We will cover three aspects of RFID solutions in this article: the drivers for adopting RFID, the state of adoption, and technology options. We will show that RFID can mitigate enterprise risk through tighter counterfeit and diversion controls, ensure compliance with electronic pedigree tracking and reporting requirements, and enable more efficient recalls.
DRIVERS BEHIND THE ADOPTION OF RFID The promise of a safer and more accountable supply chain combined with FDA support for the technology is driving the interest and demand for RFID in the pharmaceutical industry. Manufacturers, distributors, and dispensers are poised to take advantage of the technology's many benefits and are beginning to conduct pilot studies in their own organizations and as part of industry groups.
One of the ways to start thinking about an investment in RFID is for risk mitigation, which can fall into a number of categories including: brand protection, compliance, recall and returns management, diversion control, re-importation control, and inventory visibility. Unless otherwise noted, the data used to support the benefits of RFID come from Reference 3, one of the most detailed studies to date on RFID in the pharmaceutical market.
Brand Protection. Counterfeit products, product tampering incidents, and product recalls can damage a company's reputation over a long period of time and affect market share. According to World Health Organization estimates, 5 to 8 percent of drugs worldwide are counterfeit, meaning that such drugs could represent from $7 billion to $26 billion of the $327 billion global market.4 In 2003, FDA had 23 cartons of counterfeit products after averaging five cartons per year in the late 1990s. Research from the University of Wisconsin suggests a loss in shareholder value after a drug recall is approximately 12 times the estimated total cost brought about through litigation, recall, or replacement. The impact on shareholder value could be as high as one to two percent. Based on a two percent annual risk for a company that manufactures high-risk drugs, A.T. Kearney estimates a yearly brand-protection benefit of RFID of $10 to 20 million.
Compliance. Although FDA has not mandated RFID, it is expected that it and other regulatory agencies will be a driving force behind implementation. The states are so concerned about counterfeit drugs entering the supply chain that some have implemented or are considering proposals that require all distributors to create a pedigree (in paper or electronic form) on all prescription drugs they handle. The costs to develop a paper-based system are substantial when compared with electronic systems. Paper records can easily be counterfeited, which means they are not an effective deterrent to prevent product tampering.
Recalls and Returns Management. Recalls of items tracked by RFID can be more targeted, resulting in less returned and wasted product. A.T. Kearney estimates the savings range to be from $50,000 to $100,000 per year per $10 billion in revenue. This estimate is based on manufacturers having 50 to 100 percent of tagging penetration at the item or unit level and also includes time saved on administering recalls and returns.