The pandemic sounded a wake-up call for both suppliers and producers of medicines to rethink their business models and dependence on other markets, specifically for APIs and equipment components. But what is the answer to this? Is it binary? Is the answer to revert to 100% local sourcing within touching distance of our production facilities or is it something different?
The Pharmaceutical industry relies heavily on China (manufacturing equating to almost 30% of the global manufacturing output). Why wouldn’t they? The low cost, high volume ingredients, low-wage workers along with openness to regulatory compliance are a select few examples of why China has become one of the world’s fastest-growing economies and has been renowned as the ‘World Factory’.
So much so that when the pandemic hit, the Pharmaceutical world was sent into a frenzy. According to Onyx Health, an estimated 43% of acute care medicines ran low in supply during the peak of the crisis. Onyx Health also reported that at the time 44 Pharmaceutical companies were left non-operational due to the strict ‘Zero-Covid’ policy.
So what does this mean for the future?
It’s evident that Pharmaceutical companies need to increase the resilience of their supply chains, but how? Do they source elsewhere — such as the ‘China Plus One Strategy? Do they start locally sourcing? Or instead focus on what they already know?
The China Plus-One strategy has recently gained a lot of attraction, being referred to as a ‘best of both worlds’ option. Focusing investments in countries aside from China (such as India and Brazil) diversifies the supply base and creates a more risk-averse environment.
China is no longer seen as a viable option due to trade wars, tariffs and geopolitical concerns. According to Senior Procurement Leader at Lonza, David Swift, this combination created a ‘perfect storm scenario of supply chain issues.’
Indian players in particular are being urged to capitalise on the China Plus-One strategy ever since the production-linked incentive (PLI) scheme was introduced in order to reduce the 70% of their API supply which is outsourced from China.
To initiate this, India has already started producing 35 APIs in order to reduce the dependence by 25-35%. India reaps the same benefits as China (including a 50-60% lower talent-pool cost according to BioProcess International) along with being known as one of the biggest suppliers of low-cost vaccines globally.
However, investing in India comes with its challenges. It can’t be ignored that India is still in a period of development with infrastructure and innovation lacking in comparison to China.
The other viable option is limiting or scrapping global sourcing entirely, and relocating production facilities for active ingredients and other key supplies back home and/or nearshore countries.
The potential of local sourcing unlocks a wide range of benefits, such as solving the trade-off between distance and costs. When goods are purchased from the other side of the world, a build-up of costs is inevitable.
Issues, such as delays or inaccurate demand forecasting, are prime examples. Case in point, 2021 container rates were 700% higher than their 2019 baseline. However, when manufacturers are located close by, there is greater control and flexibility with the added opportunity of being able to visit suppliers regularly.
Unfortunately, reshoring is not a quick fix. Building biopharmaceutical facilities can take up to 5 years, followed by up to 18 months of securing regulatory approvals. Not to forget, this also comes with a cost of up to $2bn.
When switching to local sourcing it’s important to ensure full transparency across a multi-tiered supply chain. “You can achieve efficient localisation as long as you have an ecosystem of tier 1,2,3 suppliers” said Armando Stagno, VP Supply Chain at BD.
Having real-time visibility into suppliers at every tier, and understanding our end-to-end supply chain is crucial with collaboration no longer being optional. Those in large molecule pharma will recall how the extreme winter storms in the US last year impacted supply of medical grade tubing. This ended up limiting all Single Use Technology supply at a time when demand was also under threat for Covid-related vaccines.
To make the reshoring process successful, Procurement is even more of a pivotal partner to ensure that the right partners are chosen, strong relationships are made and sustainability can be ensured.
The supply chain focus in recent years has been on cost containment and efficiency, rather than agility and flexibility. The need to be more risk-averse is higher than ever, and a combination of sourcing nearshore, onshore and offshore is needed in order to gain flexibility — it should be considered a top priority in today’s current climate. This, however, is a longer term solution.
According to David Swift, ‘India is still miles behind China in developing its API side and it will take years, even with concentrated efforts to develop the manufacturing capabilities, capacity and workforce.’ In terms of medical equipment, it will take even longer considering that APIs depend on a chemical ecosystem that is already present in India, whereas medical equipment is more technologically complex.
So what can we do now?
An article from Bain revealed that the focus now should be on having a deeper understanding of risk mitigation as well as real-time insights within the supply chain. This should span a number of areas such as the flow of products, distribution centres, and production sites against potential threats.
Following this, suitable supply chain strategies can be prepared for these hazards by either ‘reducing risk exposure or increasing resilience capabilities.’ Effective strategies were said to include four components: Redundancy, Adaptability, Prediction and Empowerment.
With the market constantly changing and evolving, in the short term preparing and utilising effective strategies will improve efficiency and agility in response from Pharmaceutical companies.