Pharma Supply Chain Risk: Why Assessing it Correctly to Minimise Disruption is Notoriously Tricky

Pharma supply chain risk and supply side failure can have catastrophic consequences for life science organisations – the results could have financial impacts as well as cost lives. Beyond developing treatments, it is the industry’s raison d’être to make drugs available where they’re required. A failure to do so is a fundamental flaw.

Globalised, complex supply chains make it challenging to avoid disruptions, but that only makes it more important to prepare for failure. Pharma businesses should concentrate on what they can control.

The risks of supply side failure are all too frequent. As this recent piece notes, there are currently over 200 drugs in short supply on the US Food and Drug Administration’s online drug shortage database.

Moreover, shortages have grown over the past decade. A study published last year by the National Academies of Sciences, Engineering, and Medicine shows ongoing and active drug shortages are more frequent and last much longer than in the past.

It was cited in a letter by Republican leaders on the House Committee on Energy and Commerce to the FDA Commissioner in March, calling for action.

There are options for mitigating such shortages: sourcing an alternative supply and/or increasing stock levels to either carry through temporary disruption or switch to the alternative. In practice, both are costly, but alternative sourcing is complicated by limited options and, more often, by the ability to even identify the vulnerability and risk.

Several related factors contribute to the identification challenge – some common across industries, others more specific to pharmaceuticals and life sciences.

Assessing Pharma Supply Chain Risk - Common Issues Facing Pharma Supplies

Perhaps the most obvious factors that make achieving resilient supply chains across industries difficult, are the related issues of globalisation, supply chain complexities and concentrations of risk.

These impact life sciences just as other sectors, and more than many. We’ve discussed before Western pharma businesses' heavy reliance on overseas manufacturers, particularly China and India, when it comes to active ingredients.

Such globalised supply chains are perhaps unavoidable, particularly for low-cost generics, where margins require low-cost production centres.

But they mean that pharma supply chains are vulnerable to a wider range of risks than they would be were production onshore – whether that’s export restrictions by foreign governments, hurricanes hitting Caribbean islands, or the difficulty maintaining standards – and avoiding dreaded FDA Warning Letters in remote production locations.

Far from reducing globalisation, recent years have, if anything, accelerated it. US pharmaceutical imports from China (and exports to it), for example, are booming.

This contributes to the second challenge of complexity. Both risks and dependencies are more difficult to identify with supply chains that span the globe and can reach across industries – from laboratory facilities to farms.

Over a decade ago, for example, the life science industry saw a huge recall of heparin, an anticoagulant used to prevent harmful blood clots and extracted from pigs’ intestines, in small workshops based in China. This dependency may change in time with new production methods, but where animal derived products are concerned, this type of dependency is unavoidable.

Complexity may also disguise concentrations of risk – even if these are avoidable: Reliance on common manufacturers by a vast range of manufacturers is nothing new; one thinks again of the explosion in Shin Etsu’s manufacturing facility at Naoetsu in 2007 – disrupting the supply of chemicals for cellulose derivatives used by many major pharma groups for their tablet formulations and coatings. More recent examples are not hard to find.

Even where alternative suppliers exist, pharma businesses are left scrambling and competing for this extra capacity – at a minimum, driving up costs.

Pharma-Specific Supply Challenges

Other factors exacerbate these challenges. Some are, again, common across industries: The rise in just-in-time manufacturing and its spread from automotive businesses across industries has undoubtedly had an impact.

While reducing inventory may have merits in terms of efficiency, it is not necessarily well suited to complex, globalised supply chains. We’ve considered before whether time is up for just in time – at least when it comes to pharmaceuticals.

Other challenges also may affect pharma manufacturers more acutely, if not uniquely. One is the scale of manufacture: pharma and biotech companies’ influence over some suppliers is limited because the volumes purchased are often small – even while the supplies have a disproportionately high value at risk attached to them.

In the ordinary course of trading, there may be no issues; in times of crisis, however, perhaps due to soaring demand from other sectors sourcing the same supplies, pharma businesses can find they are a low priority where supplies are limited.

This can be a particular problem because the drug development process starts small, and sometimes specific sources will be identified in the regulatory dossier that are difficult to change post-approval.

