Tsm Pharmaceutische Groothandel

TSM Pharmaceutische Groothandel, B. V.© 

Assignment 1

International Business & Supply Chain Marketing

Deadline: Wednesday 21 February 2018; 12:00h

Maximum number of pages excluding front page and index : 5 (times new roman 12 pt)

TSM PHARMACEUTISCHE GROOTHANDEL, B.V.

         Peter Smits, the newly appointed general manager of TSM Pharmaceutische Groothandel, a Dutch pharmaceutical wholesaling firm, was thinking about an upcoming meeting with his four regional directors.  At the top of his list of concerns was a dramatic increase in price competition and significant profit margin erosion in the Dutch pharmaceutical wholesaling industry.  Upon his appointment as general manager, the TSM Board of Directors had made it clear to Peter that they wanted him to address these problems immediately and decisively.  Although all board members were in agreement that something had to be done, there were two opposing views on which strategy TSM should pursue. 

Some board members advocated that TSM reposition itself as a “logistics subcontractor” for pharmaceutical manufacturers.  Under this strategy, TSM would focus exclusively on transportation, warehousing, and local delivery functions.  It would eliminate traditional wholesaling functions such as trade advertising, sales calls on pharmacists, and value-added services, as well as streamline its operations by laying off personnel and selling unnecessary facilities.  Pharmaceutical manufacturers would contract with TSM for specified logistics services at negotiated fees.  Through focus, these TSM directors believed that the firm would be able to profitably beat competing wholesalers at the “low price game”.

         Peter was an advocate of the “consulting services” approach that other board members espoused.  They pointed to research which showed that over 60% of the typical pharmacy’s annual operating costs could be attributed to administrative activities such as processing orders, stocking shelves, and filling out insurance company and government paperwork.  They believed that this constituted a tremendous opportunity for TSM if the firm could develop consulting services that enabled pharmacists to dramatically reduce those administrative costs.  As Peter envisioned the future, TSM would market “total solutions” to pharmacies comprised of a full array of healthcare products offered at highly competitive prices and a broad range of “for-fee” consulting services.  TSM currently provided a few, lackluster services to pharmacists at no extra charge.  For the consulting services approach to work, TSM managers would have to create services that pharmacists valued and then convince pharmacists to pay extra for those services.  Peter realized this would not be easy.

         Of the two alternatives, the Board of Directors viewed the logistics subcontractor alternative to be the less risky.  They gave Peter a terse directive, “During the next six months, bring us a success story that demonstrates that the consulting services approach can work.  Otherwise, we must reposition TSM as a logistics subcontractor.”  Fortunately, TSM’s Supply Chain Management Group had devised one such consulting service called Integrated Stock Management (ISM) and had just completed a series of twelve, pilot case studies at pharmacies across the Netherlands.  Peter and his regional directors would evaluate ISM program results and decide whether or not to launch the program full scale.  Peter wondered if the ISM program might be the success story that the board of directors sought.

BACKGROUND

Tijmen Simon Meindertsma founded TSM Pharmaceutische Groothandel, B.V. in 1920.  Mr. Meindertsma was a pharmacist by training who had gained a reputation among colleagues for offering the highest quality pharmaceutical chemicals and highly personal service.  Today, with annual turnover (i.e., net sales) exceeding 800 million euros (€), TSM is one of the top five pharmaceutical-wholesaling firms operating in the Netherlands.  It markets the full range of ethical and proprietary pharmaceuticals as well as a limited array of over-the-counter (OTC) medicines and healthcare products to pharmacies.  Based in Enschede, TSM maintains eight distribution centers in strategic locations across the country.  

Growing Competition and Eroding Margins in Distribution Channels 

Some thirty pharmaceutical wholesalers operate in the Netherlands.  They garner about 10% of profits generated in pharmaceutical distribution channels.  The top five firms have annual turnover between €750 million and €3billion.  Increasingly, they compete on the basis of “one-stop shopping” and lowest prices.  Another five, medium size wholesalers have annual turnover between €250 million and €750 million.  They serve regional markets within the Netherlands, and try to compete based on "personal relationships with local pharmacists" and focus on offering the highest turnover and profit margin items at a lower price.  About twenty small and local wholesalers have annual turnover between €5 million and €250 million (with the average being €10 million).  They function as “opportunist brokers”, buying and selling surplus pharmaceuticals at bargain prices.  

For much of the past decade, TSM posted annual increases in turnover and profits.  About two years ago, though, the firm’s financial performance began to decline precipitously. TSM and other wholesalers find themselves in the weakest position within the pharmaceuticals distribution channel.  The Dutch Central Organization for Tariffs in Healthcare (COTG), in consultation with pharmaceutical manufacturers, sets the “Taxe” retail price for each prescription pharmaceutical, which is the maximum price that pharmacies can charge.  Some pharmacies discount off these prices to attract and retain customers.  Increasingly, manufacturers are forcing wholesalers to carry a larger share of channel inventory and to handle more logistics functions, while lowering margins to them.  At the same time, pharmacies have demanded and received greater discounts from wholesalers.  As a result, wholesalers have had to absorb not only added service costs but also margin cuts, dramatically reducing their profitability.  Manufacturers, though, still garner about 60% of pharmaceutical channel profits.