Why digital supply chain visibility should be a pharma priority

The disrupted global operating environment of recent years has dramatically highlighted the need for new strategies to secure pharmaceutical supply chains. The EY study Pharma Supply Chains of the Future (pdf), published in July 2022, considered multiple possible approaches to boosting resilience. Since its publication, the global supply chain environment has shown signs of relative stabilization. Yet supply chain resilience remains a major strategic priority. Companies confront a complex operating environment, with delivery times yet to return to pre-pandemic levels¹ and significant ongoing cost challenges.

These cost challenges arise from multiple causes:

• High inflation is driving dramatic increases in interest rates, material prices and labor costs.
• Higher interest rates are making working capital and investments more expensive.
• Cost containment measures such as the Inflation Reduction Act (IRA) are expected to drive ongoing and substantial price cuts for pharmaceuticals.

In this business landscape, improving supply chain resilience means increasing operational efficiency and reliability, agility and speed to market, and achieving a greater control over risk exposure. It is therefore becoming an increasingly critical imperative for the pharmaceutical industry.

One of the most effective levers the industry can deploy to increase resilience is improvement in supply chain visibility. With greater ability to see potential supply chain disruptions, pharmaceutical companies will increase their ability to execute mitigation activities.

More broadly, enhanced supply chain visibility offers the industry a range of benefits. Among these are some obvious potential wins:

• Greater ability to respond to shocks and fluctuations due to improved data availability and accuracy.
• With improved ability to address supply disruptions, companies can also reduce operating expenses such as the working capital required to maintain high inventory levels.
• Distribution route monitoring and alerts will allow companies to shift modes to avoid significant delays or pricing increases.
• Improved trade and compliance intelligence will help companies safeguard cross-border commerce and available capacity from sanctions and trade risk. Companies will also be able to monitor international compliance lists and acts to ensure supplier adherence.

Ultimately, better visibility will be a key enabler for evolving more sophisticated digitally driven supply chains of the future, which will build in automation, artificial intelligence (AI), and end-to-end process integration. As such, supply chain visibility will be a critical focus for industry investment into improved resilience.

Understanding the challenges of complex supply chains

At present, the transparency of pharmaceutical supply chains is constrained by their complexity, a fact illustrated during 2020-21 when companies were affected by unforeseen shortages of basic raw materials (including ethanol and magnesium) and consumables (among others, single-use bio-reactor bags, known as biobags; glass vials; and sterile filters). The industry, in common with others, largely failed to predict the shortages because the supply networks companies depend on are extensive, intricate and often opaque to the pharmaceutical companies themselves.

To take one illustration of this complexity, the production of single-use biobags – a necessary disposable component of biopharmaceutical manufacturing – depends on at least five upstream supply tiers, as shown in the chart below (a more comprehensive version can be found here (pdf)). For a single representative example of an industry biobag, we can construct a simplified “category tree” for the biobag’s production. This category tree extends from the source raw materials (including petroleum feedstocks, other base chemicals and catalysts) in Tier 5 to the final assembly of the manufactured components into the finished product in Tier 2 and Tier 1.

The industry reports strong relationships and communications with its Tier 1 suppliers. However, as we trace the production process upstream toward the higher tiers, the characteristics of the supplier base change; as illustrated in the chart below. 

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.