Ten Sources of Pharma Supply Chain Risk

Drug shortages are at record highs but what are the factors driving that? In the first of two blogs examining the issue, we look at ten common drivers of pharma supply chain risk, before exploring top strategies for increased supply chain resilience.

No matter where you look, drug shortages are worse than ever. In the US, the American Society of Health-System Pharmacists (ASHP) reported 323 active medication shortages in the first three months of 2024 – the highest since it started tracking in 2001. That includes 48 new shortages already in the first quarter of 2024 – against 156 in total for the entire year in 2023.

Chemotherapy drugs were among the top five types seeing shortages, according to the University of Utah Drug Information Service. Basic and life-saving products in short supply included oxytocin, Rho(D) immune globulin, standard-of-care chemotherapy, pain, sedation, and ADHD medications.

“All drug classes are vulnerable to shortage,” ASHP CEO Dr Paul Abramowitz told reporters. "Some of the most worrying shortages involve generic sterile injectable medications, including cancer chemotherapy drugs and emergency medications stored in hospital crash carts and procedural areas.”

It’s a similar story in the UK, with the chief executive of Community Pharmacy England saying the situation is “beyond critical”. Its survey found 79% of pharmacy staff saying that medicine shortages were putting patient health at risk. In Europe, meanwhile, said Janet Morrison, national pharmacy bodies across 26 European countries (all those participating in the PGEU survey) reported shortages in 2022 and 2023.

But what’s driving that? The answer is: No one thing. Pharma businesses have long faced a ramping up of risk to their supply chains due to everything from operating models to trade wars and weather. From 2000 to 2018, there was a 20-fold increase in recorded drug shortages in Europe. Here are ten factors that have ramped up risk for pharma supply chains.

1. Offshoring and Consolidation

This could otherwise be termed the quest for cost reduction. Looking for cheap manufacturing has resulted in about 80% of active pharmaceutical ingredients being produced abroad, mostly in China and India. That’s added to supply chain complexity and introduced or added to a wide range of the other risks listed below, from trade wars to weather risks and quality concerns.

Put simply, as we’ve noted before, cutting costs comes at a price. It means an increasing reliance, particularly for generics, on a small group of offshore suppliers in countries vulnerable to wide range of risks that are better but more expensively manged domestically.

2. Just in Time for Disruption

Closely related to and exacerbating the risks from offshoring is the move toward just-in-time (JiT) manufacturing. Over the last few decades, life sciences have increasingly adopted Toyota’s pioneering approach: “Making only what is needed, only when it is needed, and only in the amount that is needed.”

For life sciences, however, it works better in theory than practice. The concept of “need” is arguably different when it comes to cancer drugs than it is for headlights. Regulatory requirements making it difficult to simply switch suppliers in the event of a disruption, geographically dispersed supply chains, and difficulties anticipating demand surges (such as during Covid) also arguably made JiT less suitable for life sciences. Again, a cost-cutting measure exacerbated vulnerabilities to many existing supply chain risks.

3. Regulatory Risks

As stated, part of the reason for arguing just-in-time manufacturing is a poor fit for pharma and life sciences are the regulatory requirements. Apart from anything else, these require lengthy qualification or process revalidations for critical ingredients or components. Just swapping suppliers is often not that simple.

Regulatory action is also often behind disruptions to supply. A study led by Intersys with the Institute for Manufacturing at the University of Cambridge some years ago found that more than two thirds of life sciences shortages (69%) were linked to Official Action Indicated notices issued by the US FDA, with a higher prevalence of issues in China and India than in the US and Europe.

Nor is it just regulatory issues around quality and product safety that life sciences businesses must contend with. They also face all the other regulatory pressures and risks to supply chains common across industries, from employee safety to modern slavery.

4. Mergers and Acquisitions

Even if businesses don’t already have such risks in their supply chains, or have a handle on them, they can inherit them. Acquisitions can see companies take on the problems of their purchases that can dog them for months or years – one reason why due diligence is so important.

Even if they’re not involved themselves, M&A activity between suppliers can concentrate supply chain risks. Previously distinct suppliers can come to share common risk factors. It’s been an increasing risk in recent years, with the number of deals in the life sciences sector increasing by 13% between 2011 and 2021 and the rate doubling between 2019 and 2021, according to McKinsey. And while the global M&A market slowed in 2022 and 2023, life sciences bucked the trend: 2023 saw deal values up almost a quarter.

Successful M&A deals are notoriously difficult in the sector – as the McKinsey article notes:

“Culture looms especially large in pharmaceutical deals because so many deals involve large companies acquiring small companies. Many small companies owe much of their success to their distinctive culture and ways of working. The acquirer is buying not only the target’s tangible assets, but also the talent and culture that nurture the company’s innovation engine and entrepreneurial spirit.”

