Strategic API Sourcing: Offshoring Vs. Nearshoring For A Resilient Supply Chain

By Ash Gude, TBM Consulting

The global pharmaceutical industry is at a critical juncture, with an ever-increasing demand for generic drugs that are essential to maintaining affordable healthcare systems worldwide. Globally, approximately 90% of patients rely on generic drugs, making healthy competition within this sector vital for reducing costs and preventing medication shortages. However, this competition is not evenly distributed across the market, and the production of active pharmaceutical ingredients (APIs) — the key components of these drugs — remains a crucial, yet often overlooked, part of the global supply chain. The decision to offshore or nearshore API sourcing is not only about managing costs but also about ensuring a stable and reliable supply of lifesaving medications.

The Challenge Of API Sourcing In A Globalized Industry

The pharmaceutical industry faces significant challenges in maintaining a stable supply of APIs. Over 60% of APIs used in the United States are sourced from just two countries—India and China—with India alone accounting for 48% and China 13%. This heavy dependence on a limited number of suppliers creates potential choke points within the supply chain, where disruptions can have severe consequences for drug availability. This issue is compounded by the fact that many drug manufacturers rely on the same API suppliers, which increases the risk of supply shortages.

This concentration of API production has made the global pharmaceutical supply chain particularly vulnerable to disruptions from external factors such as geopolitical tensions, trade disputes, and regulatory changes. For example, a trade conflict or stricter regulations in India or China could significantly impact the cost and availability of critical drugs, leading to shortages and price increases. The COVID-19 pandemic has further highlighted the fragility of global supply chains, prompting the industry to reconsider the risks and benefits of offshoring API production.

The Complexity Of API Sourcing Decisions

Given the current environment, pharmaceutical companies must carefully consider various factors when deciding whether to offshore or nearshore their API sourcing. While it might seem straightforward to pursue the lowest-cost option, this decision involves a complex web of considerations, both benefits and risks, that can significantly impact the overall success and sustainability of the supply chain.

Weighing The Benefits Of Offshoring And Nearshoring

Analyzing the benefits helps manufacturers make strategic decisions that balance cost-efficiency with the need for a stable, responsive, and compliant supply chain, ensuring the consistent availability of high-quality APIs.

1. Reducing Total Cost of Ownership (TCO)

Outsourcing API production to regions with lower labor and manufacturing costs is a common strategy to reduce drug costs. However, this approach can lead to unintended consequences, such as supply chain disruptions, quality issues, and drug shortages. Lower-cost API manufacturers may compromise on quality, resulting in unreliable supply chains and higher long-term costs. To avoid these risks, companies should adopt a risk-based approach to supplier selection, considering not just manufacturing costs but also quality oversight, regulatory compliance, and supply chain reliability. Evaluating the total cost of ownership can help identify high-quality suppliers who offer greater long-term value.

2. Speed and Time-to-Market

In the pharmaceutical industry, speed is crucial for maintaining a competitive edge. Offshoring API production to distant regions can cause delays due to longer supply chains and customs processes, hindering timely market entry and response to demand changes. Nearshoring to regions like Mexico or Canada for U.S. companies reduces these risks by enabling faster delivery, easier coordination, and more effective communication with suppliers, enhancing agility and quality control Continuing to explore ways to reduce lead time is important here.

3. Inventory Optimization

Inventory optimization is crucial in API sourcing, requiring a balance between holding enough stock to prevent production delays and avoiding excess that ties up capital and increases costs. Demand forecasting, using historical data and advanced analytics, helps manage inventory levels by predicting future needs, reducing the risks of overstock, stockouts, and expired ingredients, along with a robust integrated business planning process. While offshoring often necessitates larger safety stocks to mitigate supply chain disruptions, nearshoring offers more flexibility with just-in-time delivery models that better align with production schedules, reducing inventory costs.

4. Regulatory Compliance

Ensuring the safety and quality of APIs is paramount in the pharmaceutical industry, where patient health is at stake. However, maintaining consistent quality control across international API supply chains can be challenging due to variations in regulatory standards, inspection processes, and manufacturing practices.

When sourcing APIs from overseas, companies must navigate complex regulatory environments, ensuring that suppliers adhere to good manufacturing practices (GMP) and meet the stringent quality requirements set by regulatory bodies like the U.S. FDA. Nearshoring can simplify regulatory compliance by allowing companies to work with suppliers that operate within similar regulatory frameworks, reducing the risk of noncompliance and facilitating faster market access.

