The recent Coronavirus outbreak has brought to the fore a systemic opportunity and challenge facing the pharmaceutical supply chain: the major role China has come to play in the industry both from the demand and supply sides. As companies respond to the crisis and attempt to move forward, they will need to take time to reconsider what this fact means for their supply chains and how they can improve their resiliency going forward.
Over the past several years, it has become clear that China is a strategic growth market for pharmaceutical companies. The increase in disposable income and improved access to health care in China presents tremendous opportunity for growth. The rapidly shifting age demographic in China is yet another factor. By 2050, 330 million Chinese will be over age 65. In comparison, the number of Chinese over the age of 65 as of 2019 was about 160 million. As a result, pharmaceutical companies are exporting quite a lot of specialty drugs and medical devices to China. A recent study of large pharma companies' earnings shows that the revenues in China grew by 29% as compared to a growth of 8.2% in the U.S. for a comparable period.
At the same time, China is also a major source of supply in the pharmaceutical supply chain. In recent years, China and India have emerged to be big players in the pharma space, especially in the over-the-counter and generic pharmaceutical segments. According to the U.S. Food and Drug Administration, 31% of all the U.S. registered drug chemical facilities are in India or China. Furthermore, just in the last year, China accounted for 95 percent of U.S. imports of ibuprofen, 91 percent of U.S. imports of hydrocortisone, 70 percent of U.S. imports of acetaminophen, 40 to 45 percent of U.S. imports of penicillin, and 40 percent of U.S. imports of heparin, according to Commerce Department data. In all, 80 percent of the U.S. supply of antibiotics are made in China. Even as India rises as an alternate source to China for generic and over-the-counter medications, facilities in the country still depend heavily on Chinese sources for active pharmaceutical ingredients (APIs) and key starting materials (KSMs). All in all, at this point, China has such a high degree of concentration of pharma sourcing, whether it is finished product, APIs, or KSMs, that the current outbreak puts it in the spotlight.
What's on the horizon
Given the above factors, let us examine the short-term impacts and implications of COVID-19 on the industry.
Drug shortages will not be immediate, but they could be significant. Several leading pharmaceutical companies have put out statements assuring their investors and the general public alike that they are well covered in terms of inventories and alternate sources of supply. However, given the industry's level of dependency on China, one has to be skeptical. The pharma industry as a whole does have a sufficient inventory buffer. In fact, the median inventory is about 180 days for the industry as a whole. However, drug manufacturing has long lead times, meaning the effects of the manufacturing shutdowns in China will take time to cycle through the supply chain. If the supply disruptions of APIs or finished products made in China prolong, the effects will be severe. Missed deliveries could be punitive for pharma companies due to penalties by purchasing entities. Additionally, it will be hard for the industry to respond in an agile manner. It is not easy to switch sources of supply in the pharmaceutical industry given its highly regulated nature and the rigorous compliance requirements set by the regulatory bodies. Furthermore, in comparison to other industries, such as fast-moving consumer goods, the pharma industry has only recently started focusing on supply chain management and is not as well equipped to respond to disruptions in supply.
The industry is continuing to see shortages of essential supplies. Demand for face masks (most of which are, coincidentally, sourced from China) and hand sanitizer has significantly increased during the pandemic, and companies have not been able to keep up. Individuals and governments alike are stocking up on these supplies, causing a significant spike in demand. The industry will also need to keep an eye on the logistics and distribution challenges related to fulfilling these demand spikes as transportation capacity has been taken away due to disruptions at the ports, crew quarantines, and labor shortages due to lockdowns. However, as the economies start to open up and lockdowns end, the situation will probably improve.
Supply chains need to plan now for how to support the launch of a vaccine. A few companies are already vigorously working towards developing a vaccine for COVID-19. However, launching a new product is not trivial. The sense of urgency in combating the virus will open doors for fast tracking regulatory approvals. However, to capitalize on the opportunity, the companies working on the treatment should consider the capacity needs and any tradeoffs they need to make in their overall portfolio offerings, as speed to market is critical for a successful launch.
How to respond
In light of the above, what are some actions that pharma executives should focus on? In the short term, the first step should be to quickly find answers to the following questions:
What part of my supply, and how much of it, is coming from China?
What finished products is this supply going into?
What alternate sources do I have to meet the demand?
