Remedying Returns

Remedying Returns

Copyright 2003, Traffic World, Inc.

Pharmaceutical returns is a complex business that is getting more complicated. Staunching the flow of counterfeit drugs and state regulations covering drugs returns are just two of the challenges companies face. Many have turned to outsourcing as a remedy.

McKesson Corp., the 20th-largest industrial company in the United States with annual revenues of more than $57 billion, is one of those companies. Headquartered in San Francisco, the healthcare services and information technology company regards supply-chain management as a core competency.

In August 2003 McKesson launched its Closed Loop Supply Chain Solution, an integrated tool set that manages the flow of information, funds and materials across all components of the supply chain for hospitals.

Yet the company, one of the country''s leading drugs wholesalers, prefers to outsource reverse logistics. "Is our core competency to return product or ship product to customers?" asked Scott Bradford, vice president of reverse logistics for McKesson.

Even though it is investing in the returns process, the organization is "leaning more towards" the forward supply chain as a prime concern, he said.

McKesson''s pharmaceutical business outsources the handling of about 2.5 million pieces of returned product - amounting to more than $180 million - annually to Dallas-based third-party logistics services provider USF Processors Inc. Additionally, McKesson''s specialty logistics company is using USF, and its medical surgical group is outsourcing to the 3PL on a test basis, he said. The company also encourages customers to use third-party services for returns. According to Bradford, most of McKesson''s customers, including hospitals and independent pharmacies, have outsourced returns of expired or outdated pharmaceuticals.

One reason why outsourcing is an attractive option is that "there is no standardization of returns processes or policies in the industry," he explained.

An onerous task is managing the credits that pharmacies are due when they send product back. As Charlie Makowski, USF Processors'' vice president for pharmaceuticals, pointed out, manufacturers require information such as lot numbers and drug expiration dates before they can issue a credit to a wholesaler or retailer.

Disposing of unsaleable drugs is another task that many companies prefer to delegate to a third party. USF has developed a database that categorizes drugs as hazardous or non-hazardous, information that is not generally available, said Makowski.

But the main reason for using third-party services is that pharmaceutical companies, in common with most other enterprises, are under intense pressure to control costs and improve margins, Makowski believes. The product return rate in the pharmaceutical industry is typically 1 to 3 percent, he said, not huge but significant for companies looking to streamline their operations.

Adding to the returns burden is legislation passed in the states of Florida and Georgia. Said Bradford, the legislation brings more complexity to returns because it introduces processes and policies that are specific to each state and to product items over and above those already in place.

In Georgia one of the challenges is "what a distributor has got to do to issue a credit to retail stores," explained Makowski. Legislation is pending that will overturn the new regulations in that state, but how successful this will be is unclear, he said. Moreover, other states could follow suit and introduce their own rules governing pharmaceutical returns.

That could bring more business for specialists such as USF. The 3PL is helping three major drug wholesalers to cope with Georgia''s new regulations by handling their returns in that state. USF recently opened a larger facility in Fort Worth, Texas, to handle its pharmaceutical unsaleables processing for customers across the United States. The facility is 30 percent larger than the previous processing center.

One of the issues driving legislators is the growing problem of counterfeit drugs. The Federal Drug Administration recently created a task force to combat the problem. According to the FDA, counterfeit drug investigations have increased to more than 20 per year; the average was only five a year in the 1990s. The reverse pipeline provides plenty of potential market entry points for bogus drugs.

Tracking pharmaceuticals will become easier and more accurate thanks to bar code and radio frequency identification technology. In March 2003 the FDA announced a proposed rule that would require unit-of-use pharmaceutical packaging to be labeled with the National Drug Code number encoded in a bar code. The aim is to reduce error rates when drugs are dispensed, by giving caregivers a better system for identifying the medicines they administer. A final rule is due by the end of this year.