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By Colby Walker
Underwriter – Life Sciences

Supply chain management in the Life Sciences sector is inherently complex, highly valuable and tightly regulated because pharmaceutical and medical products are particularly exposed to loss.

When a new product finally reaches the market – after years of costly clinical trials, quality and safety tests – Life Science companies are keen to recover R&D costs quickly and cannot entertain any prolonged interruption during manufacture and subsequent loss of revenue.

This article considers how Life Science companies can analyse their supply chains to identify where things could go wrong, how they could go wrong and how to plan for it all. Supply chains are increasingly complex in a globalised economy – and those of pharmaceutical companies are no exception. It’s not uncommon for their supply chains to extend to multiple tiers of development, manufacturing and testing facilities combined with a diverse storage and distribution network. Often it is too expensive or companies lack the expertise to carry out many of these activities themselves, so outsourcing becomes vital.

This complexity makes for a more streamlined way of operating, but it also increases the risk that something somewhere will go wrong and potentially outside of the Life Science company’s control.

The first step is risk identification, what can cause a loss to the business? Following this, risk quantification should evaluate how bad a situation can get and finally risk control, what can be done to protect the business?

The list of physical problems that can arise during manufacturing is long – from natural disasters, such as floods and earthquakes, which may be fairly evident and therefore evaluated, to those that are not so apparent such as contamination and power supply interruptions.  A prudent company will consider factors such as these that could possibly cause a major disruption to their business and plan accordingly.  For example if they rely on a master cell bank as the source of their production, consideration should be given to splitting the cell bank and duplicating storage in another unconnected location. A  back up generator would also ensure a constant supply of electricity thereby maintaining a stable temperature so that spoilage would not occur. Valuation on items such as cell banks need to encompass the raw material cost and the time invested in producing that cell bank, all of which should be taken into account when valuing the supply chain exposure.

Other best practice guidelines would include ensuring suppliers have the same best practices that the Life Science company themselves have, this would include having preventative maintenance agreements in place and contracts with suppliers of critical machinery to supply alternative equipment, to agreements with local companies to provide alternative facilities.  

Does the company or their suppliers use any equipment that is bespoke or has long lead times? It might not always be possible to have a spare sat idle, waiting to be needed, as scientific kit can be very specialist and often expensive, but businesses can take steps to protect themselves.  This can include regular servicing and preventative maintenance, thermographic scanning, back up spare components, as well as physical protections such as intruder and fire alarms to vesda and back up power supplies.

Evaluating the impact a loss at one supplier could have on other suppliers is vital in understanding the risk. Are there alternatives should one supplier be affected? Whilst many companies may not have a formal agreement with a secondary company, they have often addressed the issue and know who they would be able to approach in the event of a loss.

Strict regulations add an extra level of difficulty for these companies, which makes planning in advance even more essential than in other sectors. For example, raw materials from new suppliers need to be tested for quality before being incorporated into the supply chain, which can be a time-consuming and costly process. Similarly, finding a new storage warehouse can be challenging because products may require specialist storage arrangements such as controlled temperature conditions.

Consideration should also be given to the transportation between suppliers as this can often be a weak link and impact a complex supply chain. A company may be able to mitigate such a loss by having duplicates or a certain amount of redundancy built into each stage of the chain, or simply, staging the transit of material so that it is not all transported at once.

It is a positive feature of risk if a company is proactive in visiting their suppliers and carrying out regular unannounced audits. The company is ultimately responsible for the end product and they should be comfortable that a supplier is carrying out the contract as they have agreed to do. This is doubly important as it impacts Products Liability as well as the physical loss.

In addition, insurers need to understand the risk they are underwriting and the contingency plans a business may have in place to protect itself from the unexpected.

Developing a contingency plan

Once the bottlenecks have been identified, the next crucial step is to come up with a contingency plan to refer to in the event of failure. This should be a living document that is referred to and updated regularly, rather than a dust collector sitting on the shelf. This plan should include flexibility in the supply chain taking into account all the identified risks, and the appropriate solutions.  

In practical terms, however, even with the most watertight contingency plan, risks associated with supply chains are impossible to eliminate completely. To deal with the unexpected, many businesses are now favouring business interruption insurance as a final step in their plans to cover unavoidable losses. The idea behind this type of cover is to ensure businesses are able to retain the same financial status they had before the disruption occurred. Typically, it covers losses of income, as well as costs to move to temporary locations and rebuild/repair as needed.

Conclusion

Every business is different and has its own unique characteristics. A thorough review of their operations should determine those that are most susceptible to a loss and steps that are required to protect them and it is critical that companies have alternative plans in place should the worst happen.

Business interruption insurance offers a final level of protection to cover losses, but only if companies and insurers work together to identify the most likely problems in a variety of scenarios and put in place an adequate contingency plan.

For further information on Supply Chain Management download QBE’s Understanding and protecting your supply chain report

Colby Walker

Colby Walker

Underwriter - Life Science

Colby.Walker@uk.qbe.com

Your contact

Colby Walker

Colby Walker

Underwriter - Life Science

Colby.Walker@uk.qbe.com

Your contact

Colby Walker

Colby Walker

Underwriter - Life Science

Colby.Walker@uk.qbe.com