5. Cyber Risks

Cyber and data protection risks are also among the regulatory risks common across industries. They are, however, particularly acute for pharma and life sciences businesses. The data managed at points in the supply chain – patient data and medical information – could not be more sensitive, or the risks of disruption or intrusion from bad actors – to hospital systems or connected medical devices – more serious.

“For the health sector, cyberattacks are especially concerning because these attacks can directly threaten not just the security of our systems and information but also the health and safety of American patients,” the US Health and Human Services deputy secretary has said.

As we’ve noted previously, the risks continue to increase as attacks become more frequent and sophisticated, and an explosion of data from sensors, cloud computing and other devices expands potential points of vulnerability.

6. Weather Risks and Climate Change

Acts of God will always be a risk, but offshoring to regions at greater risk of and less resilient to extreme weather events has exacerbated the life science industry’s exposure. Even while manufacturing relatively close to home, however, the sector can be exposed to a concentration of manufacturing in particular regions. The reliance on hurricane-prone Puerto Rico as a key production centre for pharma manufacturers is an obvious and old example.

Climate change and increasing evidence of more frequent extreme weather events continue to bring these risks to the fore for pharma – whether through disruption to their own or suppliers’ operations, rising insurance premiums as underwriters become increasingly wary of the risk, or regulatory requirements to report on the impact of climate change on their supply chains.

7. Transport and Logistics

Transport risk is a function of the global supply chains that have come to dominate pharma industry. The greater distances involved inevitably introduce increased uncertainty and risk to the supply chain.

It’s not just major events like the Suez Canal blockage in 2021 but the attritional impacts of less significant delays, damage, and theft that can add to uncertainty and costs. Temperature requirements for many pharmaceutical goods add to the challenge. While connected sensors, devices and systems on the Internet of things have been valuable aids to managing cold chain distribution, the scope for disruption remains.

8. Demand Shocks

It’s not just supplies that determine shortages. As with disruption to supply chains, rapid increases in demand can result in shortfalls.

There was plenty of evidence during Covid, when analysis of FDA data from early 2020 with SCAIR® showed that demand surges caused the majority of shortages. It doesn’t take a pandemic to bring it about, either. Take the export ban on hormone replacement therapy drugs in October 2019, introduced in response to shortages. As Jansen, one of the manufacturers, offered at the time, it wasn’t supply disruptions causing the problem but simply an “unprecedented increase in demand.”

Part of the difficulty in predicting such surges is that many drugs serve as alternatives to others – as in the Jansen case. A supply chain disruption to one alternative, then, can rapidly lead to shortages in another.

9. Trade Wars and Real Wars - Geopolitical Risks

The ongoing conflict in Ukraine (which few predicted) is a powerful reminder of the geopolitical uncertainty facing global supply chains. But problems can occur long before anyone picks up arms.

Before Ukraine and a bigger direct risk to many pharma supply chains, the US-China trade war was the dominant geopolitical issue preoccupying many in previous years. With Donald Trump again the presumptive nominee of the Republican Party for the 2024 election, it’s an issue that could soon return to the fore.

Along with the pandemic and global shipping disruption, such risks have been a driver for increased government efforts and demands to protect critical supply chains. As the UK government’s strategy noted, “The COVID-19 pandemic, Russia’s illegal invasion of Ukraine, and disruption to shipping routes have all demonstrated the potential impact of global events on the reliable flow of vital goods.”

10. Quality, Counterfeiting, Fire, Flood, Theft and Everything Else

The bucket for all the rest of the risks facing pharma supply chains is big. Pharma and life sciences face the risks of supply chain disruption common across industries – and a few of their own.

Being aware of the range of risks is essential to mitigating and managing them. However, calculating the likelihood of disruption from any, given the unpredictability and complexity of the issues, is near impossible. That’s why SCAIR® focuses on impact rather than probability. Companies can’t necessarily predict what might happen, but they can quantify the potential impact of supply chain disruptions – regardless of their source.

Calling Time on Just in Time: New Answers to Efficiency and Resilience in Life Sciences Manufacturing

Like many disasters, just-in-time (JIT) manufacturing started as a good idea. Pioneered by the car manufacturers, notably Japan’s Toyota, in the 1950s and 1960s, aligning production directly with demand in terms of orders and supplies with the consequent production schedules. As Toyota’s handbook explained: “Making only what is needed, only when it is needed, and only in the amount that is needed.”

It brought significant efficiencies to the industry, eliminating waste from overproduction, transport and excess inventory, among other areas. Little wonder, then, that it has been widely adopted across other industries, from retail to technology. Apple’s Tim Cook has been among its most evangelical supporters, describing inventory as “fundamentally evil”. Inevitably, it was also widely adopted in pharmaceuticals.

