI standpoint, it would also be interesting to see how the supplier would receive the signal (which event) to trigger replenishment. Lastly, it would be interesting to see how the par value of each “managed” inventory point would be communicated to the supplier. Serialization certainly brings an additional layer of information that could translate to an additional layer of trust between trading partners that share data openly with each other as in VMI or CPFR scenarios.
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