What’s the Key to Reinvigorating the Pharmaceutical Supply Chain?
While supply chains everywhere face mounting obstacles, issues in the pharmaceutical industry are particularly severe. After the COVID-19 pandemic, the sector’s shortcomings are painfully clear, so calls for change across public and private entities are growing. Pharmaceutical supply chain management will have to evolve as this pressure rises.
The U.S. was once a leader in the pharmaceutical supply chain and could become one again. As any experienced logistics professional knows, that process is easier said than done. However, while the road ahead will be challenging, that doesn’t mean it’s impossible.
The State of the Pharmaceutical Supply Chain Today
It’s important to understand where pharmaceutical supply chain management is today to learn where it can go from here. Among the biggest current issues are a reliance on foreign sources of active pharmaceutical ingredients (APIs) and a severe shortage of critical products.
Roughly 83% of the most-consumed generic drugs have no U.S. sources for their APIs. Even if U.S. manufacturers produce them domestically, that production relies on international sources — mostly in China and India — for critical supplies. COVID-19 revealed why those dependencies are risky. Over 40 Chinese pharma companies ceased production, and India stopped exporting 26 medicines during the pandemic.
These supply chain disruptions have exacerbated existing product shortages. Many of the most critical drugs face significant backlogs and availability issues. These shortages often follow a vicious cycle. As a drug’s demand surges, generic competition increases, leading to offshoring to lower production costs, making the most essential medicines the most susceptible to supply chain disruption.
What’s Next for Pharmaceutical Supply Chain Management
Pharmaceutical supply chain management must change to break this cycle and prevent future shortages and backlogs. That shift will require several significant changes across the pharma industry and its strategic partners.
Reshoring API production is the biggest piece of the puzzle. As long as manufacturers rely on international sources for these drug building blocks, critical medicines will be at risk of severe supply chain disruption.
U.S. drug manufacturers may already have the capacity to expand domestic production. Domestic operations account for 28% of all API manufacturing facilities, more than any other region. However, generic drugs — which account for the vast majority of consumption — rely more heavily on foreign-made APIs, and many U.S. facilities are operating under capacity.
Reinvigorating the pharmaceutical supply chain starts with domestic manufacturers capitalizing on their unused capacity. Existing facilities can begin producing some APIs companies currently outsource to foreign nations until new factories can emerge to take over the rest. That effort should focus on reshoring the most critical APIs first before expanding.
As reshoring initiatives increase, the pharmaceutical industry will face financial obstacles. The biggest reason companies offshore the most in-demand APIs in the first place is to lower their production costs. Supply chain management must also focus on minimizing costs elsewhere to offset resulting price hikes from reshoring to keep generic medication affordable.
Pharma companies can emphasize supply chain efficiency to mitigate these costs. Automated picking solutions will make warehouse operations more cost-efficient, and IoT tracking solutions can prevent product loss in transit to minimize expenses. As more companies emphasize reshoring, transportation costs can fall, too.
Medical manufacturers can also offset higher API production costs by transitioning to lower-cost alternatives for other SKUs. Single-use biopharmaceutical equipment carries lower manufacturing costs than reusable options and has faster lead times, which helps account for higher expenses elsewhere.
Reshoring API manufacturing while keeping costs low will be challenging for some companies, especially in the near term. An industry-wide shift will likely require government support to balance expenses and incentivize domestic production, so public-private partnerships will play a key role in the transition.
Government incentive programs already promote the reshoring of semiconductor and electric vehicle manufacturing. The pharmaceutical industry and its supporters should push for similar legislation to incentivize API reshoring, especially given the growing U.S. demand for critical medicines. Potential rewards include tax breaks, cash rewards to cover some production costs or higher taxes on foreign-derived APIs.
The federal government has a stockpiling program to keep inventories of critical medicines to prevent damaging shortages. The problem is that this stockpile focuses on finished medication, which has a shorter shelf life, limiting the reserve’s size. Transitioning to stockpiling longer-lasting APIs to kickstart domestic drug production when necessary may be more effective.
Pharmaceutical supply chain management must also emphasize transparency amid this shift. Today’s supply chains are too opaque to reliably track demand, supply and product quality or locations in transit. That oversight leads to spoilage, shortages and inventory distortion.
More transparency would minimize losses and enable pharma companies to predict and respond to incoming shifts to prevent stock-outs or surpluses. IoT technology is the key to this visibility. Companies using these sensors in inventories and vehicle fleets can better estimate demand and shipping times thanks to real-time data.
AI can take these benefits further by analyzing IoT data to predict future shifts. When more key players in the pharma industry have that capability, they can respond to incoming demand changes sooner, preventing shortages of critical medicines.
Moving Away from Lean Principles
All of these changes represent a shift towards resilience for pharmaceutical supply chains. Embracing resilience means organizations must let go of some of the lean principles they’ve focused on in years prior.
Lean practices like just-in-time production and eliminating inventories lower operational costs, but they leave supply chains more vulnerable to disruption. That disruption is too risky in the pharmaceutical sector to justify. Businesses must instead prepare for the unexpected, keeping larger safety stocks and using multiple distributed suppliers to mitigate any unforeseen changes.
Reshoring is an important first step in this transition from lean to resilient, but it can’t be the end. Pharmaceutical supply chain management must remove single dependencies and increase reserves everywhere to become more disruption-proof.
Pharmaceutical Supply Chain Management Has a Long Road Ahead
Reinvigorating the pharmaceutical supply chain is a challenging but necessary goal. It will take time, money and cooperation between many parties, both private and public, to work. If the industry can embrace these changes, though, they can pave the way for a safer future.
There’s no one key to better pharmaceutical supply chain management but rather a collection of several interconnected steps. Understanding that is the first step in preventing future disruption to U.S. pharmaceutical supplies.