And that leads us to the critical challenge that particularly affects pharma: The regulatory demands the industry faces.

On the one hand, as the reference above to Warning Letters and OAIs (Official Action Indicated) notices indicates, the rightly strict standards for pharma and other life sciences products contribute to the risk of quality issues and subsequent regulatory action.

Quality related issues remain the leading root cause of supply chain disruption historically.

At the same time, bolstered by the experience of Covid, government interest is also increasingly focussed on not just quality but continuance of supplies. In June, US Senators put forward a bill to force government agencies to investigate weaknesses in the country’s pharma supply chain and develop plans to reduce dependence on foreign countries. It is just the latest example of the trend towards governments pushing for increased resilience.

That these twin priorities – of ever stricter quality requirements, making setting up new production facilities prohibitively expensive, and continuity of supply on the other – may conflict, goes largely unacknowledged.

Mitigating Measures for Pharma Supply Chain Risk

The range and difficulty of these challenges should lead us to a critical conclusion: attempts to anticipate the specific events that lead to major supply chain disruptions are largely futile.

In general terms, identifying issues that may cause an interruption, such as the weather, political action or regulatory enforcement, may be possible.

In most cases, however, predicting the wide range of specific threats that might impact first, second or third-order suppliers is impossible. Even if it weren’t, most events that may affect their supply chains are outside companies' power to control.

It also suggests a solution because the risk is not simply determined by the chances of disruption – but also by its impact. The first is very difficult to quantify; the second is more feasible.

As a consequence, rather than looking to precisely predict the sources of major disruption, businesses are better off assessing their supply nodes: determining which are most critical by focusing on those that are unique or difficult to replace and estimating the potential loss from their disruption.

Quantifying that loss will help prioritise mitigation efforts.

This will also provide the justification – or otherwise – for the cost of mitigation, whether that’s investing in alternative facilities, holding more inventory or establishing alternative sources.

In truth, there may not always be a cost-effective solution for avoiding shortages. Onshoring prospects for low cost generics are particularly limited . Low cost drugs come with that price.

However, two issues should be noted: first, the visibility of the supply chain that the exercise promotes can also lead to opportunities to drive efficiency, particularly as technology advances; and second, whether mitigation is worth it, is a calculation that can only be made once you know the cost of failure.

And if you do not understand the value at risk at each supply point, your competition still might.

Coronavirus Drug Shortages Highlight Pharma Supply Chain Dependency on China and India

Covid-19 threatens to cripple medicine supply lines bringing China, India dependency into sharp relief

Should pharma be panicking over the Coronavirus and Drug Shortages? Intersys Risk Director Catherine Geyman evaluates the tough choices facing pharma.

The epidemic has raised criticisms of the dependence on overseas supplies for our medicines, in particular active pharmaceutical ingredients (APIs) and generics in the pharma industry. The Economist’s recent piece, for instance, suggested that prior to Covid-19, there was widespread complacency.

“Until about the third week of January, only a few pharmaceutical executives, drug-safety inspectors and dogged China hawks cared that a large share of the world’s supply of antibiotics depends on a handful of Chinese factories,” its article opened, before continuing in similar vein.

Nor is it just industry outsiders. This week, the chairman of India’s Pharmaceuticals Export Promotion Council of India (Pharmexcil) said Europe was panicking following its government’s decision to restrict exports of 26 APIs (mainly to protect domestic supplies): “[W]e control almost 26% of the European formulations in the generic space. So they are panicking,” said Dinesh Dua.

This is unfair, however – at least as far as the pharma industry goes (and for quite a few others). It is not just a “few” executives who have been concerned about the reliance on China and India for APIs. Many European and US pharma supply chain managers have worried about it for years.

Governments, too, have noted the reliance on China with concern. Last year, a hearing of the U.S.-China Economic And Security Review Commission in Congress considered this very issue. Senator James M. Talent provided a concise summary: “According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologic imports are from China, as well as 39.3 percent of medical device imports, making China one of America's top sources for medical products. These numbers understate significantly the true sourcing of health products in China because China is also the primary supplier of precursors for pharmaceutical companies in other countries such as India which, in turn, are major suppliers of finished product to the United States.”

