Most industries have gone through several typical waves of transformation in the past 20+ years, namely customer centricity, consolidation and globalization. They haven’t all happened at the same time but for the older industries – e.g., Banking and Telecommunications – they took place largely in the 90’s and early 2000’s. Generic Pharmaceuticals is a relatively young industry and so these waves have been taking place in the past 10 years (in some cases less).
The industry is both young and immature and so organizations are going through challenges of development that will take time to overcome. It is this immaturity that shows in the shortages of medication we are witnessing in the US and Canada.
Let’s take Canada: the market is now dominated by Pharmacy Chains that place the power of the customer in the hands of a handful of organizations. This power has created a level of pressure on Service Levels that the industry has not yet learned to meet. Globalization is starting to show its effects. Recently, we are seeing a migration of pricing systems towards tendering, in one form or another. This change is opening the doors to Indian companies who compete on cost – as they have done in Europe where Insurance companies have been imposing a tender system for several years.
But the hardest change, I believe, has been Consolidation. Industry consolidation is happening both amongst Manufacturers and amongst Distributors and Retailers. Soon, we will also see mergers of Retailers and Manufacturers, creating integrated supply chains from end to end.
What happens with consolidation of Manufacturers is rationalization. This being an industry where everybody makes copies of the same products, there is typically some redundancy between the acquiring company and the acquired one. The acquiring company probably has a global policy as to where products are made. Hence, acquisition leads to rationalization which leads to products being eliminated; products being moved from plant to plant and to plants being closed.
These kinds of movements in the sources of supply of generic products cause enormous disruption in the flow of supply to the market. Moving a product to a new location takes time – the receiving plant has to try to make the product, quite often in a different environment where equipment, staff and SOP’s are not the same. Products that were made reliably in the original plant at times are difficult to make in the new plant. Projects to transfer products to new plants are not reliable because it’s difficult to estimate the time they will take. What often happens is that the original plant stops making the product – or is closed – before the new plant is ready to take its place, causing a gap in supply.
When Global acquirers rationalize sources of supply, there is a side effect with wrenching implications on shortages: while each acquired plant may have been self-sufficient making certain products for a limited market, rationalization creates an environment where the same plant has to supply many markets. This structural change requires that the various plants of the consolidating company behave as a network, many plants serving many markets. And this is where immaturity shows.
Basically, the industry is still young and Global organizations have not yet learned how to run a true supply network. Most of these organizations are plant centric, each plant being managed from inside, relating to each market in isolation from other plants. This tends to make supply plant-centric instead of market-centric (let alone customer-centric).
Supply flows are determined by markets, whose consumption behavior is completely different from one another. Even within each market the behaviors of major pharmacy chains differ. A plant that has to face several markets – e.g, Europe (many countries, various sizes), the US (one country, very large market) and Canada (one country, small market), faces an enormous challenge of accommodating several rhythms and scales in the same environment. More importantly, when many plants are required to serve a market, that necessitates an enormous level of coordination and management that immature networks can’t yet cope with. When this kind of “ad-hocracy” is accompanied by movements of products and capacity rationalization, the resulting effect on service is devastating – thus causing massive shortages of medication.
My own view, based on my 9-year experience in the industry, is that consolidation and the creation of immature networks of many plants for many markets is the most serious cause of shortages and lack of supply reliability. But there is another problem.
In recent years, the FDA and other regulatory agencies have been increasingly more stringent in their oversight of the generic industry, perhaps due to more serious drugs – such as cancer and cardiovascular medication – becoming genericized. This push for greater quality enforcement is similar to what happened in the auto industry in the 1980’s and 90’s. You may remember how long it took for American automakers to be able to produce good product at par with Japanese companies. While making medication is completely different, Generic manufacturers won’t jump over that bar in a short time either.
The first wave of quality enhancements has more to do with detecting and stopping quality problems from reaching the market than really preempting those problems. To do the latter, manufacturing environments have to move from Quality Assurance-based systems to Precision Manufacturing-based systems.
When Structural Engineers design a bridge, there is no doubt in their minds that, if built as designed, the bridge will not fall. They don’t consider the possibility of structural failure in the 3% or 10% range; they think in terms of 0%. They don’t wait for the bridge to be built and some QA people to come in, check the bridge and then determine whether it is going to fall or not. They know those QA folks will find that the bridge is sound, every single time. An auto plant makes thousands of cars per day; they have to be sure that they will be of good Quality all the time. How else can Hyundai offer 10 year warranties?
The same kind of precision has to emerge in Generics. The principle of Precision Manufacturing is very simple: for every product a plant makes, there is – or has to be – a single, precise way in which to make the product exactly right! Yet, you would be surprised how much variation there is in the making of products from operator to operator. That doesn’t mean the product is vulnerable and the public exposed -not at all; Quality Control and Quality Assurance processes are pretty good at making sure that harmful product doesn’t slip through to the market. But going from QA-based systems to Precision systems depends on a plant insuring that a single, standard, precise way of making and packaging a product is applied every time.
The Generic industry is now under tremendous pressure to improve quality, pressure that comes from the FDA and other regulatory agencies. This pressure is making manufacturers improve QA systems but it will take time before plants evolve beyond catching quality issues to making product with high quality every time.
In sum, reliability of service depends on a number of things but by and large the inability of consolidated global organizations to operate as efficient, dynamic, well synchronized networks serving multiple markets; and the immaturity of manufacturing systems that are still QA-based, makes it that the supply of generic medication to the world is unpredictable and will continue to be so for some time still.
The pressure on Quality placed by the FDA and other regulatory authorities has been beneficial to raise the bar to Generic manufacturers and get them on the road to becoming more mature organizations. But if I was to advise the FDA, I would suggest that they look for and help develop knowledge on supply network management and in precision manufacturing and lean manufacturing – that is, if they are interested not only in good quality, safe medication for the public but also in eliminating the chronic shortages in the market. Simply bringing down the hammer on GMP compliance just won’t cut it. The evidence of recent years speaks for itself – the hammer is hitting harder and shortages aren’t getting any better. Now that awareness has been raised, it is time to help manufacturers know how to be more precise and better coordinated.