Navigating a New Reality: Life Science and Pharma Supply Chains in the Era of COVID-19

April 15, 2020 Leah Hoffmann

The COVID-19 pandemic has put enormous strains on life science and pharma supply chains—not just for products like N95 masks and ventilators, which are critical for managing the disease, but for therapies from albuterol to Tylenol, which address many other conditions.

In the latest episode of our podcast, BTG Insights on Demand, life science supply chain, strategy, and turnaround expert Sandy Torrekens—who helped the UK’s Ministry of Health respond to swine flu related drug shortages in 2009—joins Business Talent Group’s Leah Hoffmann to discuss how companies can address coronavirus (COVID-19) disruption.

Listen to the podcast to hear Sandy’s advice for building more resilient pharma supply chains. You can also read our lightly edited transcript of the chat below.

In 2009, you helped the UK’s Ministry of Health change its operating model in response to the swine flu pandemic, which was straining pharmaceutical supply chains. Are there lessons you learned from that experience that might inform how health agencies and organizations should react to the shortages we’re seeing now?

The challenge then is very similar to what we face now—we’ve got an exponential increase in demand, so the only solution companies see is to put more stock in the market channels, namely the pharmacies and local distributors.

In 2009, the problem was that there was a two- to three-day lead time to replenish those pharmacies. Looking at the coronavirus numbers, you might have five people today who have COVD-19 in a village. Tomorrow, you’ll have 15, and two days after that 105. If you have a three-day lead time and you place orders today based on five people, you’re a bit outnumbered by the time the delivery arrives.

Another risk is that you would put the stock in the pharmacies where the pandemic would not hit and have shortages in the other places. The typical response is to try to improve forecasts. It’s a reaction I still hear today with my life sciences clients—if we can’t meet the demand variability, let’s make forecasting better. That doesn’t work, and it especially doesn’t work in a pandemic situation where demands raises exponentially.

Why’s that?

All forecasting is based on past experience or past demand, and then you kind of extrapolate or correct it with knowledge of the future: hey, it’s going to be Easter. People are going to buy eggs. It’s going to be nice weather this weekend. People are going to buy more meat.

With a pandemic, first of all, the demand curve is exponential, so it’s very hard to forecast. The problem is also location. You do not know where those patients are going to are going to be, so the only option you have is literally cater for all eventualities and have stock everywhere, which is economically not possible. To be honest, from a supply chain point of view, it’s not possible either, because there is no company that can produce enough product.

So if you can’t forecast your way out of the problem, what can you do?

The good thing about a crisis is that people are finally open to listening to something that is different.

What we did in the UK was instead of trying to forecast and take an order and pack that order and transport it there, we basically said, “Okay, let’s just do away with this. Let’s organize milk runs. Let’s put a whole bunch of vans with antiviral medicine on the road, and every day, just like a milk van, they will go past a certain number of pharmacies, stop, and just replenish them. So you didn’t have that lead time.

This was obviously suboptimal from a cost point of view, because now I’m not only delivering to the pharmacies that needed the goods, I’m driving along all the pharmacies. But when we weighed that against how much stock we had to put out there—in those days, the first shift of stock they put out there was £400 million for a country of 50-some million people, as it was then. In US terms, that means you would have to put out there for $3 or $4 billion of stock knowing it’s still not enough.

That basically allowed us, at that moment, to put that operating model in place for the time of the pandemic. Afterwards, the NHS simply could revert back to their old way of working. Obviously, a government is less focused on profits, but because the NHS is government run, and the way we were okay to sub-optimize costs very rapidly, we turned this whole thing around on two weeks about.

Just to clarify, the supply chain issues you were working on were specifically for swine flu therapies? Because now we have a situation where there’s concern about the supply chain not just for masks and ventilators, but for other medications.

We were dealing with the products that were necessary for patients who had the swine flu. We did not deal with the supply chain of other products, because there was no lockdown. The issue we have today is obviously compounded by the lockdowns—there are supply issues throughout the pharma industry, from a raw materials point of view to logistics companies not being able to work at full capacity.

So how would you recommend that organizations today start to unravel those issues?

I’d start by looking at what can you do today, and there we need to look at the two elements we have in this crisis. Obviously, there is a normal challenge of rapidly increasing demands for your pharma products, and your internal capacity quite often cannot follow this. Then, as we just said, this issue is made worse by global supply chains basically stopping raw materials, for instance from China, from arriving.

The very first thing as a company you need to do is concentrate your efforts. Trying to dwell now on, oh what are we going to do to make ourselves independent from the Chinese for raw material supply? Yeah, it’s a bit too late now to ask this question. Only look at what you can still affect today. Unfortunately, if I’m looking at the pharma company, there is not much you can do because you can’t increase capacity. You can’t swap suppliers because of regulatory constraints.

The only thing you can do is be kind of brave and actually say, okay, let’s now focus on speed and reactivity. That does mean sub-optimizing manufacturing costs, for instance, by putting people on paid overtime, working at weekends. Yes, it’s expensive, and in countries with labor law constraints, you might have to ask the government to allow people to work a little bit more and be paid in a different way.

