In the last few years we have seen a raft of supply chain disruptions hit the pharmaceutical sector including billions of dollars paid out in fines and news of counterfeit drugs, quality excursions and ethical lapses hitting the headlines nearly everyday. These incidents reveal the diverse spectrum of supplier risks modern pharmaceutical and healthcare companies now need to manage.
These issues also demonstrate how third parties can directly affect the reputation of global brands via inevitable concern over public health and safety, loss of supply of critical products, contamination of raw materials and a “domino effect” of instability.
Longer term there is also the impact on share price, insurance premiums, reputation and, ultimately, the bottom line. We have also seen the potential for breaches in the Foreign & Corrupt Practices Act, the United Kingdom’s AntiBribery Act and any Corporate Integrity Agreement that might be in place with the U.S. Department of Justice.
The Role of the Supply Chain
What links the vast majority of high-profile disruptions in pharmaceutical and healthcare is the involvement of suppliers at lower levels within the chain. For example, in a 2010 guidance document to industry, the Pharmaceutical Quality Group of The Chartered Quality Institute cited 19 incidents which disrupted the supply chain, most of which involved suppliers and their supply chains. Pharmaceutical and healthcare are truly globalized industries with complex international supply chains. Industry must now work to scrutinize their supply chains to the same level they do for commercial or manufacturing operations.
Pharma and healthcare companies face a perfect storm. Materials are procured, manufactured, packaged, distributed and sold in different locations across the world. And in a recent survey of global businesses, most said that “failure of a supplier to deliver the required service” was the biggest risk they currently face. However, research shows they have limited information about suppliers involved in each activity.
Three separate reports, by KPMG, IBM and Achilles, show that worldwide, major corporations are showing a worrying lack of knowledge about who is in their supply chain — let alone the risk posed by each individual company. A buyer may well know its main suppliers (Tier 1s) but what about their suppliers, or their suppliers’ suppliers.
CREATING VISIBILITY OF SUPPLIERS
The pharmaceutical and healthcare industries must mitigate the risk of potential supply chain disruption by gaining visibility of, and managing their entire supply chain. In Achilles’ experience working in complex, highly regulated industries such as oil and gas, this works best when whole industries collaborate and implement a standardized, global supply chain risk evaluation and management process.
Such a system can collect, manage and evaluate the risk from suppliers across all countries on a single platform accessed via the “cloud.” Everything is coordinated — from basic company information to in-depth information including audit results, financial assessments, corporate social responsibility (CSR) information, bribery and corruption policies, as well as details on ethics and sustainability practices.
With one standardized process, pharma companies could evaluate and benchmark suppliers, identify high-risk companies, audit them and take proactive, preventative action. This could include actions such as implementing improvement plans or addressing “pinch” points, bottlenecks and sourcing alternative suppliers.
This would help companies to reduce procurement cost, eliminate duplication and generate data which can be used to make real business decisions.
Most recently we saw this when, according to the Wall Street Journal, 70 retailers joined forces to tackle supply chain risk in Bangladesh — but there is nothing to stop pharma taking this one step further and addressing all supply chain risk, in all countries, simultaneously through one process.
One in five (18 percent) companies in the UK hold no information about their Tier 2 suppliers across the world.
• The majority (62 percent) of UK businesses hold less information about Tier 2 suppliers than Tier 1 suppliers globally.
• Although nearly all (95 percent) companies consider “A supplier failing to deliver” as one of the main risks they seek to mitigate, only 16 percent hold the same level of information about Tier 2 suppliers as Tier 1 suppliers.
• Despite the lack of information on Tier 2 suppliers, 92 percent of companies say they are satisfied that their current supply chain allows them to identify and mitigate potential risks.
• The research showed the problem is particularly prevalent within domestic supply chains. Forty percent of companies that procure exclusively in the UK hold no information at all on their suppliers’ suppliers. This is compared to only 12 percent of those who procure internationally.
• The lack of information about Tier 2 suppliers is all the more concerning when 43 percent of companies have known the failure of a high-risk supplier to meet basic compliance requirements.
*The survey was carried out for Achilles by independent research consultancy IFF, among 131 procurement managers in companies of 250+ employees, including the pharmaceutical sector.
MAPPING THE SUPPLY CHAIN
With additional visibility, pharma companies collaborating with their suppliers could then create “supply chain maps,” gaining a complete picture of all the companies in their supply chains. This works when buyers invite their suppliers to provide information about their business operations via the online system. The suppliers then repeat the process with their own service providers until the whole supply chain is mapped.
With a complete understanding of the risk profile of each supplier, pharma companies could then easily stop working with suppliers who did not adhere to specific criteria around business operations, ethics, CSR or health and safety — thus permanently removing risk from the supply chain.
This isn’t just a “nice to have.” Worth at least $300 billion a year, the pharmaceutical industry is a critical global industry, primarily for the well-being of families across the globe, but also in terms of the world economy and stock market — including (yours and mine) pension funds.
In terms of the bottom line, an academic report found that organizations with supply chain disruptions experience between 33 to 40% lower stock returns relative to their benchmarks over a three-year time period (from one year before the incident to two years after). For many businesses, the loss of profit share, alongside the cost of mitigating the incident and reputational damage could pose a serious problem.
In the United States, public companies are required to disclose risks, including potential supply chain disruptions, to the Security and Exchange Commission’s (SEC) Division of Economic and Risk Analysis. In some cases, where businesses have disclosed risks and failed to address them, shareholders have sued on the basis the companies were negligent in tackling known risks to their investments.
Across Europe, publicly listed companies (PLCs) are also required to disclose risks to the exchange where they are listed. We anticipate those shareholders will follow suit to their American counterparts and impose similar additional pressure.
With increasing legislation affecting businesses and C-level executives on a daily basis, we also anticipate that pharma companies will come under similar pressure from shareholders to manage and mitigate potential risks to protect their investments. Operating in a truly globalized sector, pharma companies have to be able to defend themselves from criticism around abdication of responsibility.
DON’T BURY YOUR HEAD IN THE SAND
The idea of denying the issue or ignoring it is no longer an option. An unstable or risk-heavy supply chain will turn into a costly business problem — pushing procurement to the top of the agenda for all the wrong reasons.
According to the insurance industry, catastrophic events are not as uncommon as one might think. In 2005 there were more than 1,000 and every year since there has been between 600-800 events. In 2011, the 820 recorded events resulted in over $380 billion losses — only $105 billion of which was insured, according to Allianz.
Even after the dust has settled, organizations will continue to be affected through reputational and brand damage. While this can be difficult to quantify, its impact on consumer trust and buying behavior is real and will be felt across the enterprise. In human terms, imagine how one might feel if one was personally involved in a serious supply chain incident.
As a critical global industry, Pharma has a responsibility to its investors, shareholders, board members, and ultimately, the families who use our products every day.
Published in the October 2013 edition of Pharmaceutical Manufacturing magazine