Strikingly, the hearing also heard that the US considers this a national security issue.

“The growing reliance of the U.S. on foreign sources for critical defence related material is an issue that must be addressed at the national level,” Christopher Priest, Chief of Staff for the Defence Health Agency Operations Directorate, which oversees the medical needs of the US Army, Navy, and Air Force, told the hearing.

Ultimately only time will reveal the true impact of Covid-19 on global pharmaceutical supply. Most well managed biopharma companies will hold significant stocks (months) of API to ensure their patients are protected from this type of unpredictable event. However, there is also a large number of low cost generic drugs that simply do not have the margin to support significant stock holdings, and many companies producing the same generic drug may be dependent on a single source of API in India or China. The global drugs market was already in a precarious position with drug shortages, so this is simply going to exacerbate that situation.

Quantifying the value of stock in terms of continuity of supply and identifying critical supply dependencies are key drivers of interest in tools like SCAIR®. Companies are increasingly urged by their stakeholders to understand and map their dependencies and exposures, precisely because they have been concerned about how vulnerable they are to a disruption.

Probabilities and pandemics

SCAIR®’s approach is to focus on impact rather than probability to ensure the company has taken measures to protect itself against major supply chain interruptions, regardless of their source. It is a more manageable challenge than quantifying likelihoods or assessing probabilities, which is a difficult task.

This is not just because it is hard to predict outcomes (after all, who really knows how far and fast Coronavirus will spread and the impact it will have?). It is also because we often don't understand probabilities and misinterpret risk terminology.

In a recent discussion of Covid-19 and risk perception on Radio 4’s World at One, Cambridge professor and chair of the Winton Centre for Risk and Evidence Communication, David Spiegelhalter made the point that most people don’t understand the term “reasonable worst case scenario”. That is despite it being a key phrase used in contingency planning activities for the Coronavirus and much else. It’s often taken as meaning a likely outcome, rather than as what it is: a catastrophic but credible scenario. A similar misunderstanding could often be detected in reporting around the Yellowhammer Brexit contingency planning.

As one critic of the resulting “hysteria” put it at the time: “It is not a prediction but a worst case scenario, helping the government in its planning to mitigate the risks.”

Even if we understand the terms, though, our brains are not well suited to evaluating probabilities, as another academic on the Radio 4 discussion pointed out. The “probability neglect bias” makes us less focussed on probabilities and more on outcomes, explained Dr Barbara Fasolo from the LSE: it’s the reason we panic over unlikely disasters and also why we bother playing the lottery.

In controlled experiments this bias leads to seemingly irrational behaviour. For example, people do not differentiate between a one percent probability of getting a non-lethal but painful electric shock, and a 99 per cent probability. In fact, they are willing to pay the same amount of money to avoid either set of odds. In real life, as with the Coronavirus, though, the probabilities themselves are massively unclear, which only makes rational judgements harder.

Consequently, impact quantification for scenarios rather than probability assessment is usually more helpful. You can spend an awful lot of time and money trying to work out the likelihood of each major interruption scenario, but that is usually wasted. It is much better to spend resource planning for and remediating the sources of risk that can do the most damage to your supply chains.

Hobson’s choice

However, once the assessment is done, there remains the challenge of the lack of attractive alternatives.

As stated, the dependence on China is not a new concern for pharma. Coronavirus has just brought it into relief. Recently, we’ve had concerns around the potential impact of the US China trade war, for example. More longstanding are concerns about quality – and that applies more so, if anything, to India. An analysis last summer showed that, of the 75 warning letters sent by the US FDA to pharma manufacturers for violating safety or quality standards in the 20 months to August 2019, half were to companies in China or India. For non-compliance notices from the European Medicines Agency, meanwhile, the proportion was almost two thirds (64%).

So why haven’t US and European pharma businesses addressed the risk?

For two related reasons: first, because change is difficult and expensive. Once a company has tuned its process to and validated its use of a certain type of API from a particular source, it is costly to replace and revalidate the source. There is therefore an in built bias to stay with current suppliers.

