UPS strikes pioneering supply-chain deal with Merck

Outsourcing to a third-party logistics (3PL) provider is one thing, but UPS Healthcare Logistics is taking the process to another level with Merck. The company struck a deal with the drugmaker to take over the management (and, when the lease runs out, ownership) of two Merck DCs, near Atlanta and in Reno, NV, totaling about 200,000 sq.ft. The Merck employees associated with the facilities are in the process of becoming UPS employees. And while Merck will continue to depend on the facilities for warehousing and distribution, eventually UPS will be incorporating them into its international network of DCs, which now is at 23 (with two more soon to open in the Netherlands and Puerto Rico)—and managing other clients besides Merck.

“Merck is the gold standard for DC operations, so while we will be transitioning some UPS systems and standards into the facilities, the main change will be to maximize the facilities’ utilization rates,” notes Bill Hook, UPS VP for healthcare logistics global strategy. “Overall, we’re taking a significant fixed cost for Merck and converting it to a variable cost for them, and allowing them to focus on what they do best.”

Merck’s corporate direction is becoming clearer. The UPS deal follows announcements from Merck last year that staff cuts amounting to about 20% of the company would be continuing for the next several years. Simultaneously with the UPS news, Merck also announced the sale of a 130,000-sq.ft vaccine testing laboratory in Wayne, PA, to the contract research organization (CRO) PPD (Wilmington, NC). In that instance as well, the Merck employees will be joining PPD, and PPD will be providing central-lab services to Merck under a five-year contract.

New business model?

Many pharma companies use 3PL services to supplement their own operations, or—especially for smaller firms—to run them outright. Hook believes that the UPS deal presages similar actions by other big pharma companies for a combination of reasons: the shipping, distribution and order-processing of pharmaceuticals has become more complex; and at the same time, the range of services that 3PLs and others can provide has grown. “There’s a greater degree of openness in the discussions we’re having with pharma companies,” he says. “Companies are questioning the need to keep regulatory compliance for distribution in-house.” The growth of dedicated healthcare-logistics 3PL capability also raises the possibilities of a changed relationship with wholesalers, who provide many of the same logistics services that 3PLs do.