When it comes to the supply chain, business can be risky. A seminal survey of companies in various industries spanning 62 countries found 85% of respondents have experienced a supply chain disruption over the last 12 months, and 50% of companies had more than one disruption.1
For the life sciences industry, supply chain disruptions are even riskier, and the stakes are greater. Gaps and breakdowns in good pharmaceutical practices can trigger a chain of dire consequences for manufacturers – from increased regulatory scrutiny and steep financial penalties to slumping sales, a surge in shareholder apprehension, an irreversibly damaged brand and reputation, and worse of all, compromised patient safety. Companies that have had a supply chain disruption have seen their stock prices fall by as much as 9%.2 Recent penalties for production failures related to Food and Drug Administration (FDA) violations of current good manufacturing practices have been as high as $150 million,3 with past fines having reached $400 million. Potential litigation and damage to the brand can have even further-reaching financial repercussions.
From natural disasters to major infrastructure failures, labor strife, counterfeiting, political instability, supplier insolvency and supplier procedural failures, the life sciences supply chain can be disrupted by a host of physical and non-physical events. These disruptions pose risk to manufacturers across the full continuum of business, from sourcing through production and distribution. To mitigate risk, build business continuity and reliably deliver critical products to patients, manufacturers need to create comprehensive crisis management plans that can provide an immediate response to emergencies. They also need to develop a detailed roadmap for supply chain risk management (SCRM) to maintain supply continuity and protect the ultimate stakeholder: the patient.
Sourcing: managing supplier risk
An effective risk management plan begins with sourcing – identifying, qualifying and retaining compliant and financially sound suppliers. Misjudgment in sourcing can significantly increase supply chain risks, from potential stock-outs that disrupt customer supply, to compromised product quality, product diversion, and falsified medicines.
Manufacturers need to thoroughly understand and audit the operations of their key suppliers, measuring their performance and quantifying the potential cost of supply disruption, damaged brand reputation, and the impact to company profitability. In the qualification process, manufacturers must collect and analyze a full range of supplier financial and compliance information that is critical to establishing sound plans for risk mitigation and business continuity. These plans are essential in protecting the supply chain against supplier failure while understanding the total cost and trade-offs of risk management. This is especially critical for suppliers who are contract manufacturers for finished product.
Production: delivering operational continuity
This same level of scrutiny for material suppliers must also be applied to the production assets used to manufacture and package pharmaceutical products as well as supporting infrastructure and technology. A failure in critical systems, utilities, or production equipment can impact product quality, disrupt operations and result in prolonged supply disruptions.
Quality control must be managed at every level. Each product and ingredient needs to come from a qualified supplier and have its quality validated to maintain supply reliability. Changes in suppliers, product components, and API need to be revalidated for quality and thoroughly documented. Failure to do so can endanger product quality, supply continuity and ultimately patient safety.
Quality and distribution: protecting the physical supply chain
The same level of scrutiny needed for material and equipment suppliers is also needed to qualify and manage storage and transportation providers. Logistics providers must understand the product and its environmental requirements to maintain product quality and efficacy. Failure to meet these requirements can result in heavy losses and regulatory or even criminal sanctions.
With logistics and storage often being outsourced from clinical trials through customer delivery and returns, it has become imperative to validate that logistics providers have comprehensive quality and risk management programs in place. Pharmaceutical companies must consider all logistics capabilities and permitting required to preserve product integrity, including management of import and export, strategic routes, compliant packaging and storage conditions, and adherence to standard operating procedures and good documentation practices.
Product safety and supply chain security continues to be one of the most significant industry risks. Despite efforts from watchdog agencies, diversion and drug counterfeiting have continued to plague the supply chain, putting patients’ lives at risk. The World Health Organization estimates that the global market for falsified medicines is $77 billion dollars, having doubled between 2005 and 2010. Parallel trade can also be problematic as the practice involves product transport and repackaging in the language of the importing country, potentially opening the door for the inadvertent entry of dangerous adulterated and counterfeit drugs into legitimate distribution chains and markets.
