The pharmaceutical supply chain is subject to many types of risk, among them the introduction of counterfeit products, poor planning of inventory levels and delays to distribution, and there is a perception in the industry that, as outsourcing becomes more prevalent, these risks are becoming harder to control. Jim Banks looks at mitigation strategies that pharmaceutical companies can deploy to maintain control of increasingly complex and globalised supply chains, while still keeping an eye on how to cut costs.
Outsourcing is an increasingly fundamental part of the supply chain in the pharmaceutical and life sciences sector because it helps companies to operate more efficiently, tap into specialist skills, improve flexibility and take advantage of regular investment in new technology. It also allows them to transfer some elements of risk to third parties. Nevertheless, despite being able to respond more quickly to changing market trends, become more cost-efficient and improve time to market, companies do find that outsourcing increases the complexity of the supply chain and, therefore, creates new types of risk that must be carefully managed.
According to a recent report from BCC Research, the global market for contract manufacturing, research and packaging in the pharma and biopharma sector was valued at nearly $220 billion in 2012, and was expected to have expanded to more than $242 billion by the end of last year. The report predicts that, by 2018, the market will be worth nearly $375 billion, with a compound annual growth rate of over 9%. In short, outsourcing will play an ever more central role in an industry where rising prices, cost pressures, regulatory changes and smaller margins are pushing companies to seek greater cost-efficiency and introduce more flexibility into the supply chain.
As this trend continues, the concomitant risks become potentially greater. Among these risks is the potential for disruption to the supply chain, should a third party suffer a critical failure. After all, the more links in the chain, the more it is vulnerable to any weakness in a single link. In addition, there is the potential for pharma companies to lose essential skills and reach a stage where they are unable to operate without external partners.
Furthermore, as more links are introduced into the supply chain, there is greater potential for the loss of intellectual property and the introduction of counterfeit products. This could be the biggest threat to the industry, and the World Bank believes that as much as 10% of the global supply of pharmaceuticals consists of counterfeit products, and that this figure is much higher if only developing economies are considered.
Tied to this risk is the potential loss of operational control of elements of the supply chain, which is exacerbated if engaging an outsourcing partner is done in such a way as to compromise the visibility a pharma company has over quality and performance.
So much depends on the choice of outsourcing partners. A successful relationship depends on there being synergy between the business goals of the pharma company and its outsourcing partner, and on how well their business cultures can fit together. It also depends greatly on the processes that are put in place to monitor quality and performance.
Combat the counterfeiters
In a recent research paper from Allied Market Research, analysts Debbie Shields and Roshan Deshmukh wrote: "Counterfeiting practices are rising for food and pharmaceutical products due to the globalisation of the retail sector and the dilution of the supply chain. The anti-counterfeit packaging market in track-and-trace technology for product tracking is growing and expected to mature in the next few years. The emergence of e-pedigree applications in pharmaceutical is changing the application of RFID technology from real-time tracking to real-time managing."
The paper, published in March, expects the global anti-counterfeiting packaging market in the food and pharma sectors to grow into a $142.7-billion arena by 2020 from $57.4 billion in 2013. This reflects a serious level of ongoing investment in technology and processes to prevent counterfeit products entering supply chains that are potentially more porous as they expand further across the globe and incorporate a greater number of partners.
The report identified RIFD technology and e-pedigree software as key tools in the fight against counterfeit products. The latter, which is being widely implemented in the US, requires an electronic record to be appended to track a drug at every point of its movement through the supply chain, from manufacturer to wholesaler to pharmacy.
"Counterfeiters and cargo thieves will be forced to move onto other types of product because dealing in pharmaceuticals and devices will become too risky," says Dirk Rogers of RxTrace, an independent consultant who focuses on healthcare supply chains. "With the addition of serial numbers to drugs in both the US and the EU, plus the tracing that will be required in the US market and the point of dispense authentication that will take place in Europe, it will be very difficult for these criminals to introduce their illegitimate products into the legitimate supply chain without detection.
"Why would they bother risking their freedom with healthcare products when less secure supply chains are available?"
It is the combination of technologies, not just in the form of RFID but through many developments in product identification and tracking, alongside rules and regulations, that will tighten up the supply chain and leave fewer gaps through which counterfeit products can enter. This, however, poses a risk in itself. Evolving standards around the globe mean that risk-mitigation strategies for the pharmaceutical supply chain must constantly adapt to compliance requirements, which become increasingly complex as manufacturing and distribution processes become more geographically dispersed.
The move towards e-pedigree standards in the US is part of a wider drive by regulators, which has seen the FDA introduce various pieces of legislation including the Safety and Innovation Act, the unique device identification rules, and the Drug Supply Chain Security Act. In the EU, the Falsified Medicines Act and the harmonised unique device identification framework must be taken into account. Further afield, standards vary more, so mapping the regulatory framework across the entire supply chain is essential, and should be done in concert with all partners that form part of that chain.
Reducing risk through relationships
No matter what type of supply chain risk a pharma company is trying to mitigate, the crux of any successful risk management strategy in a market increasingly defined by relationships with outsourcing partners will be the quality of those partnerships and the processes that are put in place to manage them effectively.
Much comes down to the implementation of processes to establish the right levels of control and visibility. Managing the quality of service delivered by outsourcing partners is essential to keeping the supply chain running smoothly and avoiding delays in distribution. Clear visibility of contract manufacturing processes plays a large part in the effective management of inventory levels to ensure that the right amount of product is manufactured, stored and transported without either falling short of demand or building up excess stocks that must be stored at potentially high cost.
One of the key tools for establishing the right quality controls and levels of transparency is the use of supplier quality agreements (SQA). Effective use of SQAs, which define the responsibilities a partner has for manufacturing and supply products, can go a long way towards mitigating many of the risks associated with manufacture and distribution, thus enabling the pharma company to focus on the advantages outsourcing can deliver in terms of cost savings, flexibility and time to market. SQAs focus on quality standards and regulatory compliance for the products they cover, and open the way to the formation of a centralised quality management system that can provide further efficiency gains across a range of outsourcing relationships.
At the core of such an approach is the fundamental understanding of the need to balance control with cost-efficiency. Pharma companies have to remain closely involved in the processes that are handed over to their outsourcing partners without getting sucked into micro-management. At the start of a relationship with a partner, it ultimately pays dividends to take a methodical, rigorous and, perhaps, slow approach to setting the parameters that will define a successful relationship in which the benefits are accentuated and the risks are minimised. The setting of milestones and deliverables is essential, but so is the establishment of clear risk-mitigation processes.
In the near future, the value of pharmaceuticals and biopharmaceuticals in the supply chain will not only be determined by the price of products and the cost-efficiency that is delivered through outsourcing, but also by the accuracy with which supply chain processes are documented. Products must have a clear supply chain pedigree, or they will have no value. Transparency and visibility throughout the supply chain are essential.
Transparency in the relationship with supply chain partners opens the way to the use of enhanced data analytics to address potential problems with inventory planning and distribution delays. In the era of big data there is a huge opportunity to crunch the numbers in increasingly sophisticated ways to ensure that lead times dovetail with demand.
Again, the level of transparency comes down to the quality of the relationships with supply chain partners.In today’s world, risk management for pharmaceutical companies is increasingly synonymous with relationship management.