3PL Outsourcing Models: Which is best for your business?

When I began writing this headline, I was struck by the degree to which the role and importance of 3PL outsourcing has expanded in just the last several years. Back in 2012, a colleague of mine at Cardinal Health 3PL Services wrote a piece for Pharmaceutical Commerce — but back then, the topic wasn’t ‘which 3PL model is best for your business?’ That article, written just seven years ago, sought to help manufacturers work through the questions that would help them determine if they needed the support of a 3PL partner at all.

Today, that question has shifted, as an increasing number of manufacturers, large and small, are turning to 3PL partners to help reduce inefficiencies, gain economies of scale, speed products to market and free up dollars to focus on innovation.

Insights from Deloitte’s 2019 Global Life Sciences Outlook reinforce this idea. In the report, Deloitte predicts that global life sciences businesses will continue to place an increasing focus on outsourcing in the next several years, and that pharmaceutical companies specifically will “shift from transactional outsourcing relationships to more strategic, relationship models for biologics, data-driven clinical elevation and novel therapy manufacturing capacity.” The report also predicts that manufacturers will outsource expertise in various areas, “to increase efficiencies, lower costs and decrease clinical timelines.”

Indeed, for many pharma companies, the current focus is less about “should I or shouldn’t I outsource?” but instead how to outsource in a way that best supports the needs of their business and the success of their products.

Here, I’ll share some of the benefits that are driving more manufacturers to outsource key 3PL functions, as well as an overview of key 3PL models, and the ways each model can meet different manufacturer and product needs.

What’s in it for you? Why more manufacturers are outsourcing 3PL services

While cost efficiency is a primary reason that many manufacturers choose to outsource to a 3PL, it is certainly not the only benefit. Creating strategic partnerships with 3PL providers can empower manufacturers of all sizes to:

• Get the flexibility they need to expand capacity as they add new products to their portfolio. This flexibility is key to driving efficiency, particularly for products that require refrigeration and other costly special handling procedures.
• More easily manage ebbs and flows in product demand.  An outsourced provider can manage this unpredictability without having to add additional shipping routes or hiring extra staff, which can drive savings for the manufacturer.
• Leverage best-in-class distribution and financial resources and technology, without making significant infrastructure investments.
• Gain expert support with meeting Drug Supply Chain Security Act (DCSCA) track-and-trace requirements.
• Shorten timelines to launch.

Strategic 3PL relationships are also ideal for smaller manufacturers and emerging biopharma companies — a segment that Deloitte defines as having less than $200 million in estimated spending on R&D, or less than $500 million global revenue. Although these companies are increasingly contributing to life sciences innovation (accounting for 73% of late-stage research and holding the original patents for 29 of the current top 100 drugs), they don’t often have the scale to build, staff or operate the infrastructure and processes need to store and ship products.

Deloitte’s report indicates that emerging biopharma companies launch new drugs more than 30% more slowly than other manufacturer segments. Developing strategic, long-term relationships with key outsourcing partners — including 3PL providers — can help these up-and-coming manufacturers expedite their products’ speed to market.

Which distribution model is best for your product?

Determining the 3PL outsourcing model that’s best for you starts with defining your business need, product profile, sites of care or administration, and target patient population. Here’s a high-level overview of different 3PL models — and how each can benefit your business or product.

• Direct Distribution Model: This model is ideal for orphan, ultra-orphan and other limited distribution products, because the 3PL provider ships the product directly to sites of care, including hospitals, practices and specialty pharmacies. This model can remove the burden of having to build back-office teams to manage the often time- and cost-intensive order-to-cash and customer service models that these types of products require.

In this model, the outsourced 3PL team acts as an extension of your team — and generally operates more efficiently than in-sourced teams, thanks in large part to economies of scale. Customers can order product online — and customers and the manufacture alike benefit from having full visibility of the product, as it moves through the supply chain.

• Traditional 3PL Model — aka the Wholesale Distribution Model: This model is best for products that are distributed through retail pharmacies or hospitals, and ship in cases or pallets to wholesalers/distributors, before they reach the end customer. Under this model, the 3PL provider serves as the finished goods warehouse for the manufacturer and handles shipping of the product to wholesalers. The manufacturer maintains control and ownership of the products as they move through the supply chain — but can also benefit from the same order-to-cash services that are available from a direct distribution model.

• 3PL Title Model: This model is ideal for manufacturers who are looking to launch a product quickly but don’t have all of the required state licenses that are needed to sell medications in each state. Because the 3PL takes title of the product, the manufacturer can utilize the 3PL provider’s state licenses to distribute products nationwide. This can potentially accelerate a product’s launch date by months, or even up to a year.

Title model can also be a good fit for manufacturers that are looking to reduce their accounts receivables risks. The 3PL provider takes title of the product and handles warehousing, distribution and order-to-cash management on the manufacturer’s behalf. This model also mitigates the significant risks inherent in the distribution process — freeing up manufacturer’s cash flow to invest in other areas of the business.  Title model services can be as short or as long as a manufacturer requires.  Working with an experienced 3PL can help in developing the right strategy for your title model needs.

Because the 3PL title model program is fully manufacturer-branded, the manufacturer is also able to remain at the center of the customer interaction through branded invoices, customer service phone lines, and web portals for order management.

• Flash Title Model: Ideal for cell and gene therapies, with flash title model, the 3PL partner takes ownership of the product, but may not handle physical storage or distribution. Working in close communication with the internal or third-party hub to align with the patient and product journey, the 3PL partner takes responsibility for invoicing and collecting the payment for the product from the sites of care where it’s sold or administered, which helps to reduce the accounts receivable risk for the manufacturer.  By tapping the expertise of a 3PL partner that is familiar with credit profiles and payment practices of different sites of care, this model can also be helpful in supporting manufacturers in developing and designing payment terms for these high-value therapies.

Regardless of the degree to which you’re outsourcing 3PL services now, you should carefully consider each of these models and the extent to which each may be able to support your business or product’s growth and profitability objectives. There’s no “one size fits all” 3PL model for any brand, so it’s important to select a 3PL partner who understands the pros and cons of each model and who brings experience working with products like yours.  Remember that the best partnerships result when you take the time to align around goals, define clear standard operating procedures, and establish open lines of communication.  When it comes to 3PL, your partner should be committed to not only moving your product from point A to point B, but to implementing the right strategy to drive the optimal success for your brand.

About Cardinal Health 3PL Services: Cardinal Health 3PL Services is a third-party logistics supplier that provides a full range of distribution and order-to-cash solutions. To learn more, visit cardinalhealth.com/3PL