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Supply chain risks for pharmaceutical and medical products

In this special independent contribution, author Eelco Dijkstra, Managing Partner, Europhia Consulting, and an industry expert, reviews the clear and current supply chain risks for pharmaceutical and medical products in relation to the COVID-19 crises currently overwhelming the globe.

The observations, from a global supply chain perspective, are based on the author’s input and concerns from many professionals and peers within the industry working in different parts of the supply chain.

Only ten weeks ago, the emergence of the novel corona virus COVID-19 seemed remote—its occurrence in far away Wuhan in central China apparently posed no threats at all. Then suddenly, and viciously, the virus started popping up in various other parts of the world. At the time of publication of this report, with more than 396,000 cases and more than 17,000 deaths globally, the World Health Organisation (WHO) announced that we now have a global pandemic on our hands that is ravaging across the world.

An increasing number of countries across Asia, Europe, the Middle East and the US are sliding into lock down mode. Exhibitions, conferences, sports events and social gatherings have been banned. Schools and places of worship are closed. People are being told to stay at home and streets across Europe in Italy, France and Spain are being policed. No one saw this coming. What started as a strange virus with a funny name has turned into everyone’s worst nightmare.

Panic purchases

People all around the world have started panic buying food from their local supermarkets leaving shelves empty. People are locked up in their homes. Companies around the world have started to halt manufacturing lines similar to what has already been happening earlier across China.

Whole industries are coming to a halt. Flights are being cancelled and airlines and hotels have started laying-off staff. Other industries are doing the same—starting to lay off temporary staff and flexi workers.

Three key industries are vital—manufacturing, auto and airlines  

A number of companies have started to slow down or stop completely their manufacturing activities. In China this has already been going on for some weeks which implies products such as electronics, mobile phones, fashion and textile exports are coming to a halt. Of course, China is the global factory for so many products and all these product supplies are affected as inventory levels across the world are starting to run low.

This week a number of key car makers announced a full production stop such as the French PSA Group (Peugeot Citroen, Opel+) and the German Volkswagen. Others such as Renault, Ford and Fiat have announced similar closures of key factories. Soon there will be no new cars to buy from the showroom. This is just an example of a whole sector grinding to a halt.

Closure of airspace’s

Another one is the airline sector, as countries close their borders and people stop traveling, all airlines are winding down their operations. Major airlines operating flights between the US and Europe have started to fully cancel all flights in an attempt to reduce the financial impact on their business. Soon there will be no trans-Atlantic flights a situation unheard of since World War II.

However, most people don’t realize that most air cargo moves around the world on-board passenger jets. Airlines are making the right decisions from their own financial business perspective, but from a macro socio-economic perspective this will start affecting supply of goods across the world.

There are three key industries which run the highest risk of impacting all of us the most very soon if governments and big business don’t step up. These sectors are utilities such as water and energy, food and food processing, pharmaceuticals and medical care.

Energy, food and medical supplies sectors

The energy sector is well organised, and governments traditionally have a direct role to play in this sector as they own most of the assets and/or have a vested financial revenue interest in ensuring energy gets to consumers as part of their tax system. The energy sector looks probably okay for now.

However, in the food industry we are already starting to see many people stock up food to build up buffers in their homes in case events turn for the worse. Most of us have never experienced this before in our lifetime.

The pharmaceutical and medical supply sector is the third sector which although on everyone’s radar screen in terms of the medical and hospital care needs, is at great risk of breaking down soon unless governments step in fast.

The Pharmaceutical supply chain will run dry

During normal times the pharmaceutical and medical supply sector typically has about six months of inventory on hand in its supply chain. There are various factors why pharmaceutical products from the pharmaceutical industry will soon be in short supply.

The production of medicines typically has a very long and global supply chain from raw material production to API (active pharmaceutical ingredient) to semi-finished product, compounding or filling to packaging. Many pharmaceutical products touch a number of countries before the finished product is actually available in the hospital or across the counter in your drug store around the corner.

Supply conundrum

Right now, there are various ‘supply’ related factors slowing down the whole pharmaceutical supply chain. Firstly, manufacturing itself is slowing down as companies are trying to protect their staff. Secondly, government pressure on certain companies has started to slow the export of certain medicines and medical consumable items as governments step in to secure supply for their own domestic needs first.

Thirdly, the transportation of product itself is under severe pressure as airlines stop flying. Medical consumables is typically moving around the world via sea-freight is also under severe pressure due to several additional factors and overland transportation on trucks is also being complicated as countries have started to block their borders.

Demand-supply balance

On the ‘demand’ side we have seen in the pharmaceutical and consumables a similar development compared to the food industry, namely stocking up of product. This is currently going on throughout the whole global medical market.

Governments and hospitals around the world have been caught ‘off-guard’. They are not known as fast movers and behave reactive to events. Price levels of many products have shot up and whilst some hospitals and clinics have secured additional stock others have clearly not been so lucky and are scrambling to find additional stock from anywhere.

Shortages

All of the above factors together are putting pressure on the whole supply chain system within the pharmaceutical sector. As a result, we could soon face severe shortages of medical supplies as the whole global supply chain for these products slow down. Inventory levels will wind down whilst medical needs for certain products such as medical gowns, surgical masks, sterilization equipment but also for certain pharmaceutical products will go further up as the corona virus gathers further pace.

What now needs to happen fast

COVID-19 needs to be treated like an enemy during war time. Not only is securing strategic stock of certain products right now vital but even more so is ongoing continuity of supply. Governments needs to step up and work more together to secure continued supply and they need to do so fast.

This is a fine balancing act as they weigh domestic political and social pressures against the need to work together internationally to ensure global pharmaceutical supply chains keep working effectively.

Currently, the global transport sector in airfreight, trucking and sea freight are all reducing capacity and they struggle financially to keep their heads above the water. This is completely the wrong direction to take and will lead to the ‘doomsday’ scenario we need to try to avoid where product supply can no longer be guaranteed as whole supply chains break down.

In the most extreme scenario, some airlines and some transportation players may need to be temporarily nationalized to ensure short term business continuity. This will cost money for sure but will cost governments far less than if they leave this problem lingering on for too much longer.

The good news

The good news will come if governments and big business act fast and work together. Securing vital supply chains will ensure there are enough products to support the hospital and medical care sector dealing with the virus with the products they need to keep the entire hospital care system going in each country.

By regulating and financially supporting key pharmaceutical manufacturing, transportation and logistics players governments can play a vital role in ensuring ongoing supply of product reaches hospitals and patients around the world. This will create a balancing factor badly needed in an industry looking for leadership and direction.

 

(Europhia Consulting is an international management consulting company specialised in the logistics and supply chain industry in the life-sciences sector. The opinions are based on the author’s own experience and understanding of the dynamics within the sector.)





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