Are supply chains ready in the life sciences and pharmaceuticals for “Made in the USA” or “Made in Europe” and the Inherent Challenges to Making the Adjustment

April 09, 2020
In the wake of the Covid-19 pandemic, I and many others have witnessed our reliance on China and Asian countries for basic medical supplies (such as gowns, masks, gloves, and ventilators), leave aside many pharmaceuticals and active ingredients are made in China. This reliance on China and Asia is troubling and shocking. In a decade of global uncertainty, the United States healthcare system is reliant on China. With the enactment of the Defense Production Act, Americans and companies in America have risen to the challenge: making masks, gowns, ventilators, and donating supplies to their local hospitals and strategic stockpiles. Will this generosity continue after the pandemic ends? While laudable in the face of a pandemic, one must ask, “will companies make long-term supply chain changes in production and lessen reliance on China and Asia in general?”

To answer the pressing changes needed in the supply chain of life science, healthcare, and biotechnology companies, several issues must be examined. There are incentives that should be given to companies to relocate their production in their United States of America (USA) or Europe? The answer appears to be yes. Representative Anna G. Eshoo (D – CA) established a bipartisan working group to assess whether funding might incentivize production of pharmaceuticals in the USA; she sponsored a bill to make stronger reporting requirements surrounding drug shortages. Senator Marco Rubio (R – FL) introduced legislation to use loans from the Small Business Administration and other Federal programs to incentivize companies. This might not be enough, though. “Buy American Laws,” which would encourage Federal government departments, such as the Department of Veterans Affairs, is being considered to purchase pharmaceuticals that are American-made, where that option exists. Such an option will be hard to enforce in the Federal government, let alone applying it to companies. Senator Josh Hawley (R – Mo) introduced a bill expanding the authority of the Food & Drug Administration requiring manufacturers to report country of origin for components of drugs and medical devices. Larry Kudlow, Director of the National Economic, has said that the Federal government will underwrite and pay for any company to move its supply chain to the USA. Incentives combined with additional reporting requirements might induce some companies to move their supply chains to the USA. We must look at why the supply chain relies on China, and how many end users know where the products they use come from, in whole or in part.

In my former career as a neural stem cell scientist and project manager at Indiana University School of Medicine, I ordered many products from life science and biotechnology companies. I did not give one thought to where products were produced, even though I ordered from US-based companies. I did not even look at the “Made in” label on products, which are misleading because some component may be made overseas and packaged in the USA. I might suggest that there is a patriotic sentiment rising in the US and consumers will be more aware of the location where the products they buy were produced.

There are a number of reasons why companies rely on China and Asia. According to Mr Peter Navarro, U.S. Trade Representative, “China managed to dominate all aspects of the supply chain using the same unfair trade practices that it has used to dominate other sectors – cheap sweatshop labor, lax environmental regulations and massive government subsidies.” This is atrocious! Consider if scientists, doctors, and nurses using your products knew these facts! Your company might lose business! The Chinese are not doing us any favor. The risk of uncertainty in terms of currency manipulation, trade wars, rising affluence, etc. are too great; the opportunity costs not to switch locations for manufacturing are too high. As we are seeing, in the case of a global pandemic, uncertainty is all too great a risk. How can companies make a change to lessen reliance on China and Asia and maintain their cost structure to customers?

Besides focusing on other low cost markets for production, which may not be ideal, a key manufacturing differentiator to locating in the US may be innovation. Through employing innovative production strategies, manufacturing in the US may make sense. Innovation can offset higher labor costs associated with production in the US or Europe, where there is a more skilled labor force. Transferring supply chains to the US or Europe may be easy in theory, but the reality may be different. To assess what may make the transition easier, I will provide a few examples of strategies that have worked.

Consider splintering large, cumbersome supply chains into smaller ones. Such a proposal may seem counter-intuitive, but examining demand for each product produced and volume of product produced, one may find that it is more cost-efficient. Production in countries such as the US may make economic sense even for low volume products because the costs associated with getting them to the consumer or end user much faster, reducing lost sales, and keep inventories down for low volume products. There may be benefits to splintering supply chains. This approach allows for reduced complexity, better management of supply chains, potential faster production of finished goods, a decrease in inventory costs, leave aside being closer to the customer. A detailed cost-benefit analysis is a must, but I think the benefits of relocating to the USA or Europe is are clear.

The benefits to producing life science and pharmaceutical in the US are clear. Businesses will have to consider the long-term benefits and chief executive officers may need to forgo some profit in the short-term. Considering three epidemics (one a pandemic) have originated in China, the time to make the supply chain move is now in order to prepare for the next epidemic. Will your company be prepared? Customers are more patriotic, particularly after this crisis and will likely pay an increased premium, if necessary, to know that their products are “Made in the United States” or “Made in Europe.”

Outstanding References

Malik, A. Niemeyer, and B. Ruwadi Building the supply chain of the future. McKinsey. January 2011. Link: https://www.mckinsey.com/business-functions/operations/our-insights/building-the-supply-chain-of-the-future

Shih. Is It Time to Rethink Globalized Supply Chains – MIT Sloan Review. March 20 2020. Link: https://sloanreview.mit.edu/article/is-it-time-to-rethink-globalized-supply-chains/

A. Swanson. Coronavirus Spurs U.S. Efforts to End China’s Chokehold on Drugs – The New York Times. March 20, 2020. Link: https://www.nytimes.com/2020/03/11/business/economy/coronavirus-china-trump-drugs.html

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