Channel Link - Gaining efficiencies in the sell-side of the supply chain
William Roth, CEO of Channel Link, a privately owned, independent, Web-based trading exchange for the pharmaceutical industry, believes the mounting pressure on big pharma to maintain double-digit growth is prompting companies to gear up the quest for internal efficiencies.
If you'sre Pfizer, Glaxo or Merck, with annual sales in excess of $15 billion, growing by 20% is easy with product launches like Viagra, Vioxx and Celebrex, Roth said. But those don'st come every year, so growing by 20% isn'st going to come just from new product launches anymore. Manufacturers are beginning to look internally to control expenses. They'sre already using procurement technology applications to lower their costs for things like raw materials, but now they'sre starting to shift their focus to the sell-side of the supply chain.
According to Roth, pharmaceutical sales and distribution has changed a lot in the past 20 years. Most of the major manufacturers had a direct detail force and were shipping direct up until the early 90s. The value derived from a rich sales and relationship channel, Roth said. But then, as costs grew with all of these reps, the pharma manufacturers started moving their reps out of the pharmacies and clinics and started shifting a lot of their distribution over to wholesalers.
Now, according to Roth, the manufacturers are only working in a direct fashion with the larger chains and major healthcare providers, leaving no one to call on the small pharmacies and clinics. There's a fragmented population out there that would like the opportunity to reconnect from a content, as well as a direct commerce, perspective, he said.
And that population is a significant one, in terms of sales for manufacturers. This group represents 75% of the number of buyers, and about 35-40% of the actual dollars, Roth said.
Channel Link is hoping to increase sales in fragmented markets with less than $100 million in annual purchases by reconnecting buyers and manufacturers. From a buyer's point of view, the value proposition is the economics as well information flow, Roth said. And from the side of the pharma manufacturers, the relationship is not as nurtured as it once was. They'sve lost the time-to-market and flexibility issues on that fragmented population.
As you Web-enable that relationship, you can use this new channel for marketing niche items and categories and focusing on new item launches, he continued. You can increase new item launch capabilities up to four-to-eight-weeks faster than what they'sre able to do right now.
Roth believes supply chain synchronization is an even bigger issue than reconnecting with fragmented buyers. The value comes in reduced inventory carrying costs and a stronger predictability of workflow through the manufacturing and distribution practices, he said. With 80% of the volume flowing through four large wholesalers, who make 70% of their profits by speculating against price increases, it causes a game of cat and mouse between the large manufacturers and the wholesalers. The manufacturers want increased visibility of the process, and the wholesalers can'st easily give that up.
Roth believes that for large manufacturers, increases in available information translate to improved efficiencies on both the front and back ends of the supply chain, thereby dramatically increasing their turns on inventory. A recent article in Pharmaceutical Executive profiled the average inventory turns of manufacturers, and companies such as Pfizer and Schering Plough were shown to have only two turns per year. When you'sve got annual sales of $15 billion, you don'st need to be tying up $7 billion in capital.
Roth contends that an independent trading exchange, like the one Channel Link offers, is the answer to the industry's sell-side supply chain challenges. He doesn'st believe that an alliance-based exchange, or consortium of manufacturers, would be successful in the pharmaceutical industry.
It's easy for buyers to collaborate, he said. It's much harder for sellers to collaborate. The manufacturers need to remain neutral to the distribution channel whether it's for legal reasons, logistics reasons or strategic reasons. I don'st think their lawyers will let them get past the anti-trust issues.
Since Channel Link began in January 2000, it has developed a platform that provides the technology and services to streamline and automate trade processes through both public and private marketplaces. Channel Link provides the infrastructure and handles customer service issues, including accounts receivable, shipping logistics, chargebacks, and other administrative functions.
The public marketplace, which became operational in January, allows buyer and sellers to come together in a common, neutral area where the access to product details and pricing are completely controlled by the manufacturer. The marketplace platform leverages existing manufacturer messaging protocols and formats and back-end ERP systems to electronically exchange product catalog information, catalog updates, inventory snapshots, orders, order acknowledgements, shipment status and invoices.
Channel Link is messaging agnostic, Roth said. It's XML on the inside, but we can convert that message into whatever data protocol and format the manufacturer operates in. If they'sre EDI, we'sre EDI. Even if they want to work via FAX, we can translate XML into a FAX format so it's really compatible with whatever backend systems they already have in place. That goes for international formats as well, making us ready to use this application outside the United States.
In addition to the public marketplace, Channel Link provides its software in an ASP format to individual manufacturers for the establishment of private marketplaces.
What we'sve found is that every manufacturer has launched some kind of Web site, whether it's a product site or a corporate site, Roth said. And their executives are looking for ways to tie ROI to how much they'sve spent on it. If you can integrate commerce to the content, you now have a draw.
Channel Link offers the proprietary technology to handle the business rules and pricing complexities that enable these private marketplaces, he continued. And from the buyer's perspective, once you'sve registered for commerce with Channel Link, it's almost like a Visa card pass to go purchase from any of the other sites.
In the private marketplace, transaction fees are paid by the manufacturers. The ASP model for private marketplaces includes a license fee, as well as hosting and maintenance charges. In addition, if Channel Link handles the accounts receivable function, it charges a transaction fee to cover the debt expense and customer service management costs.
For buyers, it costs nothing to register there's no minimum they have to purchase, Roth said. So, our hope is to aggregate a large chunk of the buyers.
According to Roth, Channel Link currently has one manufacturer integrated into the public marketplace and is in the process of enabling that manufacturer's own Web site. We'sre also in the midst of creating a Web site to work in conjunction with three or four other manufacturers so Channel Link will actually power three of those marketplaces, he said.
There are two large chunks of value from our solutions, Roth said. There's what I would call operational control and strategic control. From an operational perspective, manufacturers can literally launch new items to the entire market within 24 hours and they can dramatically start to improve their supply chain efficiencies on the front and back of the supply chain. For most larger manufacturers, that means dramatically increasing their turns on inventory and starting to move toward eliminating the chargeback process.
In terms of strategic control, Roth believes the marketplaces offer a new sales channel for the approaching era of customized drugs with shorter shelf lives. Customized vaccines, AIDS, oncology and fertility drugs all kinds of high-dollar, low-turn items will require a new channel outside the mainstream.'s The distribution chain of the future isn'st going to look anything like it does now. We'sre preparing the industry for the coming change in landscape.
Channel Link, Roth contends, offers its clients complete relationship management capabilities, allowing manufacturers to integrate content and commerce. It's as if it were that old detail rep walking in the door, he said.
For more information about Channel Link, visit the company's Web site at www.channellink.com.