Vertical integration in the US global pharmacy supply chain and impact

Posted on May 22, 2013 by aviyer2010

An article in the Wall Street Journal (May 21, 2013) describes an alliance between Walgreens, Alliance Boots and AmerisourceBergen to consolidate their global purchasing of generic and branded pharmaceuticals and sell them through their US Walgreens retail stores and AllianceBoots European stores. The article claims that such consolidation of purchasing will enable better prices from manufacturers and lower logistics costs. But it also suggests that while it will increase retail availability it may not lower retail prices paid by consumers. Given the competitiveness of US retail, would it be optimal for Walgreens to increase margins and not lower prices to gain market share ? Given that one retailer has moved in this direction, would other distributors and retailers also be expected to form such vertically integrated supply chains to compete ? How should manufacturers respond to such supply chain changes to maintain their profitability ?

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This entry was posted in Global Contexts, Operations Management, Service Operations, Supply Chain Issues and tagged Capacity, competition, Consumers, Coordination, Cost, Efficiency, Global, Margins, pharmaceuticals, Retail, Supply Chain, vertical integration. Bookmark the permalink.

5 Responses to Vertical integration in the US global pharmacy supply chain and impact

Matt L. says:

August 26, 2013 at 2:11 pm

This move by Walgreens is interesting given their significant loss of sales and market share over the past year concerning the fallout with Express Scripts. The notion of always giving customers a reduced price when efficiencies can be achieved is not always sustainable, but may be necessary in a competitive market place such as this. There comes a point in a company’s supply chain and operations when they can no longer squeeze out any more penny savings, and I believe it is when they start to realize this fact that we start seeing moves such as this article is explaining. For two companies that do not directly compete against each other, this kind of move makes sense in my mind. Seeing this kind of scenario would not be possible if it were involving two competing domestic companies if they were competing on price (which for generics is usually the case). This supply chain consolidation is in essence replicating the 3rd party logistics companies, such as Li and Fung, that are able to leverage the high volume in their shipments to decrease the price.

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yanbingshi says:

August 27, 2013 at 1:25 am

I would like to analyze this case by 4Cs of supply chain management.First of all, Walgreens and Alliance Boots are on the retailer level of the chain structure while AmerisourceBergen is on the wholesaler level, coordination between them makes supply chain more efficiency,which enables lower prices from manufacturers and reduce logistics costs.Then cost is just one type of metrics of competition,other metrics used include lead time,service level,consistency and so on. Walgreens can compete with competitors by better service and retail availability,that’s why Walgreens can increase margins and not lower prices.One solution for the manufacturers is to permit multiple approaches to get the product to downstream customers,according to the nature of demand.To some retailers ,which sell large volume, can be allowed to get the products directly without going through a distributor.

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Sai Gao says:

September 1, 2013 at 10:39 am

The vertical integration of the retailers like Walgreens and Alliance Boots can be really a good way to reduce the cost in the intermediate links of supply chain,to increase their negotiation power to the manufacturers,and sometimes it can solve the hold-up problem.However,I do not think it is optimal for Walgreens to increase margins and not lower prices to gain market share. According to the research we do in the summer session,the competitiveness if the retailer is high,the better way should be lower the price to gain the markets and in this way to increase the total profit rather than retain the price.
I guess if one retailer moved to this direction, other distributor and retailer also want to form this supply chain to improve their competition.
In the summer session, we did a project about how to improve the sales of the product of the Chao Center. The Chao Center is a pharmaceutical company ,it is the manufacturer, who faces several challenges regarding the sales of Seromycin®, a life-saving treatment for Multi-Drug Resistant Tuberculosis.because of the competition,The sales of Seromycin® have been dropping during the past several years due to competitors with lower prices, a reduction in the number of TB cases, costly shipping requirements for its raw materials.So they want to find a way to low their cost to reduce the price . They also face the problem of the press of the retailer.In my opinion,they may try to form their own retailer chain if they have the power and long strategy.

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Saurabh Srivastava says:

September 9, 2013 at 8:52 pm

The vertical Integration of retailers such as Walgreens and Alliance boot is interseting move, it will increase their bargaining power to the manufacturers but at the same time not decreasing the margin and retail cost can keep Walgreen at the backfoot because price pressure is always there and its competitors to grab market share can lower down the price.Walgreen need to think a way to reduce retail price by effective strategy otherwise stock will be available in the market but demand may fall thereby overall collaboration strategy may fail.

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Erhao Teng says:

September 23, 2013 at 1:42 pm

I would like to use 4Cs strategy to analyze this situation. First of all, Walgreens and Alliance Boots, the retailer chain level on horizontal AmerisourceBergen wholesalers, coordination among them will make the supply chain more efficient, so lower prices from manufacturers and reduce logistics cost. Cost metrics are just one type of competition, and then use the other measures include lead time, level of service, consistency. Walgreens can have better service and retail availability with the competition, which is why Walgreens can increase margins and do not lower their prices. A solution for manufacturers is allowing you to do many different things to get our product to downstream customers. Some retailers, sells a large quantity is allowed directly without going through the distributor to get product.

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