Second, while change is costly, APIs and generics are cheap. As we’ve noted before, there’s little incentive for new players to enter the market – and certainly not in Western countries where labour is relatively expensive and overheads are high. Moreover, as The Economist piece correctly states, the rest of the world will have lost a lot of its expertise in making APIs, and it’s difficult to start back up. We go back to what the FDA has called a “broken marketplace”, with prices not rising despite shortages and production typically not increasing enough to restore supply to pre-shortage levels.

Pharma has long noted the risks of reliance on Chinese sources, but a cost-risk-benefit analysis has so far always come down in favour of the status quo – because it’s cheap.

One exception to this is Sanofi who recently announced the creation of a France-based offshoot that will produce APIs. We’ll have to wait and see if other businesses will follow suit.

No upside in Covid-19

So, will Coronavirus force pharma to rearrange their supply chains? We shouldn’t bet on it – at least in the short term.

In the long term, the rise of the Chinese middle class and increase in wages means that the future of cheap production in the country is uncertain. And, when it finally looks like it is no longer economical, it may well be that pharma businesses learn from the past and don’t simply look for the next cheap production base.

In the meantime, though, businesses face significant costs and disruption of changing suppliers – and massive uncertainty over how the pandemic will develop and the potential disruption involved. It’s hard to justify the move.

Of course, in a sense this is a similar dilemma to that facing governments around the world as they determine what and how far to go in combatting the spread of the virus. Do too much, and if they succeed they will be said to have over-reacted; too little and they’ll be blamed for the consequences as the virus spreads. It’s a no-win situation. But governments have relatively unlimited resources, and risk only their popularity, which may recover by the next time their public heads to the polls. Pharma businesses don’t have that luxury – a rash move could cost them their competitiveness and ultimately profits.

For the time being then, most will choose to sit tight and wait to see if change is forced upon them. But that doesn’t mean they can’t be ready.

With tools like SCAIR® managers can map their supply chain dependencies and exposures. Soon with functionality we’re adding they’ll even be able to overlay custom events (such pandemic hotspots) to further quantify impacts and scenarios. With this they can see dependencies, loss estimates, vulnerabilities, and the ultimate financial impact of events, so they can be ready to act if the time comes.

If you want to be prepared for the worst, let alone avoid it, it pays to know what the worst might look like.

Catherine Geyman, Director, Intersys Risk Ltd

Out and about at CPhI Worldwide

Greetings from Frankfurt where we've been at CPhI Worldwide.

We’re just returning from a successful week taking SCAIR to 36,000 pharmaceutical professionals.

You don’t have to be at the conference long to appreciate the importance of technology: The event brings in participants from every part of the pharmaceutical manufacturing and delivery, with over 20 dedicated zones covering ingredients, APIs, excipients, packaging, biopharma, machinery and so on. There are also participants from over 150 different countries.

Visiting this conference, it’s impossible not to get a sense of the both complexity of the modern pharma supply chain and its truly global nature. With new innovations announced every day at the conference, you also get a sense of how fast moving it is.

CMO uncertainty

And you get a sense of the risks: The annual report of the event’s organisers picks up on some of these, including including political uncertainty in the US, with a new administration that has shown a “keen political desire… to reduce drug prices, but with very little indication of policy”.

That’s left pharma companies and the contract manufacturing (CMO) “in the dark”, the report notes, and vulnerable to decisions that could disrupt their entire business model.

We’re at CPhI to show how technology such as SCAIR can address this type of risk, as well as more long-standing challenges that affect operators across continents and across the supply chain.

We don’t pretend to be able to control Trump, but SCAIR can enable businesses to quickly get to grips with the impact any changes may have. With the software they can visualise their end-to-end supply chains and quantifying accumulated exposures of the company’s product portfolio to each critical supply point.

Nat cat and compliance

This Supply Node Exposure module in the software is also used to identify locations critical to the company for natural catastrophe alerting. Warnings and reports of hurricanes, earthquakes and floods are overlaid on these locations to rapidly highlight potential losses.

Finally, SCAIR deals with another key concern across the industry and highlighted frequently at CPhI: Compliance. It collects and consolidates non-compliance and supply chain interruption information from leading regulators such as the FDA and EMA. Root cause analysis of data such as recalls, production shortages, enforcement actions helps avoid issues in future.

