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In this Q&A, Kristian Sibilitz, senior vice president, pharmaceutical production & supply chain at Lundbeck, outlines the impact of the last 2+ years on the Danish drugmaker’s supply chain activities
Like many others we are seeing increasing costs and increasing lead times. There are a number of elements at play, not just the pandemic. Some of it relates to capacity issues in the industry and the increasing cost of raw materials, energy, freight, etc. But those are the main challenges we face: cost increases and longer lead times.
For several years we’ve done an annual business impact analysis, where we host workshops related to supplier risk and facility risk, looking into things that might occur at our production warehouse facilities. Based on scenario planning, we focus on the main risks in terms of potential impact and we formulate and implement mitigation strategies. These could involve dual sourcing, inventory management strategies, stronger relations with key suppliers, etc. So, we had been doing that, but then COVID came along and, subsequent to that, the high inflation that we’re seeing now. All this put extra pressure on us. I’d like to say that we’re in a better position to deal with it than if we’d done nothing, but to prepare for all this disruption was extremely difficult.
Some of the scarcity, for example, we had not predicted, even when COVID broke out. One of the things that we expected was the impact on glass for vials, etc., which did occur and which we were able to mitigate with our suppliers by planning ahead. But one of the things we did not expect was the shortage of filters for production, for example, and that hit the industry widely. Suddenly, everyone was fighting to get their filters up and running. We had to look at our portfolio and quickly take action on this.
We don’t have direct supply from Russia or Ukraine, but we do have second- and third-tier suppliers there. That’s where it gets tricky in terms of trying to get visibility and understanding the dribble-down effects of the conflict. Our first- and second-tier suppliers obviously also start to look for alternatives as soon as they are hit by difficulties, but that puts pressure on the markets in other area. Again, it can be hard to predict the fallout from all this.
Certainly, the industry-wide impact has been profound and I could point to single incidents that for us as a company were extremely difficult to navigate. Everything has been hit: our fiscal supplies, our energy consumption, our ability to transport goods around, everything inbound and outbound.
I want to say yes, but It’s a long journey. To fully internalize some of these supply chains is extremely difficult if not impossible. One element that has previously driven decision to source within Europe is regulations such as REACH, the European Union’s (EU) regulation on chemicals and their safe use. This requires companies to register any substances imported or manufactured in quantities of more than 1 metric ton per year with the European Chemicals Agency (ECHA). The existing 30,000 substances produced or imported within the EU must be registered. However, active pharmaceutical ingredients (APIs) and excipients are exempt from registration, evaluation, and authorization if they are already registered with the European Medicines Agency (EMEA) as an ingredient of a medicinal product for human or veterinary use. Lundbeck has made some progress here in terms of its excipient starting materials. Our API plants are in Europe and our suppliers are largely European based, which puts us in a good place in terms of our first-tier supplier base, however not the full supply chain.
We’re going to be living with all these implications for a while. Getting costs down again is going to be a struggle for us all. And then there is the whole shift toward sustainability, which has been a consideration for some time but is definitely picking up speed now and adds to an already challenging environment. We want to balance sustainability initiatives with certainty of supply at a competitive cost, which is still very hard. Part of it will be driven by demand in society, but I’m sure we will also see further regulation, either by carrot or whip, in terms of pushing the industry toward sustainability goals.
From a supply chain point of view, we can use digitalization to create transparency and also to analyze data and offer predictions and suggestions. There are definitely opportunities with digitalization that we can harvest. From a cost perspective, using data and advanced analytics also helps us to see what we can optimize, partly with our supplier base, but also internally. The difficult part is setting it all up. There is not a lot out there in terms of standards, so this digitalization is not something you can achieve overnight.