But while accountants seized on the JIT concept because it meant less working capital on the books (they love stock reduction), something got lost in translation. Two things specifically.

First, JIT worked for the auto industry because suppliers to the continuous production lines were close to the main assembly plants. There was usually not much that could go wrong between supplier and manufacturer. Second, JIT works better for industries where, if problems do arise, it’s easy to switch to alternative (also probably local) suppliers if one does not deliver.

Neither was necessarily true for many businesses and industries that eagerly took it up. JIT came to be applied regardless of the geographic relationship between site and supplier; production and inventory management was applied to supply chains that were not just national but international. Moreover, it was applied in industries like pharma, where manufacturers couldn’t simply switch to another supplier in case of a delivery failure; suppliers of quality critical components need to undergo lengthy qualification or process revalidations, making swapping suppliers much harder.

Both factors make it much harder to meet customer demand without significant stock inventories to cover delays in sourcing and securing a new supply.

Time’s Up for Pharma JIT

That was graphically illustrated during the Covid crisis.

The crisis facing pharma supply chains was, in fact, two-fold: Massive disruptions to logistics, and especially cross-border supplies, due to restrictions and worker shortages, which were common to all industries; and, more pertinently for pharma specifically, a massive surge in demand – particularly for certain drugs and components and materials needed by vaccine manufacturers, such as syringes, stoppers, vials, hygienic filters and processing equipment, with a knock-on effect for the wider pharma industry.

It was the perfect storm, and while JIT cannot be solely blamed for the shortages seen, given the scale of the crisis, it undoubtedly made it worse in many cases.

Moreover, it’s not a crisis we can confidently predict will not happen again. For a start, supply chain disruptions persisted long after the worst of the pandemic had passed. The war in Ukraine should tell us that it’s never possible to be sure that international supply chains won’t face sudden and significant derailment. And demand can quickly again become volatile: If not a pandemic, then perhaps just a very bad flu season. After all, supply chain problems did not start with the pandemic.

It's not surprising then that even relatively early in the pandemic, some were asking whether JIT was finished. Moreover, at that point, it was assumed it would simply be for industry to decide; that’s unlikely to be entirely true for pharma, where it’s increasingly clear governments intend to have a say in ensuring the supply of critical drugs.

Even without regulatory pressure outside pharma, many businesses are voting with their feet. As the FT has put it, companies are shifting from just-in-time to “just in case” when it comes to managing stock.

Long Live Low Inventories

In manufacturing more broadly, it’s unlikely that JIT has had its day. Instead, for many, it might go back to first principles. A significant consequence of the disruption seen across industries is an increase in onshoring. A recent survey of British manufacturers by industry body Make UK, meanwhile, shows more than a third (35%) planning to switch to home-based rather than international suppliers.

In bringing suppliers in closer proximity to manufacturing sites, some manufacturers will be able to save JIT, which was always a legitimate efficiency drive in the right circumstances.

For many pharma manufacturers, this is unlikely to be a solution, however. For onshoring to really work and maintain supply chain efficiencies, the supply base would need to relocate, along with the main manufacturing. As we’ve discussed before, that may be possible for new in-patent products and high-value materials and components. They already have the margins to support investment in stock, secondary suppliers and other mitigations that ensure high-quality, resilient supply chains. That could likewise support investments to bring supplies and manufacturing together.

The dependence on offshore locations for cheaper components and active pharmaceutical ingredients for generics did not happen by accident, however. The cost-benefit analysis for tight-margin products in most cases still argues for offshoring. While there have been exceptions, a wholesale move to onshore APIs dominated by China and India looks unlikely. Of course, government intervention, through regulation or subsidy, could change that, but we’ve yet to see it.

But if JIT as a production process might have been fatally undermined by the last couple of years, its drivers in terms of cutting costs remain as critical as ever – and particularly for low-margin products. The need for resilience doesn’t displace the need for efficiency. For a sustainable future, pharma manufacturers need both.

The Best of Both Worlds? Supply Chain Resilience and Efficiency

The key will be to improve supply chains’ visibility and manage them with more granularity. It’s notable that the recent US Department of Health and Human Services (HHS) report on building supply chain resiliency for essential medicines talks of onshoring but also emphasises supply chain transparency.

That’s far from being achieved in many supply chains, given their complexity. A McKinsey survey of pharma businesses and other selected industries in 2020 showed nearly half of respondents citing sole sourcing of inputs as a critical vulnerability, while a quarter pointed to a lack of visibility into supplier risks.

