Supply Chain: COVID-19 and the Pharmaceutical Supply Chain

A test to the supply chain is almost never the result of a positive event. In the past, the pharmaceutical industry has faced supply chain challenges from fires, floods, wars, and unexpected changes in demand. Now we have COVID-19, and neither the pharmaceutical industry nor any other industry has ever faced such a significant global and systemic challenge to supply chains. 

As a result of past experiences, many companies have already moved to dual sourcing to protect themselves against unplanned supply interruptions. After facing a shortage or stoppage on a critical item, companies realized the necessity of qualifying secondary suppliers or adding an existing supplier’s alternative plant location to ensure that production could continue without interruption. With COVID-19, instead of dealing with a supply disruption of a single product or service, companies are facing extended supply challenges in every corner of their business simultaneously. This no longer feels like a test but rather a final exam, and it has exposed the intricate web of global supply chain interdependency. 

The 5 Ps—Proper Planning Prevents Poor Performance— are frequently taught in managerial training courses, but no reasonable amount of planning could have prepared our industry for this exercise, and my CEO for Dummies book doesn’t have a chapter on pandemics. As I write this, states have only just begun to open up, and the longevity, community penetration, and possible resurgence of the virus are still unknown. While the situation continues to evolve daily, here are some initial considerations about what we’ve seen and done and where we might go from here. 

When the economy shut down, global logistics immediately faced challenges. Demand for raw materials surged, and production was strained replenishing depleted pharmacy and retail shelves. Production shifted from internal to external to optimize efficiencies on large-volume products. Everything was needed immediately.

Proper planning helped. Producers that had already qualified secondary sources had more options in the event of shortages. Suppliers with secondary sites were also in a better position than those with single factory locations. Most companies were able to meet contractual and forecasted demands, but the ability to meet unforecasted demands came into question. 

The urgency of the situation strained ocean and air freight logistics, giving locally sourced materials a distinct advantage. While manufacturing capacities may be able to handle strains on demand, moving raw materials and finished goods when shipping and freight have been disrupted becomes a big challenge. Local wins. 

Foresight and correctly predicting government reactions may have helped some suppliers, but anyone who knows how the government sector operates will find this strategy speculative at best. Another managerial lesson is to anticipate circumstances and develop a proactive response. Companies that took steps to test internal systems for the possibility of a remote labor force ahead of potential quarantines fared well by ensuring a more seamless transition to working from home. Increasing inventory across regional warehouses and preemptively increasing stock levels further mitigated risk. Excess inventory becomes a luxury instead of a working capital consideration. Both suppliers and producers have benefited by leveraging strong business relationships.

COVID-19 will undoubtedly have long-lasting effects, and there are many more facets to be uncovered as we progress. Drug supply will now be considered as a strategic and critical infrastructure, changing the paradigm from reduced cost to protected supply. Locally sourced materials will definitely weigh more heavily on purchasers’ decisions. Secondarily, suppliers whose materials are produced in countries with a stable geopolitical environment will also be at an advantage, with emerging markets facing setbacks. Shorter supply chains will win through a push for onshoring strategies. 

Accountants’ desires for working capital may be offset by producers’ contractual demands for inventory requirements. The US Department of Health and Human Services, along with the FDA, have already set forth a plan to develop a list of “essential medicines” and further identify from among them “high priority medicines.” They have also proposed incentives for supply chain security, with long-term price and volume contracts to generic producers, government grants, tax incentives, and regulatory reform measures designed to expedite reviews of repatriating production that had been previously offshored. 

While suppliers will have an increased focus on preemptive disaster planning, producers will further their risk-mitigation efforts by expanding dual sourcing at all levels. Producers are more likely to gain transparency in the logistics portion of the supply chain and place more weight on local providers, while suppliers will have an increased demand for forecasting. This will also likely impact the demand for skilled and semiskilled labor, but there may be lingering issues for office staff working from home. While some employees have adapted well, others may struggle with the change in work environments. 

As with any test, some will pass, and some may fail. Adapting to the new normal will be imperative for survival. Inefficient, slow, and inflexible suppliers will go out of business. Innovation and creativity play a big part in adaptation, so companies that can develop new ways to shorten their supply chains through domestic production, reduced turnaround times, creative consignment, or other ideas will succeed. 

Business has always been an ever-changing environment, so companies should be used to adapting to new circumstances. The advent of the internet in recent decades was a similarly disruptive paradigm shift. Companies that took advantage and developed new business models to secure their place in the market thrived, while companies that stuck to the old business model languished or disappeared. COVID-19 will likely result in the same types of outcomes.