Resilient supply chains in the pharmaceutical industry
Pharmaceutical companies face further challenges after the coronavirus pandemic
Seeing a child lying in a hospital bed is a scenario that not only parents can relate to. Last winter, however, there was an alarming reason that led to the high number of hospital admissions of children: A shortage of antibiotic juice was responsible for many of the young patients having to be hospitalized for infusion therapy.
However, there was not only a lack of antipyretics and antibiotics, but also blood pressure medication and even cancer drugs were and still are in short supply in many places. Quick and, above all, long-term solutions do not seem to be in sight. The pressure on the pharmaceutical industry, but also on politicians, is growing. The creation of a legal framework is on the way. But how can pharmaceutical companies themselves counteract supply shortages and ensure their competitiveness at the same time?
Asia: From „extended workbench“ to competitor
In recent decades, pharmaceutical companies have outsourced production in the course of globalization. Asia - as for many other industries - has become an „extended workbench“ due to low-cost manufacturing processes and less stringent environmental regulations. However, countries such as China and India have long since ceased to have this status. They are also developing into serious competitors in the pharmaceutical sector.
While initially only active pharmaceutical ingredients (APIs) and intermediates from Asia came to Europe for further processing, the number of finished dosage forms (FDFs) is currently also increasing. However, as these are subject to strict regulatory requirements, the situation here is currently (still) somewhat different. Regulations that cannot be complied with in Asia and a shorter shelf life mean that the production facilities for FDFs are located more evenly around the globe and closer to the end markets.
Generics and biopharmaceuticals - different supply chains?
In our daily supply of prescription medicines, generics, i.e. copycat products rich in active ingredients, make up the lion's share. The manufacture of generic APIs also accounts for the largest share of sales. Expiring patents for original drugs and low manufacturing costs are leading to a further increase. Generic APIs are mainly produced in non-European countries.
The production facilities for the active ingredients of innovative biopharmaceuticals are currently mainly located in Europe and the USA. The pharmaceutical industry in Germany is also primarily specialized in the production of innovative and complex active ingredients.
With production sites evenly distributed around the globe and mainly located in Europe and North America, the supply chains of innovative biopharmaceuticals and finished medical products are currently still to be assessed differently to those of generic active ingredients.
However, China and India have also been gaining in importance here recently. The number of approvals for production facilities in these countries is steadily increasing. If the trend observed with generics repeats itself and the production of biopharmaceutical active ingredients gradually shifts to Asia, new dependencies are likely to emerge.
The high dependence on Asian active ingredient manufacturers harbors risks
During the coronavirus pandemic, it became clear that pharmaceutical supply chains are much better protected than some other industries due to comparatively high safety stocks of active ingredients and finished medicinal products. However, even the highest safety stocks run out at some point and the concentration of pharmaceutical production sites in Asia therefore continues to harbor risks. The European pharmaceutical industry is currently facing geopolitical challenges and the resulting tense trade relations. In general, concentrating production too heavily in a single region increases the susceptibility of our global supply chains to disruption.
Diversification as the key to resilient pharma supply chains
To prevent Europe, and therefore Germany, from being squeezed out of the pharmaceutical market by international competition and to guarantee patient safety, pharmaceutical companies must take active steps. Although potential measures will focus on the production of generic active ingredients in the short term, all drug segments - including biopharmaceuticals and FDFs - must be considered in the medium to long term.
Pharmaceutical companies need to increase the flexibility and resilience of their global supply chains to strengthen their resilience to disruption. Companies can take various measures to successfully deal with supply chain issues:
Flexibilization and diversification of procurement
As already mentioned, the singular focus on one region as a supplier creates dependencies that ultimately affect supply security. The current geopolitical situation harbors trade conflicts that lead to disruptions in supply chains.
During the pandemic, we have all learned how important diversification is. The creation of a larger supplier network is central to this. Spreading production sites across several geographical regions - possibly in the form of nearshoring or onshoring - is a measure to increase manufacturing agility and spread risk.
