On January 11, China announced its first death from the COVID-19 virus. At that time, life across the globe was moving forward as usual even in Wuhan, the first epicenter of the pandemic. Three months later, the changes imposed by the virus on our daily lives, both professional and personal, feel daunting and unreal. At the same time, the pandemic has brought uncertainty and generalized disruption for businesses of all natures and sizes around the globe.
While the pharmaceutical and diagnostics industry is showing resilience during this crisis compared to other sectors of the economy, its supply chain has already been disrupted as a result of the pandemic:
- Lockdowns across the world have constrained international sourcing of critical products such as active pharmaceutical ingredients, with 72% of US and 68% of European life science corporations purchasing these from foreign suppliers
- Pharmaceutical corporations face the challenges of managing the crisis, preparing for recovery and understanding the changes that the pandemic will bring, as networks of producers and distributors that kept the global economy moving are severely impacted.
To help us understand the extent of the impact, we have gathered relevant insights from trusted sources (including business schools, management consultancies and economic think tanks) and collected reactions of supply chain experts within a-connect’s independent professional network. Aiming to shed light on the challenges faced and how to tackle them, we have curated seven areas of impact that are critical to consider while navigating the COVID-19 crisis.
First and foremost, volatility is undermining sophisticated forecasting methods and needs to be managed manually. The bullwhip effect, predicting increasing swings in inventories due to shifts in customer demand as one moves further down the supply chain, is in full swing. Panic driven orders of testing medical and pharmaceutical supplies are coupled with operational mistakes driven by forecasting errors on the side of authorities. Impacts down the supply chain are becoming evident, causing inefficient production, poor allocation of resources and traceability challenges.
Managing volatility (ordering and production) will require corporations to reconsider their automated procurement processes, as computational approaches to forecasting based on past patterns are likely to fail when facing this once-in-a-century pandemic. In the short term, moving back to case-by-case manual analysis of supply chain operations might be necessary to tackle unpredictable swings in supply and demand.
Second, detailed knowledge of the supply chain upstream network, especially if the business has a very diverse supplier base, becomes key to guarantee early action. As economies shut down, commodity low-cost products that are critical in the production process become scarce. Supply chains are only as strong as their weakest link. In partnership with their first line providers, corporations will be required to map out who are the suppliers of their suppliers -multiple tiers up the supply chain- and proactively engage with them, offering them visibility to overcome disruptions and guide countermeasures.
Third, usual client and supplier dynamics will no longer apply. Exponential demand spikes in product categories critical to managing the crisis (e.g. diagnostic reagents) have brought downstream clients to compete fiercely for supplier services. In this situation, suppliers will prioritize the customers they perceive as most attractive in the short and long term. Managing institutional reputation and assuring supply chain stability remain key.
To support their supply chains, corporations may need to balance the default focus on cost control and price negotiation with fast, extraordinary measures, ranging from offering clear guidance and cooperation in planning operations to providing financial aid for cash-constrained partners. Supply chain-financing approaches, in which companies offer short-term credit to suppliers to sustain production, can become necessary both to avoid manufacturing collapse and to demonstrate commitment to a long-term partnership.
Fourth, logistics have been broken across all major means of transportation. Approximately 70% of all air cargo goes through passenger planes, a route that is now almost closed. A significant percentage of container maritime traffic is suffering slowdown and bottlenecks during stowage. Road transport is active but truck fleets face interruptions due to a scarcity of spare parts.
Rebuilding and reinventing processes might take a long time and significant effort once economies in lockdown restart, ramp up and reach the new normal. When facing these logistic challenges, corporations will need to implement creative and cooperative solutions, such as moving to aircraft charter services individually or in cooperation with other industry players to overcome the deficit in air transport, or securing drivers’ scarce capacity to assure terrestrial transportation continuity.
Fifth, potential acquisition opportunities might arise during the pandemic and its uncertain aftermath. Corporations will need to consider new approaches to evaluating supply chains, including implementing resilience measures to the standard triad of KPIs -quality, cost and delivery. Among others, pharmaceutical players may seek M&A deals with strategic suppliers aiming to address the uncertainty of the supply chain and to prevent future shocks.
Sixth, supply chain digitalization will advance further and faster. Corporations will accelerate the deployment of predictive analytics and monitoring tools to integrate more closely with their supplier networks, making those tools widespread in the post-pandemic global economy. Beyond that, adopting smart-logistics that allow the monitoring of millions of vehicles and shipments in real-time, and facilitate communication across distribution channels will become critical in some instances.
Finally, complex trade-offs will often be required for decision-making. Standard approval protocols for massive distribution of certain medical devices or test kits are missing, drug regulatory agencies are evaluating the benefit of using new experimental drugs to treat COVID-19 and we observe anxiety driven drug stockpiling. We can only expect that, as the pandemic spreads, industry and regulatory bodies will be compelled to balance safety and quality risks in real time while the urgency of re-starting economies becomes more pressing.
Overall, the COVID-19 pandemic has more than fulfilled predictions of an increasingly volatile, complex and uncertain world and its long-term impact on the fundamental structures of the global supply chain are still unclear. In this context, the future might be brighter for companies that take steps to develop more flexible, innovative supply chain approaches based on learnings from the COVID-19 crisis. Corporations that reinvent themselves to fundamentally improve their supply chains and support the world’s weaker health systems will see the investments pay-off multiple times over.