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Article Excerpt
Abstract
Logistics reconfiguration is an active practice in the Chinese pharmaceutical industry. However, the reconfiguration performances are not satisfactory. This article investigates logistics reconfiguration strategies and develops a logistics reconfiguration success framework by a three-stage multi-method research approach. Telephone interviews and qualitative case study research methodology are used to collect data. From case studies, nine key success factors are identified. These factors are further validated as being relevant by a group of senior managers from industry. Finally, managerial implications are drawn.
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Increased market competition, globalization, and the need for quick response and lower inventory levels have created a need for more effective and efficient logistics systems in China's pharmaceutical industry. The environmental changes have forced management to reexamine their companies' logistics strategies and to seek new ways to improve their operations and cost effectiveness. Pharmaceutical logistics has emerged as an important element for reconfiguration as it occupies a large percentage of total costs.
In this article we present a survey and case studies of logistics reconfiguration issues in the Chinese pharmaceutical industry. Logistics reconfiguration is the process of adjustment of the distribution facilities, redesign of logistics processes, and reorganization of logistics operations in response to changing market conditions to improve logistics performance. O'Laughlin et al. (1993) present a comprehensive study of logistics reconfiguration in Europe. The study indicates several signs of logistics reconfiguration, including reduction of the number of distribution facilities and consolidation of the carrier base. Some researchers have studied the impact of logistics and supply chain reconfiguration on performance (Juga 1995; Lemoine and Skjoett-Larsen 2004).
Most published articles in the field of logistics strategies and practices survey the use of third-party logistics services and indicate an increasing trend of logistics outsourcing strategy adopted by manufacturers (Ashenbaum et al. 2005; Bolumole 2001; Hong et al. 2004; Lieb and Bentz 2005). Some studies compare different logistics systems in practice (Koster and Warffemius 2005; Bookbinder and Tan 2002). Daly and Cui (2003) examine the reality issues surrounding e-commerce and logistics in China.
Some recent studies on logistics strategies and practices explore the relationship between logistics strategies and performance. Panayides and So (2005) investigate the effects of relationship orientation in the logistics service provider-client interaction and find that relationship orientation has a positive influence on key organizational capabilities. Shang and Marlow (2005) examine the relationships among logistics capabilities, logistics performance, and financial performance and indicate that information-based capability can impact benchmarking capability, flexibility capability, and logistics performance, and also indirectly impact financial performance through logistics performance.
Existing literature, however, does not specifically study the logistics reconfiguration problems in the pharmaceutical industry. The purpose of this article, therefore, is to promote a better understanding of the Chinese pharmaceutical logistics operations and to identify critical success factors of logistics reconfiguration.
The article is organized as follows: We briefly introduce the Chinese pharmaceutical industry, and research design and methodology are presented. Following sections provide the results of telephone interview and case studies. Findings are validated, and discussion and implications are provided.
THE CHINESE PHARMACEUTICAL INDUSTRY
The pharmaceutical industry can be defined as a complex of process, operations, and organizations involved in the development, manufacture, and distribution of drugs and medications. A typical pharmaceutical supply chain consists of one or more of the following nodes: primary manufacturing, secondary manufacturing, market warehouse/distribution centers, wholesalers, and retailers/hospitals (Shah 2004).
The Chinese pharmaceutical distribution system has evolved from a multi-tier distribution system to a flat one. Under the traditional centrally planned economy, all the pharmaceutical products were distributed by a state-owned monopoly company (first-tier wholesaler) to several regional wholesalers (second-tier wholesalers) who then distributed the products to local wholesalers (third-tier wholesalers) (see Figure 1 a). This resulted in inefficiencies and large inventories in the supply chain. Since the reforms beginning in 1987 by the Chinese government, new pharmaceutical distribution systems have been established, in which the wholesale restrictions are phased out and enterprises under all forms of ownership (state, collective, and private) are allowed to engage in the pharmaceutical wholesale business (see Figure 1b).
[FIGURE 1 OMITTED]
In the current pharmaceutical industry, most manufacturers are responsible for their warehousing operations and transporting products to their wholesalers. Wholesalers take ownership of the products until products are received in their own warehouses.
The Chinese pharmaceutical industry has some features that make it worthy of study. First, this industry is a fast-growing one with fierce competition. As the nation with the largest population with a fast-growing economy, the Chinese pharmaceutical market has achieved an average growth of 19.5 percent in recent years (Cui 2005). The opening of China's pharmaceutical market, coupled with the government drug price cut policy, has intensified competition between companies. The pharmaceutical industry in China is different from that in the USA and UK. In the USA, three national public companies are responsible for the distribution of roughly 90 percent of wholesale pharmaceutical products (Yost 2005). In the UK, about 80 percent of demand flows through the wholesaler channel (with three large wholesalers accounting for almost all the demand), with the large part of the remainder going to hospitals (Shah 2004). In contrast, there are over five thousand drug wholesalers in China's pharmaceutical industry (Cui 2005).
Second, the industry is subject to the implementation of a basic medical insurance scheme and the government drug price cut policy. Since the State Development and Planning Commission (SDPC) released a price cut policy on 383 categories of drugs by end of 2001, the drug price cut process has continued and the profit earning by the distribution sector has dropped dramatically. The statistics, by the end of the third quarter of 2002, reported a 25 percent drop in profit earning by the distribution sector (Kwo 2003). And reforms on the separation of current hospital pharmacies from the hospitals' control will promote further price cuts owing to fiercer competition.
Third, mergers and acquisitions (M&As) have become an important means for companies to grow in size, extend into new markets, or obtain know-how in the Chinese pharmaceutical industry. In recent years, a lot of M& As have taken place in this industry. From a logistics perspective M&As could create synergies and economies of scale, but it is difficult to realize those objectives (Hakkinen et al. 2004).
Finally, logistics operations reconfiguration is an attractive topic in the Chinese pharmaceutical industry. The traditional pharmaceutical logistics system is the weakest link in the entire supply chain and drug distribution could account for as much as 40 percent of the total production cost (Kwo 2003). Recently, large funds have been allocated for the reconfiguration of logistics systems to improve efficiency and reduce costs in this industry.
Prior work on logistics reconfiguration has not concentrated on the pharmaceutical industry. Problems and challenges of logistics are often unique to the industry concerned. Pharmaceutical products may require more security, speedier delivery (especially for those with quick expiration dates), and special handling for those products with temperature restrictions (Javalgi and Reisenwitz 2001).
RESEARCH DESIGN AND METHODOLOGY
Research Questions
The aim of this research is to develop a better understanding of contemporary logistics reconfiguration issues in the Chinese pharmaceutical industry. The following research questions are put forward:
* To what extent is logistics being reconfigured?
* How is logistics reconfigured in the Chinese pharmaceutical industry?...
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