Expert: Supply Chain Disruptions Have Accelerated in Recent Years

In an interview with Pharmacy Times at the National Association of Chain Drug Stores (NACDS) 2022 Total Store Expo, Michael Zimmerman, partner at Kearney, discussed his presentation titled “Troubled Waters or Smooth Sailing—What’s Ahead for the CPG and Pharma Supply Chains?” In addition to garnering more public awareness in recent years, Zimmerman said supply chain disruptions have “hyper-evolved” during the COVID-19 pandemic.

Q: Supply chain disruptions have become increasingly talked about over the last few years. How has the issue evolved or changed?

Michael Zimmerman: Yes, and it's probably hyper-evolved in the sense that there have always been supply chain disruptions, whether it's trade wars, wars, earthquakes, hurricanes, there are a lot of causes for supply chain disruption. But insurance companies have actually studied the incidence of supply chain disruptions and found that they've increased, so there have literally been more causes of disruption. And I named some of them—natural disasters, conflicts, disputes that have disrupted supply chains. And so, supply chain professionals, you know, logisticians, but also people who are in the planning and the manufacturing distribution of goods, have had to contend with extreme increasing disruptions. Some of them, you know, are across the international supply chain, and some of them are more local. You get a hurricane that hits the Gulf Coast, or Florida, or the East Coast, and those are more local disruptions. People flock to buy equipment. Infrastructure is disrupted. That's, you know, a local supply chain disruption. But then international supply chains, if you think about the Ukraine War that's underway, products coming out of Ukraine, whether it was wheat, or gases for certain kinds of equipment. There's a lot of specialization in the world. So, when one part of the world is hit—there was the tsunami in Japan that affected electronics supply chains worldwide—you see ripple effects all over the world. And so, supply chains are having to contend with more of these disruptions.

Q: How has public awareness of supply chain issues changed?

Michael Zimmerman: Yeah, I think that is a very distinctive question in the sense that one thing is what's happening, and then the other is how is the public informed of it, and impacted by it? And I think because of social media and the proliferation of news networks and news feeds that people have, there's simply more and more constant access to information. But in the case of supply chain disruption, historically, that's something people prefer not to think about, that they just took for granted, right? And the public has become more aware of supply chain disruptions because the public has become more affected by them.

So, with COVID-19, you had a lot of self-isolation. People were working from home, they cut way down on services, and whether that's hospitality, vacations, travel, restaurants, entertainment, all of those activities and the expenses associated with them. I wouldn’t say they evaporated but they were dramatically reduced. And people started to buy things. They looked around their homes and they wanted to renovate; they want new furniture. They wanted new lawn mowers and umbrellas. So, there was a tremendous surge in in demand for physical things. And because the supply chains had been disrupted because of COVID-19 and companies shutting down capacity, both productive capacity and logistics capacity, people were acutely aware of things they used to take for granted. I buy a couch and I get it next week, or I buy a mattress and I get it in a couple of weeks, or I buy some patio furniture and it's available in the stores and I can take it home. All of that stopped suddenly. It's 9 months to get a couch, or bicycles aren't available because they need to come from Asia and they're shipped in containers and you have to wait 6 months. So, people became hyper-aware of these supply chain disruptions because it affected their daily lives.

Q: When we discuss the supply chain, that can often seem like a large, vague thing that’s impossible to really impact. But how can pharmacies manage supply chain disruptions?

Michael Zimmerman: Well, the pharmacy supply chain is quite specialized because, of course, you have you specific branded drugs, you have generic drugs, and they are produced all over the world. And when you think of a supply chain, it might be intuitively obvious to you that the more compact and valuable something is, the less transportation is important as a cost. So, for example, a couch or a garbage can, or some kind of furniture, these are very voluminous things. Packaging, ping pong balls, these are voluminous things that don't have a lot of value so they tend to be produced more locally, and transportation, because of the volume, can be quite expensive as a percentage of the value of the goods. If you think of pharmaceuticals, these are produced in the millions and billions, they're tiny little pills, you can fly them around the world and still not have the cost be too prohibitive.

So, with pharmaceutical supply chains, there might be one place where a drug is produced in the entire world and it might be made in India or in Israel, or in Ireland. And these supply chains are very susceptible to local disruption. So, if there's if there's a local disaster, a source can be disrupted for the entire world for a particular drug. But even if you're shipping these goods by air or by ocean during COVID-19, those modes of transportation became much more expensive. Air freight went from being perhaps $2 or $3 a kilo, to being anywhere from $8 to $20 a kilo because passenger planes carry about 48% of air freight cargo that's called belly freight. It's in the belly of an airplane. Pharmaceutical companies rely on belly freight and air cargo to ship drugs all over the world. And so, the pharmacy supply chain found that the cost went up and the transit times went up because the capacity was constrained. So, even pharmacy supply chains in the specific areas of drugs, whether they were branded or generic, were very disrupted.

Now, if you count in the pharmacy everything else you might find in the pharmacy, all of the goods—you know, convenience, food, and other things, more of the retail store aspects of pharmacies—those were disrupted the way they worked for everyone else. So maybe shipping containers took much longer to arrive, inventory ran out. So, the bottom line is that the pharmacy sector saw its transportation costs go way up, even though it was a small percentage of the cost of the product. And then it also had significant losses of availability, empty shelves because supply chains were disrupted.