This shift exposes the industry to certain challenges:
- The pharmaceutical industry is not the sole – or most important – customer for upstream suppliers and in fact is often only a small client for commodity products. These companies supply many sectors and are unlikely to prioritize or directly communicate with pharmaceutical companies if a supply bottleneck emerges.
- Further upstream, the supplier base is increasingly fragmented. In Tier 1, just a few major suppliers represent 85% of the market; in Tier 4, by contrast the leading players hold only a 20% share.
- Upstream we also see a decrease in levels of market regulation, which could have downstream consequences. If, for example, an upstream supplier changes its raw materials or manufacturing processes, Tier 1 suppliers must carry out re-validation procedures, which are potentially time-consuming and costly.
- The Asia-Pacific region, and most important China, represents the majority of Tier 2 through Tier 4 manufacturing; this increases US and EU pharmaceutical companies’ exposure to any potential geopolitical developments that strain trade relationships.
From vision to action: upstream visibility can allow risk management
As this analysis of the biobag supply chain suggests, building category trees for materials of concern can help companies diagnose where potential supply risks may emerge. An analysis of this kind can attempt to distinguish the most critical raw materials, product lines, reagents and suppliers, and so define the areas where the greatest potential challenges exist.
Using this approach, a pharmaceutical company can examine its own supply chain risk exposures by building a stakeholder map covering the supply of the materials of concern. Suppliers that are exposed to higher risks can be flagged up, whether these risks derive from geopolitical instability, environmental changes, financial pressures, or reliance on high-demand materials. Finally, each supplier’s level of importance to the company can be cross-referenced with each supplier’s level of risk exposure.
Risk visibility is, of course, not an end in itself, but a basis for more proactive supply chain management. Once companies have run the kinds of diagnostics described here, they would have multiple possible options for offsetting the identified risk, from dual-sourcing, to changing raw materials, to qualifying a new site for a specific market. Yet moving from diagnosis to an active system of risk-mitigating interventions requires companies to develop a broader set of capabilities, including implementing appropriate governance and associated processes that can enable proactive simulation and planning, thus minimizing reaction time and empowering appropriate decision-making.
What pharma can learn from supply chain visibility advances in other industries
Though the innovative pharmaceutical industry maintained its established high service levels during the pandemic, it continues to feel the friction of post-pandemic challenges such as the spike in inflation and interest rates. In this environment, there are strong incentives for the industry to consider strategies based on high supply chain visibility and proactive supply risk management. Such strategies have long been pursued by consumer goods giants and have more recently been adopted by companies in other sectors.
Companies within the aerospace and automotive industries, for example, are building greater supply chain visibility. Aerospace companies report using digital tools to provide managers with alerts on upcoming supply chain hotspots. Meantime, automotive manufacturers have leveraged off-the-shelf digital tools for benefits including supplier screening and due diligence, risk management services, and multi-tier network mapping. These tools can also provide offerings including global trade and risk monitoring, end-to-end forecasting, tracking and tracing services, and commodity price tracking.
None of these industries have fully overcome the structural challenges posed by supply chain complexity: the low visibility and the difficulties of managing the higher tiers of the supply network are issues that have yet to be fully resolved within any sector. However, the automotive and aerospace industries are beginning to acquire the tools to improve supply chain visibility.
The next step is to develop systematic responses to issues that become apparent with better insight. Here, the challenge is not to develop a digital tool but to establish the correct approach to help the company address the challenges. This will need to include setting out clear protocols with recommended courses of action, building well-defined governance structures which establish decision-making rights, and taking other steps enabling proactive responses and minimizing reaction time. The challenge for the pharmaceutical industry now is to match the progress made in supply chain visibility by automotive and aerospace companies – and beyond this, to establish an effective approach for turning greater visibility into effective risk-management responses.
Closing the gap: how the industry can partner to build better supply chain visibility and resilience in the future
On a positive note, EY discussions with industry experts suggest that pharmaceutical companies are increasingly aware of the issues the industry now faces with limited end-to-end supply chain visibility. Some companies remain satisfied with a strategy primarily based on engaging with Tier 1 suppliers and relying on these partners to manage relationships further upstream. Others have adopted a “brute force” strategy, simply amassing inventory at a scale intended to make supply disruption impossible in the near term (in fact, some of these companies are already de-stocking as the COVID-related disruptions ease). However, the majority of companies with whom we discussed upstream challenges are interested in or actively pursuing an enhanced visibility approach. Given the complex nature of the upstream supply networks, companies will need to leverage digital technologies to build a cost-effective approach to improving visibility.
The first step in the roadmap toward better visibility and resilience is therefore for the pharmaceutical industry to utilize dedicated digital tools aimed at delivering better supply chain risk monitoring. Third-party digital tools are already gaining some traction in other sectors, as noted above. Certain pharmaceutical companies report that they are unable to identify a suitable off-the-shelf digital tool while others have attempted to adapt existing tools with limited success. For a digital solution to usefully enhance pharmaceutical supply chain visibility, it will require three main elements:
- The ability to identify and access the right (upstream) data on which to focus analysis
- An AI model capable of analyzing data
- Deep understanding of the relevance or otherwise of upstream changes for the life sciences industry, so the analysis can be weighted and contextualized, and “noise” filtered from the output
This digital solution will begin with the same analysis of category trees and associated risk exposures discussed above. The next step will be to determine risk indicators for suppliers and materials of concern. AI algorithms will then analyze online public sources and proprietary pharmaceutical company data to identify risk exposures and discriminate between genuine risks and irrelevant “noise” in the data. For example, sudden pricing shifts may suggest growing supply pressure. The digital solution will assess if this pressure is within acceptable boundaries or if it is likely to cause bottlenecks and delays within the company’s supply chain.
Continuously updated, this analysis will supply companies using the solution with ongoing notifications including automatically generated alerts, monthly briefings and other managed service offerings. Ultimately, this early warning system – whether developed in-house or in collaboration with a trusted third party, which can draw data from multiple proprietary sources – would enable a company to develop and establish a set of proactive measures for managing upstream risk.
Deriving maximum value from better supply chain visibility will necessarily require companies to develop the appropriate systems and processes to mitigate risk effectively. Yet while it is not a solution in itself, better visibility is a major first step for companies looking to improve the robustness of their supply chains. These companies should seek to match or overtake the advances made in visibility in other industries. Though there is no single model for pharmaceutical supply chain resilience, enhanced visibility will be a critical part of the future solution for the pharmaceutical sector and must be considered a priority strategy.