UPS helps drug companies manage supply chain

In 2007, UPS put a bull’s-eye on the health care industry.

In January, UPS hit a big target, nailing a deal with pharmaceutical giant Merck & Co. that netted 200,000 square feet of warehouses in metro Atlanta and Reno, Nev.

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CURTIS COMPTON/ccompton@ajc.com

Marlen Thelen checks the temperature on stand-up freezers used for storing vaccines at -30 degrees Celsius. For other drugs, kept at 2 to 8 degrees Celsius, there’s a separate freezer big enough for a forklift to drive through.

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CURTIS COMPTON/ccompton@ajc.com

On Monday through Wednesday, an average of 5,000 to 5,500 vaccine cartons can move through ‘the sorter’ inside Merck’s warehouse in Duluth. UPS runs the sorting, packaging and shipping from the facility and another one in Reno, Nev. The 123,000-square-foot Duluth facility is so big UPS also uses it to ship goods for other drug companies.

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The majority of Merck’s U.S. vaccines and pharmaceutical volume flows through these two centers, and now UPS handles the sorting, packaging and shipping.

With the Merck deal, Sandy Springs-based UPS operates 25 compliant health care facilities. Two more facilities will soon open in Puerto Rico and the Netherlands.

UPS has been gaining ground in the health care sector, but the race is hotly contested by other big dogs in shipping such as Memphis rival FedEx and DHL, a division of the German post office.

The Merck deal is important because it helps build UPS’ credibility in a tightly regulated field.

“The Merck announcement is almost a confirmation for many that the UPS strategy is on target and working,” said Bill Hook, UPS’ vice president of global strategy in health care logistics. “That announcement woke people up. It’s happening.”

Hook, a Canadian, joined UPS in 2000 after the company bought the Canadian firm Livingston Healthcare Services.

Hook’s division now has about 1,500 employees. (UPS won’t say how much revenue it earns from the health care sector.)

Whitehouse Station, N.J.-based Merck had been seeking ways to use excess capacity in its warehouses.

Hook said the Duluth warehouse Merck built was “suboptimal,” meaning too big.

“It was like building a church for Easter,” Hook said. “We said we would handle it and bring in new clients, sharing the cost a bit.”

UPS took over the leases in Reno and Duluth, and it can now use the facilities to ship goods for other Big Pharma companies.

For companies such as UPS that love logistics, this is what they do best. For companies such as Merck that are more concerned about developing and marketing drugs, logistics can be a headache, said Doug Caldwell, executive vice president of Parcelpool.com, a Utah-based consultancy and logistics provider.

“It’s potentially very expensive to maintain supply chain internally. Outsourcing this to the experts makes all the sense in the world,” said Caldwell, who lives in Portland, Ore.

UPS has been building a practice to handle the shipping, warehousing and “just-in-time” supply needed by the highly regulated health care industry because the market potential is huge.

Hook said it’s a $50 billion market opportunity. The Merck warehouse alone processes billions of dollars of drugs a year.

The health care market is important to UPS because domestic shipping volumes have dropped as the economy cooled down.

Analyst Ed Wolfe recently wrote he doesn’t expect improvement in global demand any time soon either. He has downgraded his expectations for UPS stock, rating it “peer perform.”

For UPS, another plus is that while some industries are unstable, health care is “surprisingly nonvolatile,” Caldwell said. “People aren’t needing less health care because of the economy. In fact, they might be needing more.”

There are incredible cost constraints, however, on the pharmaceutical industry that will put pressure on companies such as FedEx and UPS to drive down the costs of handling logistics. (Merck, for example, said it will cut 7,200 positions by 2011.)

Hook said some health care companies were “beating up on their suppliers” to get costs lower.

A visit to the former Merck facility now run by UPS in Duluth shows the complexity of health care logistics.

Merck built the 123,000-square-foot warehouse in 1999. (It was eventually designed as a CDC stockpile after Sept. 11, though it was never used for that purpose.)

With 36-foot-high ceilings, about six stories of crates filled with drugs can be stacked in dry conditions, such as Singulair for allergies or Cozaar for heart conditions.

For the dry goods, there is nearly 1 mile of conveyor belt that covers three stories and two catwalks.

Employees pick the drugs off the upper storage shelves and plop them onto conveyor belts rigged with bar code readers to keep track of where the boxes are in the facility.

Eventually, they make their way to the bottom floor, where they are routed to truck shipments and checked by hand to make sure they got to the right place.

For more delicate drugs that must be stored from 2 to 8 degrees Celsius, there’s a freezer big enough for a forklift to drive through.

And two walls of the warehouse are lined with smaller stand-up freezers for storing vaccines that must be kept cooler still, or at -30 degrees Celsius.

Blue bins are full of dry ice chips that burn the hand to the touch. The dry ice will be packed into mini Styrofoam coolers to take precious cargo, such as vaccines for smallpox and shingles, to hospitals.

Gary Vener, facility manager, was a 29-year Merck employee who knows every drug and its use by heart.

It’s crucial, he said, to quality control. He now works for UPS.

He said it’s also a high-security warehouse, with steel bars on all the windows, even the skylights and motion detectors.

Hook said UPS’ biggest competitors in the sector are the health care companies that manage their supply chains on their own.

Companies such as Merck fear two things: losing control of the process and making sure there’s rigid compliance.

So at UPS, Hook said, there’s an education process.

The mantra at the health care warehouses is that what’s being shipped is “a patient, not a package,” Hook said.

“We’re in the remedy, not the package business.”

In the end, his pitch is that UPS “can do it much more efficiently and cheaply.”