Pharmaceutical distribution networks – the Chinese case

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The latest project I have been working on involves the transformation of my client’s pharmaceutical distribution network in China.

Two critical elements had to be taken into account :
• Distribution to date has always been handled directly by the factory meaning no external warehousing services;
• The flatten channel model which is currently being implemented locally.

Although both of these elements are critical, I would like to focus on the flatten channel model issue.

As you probably know, drug distribution until today remained complex and often limited growth in China’s pharmaceutical industry.Indeed, there are more than 13 000 distributors, most of which provide access to a local market or even just a hospital or two. Due to this fragmentation, drugs typically flow through several layers of distributors, with multiple changes in drug ownership before the final customer is reached.

This complexity increases distribution costs in China with some distributors requiring markups up to 8 percent on one hand and lowers supply chain visibility, pharmaceutical companies often only having an eye on their direct distributor, on the other hand.To overcome this problem, the Chinese government has called for consolidation within the pharmaceutical distribution market and local regulators are tightening drug distribution license issuances and renewals.

Furthermore, multinational pharmaceutical distribution pure players like Alliance Boots are entering the market or increasing their activity in China, but it is also the case for new players from other distribution sectors such as SF Express, which see an opportunity and are eager to bring innovation. Overall, these investments in drug distribution will help restructure and further develop the industry.

These newcomers are changing the landscape and new models are emerging. Drug companies operating locally are now more willing to bypass the first layers of distributors and go straight to the ones closest to the market which is becoming of prior importance as healthcare facilities in rural areas are sought to improve in the government’s latest 5 year plan. Moreover, the direct to pharmacies model could grow so as to gain more control on stocks and fees and help pharmacies develop their e-commerce plans. Opportunities are emerging in this fast evolving market and all players are trying to get their piece of the cake.

Are anyone of you working on this type of project locally as well ? I would be happy to exchange on the topic with you!

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