COVID-19: operational and supply chain risks in the healthcare sector

COVID-19 RESOURCE HUB | Financier Worldwide

HEALTHCARE SECTOR

While coronavirus (COVID-19) may prove to be the event that forces sectors, such as healthcare, to rethink their global supply chain models, for the moment, the pandemic has exposed key vulnerabilities of many healthcare companies, particularly those with a high dependence on global suppliers.

Indeed, the pandemic’s impact has been such that every link in globally dispersed supply chains has been affected. From raw materials, through Tier 2 and Tier 1 suppliers, to finished goods, to distribution centres, to retail outlets and onto transportation links – each link in the chain faces a raft of issues, such as payment or delivery failures, price gouging, supplier solvency and disputes.

In terms of the healthcare sector, while procurement processes have developed rapidly in recent years due to advances in technological and traceability techniques, COVID-19 has, to a large extent, disrupted and paralysed the sector, forcing companies to shore up their supply chains and re-evaluate operations.

“COVID-19 has had a major impact on how healthcare organisations think about and manage operational and supply chain risks,” says Andrew Black, principal at Effico. “The immediate surge in demand for personal protective equipment (PPE), ventilators, medicines and other required materials led to a cascade effect as the components of complex global supply chains started to fall over and availability of key materials rapidly dried up.

“Risk managers who, in the past, had assumed they could switch supply or source from different countries were suddenly confronted with a situation in which everybody, everywhere was trying to buy the same thing at the same time,” he continues. “As such, traditional approaches to risk management which aimed to balance cost and supply chain resilience were exposed as inventory was consumed and supply all but disappeared.”

Furthermore, the pandemic has also exposed the extent to which the healthcare industry is reliant on suppliers based abroad and the risks that this dependence creates in a crisis. In the EU, for example, almost 75 percent of the active pharmaceutical ingredients (API) that supply the EU market are foreign-sourced.

Further illustrating the lack of domestic production is a recent New York Times article which revealed that, prior to the pandemic, China exported more respirators, surgical masks, medical goggles and protective garments than the rest of the world combined – a situation that is likely to have been exacerbated as China ramped up production while the pandemic progressed.

To reduce this reliance on Chinese suppliers, and others, the pharmaceutical industry and public healthcare providers more generally have implemented various measures, as outlined below.

Public healthcare providers. Public healthcare providers around the world have had to contend with significant shortages of critical medical equipment. In response, providers are now starting to stockpile essential items and, in some cases, implement command and control processes to acquire and distribute materials rather than relying solely on the private sector. For example, the NHS, working with other public sector bodies, has centralised the sourcing and distribution of essential PPE after the previously decentralised system buckled under the pressure of COVID-19.

“Where COVID-19 has exposed the shallowness of the supply base, national governments are now starting to step in to encourage manufacturers to onshore production,” adds Mr Black. “The French government, for instance, is leading an initiative to bring production of critical medicines back to Europe, with governments across the globe encouraging the onshoring of PPE.”

Pharmaceutical industry. The ability to guarantee supply of an API, intermediate or pharmaceutical product will be a key differentiator in the future. While organisations in this space have always operated under onerous requirements to ensure supply, in a post-pandemic world, the ability to completely de-risk the supply chain will be a major source of competitive advantage for many healthcare providers.

The key to this is guaranteeing security of supply. “This will be achieved by significantly increasing inventory levels, multi-sourcing key materials and investing heavily in forecasting,” explains Mr Black. “The upshot will be more costly, but also more resilient supply chains.” In this regard, the adoption of new technologies is having a big impact on supply chains.

According to a 2020 study by Forrester Consulting (based on a survey of 409 supply chain, procurement and business finance leaders in North America and Europe), technology helps companies to align procurement with business objectives, as well as being instrumental in building competitive advantage and boosting risk management capabilities.

Clearly, in a post-pandemic world, a greater oversight of supply chain risks will be essential if sectors, particularly healthcare, can survive and thrive. “The post-COVID world will see significant investment in the de-risking of supply chains,” foresees Mr Black. “At its most basic, this will entail holding additional inventory, with a consequent increase in deployed working capital. But it will also involve investments in forecasting, and, in the longer- term, steps taken to restructure the supply chain itself.

“This latter could take the form of more vertical integration, the onshoring of key providers or investments in multi-sourcing of critical materials,” he continues. “COVID-19 will also amplify existing geopolitical tensions leading to reduction over time in the use of Chinese suppliers, in particular.”

Whether a supplier or a consumer, almost no entity will have escaped the impact of the pandemic – its global sweep having affected billions of people across the globe. For the healthcare sector, the disruption caused by COVID-19 has been particularly acute, relying as it does on PPE, ventilators, medicines and the like – products that have often proved to be the difference between life and death.

Fraser Tennant