Building Resilience in Life Sciences Supply Chain to Mitigate the Effects of COVID-19
The global COVID-19 pandemic has impacted every facet of our lives personally and professionally, including the Life Sciences industry. The focus on vaccines and therapeutics for COVID-19 has impacted supply chains considerably. Be it the delays in supply of active pharmaceutical ingredients, the delays in patients’ procedures and access to medicines or the global shortage of Personal Protective Equipment (PPE), this crisis has forced business leaders to build increased resilience in their supply chains to protect them from the impacts of the pandemic and future events that will continue to disrupt.
In this context, it is essential for the supply chain leaders to re-imagine their supply chain networks. As exposed by COVID-19, these networks need to have a stronger resilience and be established and managed through a mature risk-based approach. A mature supply chain network must provide end-to-end visibility, built upon redundancy of suppliers to minimize the upstream impacts created by the pandemic or next crisis.
In the short term, Life Sciences companies must make themselves agile and flexible to quickly respond to changes. On the longer horizon, they must drastically rethink their approach to being lean, relying heavily on just-in-time inventory and identifying new ways of sourcing ingredients. They must also rethink the impact of maintaining offshore production, and how this model may need to change for increased sustainability and improved risk management.
To best serve the patients, their stakeholders and business partners, Life Sciences companies must re-engineer their supply chain networks and introduce more just-in-time (JIT) practices. In order to do this, they must improve their ability to quickly sense and respond to sudden changes in demand, supply, and inventory levels.
Based on our conversations with Life Sciences supply chain leaders, we foresee the following long-term trends post-COVID-19 for Life Sciences supply chains.
Drug Manufacturing will evolve from Global to “local”, i.e. distributed and localized supply chains. Review your sourcing and supply chain strategy and practices accordingly.
Historically, the production of medicines for the U.S. population has been domestically based. However, in recent decades, drug manufacturing has gradually moved out of the United States. This is particularly true for manufacturers of active pharmaceutical ingredients (APIs), the actual drugs that are then formulated into tablets, capsules, injections, etc.
FDA recently reported that only 28 percent of the manufacturing facilities making APIs to supply the U.S. market were located in the U.S. By contrast, the remaining 72 percent of the API manufacturers supplying the U.S. market were based overseas. The main reason for it is as insightful as it is obvious.
Life Sciences companies in last decades have organized their supply chain networks focusing on costs control, instead of risk management and enabling flexible and nimble supply chains.
We predict that the largest global suppliers of drugs, mainly India and China are going to continue to apply temporary export controls for essential drugs and PPE equipment post-pandemic. This will pressure various Life Sciences companies to build production capabilities closer to home (nearshoring strategy).
Life Sciences leaders will also shift their approach to sourcing ingredients from a more diverse range of suppliers and vendors and build and implement new sourcing tactics and partnerships accordingly.
Digitization will be required for increased supply chains visibility
Among the biggest reasons why Life Sciences companies are struggling to react quickly, is their lack of end-to-end supply chain visibility. When there was no shortage of supplies, Life Sciences companies operated by making compartmentalized and siloed decisions, lacking a comprehensive view due to a limited holistic and centralized mindset and approach. This approach left drug manufacturers blind to which ingredients were in shortest supply or those that might run out given various lockdown scenarios. The data and many of the key reports were not established or mature enough, and certainly were more reactive than leading, event and forecast based. Reports such as ideal stockpile levels and country-of-origin information for every ingredient or part that could affect manufacturing capability were not available centrally and to everyone. All these underlying issues, combined with the pandemic, have caused havoc on the drug manufacturers across the Life Sciences industry.
In the short term, Life Sciences companies must quickly deploy new platforms for supply chain visibility as well as integration capabilities to tear down data siloes and enable end to end insights generation. They must immediately focus on implementing cloud-based visibility solutions on the top of their existing systems of record and systems of execution. Life Sciences companies must also establish a rapid response team as part of a multi-function and multi-geography supply chain command center. This team must be comprised of Senior Supply Chain leaders from each area of supply chain, including representants of the patient and customer experience.
Longer term, Life Sciences companies must focus on establishing “Supply chain control towers” throughout the entire supply chain organization (analysts to Chief Supply Chain Officer and Chief Commercial Officer), across the end-to-end supply chain, both internally and extended to partners. Their primary goal would be to gain insights into their supply chain by embracing existing systems and external data sources, predict the risks before they happen, and take recommended actions prescribed by the tool as a decision support platform. They also need to up-level their relationships and partnerships with external providers, commercial and government stakeholders, as well as downstream providers. COVID-19 has already triggered more collaboration, but it is now time to solidify the foundations established and change the mindsets to sustain the improvements required to face the pandemic.
With high demand and supply variability: prepare your organization for volatility.
