Disrupting the disruptions: Building a resilient supply chain

Recent months have made clear that supply chains are the lifeline of the global economy. While COVID-19 has led to unprecedented disruptions, we know these disturbances are repetitive and inevitable. In addition to the pandemic, extreme weather, economic sanctions and armed conflicts all affect supply chains—not to mention other events such as the Suez Canal blockage and the computer chip shortage, which accounted for a combined loss of more than $120 billion. Disturbances like these are expected to increase in the future due to climate change, lifestyle shifts, scarcity of raw materials, trade wars and geopolitical tensions.

Supply chains must improve their ability to handle these disruptions. A survey from Gartner found 60% of leaders say their supply chains have been designed for cost efficiency, not resiliency, making it seem unlikely many of these leaders would consider their supply chains resilient.

These problems are being recognized, however, and that’s welcome news. According to Gartner, 87% of supply chain professionals say their companies plan to invest in resilience and more than 80% of companies plan to develop capabilities for a digital ecosystem.

Texas-based Schneider became an example of operational resiliency when Hurricane Harvey made landfall in 2017 and damaged a major production plant of one of its customers. Thankfully, Schneider had thoughtfully developed a business continuity plan and the company helped its customer maintain an on-time pick-up and delivery rate of 95% (including pick-up from alternate sites) while other companies struggled to maintain services and operations.

Supply chain resiliency is especially important in the life sciences industry, which patients count on to deliver essential therapies and cures. To build a truly resilient supply chain, we must understand the structural issues that disruptions exploit:

Demand volatility: Consumer needs and demands are continually shifting, making it important to closely watch market trends and demand patterns. While demand volatility has historically been less of a problem for life sciences companies compared to other industries, high operating margins often push life sciences to overinvest in safety stocks across the supply chain. As we look forward, global events, an increasing number of “me-too products” and increased levels of consolidation will make it vital for life sciences companies to monitor demand volatility.

Uncertainty in supplies: To drive efficiencies, supply chains have focused on negotiating larger supplier contracts, moving supplies of critical raw materials offshore, outsourcing several legs of networks to third parties and more. Unfortunately, these and other tactics have strained the resilience of many supply chains. We saw this most prominently when COVID-19 affected the ability of Chinese manufacturers to deliver active pharmaceutical ingredients.

Distributed manufacturing facilities: Life sciences companies have shifted and increased their operations in countries and areas with lower labor and raw material costs. This shift has led to financial benefits and competitive advantages, but geopolitical tensions, natural disasters and international sanctions are a constant threat to distributed manufacturing facilities and the larger supply chain.

Disconnected logistics networks: Events like the Suez Canal blockage can halt the shipping of raw materials and impact the industry’s ability to meet delivery timelines. Even slight delays caused by disconnected logistics can reduce customer satisfaction and negatively affect brand reputation.

In addition to these challenges, life sciences supply chains—like many others—face risks from:

• Cybersecurity threats
• Emergencies that limit access to manufacturing and distribution facilities
• Limited supplies of raw materials, intermediates, components, packaging and containers
• Weaknesses in infrastructure, utilities, energy distribution lines and water systems
• Contractors failing to meet their obligations in delivering support or materials

In a different world, we could potentially improve resiliency by adding more redundancy to the supply chain. But the costs of redundancies make it difficult for most for-profit organizations to rely on them as their primary resiliency strategy.

Driving resiliency at scale without overburdening the cost structure has long created a whack-a-mole effect for many companies, as they try to balance a number of opposing factors. For example, remote bulk storage is cost efficient but is susceptible to extreme weather and other factors that can slow delivery speeds. Manufacturing in areas with low calamity risks reduces the probability of disruption but can increase the costs of transporting products to the world’s population centers. Stocking raw materials reduces dependence on suppliers but increases inventory costs. And using air travel to ship critical items can avoid canal and port blockages but is much more expensive.

There is no single solution that removes all concerns around supply chain disruption. This means companies must:

• Understand their level of risk exposure
• Identify their level of acceptable risk across the different dimensions of the supply chain
• Monitor risks and work to narrow the gap between actual risk and acceptable risk

All of this is easier said than done, but it is critical for organizations to understand their actual and acceptable risk.

Despite the global importance of life sciences, the resiliency of its supply chains isn’t significantly better than other industries. The COVID-19 pandemic spurred regulatory agencies including the U.S. Food and Drug Administration (FDA) to develop guidance for reducing disruptions to supply chains in life sciences. Draft guidance focusing on risk management plans (RMPs) was released by the FDA in May 2022.

RMPs can provide stakeholders with a roadmap to identify, prioritize and implement strategies to mitigate risk. In Figure 1, we share a framework we’ve developed that life sciences companies can use to assess their risk level. Not surprisingly, our framework must be driven by leaders at these companies.

It’s a positive development to see many companies building better resiliency through mechanisms including—but not limited to—designing interchangeable resources (e.g., cross-training operators), reengineering process flows (e.g., minimizing transportation network complexity) and investing in preparedness (e.g., crisis management playbooks).

Building a resilient supply chain requires a rigorous assessment of risks and a focus on strategic agility. It also demands intelligent investments in developing an ecosystem that can improve information exchange, reduce the time needed to analyze and react, and build on a strong data and digital foundation. We have seen success from companies that have implemented RMP frameworks like ours, as they have been able to build more resilient supply chains and mitigate many types of disruptions. The sooner companies focus on resiliency and risk mitigation, the sooner they will be prepared for the inevitable challenges of an increasingly complex world.