In recent decades, outsourcing of production steps, especially to Asia, has been one of the most important trends in manufacturing strategies in both the European and the US pharmaceutical industry. This resulted in a significant dependence on Asian suppliers. In an interview David Francas, professor for Logistics and Information at Heilbronn University and managing director of the Healthcare Supply Chain Institute, Germany, gives a closer look at the global pharmaceutical supply chain and at methods to calculate risks and chances. The interviewer was Sonja Andres, CHEManager.

CHEManager: Mr. Francas, do you expect the current outbreak of Covid-19 will cause a long-lasting impact on the pharma supply chain?

David Francas: First, the significant demand changes, like the surge in demand for paracetamol, and temporary supply shortages, like APIs from Asia, are likely to result in a bullwhip effect that will cause imbalances in supply chains over the next nine to 18 months. Second, decision-makers in politics and business are already starting to question whether they could have been better prepared for this crisis. It is very likely that this will result in a critical review of the design principles of global pharmaceutical supply chains. The calls to move production of active pharmaceutical ingredients – or APIs – back to Europe are first examples of this upcoming discussion.

Especially in pharmaceutical manufacturing the global complexity of the supply chain has increased substantially in the past years. Can you please picture this complexity? Where is its highest impact on the supply chain?

D. Francas: Over the past decades, consolidation of production sites and outsourcing of production steps were major trends in manufacturing strategies. In particular, API manufacturing has maintained a firm position as the most outsourced area for drug manufacturers. Since one API supplier often delivers to multiple pharmaceutical companies, issues at this level may have widespread effects on drug supply. Especially, the fact of India and China being a prime location for API manufacturing is a subject of intense debate. National authorities and other stakeholders question more and more the resilience and political implications of this supply chain model.

Looking at the general supply of medicine, how do you estimate the resulting dependence?

D. Francas: Data from Europe and US authorities confirm a significant dependence on Asian suppliers. For example, 40% of API manufacturing facilities that serve the US market are located in India or China. Unfortunately, there is no detailed information available about the type and volume of API being produced in Asia for the US or European market – a matter of fact also admitted by the American FDA. Several industry reports indicate that the true dependence on Asian suppliers may be even higher: They state that up to 80% of API used in Europe or the US comes from China and India. From a risk management perspective, the high concentration of API production in one region comes along with higher supply chain vulnerability. This fact has been confirmed by the temporary shutdowns in China during the coronavirus outbreak, which sparked severe fears of global drug shortages.

Did these dependences cause negative impacts already on production and supply of APIs in the last couple of years?

D. Francas: Drug shortages have become a global phenomenon and are recognized to affect all health systems. Though several shortages are reported to be caused by issues with API supply, there is no clear empirical proof yet that outsourcing has substantially contributed to this trend. However, some facts may suggest that there is a connection. Before the coronavirus outbreak, manufacturing quality issues in India and China had been subject of concern. In fact FDA data from 2019 show that India has the poorest rate of FDA inspections with acceptable outcomes (83%) – much lower than China (90%), the US (93%), and EU (98%). A case in the year 2018 shows the impact of such quality issues. Contaminations found in drug ingredients manufactured by API manufacturer Zhejiang Huahai Pharmaceutical caused worldwide product recalls of Valsartan.

How do you estimate China’s and India’s part as API delivering countries – today and in the future?

D. Francas: It is worthwhile to note that India with its generic drug production also heavily depends on Chinese manufacturing of API and intermediates; several sources estimate that India imports nearly 70% of its APIs from China. The basis for China’s and India’s dominance in API and other key ingredients in drug production are labor and other cost advantages that are not likely to diminish that soon. Moreover, especially China benefits from a strong chemicals industry and substantial scale advantages in production. Given these cost advantages and the considerable investment cost for moving API production back to the USA or Europe, it seems very likely that China and India will remain key suppliers of API in the next years.

Can you give us a closer look at the supply chains of European and North American pharmaceutical production?

D. Francas: In general, we see that primary API manufacturing is often done in Asia while secondary manufacturing, and packaging in particular, tends to be closer to the local or regional markets. For example, only 22% of the API manufacturing sites that serve the US market are based in the US, in contrast to 64% of the (secondary) manufacturing sites. Though much of the public attention focuses on the high share of API production in Asia, the high concentration of manufacturers also warrants critical analysis. In Germany, around 530 drug substances are classified as essential medicine; almost a fifth of them are attributed with an increased supply risk since only one authorization holder, or only one manufacturer, or only one active substance manufacturer is available. Risk and supply chain theory clearly suggests that those supply chains are much more vulnerable to disruptions.

Is it possible to counteract the shortage of general pharmaceutical ingredients and APIs without risking an extreme increase in the price of medicines? Would methods like predictive und prescriptive analytics be helpful?

D. Francas: Increasing prices for generic drugs, national drug reserves, and reshoring of API production are frequently discussed measures to reduce shortages and secure national drug supply. The truth is, however, that any of these measures would likely increase directly or indirectly healthcare costs. As is also acknowledged by national authorities, there is a general lack of detail data and empirical studies that thoroughly explain key drivers of drug shortages. Understanding those drivers and the development of appropriate decision support systems would be important to better guide decision making. In this way, analytics could certainly help.

How can pharmaceutical companies protect themselves against risks in the supply chain?

D. Francas: Structural risk mitigation levers in a pharma supply chain are dual or multi-sourcing, agile capacity, and risk inventory. Furthermore, choosing the right risk mitigation measures requires effective planning. The commonly used deterministic, i.e. scenario-oriented, planning logic is hardly capable of adequately accounting for risk and uncertainty. Our own research confirms that prescriptive analytics such as stochastic or robust optimization can help companies to better manage supply chain risk. For example, we developed an optimization approach for biopharmaceuticals that takes demand variability – forecast errors – and shelf life risk along with supply chain cost into account when determining lot sizes and inventory levels. Case studies with companies show both significant cost savings and risk reduction compared to standard planning approaches.

Finally, what actions should be taken to improve resilience of the supply chain?

D. Francas: While the above-mentioned risk mitigation levers are generally well understood, there is a need for better end-to-end metrics and supply chain planning. Because historical data on rare events such as the coronavirus outbreak are limited or non-existent, their risk is hard to quantify using traditional models. As a result, many companies do not adequately prepare for them. Our research shows that novel metrics like time-to-survive and time-to-recover can help companies to better assess their risk exposure. We recently developed E2E Risk Guru, a software that uses prescriptive algorithms to simulate optimal reactions to failures and optimize risk mitigation strategies based on these metrics. Using data from ERP and planning systems, E2E Risk Guru creates a digital twin of the supply chain planning environment. For example, this allows for finding weak links in the supply chain and optimizing risk inventory or other measures considering multiple risk scenarios simultaneously, like failure of API supply and failure of bulk production at the same time.