Health organizations will start building a more resilient and agile supply chain in 2021

Written in collaboration with Kathy Michael, PwC's US Health Industries Tax Leader

Early in 2019, the pandemic quickly revealed major weaknesses in the medical products supply chain, and we believe 2021 will be marked by efforts not just to fix the flaws, but to build a more flexible and responsive system.

Chief among the problems that need to be addressed is the lack of geographic diversity in manufacturing sites and in sources of medical supplies and equipment, generic drugs, active pharmaceutical ingredients, and raw materials according to PwC’s Health Research Institute in its “Top health industry issues of 2021” report. 

The over-reliance on markets with labor rate advantages, primarily China and India, predates the pandemic. But the pandemic-induced shortages of APIs, supportive care drugs and personal protective equipment, along with the logistical issues of getting ventilators to the right locations and price markups on high-demand products, showed very publicly how untenable the situation is. 

While some of these issues may be better solved with policy and government intervention, the health industry has its own work to do. The focus in 2021 will be using systems thinking to build flexibility, better transparency and communication and redundancy into the supply chain. This strategy has benefits beyond preparing for the next public health crisis — it builds a buffer against other disruptions, including natural disasters and geopolitical conflicts.

The work of providers, payers, medical supply distributors, and pharmaceutical and life sciences companies should begin with proactively mapping suppliers of essential goods to determine whether they are in regions that could be subject to disruption. Depending on the results, secondary suppliers should be identified and secured, strategic inventory policies should be adjusted, and flexible capacity capabilities should be deployed.

Hospitals also should weigh the costs and benefits of group purchasing organizations and of bringing parts of the supply chain in-house when feasible. In some cases, partnerships or joint ventures with local manufacturers could serve as a redundancy measure. Likewise, medical supply distributors should consider approaching storage and distribution on a more regional scale to guard against disruption.

Pharmaceutical and life sciences companies are also under pressure to diversify manufacturing plant locations. One option is to follow the example of tech and automakers by embracing dual sourcing, in which a company relies on facilities in more than one region. This strategy adds redundancy without disrupting established networks. 

As the industry faces additional pressure to increase domestic production capacity, companies could again follow the tech and automakers’ playbook by maintaining overseas manufacturing facilities, but building a secondary facility in the US. These decisions must make economic sense by balancing risk mitigation and supply assurance with the appropriate level of investments and availability of talent.

As executives well know, restructuring a manufacturing portfolio isn’t like flipping a switch. In evaluating whether to reshore, companies will have to consider such factors as the tax implications, the time and costs of establishing new facilities and supply networks, transportation logistics, and the availability of a skilled workforce. In addition to the strategic, operational and regulatory considerations of designing a more resilient supply chain, cost will also be a factor. The ability to pass along these costs is unlikely given pressure on drug prices, which underscores the need to find efficiency elsewhere in the cost-base. 

In the coming year, healthcare organizations may turn to another solution — surge contracting, a technique used by some cellphone makers. Under this strategy, companies pay suppliers to maintain a stock of materials for use if demand spikes. This approach is most useful for less-specialized supplies and for products with longer shelf lives.

But fixing the gaps in the supply chain is only part of the task ahead. The industry also needs to build flexibility and responsiveness into the system, and that requires an investment in advanced data analytics that can provide an end-to-end view of supply and demand from basic materials to the consumer.

Over time, investment across supply chain stakeholders in advanced analytics would enable the system to better deliver on the promise of providing the right treatment to the right patient at the right time at the lowest cost. It also would enable the industry to provide the transparency into the US supply chain that consumers and policymakers are increasingly demanding.

Written in collaboration with Kathy Michael, PwC's US Health Industries Tax Leader