Among the biggest challenges to face ahead is the need to address the simultaneous increased variability of demand by patients and increased variability of supplies from suppliers. Due to the pandemic, patient behavior and supply chain actors have changed. Patients are now stocking up on many drugs due to fear of stockouts and there were availability, production and distribution issues, all of this resulting in drug shortages. A quick review of Drug Shortages reported by FDA clearly presents this picture.
Figure 1. Cumulative count of Drug Shortages reported by FDA from 2018 onwards (as of Feb 2021).
Source : https://www.accessdata.fda.gov/scripts/drugshortages/
Healthcare teams are also recommending patients to take this action to reduce their exposure to COVID. This has resulted in demand signal getting cluttered with noise. The noise in the demand data stream has increased, making the true demand signal harder to determine. On the other hand, suppliers have their own disrupted upstream supply chain network, hence they are unable to meet their commitments at the previous levels. Given these competing market forces, the bullwhip effect is in full force up and down the healthcare supply chain. The Bullwhip effect or the Forrester effect is a concept explaining inventory fluctuations. resulting from demand changes as the information moves further up the supply chain. This results in upstream manufacturers often experiencing a decrease in forecast accuracy as the buffer increases between the customer and the manufacturer. The diagram below illustrates the concept.
Figure 2. Bullwhip Effect refers to the phenomenon whereby orders become more variable upstream in supply chain.
To mitigate such demand and supply disruptions and increased variability for both upstream and downstream supply chains, an improved ability to “sense” supply and demand trends must be established. This will require additional data sources ranging from social media to third-party sales information and next generation analytics capabilities. With the integration of such a broad range of structured and unstructured signals and automation of real-time data updates, realization of continuous planning and accelerated response to unexpected changes can be established.
These additional sources of data combined with deeper statistical analysis and forecasting can improve the overall accuracy of the Demand Forecasting. Companies can implement advanced demand planning solutions that enable life-cycle planning, multi-variate segmentation, hierarchical planning, and machine-learning based on tuning of the most accurate algorithm for each forecasted item. Visual analytics can further be leveraged to incorporate a broad range of causal factors and enabling artificial intelligence (AI) capabilities to learn and refine causal relationships. This will also support an approach based on what-if scenarios, informed decisions, and operational adjustments from analysis of the possible supply chain events.
Even a small fraction of improvement in demand forecast accuracy if appropriately applied can enable a significant reduction in costs and improvements in fill-rates. In a post-pandemic era, dynamic planning will become of increased importance, as will the ability to plan based on probabilities of change rather than firm predictions.
A balancing act, “from costs focus to resilience”, will lead to innovative efficient and effective supply chains
Life Sciences supply chain leaders must start asking questions to identify the design changes required to deliver the highest overall value and resiliency. Traditionally, the first step has been to start by anchoring the decision to manufacture offshore or onshore and then the entire supply chain design revolving around it. Post-pandemic supply chain leaders will need to think about a combination of strategies of off/on/near shoring.
The supply chain design for Life Sciences companies will need to strongly consider not only ‘just-in-time’ but also ‘just-in-case’.
Whether to onshore or offshore production, the starting point should be the question, “How can we forge a supply chain that creates the most value?”. That will often lead to an answer that involves neither offshoring nor onshoring but rather “multi-shoring” — and with it the reduction of risk by avoiding being dependent on any single source of supply.
One important area of vulnerability that many Life Sciences companies realized during the pandemic is the lack of deeper understanding of the upstream nodes in their supply chain. Many times, during the pandemic, critical inventory material could not be delivered in a timely manner because the supplier of suppliers could not deliver in time the expected supply. With such situations, Life Sciences companies will need to evaluate their risk aversion and make decisions utilizing bottom-up estimates of inventory and scenario planning. Suppliers could be required to develop and maintain risk management plans. Is there an element to collaborative planning then can play in here, on top of requiring suppliers to build risk management plans? What is in it for them?
In conclusion, Supply Chain leaders will need to further prioritize capabilities to build greater resilience. The impact of the pandemic requires adopting new supplier risk management and digital-planning tools to create greater resiliency, increased capability, better inventory management, demand management, and risk management across the value chain. Doing this will enable Life Sciences companies to react well to changes in supply or demand conditions.
Meet the Authors:
Ankur Balar is a Consultant in Silicon Valley. Find him here on LinkedIn.
Thomas Celerier is a Senior Director in Silicon Valley. Find him here on LinkedIn.
Slalom is a modern consulting firm focused on strategy, technology and business transformation. Our healthcare and life sciences industry teams partner with healthcare, biotech and pharmaceutical leaders to strengthen their organizations, improve their systems, and help with some of their most strategic business challenges. Find out more about our people, our company and what we do.
