4 Key Considerations For Onshoring Or Nearshoring Of Drug Production
By Sanobar Syed, M.Sc., MBA
Modern international production is organized in global value chains (GVC), where the stages of production for a final product are located across different regions and countries, according to the comparative advantages of these locations. Though stagnating over the last decade, GVC-based production is still vulnerable to exogenous shocks caused by, for instance, pandemics, extreme weather events, political conflicts, and cyberattacks.
Reshoring is defined as the process of bringing productive activities “home” to a specific location, while nearshoring refers to manufacturing being relocated to a country closer to home. This is motivated both by security of supply concerns and by the need to increase the strategic autonomy of the economy in response to the ongoing shifts in the international order. Against the background of both supply shortages due to the COVID-19 pandemic and a secular shift in the international order toward geopolitical rivalries between countries, reshoring and nearshoring of pharmaceutical production has become a topical issue in recent years in the U.S.
According to Baker Tilly, in 2019 alone, the U.S. imported over $20 billion of pharmaceuticals, medical equipment, and products and related supplies, with close to $2 billion of pharmaceuticals and antibiotics coming from China. Following the outbreak of COVID-19, China closed off its exports of crucial medical equipment to the world economy and directed all production for domestic use. This pivot exposed the limited domestic stockpile in the U.S., sparking fear that shoring up that stockpile could be costly and time consuming, outpaced by the spread of COVID-19. According to the FDA, 88% of active pharmaceutical ingredient (API) manufacturing has shifted offshore over the past decade alone. In the last few years, though, the COVID-19 pandemic has highlighted several weak links in the current global supply chain and heightened concerns about national security and public safety from both sides of the political spectrum. Being able to control supply chain availability is critical, and dependence on other countries during supply chain disruptions has caused the U.S. government to consider onshoring and nearshoring of APIs and essential medicines as a critical step in this direction.
Is Reshoring Or Nearshoring Right For Your Organization?
The important question companies need to ask themselves is what is required to accelerate investments, achieve competitive positioning, and mitigate operational risks in today’s economic environment?
Traditionally, offshoring services come with a few challenges, such as different time zones, communication barriers, cultural differences, etc., but the speed and cost savings were big enough incentives for companies to jump on the bandwagon. Reshoring is likely to come with large costs and take several years as companies upgrade existing facilities or build new ones. Developing a high-level road map can underscore the investments required in building or upgrading capacity. It is important to undertake rigorous internal assessments to arrive at a decision. Let’s look at five key considerations.
1. Cost​
The biggest and possibly most obvious barrier to reshoring is cost. Pharmaceutical companies have a few key sticking points with reshoring or nearshoring, but chief among them is the lack of financial incentives for adopting the practice. For common medications, especially generic drugs, margins are small. Drug manufacturers claim that it simply does not make sense to invest in switching to nearshoring or reshoring for drugs that are currently under patent and are not produced in large quantities. The large investment needed to establish new facilities capable of reshoring or nearshoring is simply too high a price to pay. In addition to supply continuity issues, the cost must be right to reinvest in domestic production.
Typically, the cost of manufacturing in the U.S. is, on average, 30% to 50% higher than in China or Mexico. Swiss-based medtech company Ypsomed decided to reshore its insulin pen production in 2018 after more than 30 years in Mexico, in what is a classic example of a reshoring project to a high-labor-cost country made possible by highly automated production. In the near future, advancements in automation technology and the resultant reduced labor costs could be used to offset the offshoring argument.
2. Establishing The Workforce
It is also important to add that if the company is considering reshoring it would be establishing a well-equipped workforce to run these new facilities. Today, rather than the average labor cost per hour, it is the technical skills of the workforce (the ability to integrate automation into production processes and run them efficiently) that will be a source of competitive advantage. The workforce needs to be well educated and trained, and investments should be made in continuous training to ensure workforce adequacy. This could be done by collaborating with local colleges or institutions to develop a future ready workforce and, of course, it cannot be done without local policy and government support.
3. Involving Strategic Procurement Teams
If the assessment results in the decision to reshore while avoiding capital investments by seeking domestic and regional partnerships, procurement can play a critical role in establishing the necessary supply chain resiliency, as well as making sure of the sustainability of the benefits of reshoring by identifying the right partners, establishing relationships, and securing contracts.
It will be impossible to completely eliminate all supply chain risks. The largest gap in the supply chain is the sourcing of raw materials. That’s where involving strategic procurement teams comes into play, as they have the expertise and critical input to solve the bottlenecks in drug production for years to come. However, moving all the other steps in drug production to one facility in the U.S. would be the most effective way to greatly reduce risks in all other areas of the supply chain. It also provides autonomy and control of the process and, leading to greater margins and profitability. If drug reshoring is the priority for the company, it should be done with the right people and inclusion of the procurement teams.
To establish an optimal pool of strategic partners, procurement will not only need to assess CMOs’ capabilities, capacities, and manufacturing footprints but also evaluate how new technologies can best be utilized to enhance manufacturing efficiencies. Procurement may be critical in not just negotiating supply contracts but also in licensing contracts with new technology vendors that could potentially accelerate onshoring efforts and help reduce costs.
With the high costs and time associated with setting up existing and new manufacturing facilities, procurement can play a more integral role in solidifying reshoring efforts.
4. The Power Of A Consortium
A consortium consists of two or more independent organizations that join to collaboratively increase buying power and leverage economies of scale on materials, services, and solutions offered by vendors. Consortiums across a broad array of industries and applications have proven to be a very successful model for attaining procurement efficiencies and improving security of supply. The UK-based ReMediES consortium is one good example. Establishing a procurement-related consortium that links life sciences companies with key ecosystem partners, such as CMOs, contracting packaging organizations (CPOs), and third-party logistics providers could further help drive sourcing and manufacturing efficiencies. According to E&Y, in the medical industry, 75% of all medical and surgical supply dollars and 82% of pharmaceutical supply expenditures are already negotiated through influential purchasing consortiums.
A consortium would also help to gain key learnings, especially in the early days of reshoring, which can then be applied back to the operations. There might be initial hiccups and challenges, but the long-term goal needs to be the North Star. At the end, the very essence of reshoring is to put the “control” in the organization’s hands.
Moving Into The Future
During 2022, according to the United Nations COMTRADE database, U.S. imports of pharmaceutical products was $164.99 billion, with imports from China, India, and Mexico leading the surge.
With supply chain continuity and resiliency for pharmaceuticals, it is likely one might see more regulations or guidelines in the near future that address the supply chain and, specifically, onshoring efforts. It is important to work with companies to understand their supply chains and focus on optimization, security, continuity, and resiliency, as there are a number of complex issues to consider and address. Add in regulatory and legislative and geographic factors, and making wise decisions related to a company’s supply chain can be very daunting. Continued collaboration and proper use of technology will be vital to the U.S. in paving a path forward to bring new products to market, while securing availability of essential medicines in the future.
Manufacturers should consider all of this in their decision-making when it comes to examining and potentially making changes to their supply chains. Avoid myopic vision on this key strategic decision. Implementation might be a technical challenge if your company hasn’t done rigorous due diligence internally. It is important to map out the internal vs. external capabilities before stepping into a decision.
All the views and opinions expressed are fully independent and belong to the author only. They do not represent the views or opinions of the author's employer or organization.
About The Author:
Sanobar Syed, M.Sc., MBA, is associate director of market insights and strategy at BeiGene. She has more than 14 years of experience in establishing and leading business strategy and forecasting in leading global pharmaceutical firms. She regularly speaks at industry conferences and guest lectures, and has developed academic modules in this field. She has a master’s in organic chemistry and an MBA in marketing.