New strategies to manage risks and reap benefits
It is well-known that product sales, sourcing and manufacturing by U.S. pharmaceutical and life sciences companies, especially in newly prosperous nations such as China, India, Mexico and Brazil, has expanded dramatically since the late 1990s. Global companies now routinely source raw materials from all over the world, and they are increasingly outsourcing drug development, manufacturing and packaging to contract suppliers and partners in international markets.
The worldwide scale of their operations is creating supply chains that are more extended, globally dispersed and virtual in nature. But globalization of the supply chain also introduces a new level of risk for brand owners, many of whom have limited access and visibility to the supply chain from end-to-end and who must rely heavily on local contractors operating in great measure without close supervision. Partly as a consequence of this opaque relationship, threats that were thought to be of little consequence less than 10 years ago —product contamination, counterfeiting, intellectual property theft and product diversion — are now major headaches.
Management of a more global supply chain is further challenged by the growth of biologics and specialist therapies, which may be more sensitive to environmental conditions, more quick to perish and more valuable to thieves, counterfeiters, and competitors.
For contract organizations, the globalization of the supply chain could represent an enormous opportunity to forge stronger relationships with biopharma companies and to grow international market share. By providing solutions to enhance supply chain management, increase transparency, reduce loss, mitigate risks and ultimately protect the brand and intellectual property, many contract organizations are positioning themselves to be more strategic partners willing to share information as well as the risks and rewards of global growth.
An Increasingly Global Focus of Operations
The biggest areas of risk in the global pharmaceutical supply chain were identified by a recent survey of 112 executives from 75 different pharmaceutical, medical device and biotechnology companies based in 12 nations. The findings were published by Life Science and Healthcare analyst firm Axendia, Inc. in the report Achieving Global Supply Chain Visibility, Control & Collaboration in Life Sciences: Business Imperative, Regulatory Necessity, and offer interesting insight to contract manufacturers and other suppliers, partners and stakeholders in the pharma supply chain.
Figure 1: Survey respondents’ operations in select countries
Source: Axendia Global Supply Chain Study
Substantial numbers of the companies that participated in the study either have suppliers in emerging markets or sell products in them, or plan to do so in the next two years. Notably, 70% of the companies have suppliers in China and 57% in India, the two largest emerging markets. The number of companies with commercial operations across emerging markets is even more dramatic. The following chart shows a breakdown by country, and it makes clear how global the industry’s operations have become:
Large majorities of the survey respondents see their companies’ international sales, sourcing and manufacturing activities all increasing over the next three years. Nearly all (94%) said that global product sales outside of the U.S. will be increasing in the next few years; 78% said global sourcing outside of the U.S. will be increasing; 76% said their global manufacturing outside of the U.S. will be increasing.
The Downside of Globalization:Supply Chain Vulnerabilities
The executives surveyed recognize that increasing reliance on outsourcing carries risks. When asked where the greatest vulnerabilities were in their value chain, one-half of executives said that raw materials sourced outside of the U.S. posed the most significant risk (see Figure 2).
Figure 2: Greatest risks to survey respondents’ value chain
Source: Axendia Global Supply Chain Study
Looking ahead over the next five years, the majority view contaminated or nonconforming raw materials as their top business threat. Furthermore, threats that were thought to be limited in scale as recently as a decade ago, such as drug counterfeiting and illegal diversions of products, are becoming major concerns, with 44% and 35% of survey respondents, respectively, citing them as business risks in the next five years.
In fact, 69% viewed counterfeiting as a “high” or “moderate” risk and 64% viewed diversions as a “significant” or “moderate” risk. Perhaps not surprisingly, half of pharmaceutical executives said that their company’s products already have been counterfeited or diverted.
As big a concern as counterfeiting is, pharmaceutical and life sciences executives ranked contract manufacturers as an even bigger risk to their supply chain, signifying an area to which contract organizations should pay particular attention. Whereas just 26% of executives think their internal manufacturing operations posed “significant” or “moderate” risk, nearly three-quarters said the same of their contract manufacturers.
Executives See Limited DefensesAgainst Threats
Pharmaceutical supply chain executives are frustrated that they have limited ability to manage their extended supply chain because they lack timely access and visibility into important data that would enable them to make swift and strategic business decisions. Fewer than half of the executives surveyed said they could track critical information for transaction history, chain of custody, ownership record or storage conditions. Even comparatively basic information such as products and materials by manufacturing location or the pedigree of raw materials and ingredients in a given product were not universally available.
Few companies have real-time access to information within their own supply chain, let alone that of their suppliers and partners, and most must manually aggregate data coming in different formats from multiple sources, making information historically interesting and somewhat useful but not necessarily actionable in real time.
When it comes to the contract manufacturers and other suppliers, access and visibility is even more limited. Pharmaceu-tical and life sciences companies say they conduct periodic audits to gain visibility into their suppliers’ operations and practices, but that this is by nature a backward-focused practice and gives them only snapshots in time. Furthermore, there is little sharing of common practices and information with most suppliers (with the exception of contract manufacturers, the only category with which pharmaceutical companies regularly share common practices).