You might also have to reshuffle priorities between products. What products are less important to produce today or, for instance, pass quality control? Quite often, it’s a matter of how fast I can get something through quality control, and then be faster to the market. For today, I would say concentrate your efforts really on what you can do. You have to see it as, let’s say, an economics exercise more than an accounting exercise. Your costs, by definition, will not be optimal, but you’ve got to see that it’s an extra demand. You’re going to exploit these existing overheads, anyway. It’s an increase in sales with a marginal increase of costs. In the end, economically, you will be much better off actually trying to capture this demand increase then not doing so because of accounting constraints.

I understand that a lot of the largest life science companies have stockpiles of ingredients, maybe six months to a year’s worth. Are they starting to feel this pain yet, based on the companies you’ve spoken with?

Pharma companies have stockpiles, but quite often, they have stockpiled the products at an active pharmaceutical ingredient level. That may still mean I do not have the package with the American flyer it in it or with the flyer for Canada or Mexico. It may still mean I need to tablet it, or I need to put it in vials and pack it.

The companies that are actually looking at this today really need to think about how to produce and get things down to quality without queuing times. Push things to quality as fast as possible, move to the next stage, and potentially also ship things at risk. The product could move to the distribution center somewhere, the other side of the country, while you don’t have the results yet from quality. It might be that it’s arrives there and quality then says, “Sorry guys, you can’t sell it.” It’s a risk worth taking in this situation.

When you think about some of the other disruptions that the COVID pandemic has brought to the life science industry, what sort of out-of-the-box thinking would you recommend? There’s certainly been talk about creative solutions, from 3D printed ventilators to the cloth masks people are making at home.

I would say I can only encourage people to make masks and so on. They are not regulated items. My fear is that we’re going to put a lot of things on the market that are—if not dangerous, not efficient. They’re going to give people a false sense of safety, and people will go out with masks that are totally ineffective, or breathing apparatuses will arrive at a hospital that have not really been tested, and people will think the hospital has capacity. In Europe, we call this panic football, when the ball is just in front of your goal, and you just kick it in any direction to get it away.

Do you think this pandemic is going to change pharmaceutical supply chains? Obviously, there’s been some comment about reducing reliance on single countries like India or China. Do you think that’s going to happen? Is it too soon to say?

I basically hope that this is going to be a serious wake-up call that the supply chain has been waiting for. When I look at the weaknesses of the current supply chains, there are three points that come to mind. First of all, 15 to 20 years ago, when I was working with the likes of AstraZeneca, GSK, and J&J, they were always asking us to simulate supply chain disruptions. Let’s say a hurricane in Puerto Rico wipes out a factory and we can’t produce for six months. How do we deal with this?

The financial crisis of 2008-2009 left no room for contingency planning or excesses, and it’s been helped by the fact that we’ve hardly had any proper disruption scenarios, especially at a global basis. Management are under pressure to be as lean as possible. There is little padding but also little capability in companies of people who still know how to react and shift to another operating model.

The second point is, and I’m sorry to say so, the management of a lot of companies have been stuck in the Dark Ages. Today, we still have companies working with one operating model that has to supply all the markets and has to supply all the products. Then, for everything that’s a little bit different, we have an exception. With most of my clients, 70% of the product goes through the normal chain and then for 30% they have, well, 27 different other exceptions to work this, with then obviously an army of people that manages all these exceptions.

When you talk to people and you say, “Guys, why don’t we have two or three operating models that could cater for 95% of your products?” Well, that is difficult to manage. It means a shift change quite often in the organization. It means teaching to everyone a different way of working. They could have helped massively in a situation like this because if you have, for instance, a fast way of supplying and a cheap way of supplying, well, when you have a crisis like this, you can easily shift from one system to the other. This openness to having two or three solid operating models in the future, hopefully we’ll be there again, because a lot of people will have learned that lesson.

The third thing is that supply chain is still seen as moving pallets. The guy who does day-to-day logistics is not as important as manufacturing. It’s not seen as the orchestrator between supply and demand, and as a result, if you’re always playing second violin, it’s a little bit difficult to get in the lead and really influence the design of the company. When you ask how companies should react, they only have limited possibilities because by design, they’ve limited themselves to only have a few options.

If you wanted to devise a global stress test for the life science industry, you couldn’t have come up with a better scenario.

This is a global stress test for everyone. I think where I see this going is, one, companies are starting to think of disruption planning simulations around it. Companies also starting to think of implementing, as I said, several operating models that they can swap from one to the other and obviously also rethink their sourcing. If this crisis shows anything, it’s obviously that old, cheap, and normal active pharmaceutical ingredients come from China or India. That’s not just a problem of lead time or logistics but of concentration. If I have five or six suppliers and demand increases, I can split it over five or six suppliers. Today, we pushed ourselves into a corner, where about there is only one supplier, and then we have told that supplier that they have to work as leanly as possible, which means they have no upward flexibility to react to a crisis.

This trade-off between flexibility of the supply chain and cost per unit is something companies really are going to have to bring back onto the table, because that’s long overdue.

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About the Author

Leah Hoffmann

Leah Hoffmann is a former journalist who has worked for and The Economist. She is passionate about clear thinking, sharp writing, and strong points of view.

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