COVID-19 Black Swan Colliding with Your Supply Chain?

By: Daniel R. Matlis, President, Axendia, Inc.

Globalization and outsourcing have increased the volume of geographically dispersed partners, facilities, and suppliers in the Life-Science global supply chain. This has resulted in increased supply chain risk and decreased predictability due to variability and complexity and increasing the impact of ‘Black Swan’ events on the healthcare ecosystem.

In 2010 we started preaching about some of the risks associated with globalization, outsourcing and single sourcing in Life-Sciences (See Research Report Achieving Global Supply Chain Visibility, Control & Collaboration in Life‐Sciences: “Regulatory Necessity, Business Imperative”).

While many analysts focused on the rewards of these practices, Axendia took a holistic risk-based approach.

Globalization and Outsourcing allowed the COVID-19 Back Swan to Take the Crown:

In his book “The Black Swan: The impact of the highly improbable,” Nassim Taleb defines a ‘Black Swan’ as an event characterized by rarity, extreme impact, and retrospective (though not prospective) predictability.

Corona (Latin for Crown) is likely the largest Black Swan event to affect the Life-Science supply chain in a generation.

Black Swan events once seemed extremely rare and had little or no impact on Life-Science supply chains. In recent years, however, natural disasters including super-storm Sandy in northeastern US, the earthquake and tsunami in north-east Japan, flooding in Thailand, and the ash cloud from the Grimsvotn volcano in Iceland and now the COVID-19 pandemic have had significant impact on global supply chains.

As Life-Science companies considered ways to lower costs, many shifted to global supply chains and “single source” suppliers. Globally, single source suppliers greatly reduce supply chain robustness and flexibility as well as increase vulnerability. I will leave it to the experts to define whether or not these events are happening more frequently. Nevertheless, globalization and single sourcing are having an increasing impact in day-to-day operations of Life-Science supply chains.

70% of industry executives responding to our research report (See: Achieving Global Supply Chain Visibility, Control & Collaboration in Life‐Sciences: “Regulatory Necessity, Business Imperative”) reported having key suppliers in China.  With China being the focal point of the COVID-19 outbreak, many Life-Science companies were quickly and severely impacted.

Our research showed that industry leaders have significant concerns due to single sourcing stemming from risks associated with Black Swan events (43 percent). It is worth noting that the research was published before super-storm Sandy hit the U.S.

Low Supplier Visibility Increases Risk

The timely access to information is vital to the decision making process.  Yet, the vast majority of executives surveyed face a confidence crisis due to the lack of visibility into their own supply chain. 

Respondents reported that their highest perceived risks (73%) are associated with suppliers to their critical suppliers. 

Nearly 3 out of 4 respondents rated their level of risk moderate to high based on their current level of visibility into Tier 2 suppliers to critical suppliers.  As one Executive put it “we feel that the level of visibility goes down exponentially with every link in the supply chain.”

Even more of a concern is that the comfort level with “critical suppliers” is not much better, with a full 68% reporting their level of risk as moderate to high based on current levels of visibility.

This level of unease seems to be justified, given that more than half of the respondents report that their suppliers have made changes to raw materials, processes, and testing and inspection practices without their prior approval. Nearly 70% reported that suppliers have made process changes (frequently or occasionally) without their prior knowledge.

Based on the current lack of visibility, suppliers to critical suppliers represent the highest perceived risk.

When most organizations, including regulators, are shifting to a risk based approach to decision making and compliance, lack of visibility is a key barrier to its implementation.  Limited visibility translates to greater risk.

To improve supplier management, and mitigate risk associated with complex supply chains, many organizations are working diligently to reduce their supplier base.

However, as one Executive commented, “the more rare/scarce/sole source a supplier is, the higher the level of visibility and control that are required from the Brand Owner.”

As a result, the topic of global supply chain resilience is back on the agendas of industry executives as they seek to maintain product availability and integrity across the world.

There is no way to fully predict or prepare for the impact of Black Swan events such as pandemics, natural disasters and geopolitical unrest on the supply chain. However, the recent frequency of these events calls for the implementation of contingency plans to improve supply chain resilience and balance the risks as well as the rewards of Life-Science globalization.

To attain the sustained benefits of globalizations and mitigate Black Swan events, Life-Science organizations must improve the resilience of their supply chains. This will allow them to capitalize on the opportunities set forth by globalization and outsourcing while proactively reducing and controlling risks. This calls for changing the business, technology, and regulatory models traditionally used in the industry.

To support these initiatives, we recommend that Life-Science companies implement solutions to address issues and concerns that should be taken into consideration when managing in this global and outsourced environment.

These include:

Enhanced visibility across the Life-Science extended partner network

Life-Science organizations should deploy systems and technologies to provide visibility and control not only in the supply chain, but also in the entire value chain, from product design, sourcing, manufacturing, and distribution to the consumer.

To enhanced visibility across the Life-Science extended partner network, brand owners should:

  • Employ risk-based supply chain management strategies;
  • Require partners to document their complete supply network;
  • Integrate data islands and point solutions to aggregate data needed to glean business information;
  • Implement global, standards-based, and interoperable systems to support visibility outside the corporate four walls;
  • Collect, analyze, and act on critical-to-quality indicators and parameters;
  • Implement IT solutions to achieve business results, not simply meet regulatory requirements.

Improve collaboration with all constituents in the ecosystem

Effective collaboration remains the cornerstone of successful relationships, especially in today’s global and outsourced environment. Life-Science stakeholders should embrace this changing environment and partnership, transparency, and harmonization initiatives, transforming relationships so that interactions can begin earlier in the process to support mutually beneficial outcomes. It also means engaging suppliers who are willing to share information about the product on-demand, to support efficiencies and effectiveness across the product lifecycle.

To improve collaboration with all constituents in the ecosystem:

  • Identify partners who share your approach and philosophy to quality and compliance;
  • Consider a “smart-sourcing” strategy; evaluating the total cost and potential risks, not just initial cost;
  • Implement commercial, legal, and technological frameworks that promote the exchange of information;
  • Enable partners to become an extension of the brand owner’s own quality and information systems;
  • Create and publish standard measurable incentives to drive collaboration, improved performance, and mitigate risks;
  • Establish an honest dialogue with partners to enhance the value and impact of the relationship;
  • Don’t focus on price alone, consider overall value and associated risk.

Bottom Line:

Life-Science organizations need to gain supply chain flexibility and reliance necessary to quickly adapt in response to Black Swan events.

These strategies will enable Life-Science organizations to minimize supply chain disruptions and increase predictability resulting from COVID-19 as well as future Black Swan events.

To discuss how your organization can be better prepared to mitigate Black Swan events, contact Research@axendia.com to schedule a briefing or inquiry.

Related Content:

  1. Achieving Global Supply Chain Visibility, Control & Collaboration in Life‐Sciences: “Regulatory Necessity, Business Imperative”

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