A key question for pharmaceutical companies as they evaluate their relationship with suppliers and distributors is whether the lack of information they get from them is a fixable technological challenge or an indication of more fundamental structural challenges in the relationship. Approximately six in 10 pharmaceutical executives say they are worried that their suppliers aren’t willing to provide information to address regulatory requirements.
A Supply Chain Roadmap
The industry is being driven to develop a supply chain that is not only more protected against external threats but also more extended, globally dispersed and virtual. However, companies’ ability to control the safety, efficacy and effectiveness of their products will be limited until the industry can improve its controls over the supply chain.
In order to achieve this, companies need to make a number of changes, including forming mutually-beneficial relationships with their contract manufacturer partners. They need to overcome the barriers that have hindered such cooperation, creating a routine, thoughtful collaborative dialogue that enables them to share information. In addition to their willingness to do so, companies need management discipline around building the right processes and putting them in place.
Following are six steps that individual companies and the pharma and life sciences industry collectively can take to reduce the risks that globalization of the supply chain has unleashed.
1. Invest in track-and-trace technologies
Technologies to help the industry gain better control over its supply chain are readily available, including bar codes and RFID and GPS tags. Hurdles to universal adoption exist, including cost and difficulty of implementation, but companies need to make the necessary internal commitment and investments to adopt these technologies. Proposals currently under discussion at the federal level, such as accelerated depreciation of certain capital investments, might further speed adoption.
2. Encourage adoption of industry standards
The lack of industry standards and regulatory requirements and guidance may serve to hold back adoption of new technology that can improve supply chain management. The industry can support them by encouraging the development of common standards and best practices. While the executives surveyed preferred that such standards be generated by industry rather than through regulatory fiat — three in five (59%) wanted such standards created through industry consortia — federal direction may become necessary. The U.S. Intellectual Property Enforcement Coordinator recently recognized this by recommending modification of the Food, Drug and Cosmetic Act to require that manufacturers (both internal and contract), wholesalers and dispensers adopt track-and-trace technologies.
3. Adopt “on-demand visibility” strategies
In order to provide better insight into their supply chains, companies need to adopt real-time,”on-demand visibility” strategies and systems which help them to have greater control over their products, with practices and information from suppliers, distributors, shippers and contract manufacturers. These systems would help them to obtain the information they need when they want it for analysis and decision-making. Such visibility also would enable a shift from traditional, microscopic on-the-ground inspections to macro views that enable realtime spot audits leveraging contemporaneous information — a far more effective means of identifying problems.
4. Shift from supply chains to supply networks
The industry needs a new way of looking at the supply chain. In fact, it needs to think not about supply chains — with their conventional one-way and sequential orientation — and more about supplier networks with multiple points for obtaining information and taking action. More risk-based supplier management strategies aimed at actual threats and global, interoperable, standards-based track-and-trace technologies can support such an approach, which would enable greater control of the global supply network.
5. Support greater collaboration within the industry
Furthering each of these steps would be greater collaboration — among brand owners, suppliers, contract manufacturers, shippers and distributors — and between industry and regulators. Such partnership and harmonization would promote cost-control, greater transparency, sharing of information and the development of common standards and indicators, which could result in safer, more effective and higher-quality products. Industry groups such as the Pharmaceutical Supply Chain Initiative, the Experimental Physics and Industrial Control System and the Rx-360 Consortium all have a potential role to play in fostering such collaboration.
6. Create an industry-wide culture of innovation
“Best practices” remain so for only a short period of time, especially in technology industries. The opposition is never checkmated. The information technology industry illustrates this clearly, as hackers quickly surmount each new barrier that security experts raise. The same will be true of efforts to defend the supply chain, especially given how much is at stake. Consequently, the industry needs to constantly seek ways to innovate, implement and improve on its stakeholders’ best practices.
From Supply Chains toInterdependent Supply Networks
Globalization of the pharma and life sciences industry in its many forms has resulted in significant benefits — revenue growth opportunities and lower costs for companies, lower costs for patients and greater access globally to life-saving and life-enhancing products. Globalization is here to stay, and it is only going to become more and more prevalent. At the same time, the growing size and complexity of global supply chains makes them more challenging to manage and more vulnerable to threats. These risks can be reduced, but it requires leadership and collaboration on the part of the industry.
The industry can manage the risks associated with the growth of globalization in both production and sales by altering its supply chain to become more flexible, with different manufacturing routes and distribution channels for various types of products. The industry — and its constituent companies — will have to identify and implement new strategies and new processes, supported by new technologies, to aggressively reduce and manage the new threats it faces. With a proactive approach, the industry can realize the benefits of globalization while managing its risks.
© 2010 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Wynn Bailey is a Pharmaceutical and Life Sciences Advisory Services Principal with PwC in Chicago. He leads the firm's supply chain practice for the life sciences sector. He can be reached at email@example.com.