Specialty Pharma: Integrating ERP with Contract Manufacturers and Third-Party Logistics Companies

It is very common for specialty pharmaceutical (pharma) companies to work with Contract Manufacturing Organizations (CMOs) and Third Party Logistics companies (3PLs). A typical scenario is for the pharmaceutical company to procure the active pharmaceutical ingredient (API) from a vendor and have it drop-shipped to the CMO, who will add other ingredients as well as perform the manufacturing service. Often, the product is then shipped to another CMO that will perform the final packaging of the product and ultimately send it along to a 3PL that performs warehousing and sales order processing services. Dynamics AX has excellent functionality for properly tracking and accounting for all of these steps, as well as a robust toolset for importing the data to process each step in the supply chain without the need for manual intervention. It is important, however, to work with the CMOs to determine their capacity for providing data for integration into the ERP system prior to beginning the ERP implementation process, as this can occasionally be a significant limiting factor in the system design.

Many pharma companies desire to trace lot numbers from raw materials through finished products in their own ERP system, as opposed to relying on the CMO for this documentation. This means that the CMO must transmit lot number data for integration into ERP as part of the transaction records. Unfortunately, providing detailed inventory transactions with lot numbers in a timely manner is not something that all CMOs can offer. For example, if the CMO offers to send over the quantities and lot numbers of API received from vendors and the quantities and lot numbers of finished goods that they have produced, but cannot send over “real time” the quantities and lot numbers of the API used in the production of each individual batch of finished product, the pharma company must resign itself to simply “back-flushing” a standard quantity of the ingredients used in production (per the Bill of Materials). This, of course, means that the ability to do in-house lot tracking is lost. However, there is still significant value to even this limited type of integration. As long as periodic stock count “true-ups” can be sent by the CMO to ensure that the back-flushed quantities are accurate and leaving correct inventory balances, the pharma company has gained the ability to maintain a perpetual inventory for both the finished goods and the API at the CMO locations. This, in turn, allows for inventory planning and control functions such as MRP to be managed using the ERP system.

While it is common for 3PLs to handle the entire sales management process (sales order processing, shipping, invoicing, accounts receivable, cash application), they sometimes simply perform warehousing duties, leaving the pharma company to advise them of orders to be shipped and to perform all billing and accounts receivables processes in-house. This latter scenario generally lends itself to a simple communication flow, whereby the ERP system transmits the sales order information (customer, ship-to address, items, quantities, etc.) to the 3PL, and the 3PL sends back confirmation of the quantities and lot numbers shipped. It is the when the 3PL handles the entire sales process that more decisions need to be made regarding integration points. To keep inventory quantities and accounting up to date in the ERP system, it is necessary to at least receive summarized updates of quantities sold and revenue, as well as summarized cash and AR updates.  Often this is deemed sufficient, as any attempts to track detailed sales and accounts receivable data is redundant with the services being provided by the 3PL. Presumably, such data is easily obtained by reports from the 3PL. However, should the pharma company desire to bring this data into ERP, most 3PLs can provide detailed sales data as well as details of cash receipts and credit memos. The one area that sometimes proves challenging is the application of credits and payments to invoices (the “marrying up” of the documents). For example, after transmitting that a particular credit was applied to a given invoice, if a change is made and the credit is re-applied elsewhere, that change would need to be transmitted as well. The challenges of having to handle these types of updates in order to “mirror” the 3PL often lead pharma companies to choose to simply rely on the 3PL for managing and reporting on all Accounts Receivable details, and to not bring that data into the ERP system. It is important to discuss with the 3PL the desired level of integration and, based on their business processes, determine what type of integration is manageable.

This article was written by Matthew Boese, Partner at Tridea Partners, a Gold Certified Microsoft Dynamics Partner.