Answering the above questions will help executives understand and quantify their company's risk exposure. To ensure continuity of supply, companies need to identify alternate sources and then select which suppliers to work with based on landed cost. They should also be aware, however, that as supplies start going on allocation, being the first mover to lock in on the allocation will significantly reduce risks. As pharmaceutical industry veteran Atul Tandon recommends, companies need to make sure that they are rigorous in ensuring that supplies are released per human health and business priority criteria. In exceptional situations, such as the current crisis, constant monitoring for excess consumption and diversions due to customer hoarding is key so you can take mitigating actions in a timely manner. One action, for example, is to compare current consumption with historical needs. Even after accounting for COVID-19 stockpiling, the consumption patterns from the past can help indicate where there is excess consumption. Diversion can be caused by players buying products to sell in secondary markets. Government crackdowns can help to an extent, and in exceptional situations, public-private enterprise can should collaborate with public entities to ensure better allocation of supply.
For most companies, answering the aforementioned questions is not a trivial matter. Given the complexity in the pharma industry, analytics are essential for organizations to assess risks. However, most companies' technological capabilities are anchored upon enterprise resource planning (ERP) and other planning systems that are simply not equipped to help enable resilient supply chains of the future. In the intermediate to longer term, companies will need to look to advanced algorithms powered by artificial intelligence to help them better design their supply chains in order to build resiliency and monitor for risks.
In addition, as mentioned before, source switching can be expensive in pharma, both in terms of cost and time. Companies should evaluate their supply networks for single points of failure and build redundancies into the system by identifying alternate sources. While building redundancies can come with increased costs, the downside of not having the protection when you need it can be very expensive. Designing resiliency into the supply chain should also incorporate placing inventory at the right nodes of the network. This does not mean increasing a company's working capital. It is about rightsizing the inventory in consideration of risk and resiliency.
The coronavirus impact on the pharma industry as a whole can be significant if the uncertainty persists. This is yet another reminder for the need to factor risk and resiliency into designing the supply networks.
Online merchants should consider seven key factors about American consumers in order to optimize their sales and operations this holiday season, according to a report from DHL eCommerce.
First, many of the most powerful sales platforms are marketplaces. With nearly universal appeal, 99% of U.S. shoppers buy from marketplaces, ranked in popularity from Amazon (92%) to Walmart (68%), eBay (47%), Temu (32%), Etsy (28%), and Shein (21%).
Second, they use them often, with 61% of American shoppers buying online at least once a week. Among the most popular items are online clothing and footwear (63%), followed by consumer electronics (33%) and health supplements (30%).
Third, delivery is a crucial aspect of making the sale. Fully 94% of U.S. shoppers say delivery options influence where they shop online, and 45% of consumers abandon their baskets if their preferred delivery option is not offered.
That finding meshes with another report released this week, as a white paper from FedEx Corp. and Morning Consult said that 75% of consumers prioritize free shipping over fast shipping. Over half of those surveyed (57%) prioritize free shipping when making an online purchase, even more than finding the best prices (54%). In fact, 81% of shoppers are willing to increase their spending to meet a retailer’s free shipping threshold, FedEx said.
In additional findings from DHL, the Weston, Florida-based company found:
43% of Americans have an online shopping subscription, with pet food subscriptions being particularly popular (44% compared to 25% globally). Social Media Influence:
61% of shoppers use social media for shopping inspiration, and 26% have made a purchase directly on a social platform.
37% of Americans buy from online retailers in other countries, with 70% doing so at least once a month. Of the 49% of Americans who buy from abroad, most shop from China (64%), followed by the U.K. (29%), France (23%), Canada (15%), and Germany (13%).
While 58% of shoppers say sustainability is important, they are not necessarily willing to pay more for sustainable delivery options.
Gulf Coast businesses in Louisiana and Texas are keeping a watchful eye on the latest storm to emerge from the Gulf Of Mexico this week, as Hurricane Rafael nears Cuba.
The category 2 storm’s edges could also brush Florida as it heads northwest, causing tropical storm force winds in the lower and middle Florida keys. However, the weather agency said it is too soon to forecast Rafael’s impact on the U.S. western Gulf Coast.
In the face of campaign pledges by Donald Trump to boost tariffs on imports, many U.S. business interests are pushing back on that policy plan following Trump’s election yesterday as president-elect.
U.S. firms are already rushing to import goods before the promised tariff increases take effect, to avoid potential cost increases. That’s because tariffs are paid by the domestic companies that order the goods, not by the foreign nation that makes them.