Solutions like SCAIR® are critical to overcoming these obstacles and enabling pharma businesses to ensure that they’re holding stock but doing so efficiently – in the right place in the supply chain to most effectively mitigate potential shocks, rather than across the board. It enables manufacturers to identify their critical, single source, long lead time suppliers effectively. They can then hold the appropriate stock to protect them while taking a leaner approach for easily substituted supplies.

This hybrid approach combines just in time and just in case inventory levels at different points in the supply chain. It provides the resilience businesses need to stand up to sudden demand surges or supply chain shocks, when they inevitably arise; and the efficiency to ensure that the business is still around to see them.

Good Business Insurance Exposure Management Means Quantifying Profit at Risk

The pandemic has brought business interruption (BI) risk into sharp focus for companies with complex supply chains as well as their insurers. However, many firms still struggle to accurately quantify which supply points and exposures pose the biggest threats to their profits.

The wave of insolvencies and production shutdowns caused by recent global supply chain disruption has highlighted the importance of knowing where your exposures lie and having agile business continuity plans in place – particularly in complex manufacturing segments whose supply chains contain multiple suppliers and interdependencies. Unfortunately, these plans are often misguided as they are based on the wrong type of information.

Focus on Profit at Risk, Not Gross Spend

When prioritising where to focus risk management efforts within their supply chains, companies often look first at the gross sum they spend with each supplier. However, this ‘risk by spend’ approach paints a distorted picture of the company’s risk profile as the gross cost of a component tells you little about its impact on business continuity.

The figures that really matter are the revenue or gross profit at risk if any given supply point fails. These are the numbers that tell how much money your company stands to lose every day, week or month you are unable to supply your customers because of being without any given component.

These are the numbers that define success and failure as a business – and guide you on where most investment should be spent mitigating risk and putting business continuity plans in place.

At present, SCAIR is the only Enterprise Grade supply chain risk assessment tool that calculates value at risk.

Holistic Risk Assessment

To accurately quantify supply chain exposure, several other factors must also be taken into consideration, such as the risk mitigation actions the company has in place. If a contract is already in place with an alternative supplier, for example, this will have a material impact on mitigating the real-world profit exposure and should be factored into calculations.

So should the projected recovery time of specific facility types, the cost and time of onboarding alternative suppliers or building new facilities if supply points fail. It is vital to extend the assessment to tier two suppliers or beyond to root out interdependencies lurking further up the supply chain.

Testing exposures against multiple scenarios is also key. How would an earthquake in Japan affect production? Are there multiple suppliers located in the same Florida floodplain or Californian wildfire zone? How would a regulatory shutdown, cyber-attack or insolvency of one or more suppliers disrupt your organisation – and at what cost?

Failing to assess risk in this level of detail makes it impossible to accurately quantify business interruption exposures across a highly complex supply chain. As well as exposing companies to potentially devastating – and unexpected – financial shocks, this can also result in misplaced allocation of effort and resources, as well as over- or underinsurance.

For insurers, many of whom have been hit with heavy BI losses from the pandemic, it is prudent to ensure clients accurately quantify their BI exposures from both an underwriting and loss mitigation perspective. Scenario testing across portfolios of insured risks can also play a key role in helping insurers manage their own underwriting exposures, rooting out hidden interdependencies and unwanted risk accumulation within their portfolios.

Armed with this information, insurers can more accurately price risk, meaning clients are charged premiums that fairly represent their risk. Overlaying company non-compliance data across the portfolio can also help insurers in the client due diligence process.

Say Goodbye to Spreadsheets

As well as getting the methodology right, companies also need to be using the right infrastructure for their risk assessments. Most firms – including even large brokers with market-leading business interruption assessment capabilities – still quantify their exposures on spreadsheets. This comes with a variety of risks and limitations. While spreadsheets can be easily adapted to suit the characteristics of any given company or supply chain, they become increasingly unfit for purpose as organisational and supply chain complexity increases.

Spreadsheets are easily broken, vulnerable to human error and lack transparency and flexibility. One of the biggest risks is that risk accumulations can go unnoticed. For example, a supplier may have acquired another and although they may operate under two names, they are in fact the same organisation, with many shared risks. If address and supplier name identification is not automated and verified this is easy to miss.

Spreadsheets also do not integrate easily with third-party datasets, models and overlays and require manual management, making it difficult for the company to view their exposures in real-time or slice and dice data for analysis or visualisation purpose, limiting its agility.

Leading organisations are moving away from spreadsheets for these reasons in favour of tools that enable them to centrally manage, analyse and visualise their evolving supply chains while, crucially, more accurately calculating their exposures.

With supply chains under exceptional pressure, these firms are at a distinct competitive advantage and while the threat to those left behind continues to grow.

SCAIR's supply chain risk assessment and management tools can help organisations identify, track and manage supply chain exposures.