Covid-19: Manufacturing strategy needs to change

The start of 2020 and what was to be a decade of hope and change for the world has become one of pain and confusion due to the Covid-19 pandemic. One area that has been under scrutiny has been the availability of medical supplies and other key goods.

Up to the 1990’s, Europe was the centre of much of the manufacturing industry and was pivotal in the development of the commodity, speciality chemical, fine chemical and pharmaceutical sector.  Over time, manufacturing has moved east towards India, South-East Asia and China. The region has much lower fixed costs than elsewhere and can competitively export to Europe and the Americas.  This movement was allowed to occur naturally by previous governments which recognised the need to transform Western nations into service economies.  Without this transformation, these economies would have stagnated as their manufacturing sectors tried to compete with lower cost competitors in Asia.  This is the basis of globalisation and worked very well commercially (and without a magnifying glass) prior to 2020.

But during the current pandemic, the manufacturing sectors in developing economies (e.g. China, India) have not been able to cope. Demand has spiked to amounts that supply chains cannot move quickly enough.  This is further impacted by shutdowns to industry in these countries which may indirectly affect the production of these goods.  In the European Union and the United States, protectionist policies have also restricted exports of medical supplies so that the options are further limited.

An example of this would be with the supply of drugs.  India has already restricted the export of paracetamol and hydroxychloroquine causing fears of global shortages.  India is the largest producer of APIs (active pharmaceutical ingredients) which are the functional ingredients within everyday drugs.  China is also involved, and is a key supplier of the raw materials to India while also rapidly developing their pharmaceutical sector so that they can produce APIs. 

Manufacturing strategy needs to change to ensure security of supply

The concern here is twofold, firstly over-reliance on a small number of countries for production of drugs can lead to procurement security issues when supply chains are disrupted. On top of this, it can take years for a new API or excipient supplier to be audited properly so alternatives are difficult to acquire rapidly.

So what options do countries have to ensure security of supply?

The current pandemic has shown that many countries in Europe and North America were not sufficiently prepared. However, these countries already spend time ensuring lights are kept on (energy security)  and people are fed (food security) during economic and political disruption. Using energy security as an example, practices employed there could be used to ensure security of supply for key manufactured goods.

1. Supply chain strength analysis – a review of key manufacturing industries under disruption scenarios (both short-term and long-term) which would feed into a gap analysis that identifies pathway to supply security for key goods
2. Strategic storage (stockpiling) – short-term solution to supply disruption
3. Just-in-time manufacturing – select more reliable supply chains which have reduced response time between order and arrival of product
4. Incentivise product diversification – analyse potential for replacing certain key goods with other goods that can perform the same function but with safer supply chains
5. Regional manufacturing hubs – encourage the development of manufacturing hubs (e.g. Rotterdam, Houston, Wilton) that are more efficient and have reduced delivery times to markets
6. Incentivise supply diversification – countries should take a responsibility to reduce their reliance on single countries for their key goods and encourage the diversification of production by region and by company.
7. Incentivise domestic manufacturing –reduce dependence on international supply chains

The solution is not straightforward but hopefully discussions around this topic will increase pressure to change government strategy towards manufacturing and ensure continuity of supply during future crises.

The Authors

Daniel Saxton – Senior Analyst , Nexant

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