Planning for potential disruption in 2023 will be crucial for pharmaceutical companies that wish to mitigate supply chain woes further down the line. The situation regarding COVID-19 in China is already being hailed as a potential source of supply chain disruption, with some organisations already feeling the impact – not forgetting ongoing challenges around economic instability, geopolitical risk and cybersecurity issues.
We have already witnessed much of this throughout 2022, with a surge in geopolitical disruption, labour strikes, COVID-19 disruption and supply shortages. These factors will continue to pose risks in 2023, challenging pharmaceutical companies that seek to build resilient supply chains over the course of this year and beyond.
This article outlines five of the biggest threats to pharmaceutical companies eager to realise secure supply chains in 2023.
1. Ongoing economic instability could destabilise supply chains this year
Ongoing economic instability will continue to loom over much of this year, with inflation of raw material costs predicted to make supply chains far more expensive for pharmaceutical companies and consumers. According to the recent data from Resilinc, rising electricity prices have raised operating costs tenfold for some drug manufacturing plants in Europe, and increases in costs and services could mean that organisations are forced to reassess their current supply chains an effort to minimise costs or ensure continuity of supply. For example, surgical equipment and joint- replacement manufacturer Stryker Corporation has raised prices and slowed purchases and production in order to find better prices.
Additionally, pharmaceutical companies are likely to continue to cut production of drugs that do not create revenue due to higher production costs this year. Furthermore, inflation and increases in demand led to some medical device manufacturers struggling to produce parts, with a shortage of semiconductors as well as specialised plastics, metals and resins.
This made the manufacture of dialysis-related products, ventilation-related products, defibrillators, ultrasound devices and blood pressure monitors especially difficult to produce. As a result of these shortages, the medical device industry has seen lower year on year growth throughout 2022 – a 7.8% increase – than in 2021 which saw the industry grow by 8.1%.
2. Geopolitical risk continues to subvert previously reliable supply networks
The last year has clearly shown that geopolitical risks will continue to threaten established and reliable supply chains. We only need to look to the conflict in Ukraine to witness the profound impact that this had for the pharmaceutical industry, with the cost of raw material costs rising by 50-160% according to our data. The predominant cause being rising energy costs that largely began during the invasion of Ukraine.
The conflict on the European continent has impacted the industry significantly, both through the rising cost of energy as well as scarcity of resources. The Medicines for Europe group issued a letter to energy and health ministers of EU member states in July 2022 to warn that some of its producers may not be able to continue manufacturing if gas supplies are rationed, hence the Russia-Ukraine war had significant consequences for pharmaceutical companies and this may continue into 2023.
As a result, it is increasingly important that pharmaceutical companies and suppliers find alternate sites for those that are facing production cuts, shortages, or recalls. Supply chain mapping down multiple tiers is crucial if companies are to combat rising costs and secure supply. In doing so, organisations can identify where supply disruption may emerge in advance and identify alternative supplies to mitigate this, given that low-spend, often single-sourced materials produced by third- or fourth-tier suppliers cause the most disruption if they become unavailable. This is where the pharmaceutical industry’s focus should be in 2023; collaborating with suppliers will be key to creating long-term contracts for drugs or devices that are not impacted by shortages.
3. Adopting a ‘zero trust’ cybersecurity model to better prepare organisations for threats in 2023
Of the major industries Resilinc monitors, the healthcare industry, of which the pharmaceutical sector is a key part, was the industry hit hardest by cyber attacks in 2022. Not only this, but 2023 will certainly see the pharmaceutical industry remain a target for cyber attacks. This is why the most cyber-secure companies conduct extensive due diligence procedures on suppliers and vendors before they are selected to provide or produce materials, components, services or software.
This approach is starting to permeate the pharmaceutical sector, with global hiring activity related to cybersecurity in the industry increasing by 30% in Q3 of 2022 compared to Q3 2021 according to GlobalData’s Jobs Analytics. While there will always be an element of inevitability to business practices, processes and suppliers changing, when it is not a requirement for suppliers to periodically update IT security diligence data, the risk of cyber attacks becomes far greater.
As more pharmaceutical companies invest in cybersecurity measures, they are realising the serious threat that cyber attacks can have on organisations and businesses are no longer assuming that their suppliers will always ‘do the right thing’, or share the same values, policies or procedures. This is why the ‘zero trust’ cyber security model will increase in popularity in 2023, having previously gained traction in 2022.
The default mode of thought is quickly becoming to deny applications and data, and only enable access after verification.
Ensuring that pharmaceutical companies have a risk-mitigating cyber security strategy in place is key to minimising disruption further down the supply chain and means significant economic losses can be avoided altogether. By identifying vulnerable suppliers, companies can take pre- emptive steps to avoid unnecessary security risks before they happen.
4. The ‘China plus one’ strategy reshaping supply chains through regionalisation
With the lockdown policies employed by China having a dramatic impact on supply chains last year, many organisations are putting in place a ‘China plus one’ approach. This strategy mitigates exposure to the political decisions of China through diversification of suppliers and the avoidance of being dependent on one key supplier in a particular region.
To further prepare for potential risks, pharmaceutical companies should begin to establish a mature supply chain resiliency programme. Such a programme should involve real- time event monitoring and alerts, as well as supply chain mapping down to part or material origin to give the greatest insight into potential emerging disruptions and supply weaknesses. It is crucial to map suppliers down to the origin level and prioritise risk mitigations based on revenue impact, rather than by spend. The orthodox approach to supply chain mapping focuses on the top 20% of suppliers that make up 80% of the spend, however this is extremely risky and leaves procurement teams with little or no visibility over the other 80% of suppliers that compose the overwhelming majority of a company’s supply chain. This should therefore be avoided, with attention turning instead to the suppliers that organisations have no visibility over, that tend to be lower-spend.
5. Climate risk represents a sustained dangers to supply chains
Companies and organisations are becoming acutely aware of the impact that climate change is having on their supply chains with the global frequency of natural disasters increasing almost threefold in recent decades. Climate risk quickly gives way to supply chain risk when there is little independence in drug supply in the US and Europe, which means that droughts and floods in India can have a significant impact on pharmaceutical companies. When a significant proportion of pharmaceutical companies operate on a just-in-time principle, it becomes clear that climate risk leaves these companies vulnerable to supply shocks. As the frequency of extreme weather events isn’t lessening, the pharmaceutical industry must prepare for supply chain disruption caused by climate change and threats to supply.
While 2023 won’t be without its challenges for the pharmaceutical industry, supply chain resiliency through mapping and monitoring is the most effective way to prepare for and minimise disruption. Though crisis management may be necessary, by adopting a proactive approach pharmaceutical companies can be prepared and have greater visibility over potential disruption before it hits. When a secure and resilient supply chain isn’t viewed as an operational burden but recognised at C-level as the hallmark of a strong, sustainable organisation minimising potential risks, threats from external factors are greatly minimised.