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Supply chain watch: Key challenges for pharma companies in 2023

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Bindiya Vakil, CEO & co-founder of Resilinc,outlines the top five potential supply chain disruptions pharma companies should ‘watch out’ for in 2023. 

Key insights:

The past twelve months have certainly provided another unsettled year for supply chains and international business operations, with geopolitical disruption, labour strikes, supply shortages and continued pandemic disruption.

With the current Covid-19 situation in China continuing to make headline news and increasingly threatening to disrupt supply chains, some businesses (including household names) are already feeling the impact. But where do the biggest threats lie during the months ahead? And how can pharmaceutical companies mitigate the risk and build supply chain resiliency?

We explore five of the key challenges that pharmaceutical companies need to be aware of in 2023. 

Navigating an uncertain economy 

Unfortunately an unstable economy will continue to weigh heavily on the minds of manufacturers, with the increase in raw material costs set to make supply chains more expensive for pharmaceutical companies and consumers during the year ahead. In addition, the most recent data from Resilinc, shows that electricity costs due to rising prices have increased tenfold for some drug manufacturers in Europe, forcing them to reassess supply chains to reduce costs and ensure continuity.

The other factor is the impact on patients themselves with pharmaceutical companies being forced to scale back production of drugs that do not create strong margins owing to higher production costs. Inflation and increases in demand have also seen some medical device manufacturers struggle to produce parts, with a shortage of semiconductors as well as specialised plastics, metals and resins. In fact, as a result of these shortages, the previously buoyant medical device industry has seen lower year on year growth throughout 2022. Achieving a 7.8% increase in 2022 compared to  8.1% growth in 2021.

Geopolitical risk remains 

Even the most established and reliable supply chain networks have unsurprisingly been shaken by the geopolitical tension of the last twelve months. The conflict in Ukraine has had a significant impact on the cost of raw materials in the pharmaceutical sector, due to the rising cost of energy and scarcity of resources. According to our latest data costs have risen from 50-160% in some cases. Recognising the potential impact, The Medicines for Europe group even issued a letter to energy and health ministers of EU member states last July (2022), warning that some of its producers may not be able to continue manufacturing if gas supplies were rationed. 

To mitigate this, pharmaceutical companies should consider alternative sites to those that could face production cuts, shortages or recalls. Ideally, companies should be mapping their supply chain down several tiers. This is crucial to identify in advance where disruption may occur and get a plan B in place with other supply options. Third or fourth-tiers suppliers might comprise lower value relationships but single-sourced materials produced by these businesses could cause significant disruption if they become unavailable.

'Zero trust' cyber security 

The healthcare sector, which includes pharmaceutical companies, was the hardest hit by cyberattacks in 2022 according to our supply chain monitoring software. With the industry remaining a target for cyberattacks this year, the most cyber-secure organisations undertake extensive due diligence on potential (and current) suppliers. This approach is starting to gain wider traction in the pharmaceutical sector with global hiring of cybersecurity professionals increasing by 30% in Q3 of 2022 compared to Q3 2021, according to a white paper by GlobalData.

Despite bringing in cyber expertise, if pharmaceutical companies aren’t ensuring suppliers are regularly carrying out their own cyber security updates, the risk of cyber attacks increases tenfold. This is why the ‘zero trust’ cybersecurity model became more commonplace in 2022, and will continue to be adopted by smart pharmaceuticals in 2023.  The 'zero trust' approach is based upon a default mode of denial, with access to systems only granted after verification. By taking a proactive approach and identifying cyber-vulnerable suppliers, companies can minimise disruption to supply chains and avoid potential financial or reputational damage. 

China plus one

The China plus one approach is a strategic decision being taken by many large global organisations, including pharmaceutical companies, to diversify supply chains and avoid over reliance on China. The aim is to mitigate supply issues caused by ongoing challenges in the Chinese market, avoiding being reliant on one key supplier in a particular region. Pharmaceutical companies should look to establish a mature supply chain resiliency programme to mitigate these risks.

A robust programme should involve real-time event monitoring and alerts, as well as supply chain mapping down to part or material origin to gain visibility of potential disruptions and supply weaknesses. An essential aspect of this, that many organisations get wrong, is to map suppliers down several tiers to origin level and review risk based on revenue impact, not spend. All too often, supply chain mapping focuses on the top 20% of suppliers based on the fact they make up 80% of the company’s spend. However, this an extremely risky approach as it leaves procurement teams with little or no visibility over the other 80% of suppliers. One of which could be producing a vital component that if suddenly unavailable, could paralyse the whole production line, seriously impacting revenue. 

Climate risk 

Awareness amongst organisations on the impact that climate change could have on supply chains is rising, not least due to the global frequency of natural disasters increasing almost threefold in recent decades. Climate risk fast becomes supply chain risk when there is little independence in drug supply in the US and Europe, with occurrences such as droughts and floods in India potentially having a considerable impact on pharmaceutical companies. With a significant proportion of pharmaceutical companies operating on a just-in-time basis, climate risk makes them vulnerable to supply shocks. Unfortunately, extreme weather events will only become more frequent with global warming, meaning the pharmaceutical sector must be ready for threats to supply caused by climate change.

Conclusion

The nature of the pharmaceutical industry means it has to constantly react and adapt to changing market conditions. With very real consequences for patients if continuity of supply is interrupted.   However, supply chain mapping and monitoring is the most effective way to achieve supply chain resiliency and minimise any potential disruptions before they become bigger issues. While crisis management may still be necessary in such an uncertain global economy, in pharmaceutical companies where the importance of a strong, stable supply chain is recognised at C-level, the risk from external factors is significantly lessened.

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