That dynamic would likely increase prices for U.S. consumers as importers pass along the extra cost in the form of price hikes, according to an analysis by the National Retail Federation (NRF). Specifically, Trump’s tariff plan would boost prices in six consumer product categories: apparel, toys, furniture, household appliances, footwear, and travel goods. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said in a release. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The rush to avoid those swollen costs can already be measured in the form of rising rates for transporting ocean freight, as companies start buffering their inventories before the new administration officially announces tariff hikes. Transpacific rates are still $1,000/FEU or more above their April lows, showing increased ocean volumes and climbing rates generated by shippers’ concerns about supply chain disruptions including port strikes and the Trump tariff increases, supply chain visibility provider Freightos said in an analysis. "The Trump win may start shaking up supply chains even before he takes office. Just the anticipation of higher tariffs may lead importers to pull forward shipments, creating a preemptive freight frenzy," Judah Levine, Head of Research at Freightos, said in a release. “Frontloading will cause freight rates to feel the heat as importers race to dodge the extra costs, similar to what took place with Trump’s tariffs on Chinese goods in 2018 and 2019."
Another group sounding a note of caution about international trade developments was the Global Cold Chain Alliance (GCCA), a trade group which represents some 1,500 member companies in more than 90 countries that provide temperature-controlled warehousing, logistics, and transportation. “We congratulate President Trump on his election. We also congratulate all those who have been elected to the U.S. Senate and House of Representatives,” GCCA President and CEO Sara Stickler said in a statement. “We are also committed to promoting the growth of exports from U.S.-based food production and broader manufacturing sectors. We will engage constructively in the policy discussion about future trade policy and continue to make the case for the importance of maintaining balanced and resilient trade routes for food and other temperature-controlled products across the world.”
Businesses in the European Union (EU) were likewise wary of tariff plans, judging by a statement from the VDMA, a trade group representing 3,600 German and European machinery and equipment manufacturing companies. "Donald Trump's second term will be a greater challenge for German and European industry than his first presidency. We must take his tariff announcements seriously, in particular. This will once again put a noticeable strain on transatlantic trade and investment relations," VDMA Executive Director Thilo Brodtmann said in a statement. “The USA is and will remain the most important export market outside the EU for mechanical and plant engineering from Germany. Our companies offer the products required to implement the re-industrialization of the USA that Donald Trump is striving for. The VDMA's overall outlook for the American market therefore remains positive."
In addition to its flagship Clorox bleach product, Oakland, California-based Clorox manages a diverse catalog of brands including Hidden Valley Ranch, Glad, Pine-Sol, Burt’s Bees, Kingsford, Scoop Away, Fresh Step, 409, Brita, Liquid Plumr, and Tilex.
British carbon emissions reduction platform provider M2030 is designed to help suppliers measure, manage and reduce carbon emissions. The new partnership aims to advance decarbonization throughout Clorox's value chain through the collection of emissions data, jointly identified and defined actions for reduction and continuous upskilling.
The program, which will record key figures on energy, will be gradually rolled out to several suppliers of the company's strategic raw materials and packaging, which collectively represents more than half of Clorox's scope 3 emissions.
M2030 enables suppliers to regularly track and share their progress with other customers using the M2030 platform. Suppliers will also be able to export relevant compatible data for submission to the Carbon Disclosure Project (CDP), a global disclosure system to manage environmental data.
"As part of Clorox's efforts to foster a cleaner world, we have a responsibility to ensure our suppliers are equipped with the capabilities necessary for forging their own sustainability journeys," said Niki King, Chief Sustainability Officer at The Clorox Company. "Climate action is a complex endeavor that requires companies to engage all parts of their supply chain in order to meaningfully reduce their environmental impact."
Supply chain risk analytics company Everstream Analytics has launched a product that can quantify the impact of leading climate indicators and project how identified risk will impact customer supply chains.
Expanding upon the weather and climate intelligence Everstream already provides, the new “Climate Risk Scores” tool enables clients to apply eight climate indicator risk projection scores to their facilities and supplier locations to forecast future climate risk and support business continuity.
The tool leverages data from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) to project scores to varying locations using those eight category indicators: tropical cyclone, river flood, sea level rise, heat, fire weather, cold, drought and precipitation.
The Climate Risk Scores capability provides indicator risk projections for key natural disaster and weather risks into 2040, 2050 and 2100, offering several forecast scenarios at each juncture. The proactive planning tool can apply these insights to an organization’s systems via APIs, to directly incorporate climate projections and risk severity levels into your action systems for smarter decisions. Climate Risk scores offer insights into how these new operations may be affected, allowing organizations to make informed decisions and mitigate risks proactively.
“As temperatures and extreme weather events around the world continue to rise, businesses can no longer ignore the impact of climate change on their operations and suppliers,” Jon Davis, Chief Meteorologist at Everstream Analytics, said in a release. “We’ve consulted with the world’s largest brands on the top risk indicators impacting their operations, and we’re thrilled to bring this industry-first capability into Explore to automate access for all our clients. With pathways ranging from low to high impact, this capability further enables organizations to grasp the full spectrum of potential outcomes in real-time, make informed decisions and proactively mitigate risks.”