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Cleaning up pharma's supply chain

For a clean bill of health companies must address their supply chain risks

Supply chain

A gang comprising more than 1,000 people push counterfeit drugs; dozens are arrested amid claims horse meat for trials entered the food chain and a company's sales plummet 61 per cent almost overnight. This sounds like a film plot, but these are all real issues affecting the pharmaceutical industry's reputation and the bottom line. 

In Beijing, authorities closed online pharmacies in 29 provinces and seized fake drugs and nine tonnes of raw materials worth over $362.4m. Almost simultaneously, police in France have arrested 21 people on suspicion of putting horse meat used for pharmaceutical tests and not fit for human consumption into the food chain. 

In a matter of months there have been countless examples of how risks within the supply chain can directly affect the reputation and sales of global brands. Pharmaceutical companies are subject to increasing scrutiny and must now further increase due diligence of their entire supply chains to avoid being associated with similar issues.

Emerging threats in the supply chain 
What links the vast majority of high-profile disruptions in the pharmaceutical industry is the involvement of suppliers at lower levels within the supply chain and the lack of information held on these suppliers. Not knowing what your suppliers' suppliers are doing opens you and your client base up to numerous risks and repercussions. 

Organisations with supply chain disruptions were found to experience 33-40 per cent lower market capitalisation returns over a three year time period (from one year before the incident to two years after). For many businesses supply chain failure, the resultant loss of profits and the cost of mitigating the incident and reputational damage is a challenge that all companies need to be aware of. 

This is particularly pertinent as pharma increasingly looks to 'emerging markets,' where standards can be lower in terms of compliance, health and safety, and ethics. Entering one of these countries without robust information about suppliers is like entering a dark room with only a tea light to guide you.

Globalisation in the supply chain
Pharmaceutical companies are truly globalised with materials procured, manufactured, packaged, distributed and sold in a myriad of different locations internationally.

The industry relies upon a highly complex supply chain network, comprising thousands of suppliers worldwide. And that presents a problem in itself. As highlighted by recent reports from KPMG, IBM and Achilles, across the globe major corporations demonstrate a worrying lack of knowledge about their supply chain.

Almost always buyers know their main suppliers (tier one) but have much less knowledge about the activities of all their suppliers (tier two), or their suppliers' suppliers (tier three) and so on. It is not unusual for major corporations to have over 30,000 suppliers, so even if 15,000 are preferred tier one suppliers, that still leaves 15,000 or more that need scrutinising. This takes time and constant updating, so is a major operation to ensure complete visibility.

Creating visibility of suppliers
To mitigate the risk of potential supply chain disruption, the pharmaceutical industry must look to gain visibility of, and then manage, the entire supply chain.

In our experience of working in other complex and highly-regulated sectors, such as oil and gas, this works best when companies implement a centralised and standardised, global supply chain risk evaluation and management process. 

This type of system can collect, manage and evaluate the risk from suppliers across all countries on a single, online platform. Everything is coordinated - from basic company information to in-depth information such as audit results, financial assessments, corporate social responsibility (CSR) information, bribery and anti-corruption policies, and details on ethics and sustainability practices.

With one standardised process, companies can implement a robust database of suppliers based on accurate information. They can issue questionnaires to all suppliers; asking the same questions around core business areas, such as health and safety, compliance and adherence to legislation. 

With the core information in place, they can evaluate and benchmark suppliers, assign a risk rating to each company and carry out audits on those deemed higher risk. With a clear understanding of performance, pharma companies take proactive, preventative measures. 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 costs, eliminate duplication and generate data which can be used to make real business decisions, such as the most effective suppliers in a global marketplace. 

For example, we saw this in the FMCG sector in 2013 when 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. So how can this be achieved?

Entering an emerging market without robust supplier information is like entering a dark room with only a tea light to guide you

Map the supply chain 
The best way pharmaceutical businesses can maximise visibility of risks and take preventative action is to map the entire supply chain, through multiple tiers - evaluating each supplier and who they work with. 

  • Information is key - the most effective way to map the supply chain is to implement a standardised approach to the management of supplier information. With an accurate database, buyers can request information from everyone involved in their supply chain, gaining a complete picture of all the companies in their supply chains. This then allows them to recognise the risks within the supply chain as a whole and identify every supplier they work with – directly or indirectly.
  • Collaborative working - For supply chain mapping to work, it is essential to get buy-in from suppliers because without their help, mapping cannot be achieved. Initially, some suppliers may be reluctant to provide information, especially if they feel the information is sensitive. It is important to reassure suppliers that they can control who has access to their information and commercial confidentiality can be maintained. It is important to communicate the benefits. A major incentive for suppliers to get involved is that they will also be able to understand risk in their own supply chains. Once suppliers see the benefits, buyers invite them to provide information about their business operations. The suppliers then repeat the process with their own service providers until the whole supply chain is mapped, showing a web of companies all interlinked. The key to a successful map is automation – ensuring that the person in the middle can link what he sells to whom; and that details of what he buys links to the next person in the chain.
  • Know the risks and set standards - Several important legal precedents have been set for pharma companies. In the USA, listed companies are already required to reveal potential supply chain risks which could affect their supply chains. In addition, companies are required under the Dodd-Frank Wall Street Reform and Consumer Protection Act to identify and disclose whether they know where all metal components are sourced and to provide the chain of evidence through the supply chain back to the mine of origin to prevent issues of conflict minerals - funding terrorist activity. Pharma and healthcare companies are already affected by this, for obvious items such as needles and syringes and more complicated medical equipment and analysers. But how long will it be before the principle is extended to other materials, such as chemicals? In the interests of patients' safety why shouldn't visibility of the supply chain of components in the finished goods be completely visible in a similar way to conflict minerals? Pharma companies have a duty of care to protect everyone in their supply chain and now have an industry leadership opportunity to get ahead of the game and pre-empt the extension of these principles rather than wait for legislation to drive the change.
  • Once pharma companies have agreed a consistent way of evaluating potential suppliers, they can set and implement standards any supplier must achieve in order to be eligible for business. Pharma companies can then gain a complete understanding of the risk profile of each supplier, and stop working with suppliers who did not adhere to specific criteria or meet compliance standards. This could include business operations, including ethics, CSR, or health and safety - thus permanently removing these risks from the supply chain. 

Avoid the domino effect and act 
Although mapping your supply chain may seem a sizeable task, it isn't just a 'nice to have'. With increasing scrutiny on companies' reputations and balance sheets, pharmaceutical companies will come under similar pressure from shareholders to manage and mitigate potential risks to protect their investments. 

Denying that there is an issue or ignoring this problem is no longer an option. An unstable supply chain will turn into a costly business problem – pushing procurement to the top of the agenda for all the wrong reasons.

As a critical global industry, pharmaceutical companies have a responsibility to their investors, shareholders, board members, and ultimately, the families who use their products every day to look carefully and holistically at their supply chain. It's up to each company to ensure it is as accountable and safe as it can be to help avoid any supply chain disasters in 2014 and beyond.

Article by
Dr Robert Brooks

director of pharmaceutical and healthcare at Achilles – which protects businesses from supply chain risk.

24th March 2014

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