28 May 2020
Sam Roscoe is a Senior Lecturer in Operations Management and Research Leader for the Supply Chain 4.0 Hub at the University of Sussex. He is an Associate Fellow of the UKTPO.
Boris Johnson has drawn up plans (codenamed Project Defend) to reduce the UK’s reliance on foreign countries for products that are deemed critical to the wellbeing of the nation. This follows a recent Fox News interview with President Donald Trump, who said “these stupid supply chains that are all over the world…..we should have them all in the United States”. And, a recent article from The Economist (May 16th-22nd, 2020) that declared the end of globalisation, noting that the push to bring supply chains back home in the name of resilience is accelerating. Indeed, the pandemic has exposed that global supply chains are only as strong as their weakest link and is prompting a move from low-cost, overseas production towards the localisation of manufacturing.
The call for the ‘repatriation’ of manufacturing is particularly strong for critical pharmaceutical products. The majority of generic drugs sold in the UK have a complex multinational supply chain with about 70 per cent of active pharmaceutical ingredients (APIs) made in China and the majority of manufacturing and packaging done in India. Overall, between 80 to 90 per cent of the UK’s supply of generic medicines are imported.
The sentiment of many politicians is that on-shoring the production of all critical drugs will build a more resilient supply chain. An article in The Times (May 22nd, 2020) quotes a source working on Project Defend that states “we’re seeing resilience as a national security issue. If we are reliant on other states for particular things that is, in effect, a national security concern.” However, having all of your eggs in one basket does not lead to supply chain resilience. Instead, making all critical drugs in the UK makes the pharmaceutical sector susceptible to changes in UK regulations, the whims of new political parties and interventions by the State in a company’s manufacturing methods and volumes.
The Government’s all-or-nothing approach risks alienating pharmaceutical companies that for over 30 years have established centralised manufacturing facilities overseas. These facilities have high fixed costs and serve a number of regional or global markets, which keeps the per-unit cost of production low. Pharma companies have also spent years validating and setting up collaborative supplier relationships with contract manufacturing organizations in India and China, another very expensive proposition. Calling on companies to close these facilities and end years of successful supplier relationships to set up operations in the UK is a tall order.
Moreover, the Government is entering a political minefield as it chooses which drugs to on-shore. The World Health Organization model list of essential medicines (2019) contains 460 medications considered to be the most effective and safe to meet the most important needs in a health system. The UK government will face difficult trade-offs when deciding which of these drugs, and by extension which medical conditions, to prioritize for UK-based production.
A more realistic, and resilient, approach is to establish parallel supply chains that take advantage of low cost production overseas as well as the responsiveness of being close to the UK market. The parallel supply chain model entails having 20-30% of pharmaceutical manufacturing located in the UK including APIs, excipients and packaging. The remaining 70-80% would remain overseas using the centralised, low-cost model. When a crisis occurs, production volumes could be scaled up in the UK. If a company expected it to take 3 to 4 months to ramp up UK production, then 3 to 4 months of finished goods inventory would be held at “critical stores” within UK borders. The parallel supply chain model would also be applicable to companies providing other life-saving products such as personal protective equipment, testing kits and ventilators.
The localised part of the supply chain will require advanced manufacturing technologies such as additive and continuous manufacturing to counteract the high labour costs associated with UK based manufacturing, Localised supply chains do offer some cost advantages compared to overseas manufacturing because lead times are shorter and companies are more responsive to demand, which reduces inventory carrying costs. Admittedly, the overall costs of establishing the UK supply chains will be extremely high and cannot be offset by the low-margins of generic drugs. The UK government would need to support the local proportion of manufacturing through grants and other incentives. Saying that, however, the localisation of production would support the UK Industrial Strategy grand challenge of enhancing UK productivity.
For the portion of production that remains overseas, pharmaceutical companies will need to spread risk geographically by sourcing from a dispersed range of countries and regions, outside of India and China. Dual and multiple sourcing agreements will be required for critical raw materials and components. Companies will need to map the entirety of their supply chains, up to and including raw materials, to create end-to-end visibility and to identify single points of failure. By having robust contingency plans in place, and multiple production facilities, firms can quickly shift production volumes away from areas affected by disease outbreaks or other natural disasters.
Undeniably, COVID-19 is forcing a rethink of the low-cost, centralised production model. However, this does not necessarily mean that politicians should respond with an all-or-nothing approach underpinned by an ethos of self-reliance and national security. The parallel supply chain model offers a best-of-both worlds solution that spreads risks while enhancing supply chain resilience.
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.
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