Another is flexible contracts with suppliers and producers. They allow production locations and quantities to be adjusted quickly, enabling a rapid response to market shortages.
Location planning: nearshoring, onshoring and insourcing
The search for the best supplier composition is currently leading to deglobalization. Offshore production is being relocated from Asia in the form of nearshoring and onshoring to locations that guarantee more secure deliveries.
Pharmaceutical companies are also considering which preliminary products can (again) be manufactured in-house. In-house production has the clear advantage that it is less risky and makes it much easier to control production volumes and times.
However, the financial aspects and the associated competitiveness are good reasons for outsourcing and offshoring. As the choice of location is a strategic and long-term decision, it should be carefully considered and planned.
Optimization of inventory and demand planning
Another measure to be prepared for sudden market shortages and thus be able to guarantee your own production is precise stock and demand planning.
As part of good inventory management, a sufficiently high safety stock of active pharmaceutical ingredients and components is always ensured. This can be optimally determined with the help of an exact demand forecast in order to avoid possible additional costs. In this way, it is possible to flexibly adapt production quantities to future demand situations.
Digitization
Digitalization and automation are essential for creating resilient supply chains. Only with the help of digital solutions is it even possible to analyze the large amounts of data that supply chains generate. Digital tools, which ideally work in real time, create transparency and enable risks and potential disruptive factors to be identified at an early stage. A planning tool such as OPTANO helps to identify critical and disruptive events and helps to take appropriate countermeasures.
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Mathematical optimization for efficient measures
The alarming reports from doctors and hospitals make it clear how important the production continuity of pharmaceuticals is. The measures mentioned all contribute to creating resilient and robust supply chains - to ultimately ensure patient safety.
Even if this safety is the top priority, the measures to increase resilience cannot be implemented just like that. This is because they all have an impact on costs and therefore ultimately on the return on investment and profitability of each individual pharmaceutical company. These companies must therefore weigh up which approaches are the best with regard to the defined objectives or how they can be optimally implemented.
One way of making decisions is to use modern analysis methods. With the help of mathematical optimization methods analyzes the huge amounts of information and data that supply chains produce at all levels.
Optimization for multiple targets with OPTANO
When using mathematical optimization, there are no limits to the number of optimization targets. Any number of target variables can be included in the calculations during planning. But how can optimization software such as OPTANO help with the individual aspects?
Creating resilience through diversification
Optimization software such as OPTANO uses a mathematical model to analyse all relevant aspects in order to create an optimal supplier network. It also enables Scenario planning and risk and opportunity analyses to respond to sudden changes in the supply chain.
Location planning
Relocation of the production site? Nearshoring or onshoring? Analyzing all potentials and contradictions in the question of location in the form of network planning helps companies to make the right decisions in the long term, taking into account aspects such as costs, reliability and independence.
Demand forecasts
The analysis of healthcare data can help to better forecast future demand for medicines and thus optimize procurement and production. To create forecasts, OPTANO uses efficient mathematical models in which the key aspects of a demand and supply function are mapped. These are continuously trained using machine learning algorithms.
OPTANO supports the organization of supply chains
The solutions described are just brief examples of how OPTANO can support planning as optimization software. Creating resilience, network planning and demand forecasts are just some of the many fields of action.
With OPTANO, companies can carry out their planning faster, easier and better. With the help of intelligent mathematical optimization methods and solvers, thousands of what-if scenarios can be analysed at the touch of a button. The result is recommendations for action that optimally fulfill the - often conflicting - objectives.
This provides pharmaceutical companies with concrete suggestions on how to maintain a balance between the necessary resilience in their supply chain and the costs arising from the potential measures.
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Create security
Companies alone will not be able to master this challenging situation. In the pharmaceutical sector in particular, the question of supply chain resilience has a political dimension - beyond national borders. A legal framework must be created to give companies planning security. And us as patients the certainty that medicines are available.