In the recent decade, the world economy has become ever more global. It is common to see that many goods, especially related to the pharmaceutical industry, are manufactured in Asia and then exported to several other countries. This strong dependence on Asian pharma production could be a strong reason of concern, especially in light of the visible supply chain disruptions. Many qualitative analyses confirm the current challenges faced by the global pharma supply chains during Covid-19; on the other hand, the quantitative performances of some leading Chinese pharmaceutical firms in the years prior to the pandemic crisis confirmed how dangerous it could be a potential dependence from Asian production.
The qualitative analysis, identifying the main challenges for pharmaceutical manufacturers’ supply chain, are focused on supply chain performances (supply chain capabilities and efficiency) and Supply Chain Operations Reference models: SCOR models are focused on supply chain capabilities (reliability, flexibility and responsiveness) and supply chain efficiency (costs and asset management).
In terms of capabilities, the major issues identified are related to:
- inventory and sales problems – destocking, high backorders, inventory oscillation – reflecting in possible inaccurate forecasts and consequent substantial decrease of supply orders
- high quantity of time to complete both manufacturing and R&D cycles
- limited time available for tackling unpredictable events.
On the other hand, the issues affecting pharmaceutical supply chains efficiency are the higher average inventory costs, the higher average time of inactive inventory and longer cash-to-cash cycles. Pharmaceutical firms can adopt different strategies in order to tackle these supply chain challenges. First, strategic supplier relationships can allow pharmaceutical firms to better face market instability, and other adverse occurrences such as the bullwhip effect, by sharing information and pursuing joint decisions.
Furthermore, strategic supplier relationships result in the increased capability of responding to demand, increased market share, increased customer satisfaction, increased profitability and cost reduction. Second, it is important for pharmaceutical companies to concentrate their investments in new technologies in order to improve production processes/R&D and reduce the amount of waste materials and reworks.
By adopting new technologies into the manufacturing process, firms can become more flexible and more competitive. Finally, an improved IT system leads to more accurate forecasts, decreasing the risk of inventory mismanagement and market instability. This approach is also known as Collaborative Planning, Forecasting and Replenishment.
The academic and scholarly literature has proved the quantitative analysis of financial performance ratios to be an accurate supply chain management performance indicator. This analysis compared China’s major and most important Chinese pharmaceutical manufacturers – China Meheco, Guangzhou Baiyunshan Pharmaceutical, Harbin Medicine, Huadong Medicine, Jiangsu Hengrui Medicine, Shanghai Fosun Pharmaceutical, Shanghai Pharmaceuticals and Sinopharm Group – with J&J. These approaches and methodology are used to verify if accurate quantitative data confirm the increasing concerns over this topic.
The following ratios and metrics are part of the analysis
- Efficiency: Cash Conversion Cycle, Inventory Turnover, Asset Utilization and Cost of goods sold.
- Profitability: Return on Capital Employed, Return on Asset, Gross Profit Margin and Operating Margin.
In conclusion, the supply chain management performances of the selected companies prior to the pandemic confirm their efficient internal processes; in this way, the recurring distrust towards Chinese drug manufacturers was renewed by the fears and uncertainties brought by the new Coronavirus. In particular, moving from 2015 to 2019 and comparing these Chinese manufacturers’ average performances versus J&J, it is possible to confirm that the majority of these Asian companies have very high-efficiency ratios in terms of inventory turnover and asset utilization. Even if some of these companies have good profitability ratios, only one is comparable to J&J in terms of performance.
Edit by Professor Paolo Bongarzoni