Life sciences companies have faced media and public scrutiny following supply chain security incidents that highlighted the challenge of managing trading networks that span the globe and the disparity of quality standards and controls across those networks. While new sources of raw materials and labor offer cost advantages, they need to be evaluated carefully in terms of potential risk and reward.

To gauge the strengths and vulnerabilities of the current life sciences supply chain, Marsh Inc.'s Supply Chain Risk Management Practice surveyed 66 pharmaceutical manufacturers in late 2008. Results suggest that pharmaceutical manufacturers, given the increasingly globalized and outsourced nature of the industry, do not have as much control over supply chain security as they may expect.

Study participants identified a number of areas in which they are concerned about potential supply chain vulnerabilities, including:

• Vendor approval and ongoing compliance issues. Study participants cited such issues as: uncommunicated process changes; vendors making changes to their product without notifying the buyer; vendors having trouble maintaining quality control or yield rates; and unknown impurities in sourced product. One respondent stated, "Vendors [are] making changes to their product without notifying us, or having trouble maintaining quality control."

• Glitches with continuity of supply. A number of participants said that sole and single sourcing were of concern, citing a lack of secondary suppliers for every component, having only a single "approved" source of a raw material, raw material shortages, or experiencing issues when vendors unexpectedly got out of the business of selling the ingredient needed.

• Lack of full supply chain transparency. A lack of clear visibility to the end-to-end supply chain was also cited, including not knowing the true supplier of a material. Other participants who dealt with temperature-sensitive product cited that shipper integrity and on-time delivery are important concerns for them.

• Distribution and logistics concerns. Participants also identified a variety of logistics-related concerns, including cross-mixing and mislabeling at the supplier location; bad storage practices; and labor strikes or weather impacting ports and shipping lines, creating delays that impact production.

The study shows that different segments of the life sciences industry are moving at different paces to fully safeguard their supply chains. Fully 91 percent of outsourcing-intensive pharmaceutical participants in the study report having had a "significant incident" (i.e., causing a loss of $10,000 or more) due to quality problems or delays with contract partners. Only 59 percent of their more vertically integrated peers, which have mostly in-house discovery, clinical trial, and manufacturing processes, report having incidents.

The Outlook

For better or worse, the reality is that globalization has changed the rules of pharmaceutical manufacturing and distribution forever. To prevent operational disruptions and loss of patient trust, pharmaceutical and bio-tech manufacturers should seek in 2009 to strengthen their practices for monitoring their end-to-end supply chains. This includes ensuring processes are in place for identifying changing "country of origins" for raw materials, ingredients and components, and packaging materials. Service level agreements that are part of the legal terms and conditions of procurement and logistics service contracts should be used to help ensure compliance.