5. Customer Proximity and Satisfaction

Sourcing APIs closer to the final drug manufacturing site can enhance supply chain reliability, reduce lead times, and improve customer satisfaction. Consistent quality, timely deliveries, and product availability are key drivers of customer loyalty and trust. By maintaining a well-managed supply chain that minimizes delays and ensures consistent quality, companies can strengthen their relationships with customers and build a reputation for reliability in the marketplace.

Understanding The Risks

While there are clear benefits to both offshoring and nearshoring API sourcing, companies must also carefully consider the associated risks.

1. Political Risks

Political instability in key API manufacturing regions can disrupt production and supply chains, leading to delays, increased costs, or shortages. Changes in trade policies, such as the imposition of tariffs or trade barriers, can further complicate the import and export of APIs, affecting the overall cost structure and competitiveness of pharmaceutical products.

2. Economic Risks

Economic factors, including fluctuations in raw material costs, rising labor costs, and supply chain disruptions, can significantly impact the cost-effectiveness of API sourcing. For example, a spike in the price of key raw materials due to supply chain disruptions or increased demand can alter the cost structure of API manufacturing, squeezing profit margins and making it difficult to maintain competitive pricing.

3. Freight and Logistics Risks

The global distribution of APIs involves significant challenges in transportation and logistics. Inadequate facilities, complex customs procedures, and logistical barriers can lead to delays, damaged or expired shipments, and interruptions in the timely delivery of APIs, which can halt production and increase costs. To mitigate these risks and ensure the efficient movement of APIs across borders, effective supply chain management and strong partnerships with reliable logistics providers are essential.

4.  Technological Risks

The integration of advanced technologies in API manufacturing can enhance efficiency and quality, but it also requires significant investment. Companies that fail to keep up with technological advancements risk losing market share to more innovative competitors. However, investing in new technologies can be a financial strain, particularly for smaller manufacturers, necessitating careful consideration of the costs and benefits.

Solutions For Making Informed API Sourcing Decisions

To navigate the complexities of API sourcing and mitigate the associated risks, pharmaceutical companies must implement robust processes and tools.

• Robust Cross-Functional New Product Introduction (NPI) Process

A well-structured NPI process is essential for ensuring that sourcing decisions are aligned with overall product development strategies. This process involves cross-functional collaboration between teams, from procurement to quality control, to ensure that sourcing considerations are integrated into the product development journey from the outset.

By applying a structured project management approach and leveraging scientific principles like design of experiments (DoE), companies can effectively assess and address risks, ensuring that new products are brought to market efficiently and with minimal disruptions.

• Integrated Business Planning (IBP)

Integrated business planning (IBP), similar to sales and operations planning (S&OP), is another critical tool for optimizing API sourcing strategies. IBP aligns demand, supply, and financial planning, allowing companies to make proactive sourcing decisions that support overall business objectives.

By implementing IBP, pharmaceutical companies can better anticipate market needs, validate ingredient quality, and ensure compliance with regulatory standards, reducing the risk of production delays and improving time-to-market.

Ensure A Resilient And Cost-Effective API Supply Chain

The decision to offshore or nearshore API sourcing is complex and multifaceted, with significant implications for cost, quality, and supply chain resilience. While offshoring can offer cost advantages, it also introduces risks related to supply chain disruptions, regulatory compliance, and quality management. Nearshoring, on the other hand, provides greater control over these factors but may come with higher up-front costs.

Ultimately, the choice between offshoring and nearshoring depends on a company’s specific circumstances, including its market strategy, regulatory environment, and risk tolerance. By adopting a risk-based approach to API supplier selection, implementing robust cross-functional NPI processes, and leveraging integrated business planning, pharmaceutical companies can make informed sourcing decisions that balance costs, risks, and quality.

In an industry where the stakes are high and the margin for error is low, making the right API sourcing decisions is crucial for maintaining a reliable supply of lifesaving medications and ensuring long-term business success.

About The Author:

Ashay Gude is a senior management consultant at TBM Consulting Group with 16 years of expertise in management consulting, operations and supply chain management, operational excellence, change management and team leadership in the United States, Japan, and Canada. He drives organizational transformation, cost reduction, and performance improvement. Gude has led a progressive career at pharmaceutical and medical solutions manufacturers such as Abbott Laboratories, Young Innovations, and Germiphene. He has bachelor’s and master’s degrees in mechanical engineering and an MBA. He is also a Lean Six Sigma Black Belt (ASQ).