As fast as the industry changes, events like CPhI make it clear these traditional concerns, along with issues such as maintaining data integrity and good manufacturing practice, continue to be key. It also suggest, though, that those companies that tackle them successfully, can look forward to the future with considerable confidence.

When the storm comes

Hurricane Irma once again shows us the importance of mapping supply chain risks for the pharmaceuticals industry.

The storm has passed, but the effects will be felt for months to come. In the Florida Keys up to a quarter of homes in the low-lying islands are reported to have been destroyed. Many in the Caribbean have had it worse.

There will, as always, be lessons for industries, including pharma. Puerto Rico, for example, is a huge centre for pharma manufacturers – the fifth biggest in the world with more than 80 plants. It accounts for about a quarter of the country’s GDP.

The island was actually spared the worst of the hurricane, but still three died, 50,000 were left without water and 600,000 without power. The storm served once again to expose the fragility of the island’s infrastructure. Nor are hurricanes the only recent disruption to hit the island. Only at the start of the summer did it declare its outbreak of the Zika virus over, after it infected more than 40,000.

Weather risk: an unavoidable reality

It’s not just Puerto Rico, of course; Irma brought potential for disruption across the Caribbean, to Florida and on inland. And it’s not just Irma; it followed hard on the heels of hurricane Harvey.

The industry has got better in recent years at dealing with these events, not least because of government encouragement to avoid disruption to medical supplies that can exacerbate the tragedy. One of the untold stories of both hurricanes Harvey and Irma is the shortage of urgently needed medicines; untold, because the problem was largely avoided with some improved planning.

But we’ll be tested again. Yes, hurricane Irma was unusually strong, but we’ve seen storms this powerful – and perhaps more so – before. We’ll see them again. The role of climate change in developing such storms will continue to be debated. What’s unarguable is that pharma – and a wide range of other industries with global supply chains – will always be at risk of exposure.

Preparing in advance for real resilience

Modern technology is a big part of the answer to managing this risk. The information businesses and the public have on a hurricane’s trajectories and strength is unparalleled; they can now track it online in real-time. Combine that with modern software solutions and we can quickly map risks for at-a-glance understanding of exposures.

That’s always useful in directing emergency responses when the storm comes. It’s more useful, though, used to map exposures and build resilience through continuity plans before. The power of Irma may have been a surprise, but storms in the hurricane season are not. Fortunately, we have the tools to weather them well; we just need to make sure we use them.

Will Brexit break your supply chain?

Brexit means uncertainty and complexity for supply chains, but that shouldn’t stop us planning

We know the result, but not much more. The only certain conclusion we can draw from the EU referendum vote is that we’re in for a period of uncertainty.

In one sense, little has changed. The UK’s membership of the EU continues. David Cameron has said it’s up to whoever replaces him to officially notify the European Council of the UK’s intention to leave and that won’t be until September. Then there’s a two-year period to negotiate a “withdrawal agreement”. Even that may be extended.

The UK could remain in the EU into 2019 or longer.

So, on the one hand, nothing’s changed. On the other, everything is different. Whether you support Brexit or think it’s madness, it’s impossible to deny it’s a game changer.

Volatile supply costs

First, there’s the short-term uncertainty. Even the most optimistic supporter of Brexit would struggle to claim we’re not likely to see increased volatility. Big currency moves, for example, are likely to be a fact of life for some time to come. We’ve already seen a 31-year low against the dollar. One analyst has predicted it could fall to parity by the end of the year.

Whether that’s true or not only time will tell, but less settled currency markets will be here for the foreseeable future. The impact on costs of overseas supplies and raw materials could be significant.

Uncertainty also means investments are more difficult to predict, both for businesses themselves and for suppliers. That could affect plans to support growth.

Longer-term, though, the big questions are likely to be about access to markets.

Diverging Regulation and Standards

This is not always going to be simply about tariffs. There are other dangers in going your own way.

Before the advent of the single market, for example, it was often impossible to sell a product designed for one EU market in another due to different technical standards or regulations operating in each.

Manufacturers must keep an eye on these barriers creeping back in. Existing harmonisation in industries may be eroded over time by new regulations and developments in either Britain or the EU. Equally, they may be the result of intentional protectionist measures introduced by the remaining EU countries.