New legislation in the US: raising the bar on compliance
The Drug Quality and Security Act (DQSA) and the related Title II of the DQSA, the Drug Supply Chain Security Act (DSCSA), signed into US law in November 2013, is one of a number of policies designed to protect consumers by raising the bar even further on compliance vigilance. To prevent falsified product, the DSCSA gives the FDA new regulatory authority in supply chain security and operational activities. As a result of these laws, manufacturers will need to focus on authenticating their products, integrating disparate systems across supply chain partners and updating storage, facility equipment and information technology.
By requiring product authentication, these laws are a major step forward in preventing dangerous substandard and counterfeit medicines from being introduced and sold. All supply chain partners will need to be hyper-diligent in all steps of the distribution process, from coordinating and standardizing data transmission to moving product securely and continually authenticating at each level of the supply chain.
Action steps: assessing risks & opportunities
Here are 10 steps your organization can take to mitigate supply chain risk and manage business continuity:
1. Qualify. Develop clear processes and governance for qualifying and managing your portfolio of suppliers, establishing clear standards, and collecting and evaluating in-depth background information on their financial stability, compliance standards and business ethics.
2. Review sourcing risks. Identify all ingredients, components, and equipment required in production. Identify any sourcing risks and implement controls, policies and processes to eliminate avoidable risks and mitigate unavoidable risks.
3. Understand your suppliers’ networks. Confirm your primary suppliers have solid business continuity programs, including redundant supply, transportation, equipment and infrastructure.
4. Maintain service-level agreements (SLAs). Establish financial incentives with material and equipment suppliers and appropriate penalties for sub-performance.
5. Collaborate. Leverage network collaboration across sites to optimize supplier relationship management, network assets and spend, reduce costs, negotiate improved service levels, and achieve operational efficiencies.
6. Review equipment and packaging processes. Identify key production equipment, laboratory needs, building and environmental infrastructure, utilities and systems with critical dependencies that have a high impact or potential for failure. Develop a network wide plan to manage equipment and systems, suppliers, spare parts, and equipment maintenance and repair capabilities. Establish SLAs to confirm adequate response times for mitigating potential disruptions.
7. Create redundancy plans. Develop on-site and in-network equipment redundancy for critical production equipment that may not have back-ups. Identify alternative equipment to be validated for production to provide back-up and reduce recovery time should equipment malfunction.
8. Confirm adequate stock. For key products and supplies, make sure stock and safety stock levels are sufficient to maintain supply continuity in a disruption.
9. Guard against counterfeiting and diversion. Put in place policies, procedures and security safeguards to prevent your company’s products from being counterfeited or diverted from the regulated supply chain. Identify and invest in authentication technologies and packaging technology like holograms and security codes, to minimize the impact of counterfeit drugs. Confirm that all product transactions are fully traceable – even if the product has been repackaged and relabeled.
10. Integrate new regulations into your compliance program. Develop sound procedures for traceability and e-pedigree management. Factor regulatory-driven updates into your operational and budgetary plans, considering the personnel, capital, and other resources needed to meet evolving regulatory requirements. Integrate requirements into sourcing, SLAs and contract management. Maintain continuous end-to-end process review and make immediate changes if vulnerabilities are found. Partner with strategic third parties who can provide redundancy and, if necessary, provide knowledge, resources and capital.
The holistic approach: delivering value
Supply chains today play a critical role in the viability of the life sciences industry. To protect companies from the impact of unpredictable events, managing supply chain risk and business continuity needs to be a high priority for the C-suite. Executive teams are challenged to proactively address supply chain exposures and develop sustainable solutions for managing risk, maintaining compliance, and protecting consumers.
A holistic approach – one that integrates supply chain risk management with all aspects of business strategy – will enable executives to evaluate the financial and strategic impact of supply chain disruptions, better prevent and mitigate risk and strengthen relationships with all company stakeholders. A sound SCRM and business continuity management program can provide opportunities not only to increase compliance, but also to improve business processes, enhance operating performance and deliver value across the entire life sciences supply chain.n
1 Business Continuity Institute survey, November 2011
2 Vinod R. Singhai, “Supply Chain Glitches and Shareholder Value Destruction,” Business Briefing: Global Purchasing and Supply Chain Strategies, Dupree College of Management, Georgia Institute of Technology, July 21, 2007
About the author
Jamie T. Hintlian is a principal and Ryan Kelly is a manager in Ernst & Young LLP’s Advisory Services practice, focusing on the life sciences supply chain.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.