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Risk – The Achilles Heel of Pharma Supply Chains

It is a well-known fact that supply chains are prone to risk. The sensitivity of supply chains to risk lies
in the end use of the product. Pharmaceutical supply chains are one of the most sensitive supply
chains. The industry relied on a series of stringent quality and certification norms to ensure their
products meet the highest safety standards. However, recent events have proved that this approach,
though necessary, is not adequate to ensure the quality of the product at the point of consumption.
The Editor of SCMPro, Girish V S writes on the changing dynamics of risk in the pharmaceutical supply
chain.

There is an inverse relationship between risk and efficiency. In a strange twist, the very actions
managers take to improve efficiency exposes them to greater risks. The pharmaceutical industry is
justifiably proud of its achievements in the manufacturing sphere. From the stringent US FDA
approvals to the European GMP, the industry has walked the talk. Along the way, they have squeezed
every cost within the supply chains – from sourcing of materials to logistics operations. But recent
events have raised questions on the risks within their supply chains. The single minded pursuit of
efficiency and cost reduction has exposed the supply chains to a host of risks. Pharma supply chain
managers have realized that they need to balance cost reduction efforts with increasing customer
satisfaction steps. These competing goals has placed risk management on the agenda of supply chain
managers.

Risks in supply chains come in a variety of ways – supply disruptions of the raw material, disruptions
in logistics and disruptions in the availability of medicines at the chemist. Taken together, the canvas
for risk management is very wide. In October last year, India faced a major supply disruption risk from
Chinese suppliers. According to a report, almost 60 per cent of India’s bulk drugs are imported from
China. Chinese companies upgrading their plants or shutting down over environmental concerns
affected supplies into India. One way of mitigating this risk is having an alternate supplier. But this will
push up total supply chain costs. Switching suppliers is a major exercise, leading to added costs and
even worse longer lead times.

Traditionally, inventory is a way to reduce supply chain risks. But shorter shelf life of pharmaceutical
products and storage conditions can push costs up. Pharma supply chains have to balance expiry of
stocks with the need to avoid stock outs.

An even higher risk is that of spurious drugs entering the supply chain. Counterfeit drugs impose costs
which include lost revenue, costs to secure the supply chain, investments in anti-counterfeiting
technologies, and reputational risk and liability. A recent report by the World Health Organization
estimates that 20 percent of all drugs sold in India are fake. Additionally, 35 percent of all fake drugs
sold globally are exported from the subcontinent. TAXUD statistics released by the European
Commission a few years back showed us the dark side by stating that 75 percent of fake drugs supplied
world over had some origins in India. Supply chains play a major role in preventing counterfeit drugs
entering the markets. Efforts like serialization and track and trace capabilities are one way supply
chains can meet the risk of counterfeit drugs. Indian government is planning to use blockchain
technology to counter the risk of counterfeit drugs in India.

Risk Management Process

Whatever the source of risk, firms need to walk the talk and embed risk management principles in
their operations – including supply chains. A mismanaged approach to risk in the pharma supply chains
could lead to a catastrophe. At a basic level, supply chain risk management can help the firm recover
quickly from a risk event – both – black swan events and the more mundane everyday events. Usually,
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the larger, headline grabbing risks get more management time, while the mundane smaller risks are
ignored. These smaller risks often cause friction in the supply chain.

Risk management has two approaches to it – one is process based and the other based on data and
algorithms. In the process view of risk, the firm has to focus on two major elements – risk identification
and risk management. Risk identification – and consequently the outcome of the risk event is crucial.
For example, in the immediate aftermath of the 9/11 attack, retailers across US believed that they
would have reduced inventory as deliveries would be reduced. However, in reality, they ended up with
excess inventory as consumers held off buying clothes. Understanding cause and effect is very
important.

Add the frequency to the cause and effect analysis and the manager has a fair idea of the extent of
the potential for damage. The next step is to analyze the tradeoff between suffering the risk impact
and mitigating the risk. Managers need to create a framework to choose between the options.

All this pre-supposes a high degree of visibility over the supply chain – which is a function of technology
investment in the supply chain.

Blurb

A recent report by the World Health Organization estimates that 20 percent of all drugs sold in India
are fake. Additionally, 35 percent of all fake drugs sold globally are exported from the subcontinent