Like any change in tariffs, this will only become clear with time. There is one thing we can already bet on, though: increased complexity

Increased supply chain complexity

Any arrangement other than membership of the EEA like Norway’s is likely to see either a change in the UK’s terms of trade with the EU or the possibility to change its terms with those outside – and perhaps both.

That could mean opportunities, as well as challenges. But if it means sourcing from new markets or just navigating new rules when buying from existing suppliers, it will mean changes to the supply chain that have to be managed.

There’s no crystal ball, but there are things businesses can do to prepare now.

Most obviously, they need to look at anything they can do to make their supply chains resilient. Dual sourcing from suppliers both within and outside the EU could be one way businesses hedge their bets, for example.

Even before considering that, though, businesses need to make sure they really understand their supply chains, and have visibility across them. That will enable them to consider the impact the various possibilities may have and plan accordingly. It will also mean they can react faster and more intelligently to the dangers and opportunities Brexit brings when the time does eventually come.

Power, money – and technology: the rise of the supply chain CEO

Evidence supply chain management is increasingly critical to corporate success

Money isn’t everything, but it helps, and supply chain management professionals are likely to welcome evidence of rising salaries. According to the recent Institute for Supply Management (ISM) survey average salaries in the US grew 7.9% last year, while the proportion of supply chain managers making $100,000 or more is now up to 44%.

There’s evidence it’s not just a US trend, either. In the UK, another recent survey has predicted increased pay in the coming year, albeit at a slightly more modest rate of 5%.

For me, though, a more telling piece of evidence of the status of supply chain management is more anecdotal: the increasing numbers of supply chain managers who have gone on to lead their organisations as chief executive (where, of course, the financial rewards are all the greater).

As a recent article in Forbes notes, the role call of CEOs from a supply chain background includes leaders of some of the world’s biggest and best-known companies: Tim Cook at Apple, Mary Barra at General Motors, Brian Krzanich at Intel, Fabian Garcia at Revlon, John Hendrickson at Perrigo…

All told, it seems career prospects for supply chain professionals look pretty good. What’s perhaps even more interesting, however, is what that tells us about supply chains themselves.

Setting the course: supply chain strategy as corporate strategy

On the one hand, it clearly sends the message that supply chains are important – and touch a lot of the business; the Forbes piece says chief supply chain officers (CSCOs) now often control more than half companies’ spending and have two thirds of employees reporting to them directly. In short, supply chain managers are good choices to run the business because they know the business.

It also notes, correctly, that globalisation and changing manufacturing patterns means supply chains have become enormously complex. The supply chain function has had to attract smart people, and it’s perhaps not surprising some of those sharp minds rise to the top.

The reason for the increasing profile of supply chain managers, though, can probably be summed up more simply: Supply chain management has become a strategic position, making the progression to CEO more natural.

As the writer puts it: “The modern CSCO approximates the thought process of the CEO, balancing risk and opportunity, fighting the near-term battle with an eye on long term strategy, and focusing above all on profitable growth.”

The role of supply chain software

I would add one further thought: That this transformation is heavily supported by the increasing role of technology.

First, much of the logistics, administration and number crunching is increasingly automated, enabling supply chain managers and their departments to focus on more strategic issues. Second, it’s only through technology that supply chain managers can actually gain the visibility and understanding of complex supply chains – and associated risks – they need to make decisions.

That’s unlikely to change. After all, if supply chain managers are to keep making the step up to leadership, they’re going to have to show more than just that they’re responsible for making strategic decisions; they’re going to have to demonstrate those decisions are the right ones for the business.

Supply Chain Interruption Software Demonstration

If you're a Risk Manager, Supply Chain Professional or just someone concerned with the health of your manufacturing functions, how can you be sure you have fully considered your supply chain vulnerabilities?

Our software, SCAIR: Supply Chain Analysis of Interruption Risks, helps you fully analyse the risks to your business, and ensured you have considered mitigating correctly against profit variations caused by Supply Chain Interruptions.

Click here for a walk through demonstration of the software.

For more information, call Catherine Geyman on 0845 094 8925 or contact us online.