Quantifying the Value of Blockchain-Based Supply Chain Networks—Part Five

Value of Inventory Optimization and Anti-Counterfeiting for Pharmaceuticals


Pharmaceutical manufacturers can realize value by carefully and methodically reducing inventory, reducing the amount of drugs that expire, and reducing counterfeits in their supply chain, all by using a supply chain network solution. Here we describe the mechanisms and estimate the value of those improvements.


In Part Four of this series, we estimated the value that a multi-enterprise supply chain network could potentially provide via patient adherence and ease of doing business improvements. Here in Part Five, we estimate the potential value from optimizing inventory, reducing expired drugs, and implementing anti-counterfeiting using the network.

Optimized inventory management

The PharmaNet network provides mechanisms to better optimize available inventory, thereby freeing up working capital and reducing expired products.

Inventory management

Doctor is writing a prescription — Source: rawpixel

The average amount of inventory held by major pharmaceuti­cal manufacturers is quite high, about 180 days inventory outstanding,[1] much higher than other industries such as CPG companies (~60 days) and high-tech electronics (65 – 70 days). There are many valid reasons for pharmaceutical manufacturers to hold higher levels of inventory than other industries.[2] Margins for pharmaceutical firms have traditionally been much higher than other industries (especially for branded drugs) and the impact of shortages more dramatic, leading to more of an emphasis on ensuring supply rather than reducing inventory. However, several trends are putting pressures on margins, such as patent cliffs, the rise of generics, and downward price pressure from powerful payors. As well, a shift from blockbuster drugs to personalized medicine, genomics, and orphan drugs has led to proliferation of SKUs and supply chain complexity. These are all driving the increasing importance of managing excess inventory levels.

PharmaNet provides end-to-end visibility into inventory levels, near-real-time consumption, and production visibility. This enables manufacturers and distributors to detect deviations from demand plans sooner. As well, it allows analytics that can spot mismatches between what is being produced, where it is being stocked, and where there are shortages. This allows production and distribution that more closely matches actual consumption. Thus, the supply chain can provide higher service levels (fewer shortages) while simultaneously reducing inventory levels. By better aligning production and distribution with consumption, we estimate that inventory levels could be reduced by 5 percent to 10 percent, without negatively impacting revenue or service levels (shortages).

Reducing expired drugs

About 1.5 percent to 2 percent of drugs sold are returned to the manufacturer for credit, with 72 percent of those returns due to product expiration (outdated or short-dated). PharmaNet would provide highly granular, near-real-time visibility across the entire supply chain to help identify where in the supply chain expirations are occurring and help diagnose why they are occurring. Armed with this information, manufacturers, wholesalers, and dispensers can work together to reduce expirations through a variety of means,[3] such as:

  • Ensuring that pharmacies are inspecting and rotating stock, as well as transferring aging inventory to more actively dispensing locations.
  • Alerting distributors and dispensers to shorter-life products, so they can take proactive action.
  • Holding back more inventory at distribution centers to better respond to end-of-season demand fall-off, sending product to where it will be consumed.
  • Rationalizing SKUs based on demand and sourcing slow movers via wholesaler or direct from manufacturer.
  • Better coordinate new product delivery with prescriber communications; provide complete lifecycle instructions; evaluate new product demand early to rebalance production and inventory levels.
  • Better align product packaging unit counts with common prescribing practices.
  • When patent expiration dates are coming up and when competing generics will be launched, doing more granular and accurate monitoring of branded product inventory levels at all locations across the network.

Taken together, we estimate that these measures could reduce returns by 20 percent to 50 percent. In addition to the reduction in credits issued, there are savings from reductions in reverse logistics and disposal costs.

Compliance and control

There are several ways that the platform improves compliance and control across the supply chain, including:

  • Anti-counterfeiting—Counterfeits are reduced due to robust end-to-end chain of custody tracking.
  • Cold chain temperature excursions—Excursions are reduced by a combination of chain-wide accountability, systemic improvements, real-time alerts and actions, and better-informed distribution and dispensing decisions.
  • Grey market diversion—End-to-end chain of custody tracking reduces grey market diversion.
  • Regulatory compliance, recalls—The platform provides compliances with DSCSA and similar imminent serialization and end-to-end traceability regulations. It also reduces the cost of recalls.


Counterfeit drugs are a significant issue with serious consequences for healthcare outcomes and expenses. There is, however, little consensus about the size problem.[4] Estimates of counterfeit drugs range from 2 percent to 10 percent of all drugs sold worldwide. The range of market value estimates of counterfeits is even more extreme: from $4B to $431B. Based on our research, we estimate the size of the counterfeit drugs market is probably around $40B, equating to about 3 percent to 3.5 percent of the total global pharmaceuticals market (prescription and OTC). However, the rate of counterfeits is much higher in developing countries than in developed countries. About 75 percent of counterfeits are sold in developing countries, even though those countries buy only about 15 percent of the total drugs sold globally. Some estimates indicate that in parts of Asia, Africa, and Latin America, at least a third of the drugs sold are counterfeit.

Source: Wikipedia, © Raimond Spekking,  CC BY-SA 4.0

The PharmaNet platform would provide track and trace of individual serialized units at every handoff in the chain of custody, from the manufacturer all the way to the dispensers and the consumers. This allows any party, at any stage (including the end consumer), to confirm that they are receiving a legitimate product. This visibility needs to be combined with robust monitoring and vigorous enforcement. Together, these could have a dramatic impact on reducing counterfeits. We estimate that using the PharmaNet platform to drive monitoring and enforcement programs could reduce counterfeits by 25  percent to 75 percent. Assuming that legitimate drugs were sold instead, that would equate to recovery of about 0.8 percent to 2.5 percent of revenue for global pharmaceutical companies.

In the next installment, Part Six of this series, we look at two more key areas of compliance and control: cold chain and grey market diversion.

[1] According to a 2010 report by McKinsey, “The average pharmaco holds 180 days of finished goods inventory on hand.” (David Keeling 2014). A 2017 report by nVentic (nVentic 2017) said “Median inventory levels for the industry are high – ~180 days DIO.” A 2019 report by nVentic (nVentic 2020) showed that inventories had grown since 2017. These numbers belie the enormous range of inventory held by major pharma companies, from ~80 days to over 320 days. — Return to article text above

[2] Pharmaceu­ti­cal manufactur­ers are challenged to reduce inventory in a prudent manner due to many factors such as: high service level requirements (hospi­tals and pharmacies never want to be out-of-stock for critical medicines), regulation-imposed batch size require­ments that cannot be easily changed, long production times, perishable products, patent expiration deadlines, and limited number of suppliers for key ingredients. — Return to article text above

[3] Most of these recommendations, as well as the statistics regarding expired drugs, are from the HDMA report “Understanding the Drivers of Expired Pharmaceutical Returns” (HDMA Returns Task Force 2009) — Return to article text above

[4] Most articles and reports tend to overstate the extent of counterfeit drugs. They have an agenda to bring attention to the issue of counterfeits and as a result they too often seek the highest numbers and most attention-grabbing interpretation of those numbers that they can find. For example, a common misleading figure, often attributed to the WHO (World Health Organization), is that 10% of drugs globally are counterfeit. The 2017 WHO Global Surveillance and Monitoring System for Substandard and Falsified Medical Products report said “the observed failure rates of substandard and falsified medical products in low- and middle-income countries at approximately 10.5%”. However, this number is only for the developing world, which accounts for about 15% of the global drugs market. Furthermore, the figure includes both substandard and counterfeit drugs without breaking down the proportion of each. — Return to article text above

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