Why pharma should spend an hour or two on Total Landed Cost

Karen Harbour Strategic Account Manager
karen.harbour@envirotainer.com

When shipping vaccines or any other temperature-sensitive medical solution, pharmaceutical companies look for partners that ensure high quality, that can simplify the handling process, and help to reduce CO2 emissions. While active temperature-controlled solutions meet all those requirements, the general perception is that they are more expensive. That perception sometimes makes pharmaceutical companies choose other, seemingly less costly alternatives, commonly known as passive solutions, not realizing that they are in essence, paying more for an inferior solution.

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The main reason pharmaceutical companies use the large Envirotainer RAP e2 active temperature-controlled container is that they want to maximize the safety of their shipment. The RAP e2 container has an active electric cooling and heating system, meaning that it can continually keep a constant temperature inside the container, despite varying outdoor temperatures. In fact, it can keep your cargo protected indefinitely by simply plugging it into a power outlet. Add to that data logging, no disposable materials, no time for conditioning and assembling of the container, and a track-record of zero product losses.

Compared to passive solutions, which are essentially just insulated boxes without any form of active temperature control, it is easy to understand why active temperature-controlled containers are thought to be a more premium, expensive option. And if you just compare the costs of the containers, active temperature-controlled containers do cost more than their passive counterparts.

What you save on a cheaper packaging solution is unfortunately more than offset by higher costs for air freight and auxiliary costs, not to mention the risk of product loss

But that is like thinking that the cost of the box is the same as the cost of shipping. When you calculate the Total Landed Cost, it becomes clear that in most cases, what you save on a cheaper packaging solution is unfortunately more than offset by higher costs for air freight and auxiliary costs, not to mention the risk of product loss.

Airplane-cargoarea-639456162-1000x669.jpg

Total Landed Cost means including all costs when comparing shipping alternatives

The reason passive shipment solutions are perceived as cheaper, stems from that the various costs associated with shipping pharmaceuticals using passive boxes often are spread over a number of different departments within the pharmaceutical company, thus making it difficult to see the whole picture, and grasp the actual Total Landed Cost. So, what is Total Landed Cost?

Total Landed Cost = cost of packaging + cost of air freight + auxiliary costs + the probability of the cost of product loss.

Air freight costs

Air freight rates are calculated using both the freight weight and the freight volume. Air cargo space is limited and due to the COVID-19 pandemic, air freight rates as a proportion of Total Landed Cost have increased. As a result, if you want to ship large volumes of pharmaceuticals, it becomes increasingly important to use packaging solutions that take up as little space as possible in the cargo hold of the aircraft.

Auxiliary costs

Apart from taking up less space, an active temperature-controlled container also means much less manual handling, preparation, storage and other auxiliary costs, which will also save you money.

Tarmac-cargo-146070620-1000x669.jpg

Product loss costs

In addition, there is one cost related to logistics that can often be forgotten, and that is the cost of having to scrap and replace products that have been damaged during transportation. Having to scrap damaged products is expensive and touches all areas of the pharmaceutical business – quality, profit, logistics etc. Even just the suspicion of a temperature deviation adds thousands of dollars in costs to investigate if something went wrong and damaged the medicines.

Calculating the Total Landed Cost is not quite as straightforward as looking at a price list – but if it is possible to have a shipment solution with better quality, higher reliability, fewer temperature excursions, no product losses, no reputational risk and better environmental performance, at the same or even lower cost – shouldn’t that be worth an hour or two to calculate your own Total Landed Cost?

Getting the numbers right – real life examples

Below are two examples that illustrate why it is important to spend that extra hour or two.

Example 1: Optimizing volume shipped

Our first example is a company that wanted to ship large volumes of pharmaceuticals packed in 13-liter boxes. Due to the COVID-19 pandemic and limited air cargo space available, they had to charter their own aircraft. The cost for the charter was well over 1 million USD, so they had to optimize the use of the cargo space.

We helped the company calculate how they could maximize the volume of shipped pharmaceuticals. Using our RAP e2 active temperature-controlled container, they could fill 432 boxes in each RAP e2, and with 14 RAP e2 containers on the aircraft, they could ship a total of 6,048 boxes.

With a passive Half PMC solution, they could fill 189 boxes in each passive unit and fit 28 units on the aircraft. In total, that would enable them to ship 5,292 boxes, that is, 14% less, than with the active RAP e2 containers. Using passive twin pallets would ship the same volume of boxes, and smaller PMC(1) solutions would imply 35% less boxes compared to the active RAP e2. See image below.

Maximizing load efficiency.PNG*Optimized with 2 cm spacers​
**Example Boeing 777-300​
***PCM (Phase Change Materials) are substances that absorb and release thermal energy (heat) during the process of melting and freezing. They are called “phase change” materials because they go from a solid to a liquid state during the thermal cycling process.​

Example 2: Optimizing Total Landed Cost

Example 1 above shows the difference in volume shipped. In this example, we will take a closer look at the actual costs of shipping. The calculation includes the cost for the shipping solution and the airfreight cost.

The total savings per year, by using the RAP e2 instead of the passive solution, was €55,000

In this real-life example, our client wanted us to calculate the cost of shipping a volume of 200,000 boxes. As can be seen in the image below, the air freight cost for using a passive pallet (Half PMC) is much higher – €3,875,000 compared to the air freight cost of the active temperature-controlled container of €2,595,000. The cost of leasing the active RAP e2 container is higher, €2,305,000 compared to the Half PMC of €1,080,000. But in total, the Total Landed Cost per box is €24.8 for the passive Half PMC and €24.5 per box for the active RAP e2. The savings per box that the company could make by using RAP e2 was thus €0.3. The total savings per year, by using the RAP e2 instead of the passive solution, was €55,000 (calculation based on 200,000 boxes).

RAP e2 compared with passive half PMC shipper​.PNG

Total Landed Cost includes more than air freight cost and shipping solution
Air freight cost and the cost of leasing/buying a shipping solution are however not the complete Total Landed Cost. There are numerous other costs involved, such as time for assembly, preparation and packaging, cost for disposal of packaging materials, cost for temperature monitors, cost of transportation of the packaging solution to the airport or warehouse, cost for dry ice, refrigerants, electricity etc. These costs are generally higher for passive packaging that requires more manual handling. The image below shows a summary of auxiliary costs.

Total Landed Cost TLC for a Pharmaceutical company.PNG

To sum up, to optimize cost efficiency for your company as a whole, you need to calculate the Total Landed Cost. It will be time well spent that could save you tens of thousands of USD, as illustrated above – in just a few hours. It can be a complicated exercise if you are unused to it. If you need assistance, we can help you calculate Total Landed Cost. Please contact us if you need support.

(1)A PMC aircraft pallet is a common pallet used to transport freight by air, also known as a 'Cookie Sheet'.

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