Case Study - Manufacturing

Supply Chain Risk Management

The Facts
PharmX has one blockbuster, BB1 (over $1 billion in annual sales), and several other important (over $100 million) products - DR1, DR2, DR3, DR4 - in their portfolio. Their supply chain is similar to those of their peer companies, with a mixture of owned and outsourced manufacturing and a large supplier base scattered throughout the world.

PharmX has undertaken a global Enterprise-Wide Risk Management Program.

Identification
During the interview phase of the project, members of senior management emphasize that PharmX depends on the sales of these key products to fund virtually all the company's operations, including research. The company's future growth depends on reliable and consistent production.

Several plants are located in areas exposed to high risk from natural disasters, like hurricanes and earthquakes. Some are not considered well protected according to insurance reports. It's also noted that the supplier base is managed based on volumes purchased rather than the criticality of supply.

Assessment
Upon follow-up in a multi-functional workshop, the "inherent risk" associated with the plant that manufactures the blockbuster product BB1 ("Alpha plant") and two other plants which produce several of the other key products is deemed to be "very high"; the controls in place are not considered to be adequate.

It's also recognized that the company, while effectively managing the suppliers with higher volumes, does not have a view of which raw and intermediate product supplies are critical to PharmX's strategic products. An interruption in supply would cause a corresponding interruption in their production lines.

The potential exposure to the company, based on the long recovery times associated with products requiring regulatory validation, is estimated at $500 million to $2.2 billion.
Key findings included:

  • Alpha Plant, which produces the active ingredient for BB1, is located in Puerto Rico and has an older roof which is not expected to withstand a severe hurricane.
  • Raw material XYZ, a key ingredient for BB1, is made by a small one-location company; only $6,000 worth of material is used per year. This raw material is specifically referenced in the FDA registration and is not made by any other supplier. PharmX maintains only a one-month supply.
  • A single hydrogenation production unit at a location in Spain supplies the active ingredient for three of the DR products with no redundancy or back-up capacity.
  • There's a general concern about how suppliers are tracked. PharmX doesn't know which supplier locations make which raw materials. The company tracks larger suppliers, but only has records on sales offices.
  • Besides having no business continuity program to address critical product supply, internal audit reports for eight of the 10 major plants note incomplete disaster recovery plans and lack of follow-up on formal SOX exposure recommendations.

Response

  • A Risk Owner is selected and a Supply Chain team is assigned to evaluate how PharmX identifies, certifies and manages critical suppliers. A database of actual supplier manufacturing locations is to be developed to identify and document supplier exposures.
  • A project team made up of representatives for the three exposed DR products and led by the plant manager in Spain is assigned to develop a recovery strategy for the hydrogenation unit and to investigate the cost of a redundant line.
  • Opportunity benefit: The project team recognizes that, with a relatively minor increase in the hydrogenation investment, they could provide additional R&D capacity to meet an unmet and unfunded development opportunity.
  • A recommendation to develop a formal Business Continuity/Disaster Recovery (BC/DR) process with central control and governance is presented to the PharmX Board of Directors.
  • Until an alternative supplier of raw material XYZ is identified, an additional safety stock of two years is ordered and stored at two separate locations. (Investment of $12,000.)
  • A project team is assigned to develop interim recovery scenarios for the Puerto Rico plant and to develop alternatives for a long term solution (e.g., reinforce the roof, build more capacity elsewhere).

Once Mitigation Plans are accepted and budgets are approved, Implementation Teams are designated to address each challenge and execute the approved mitigation plans. The Risk Council will oversee progress and monitor performance against stated objective.

Management & Monitoring

  • The Supply Chain teams regularly review and discuss critical suppliers and consider exposures in selecting suppliers and determining the need for safety stock.
  • A formal, centrally-managed BC/DR program controls the company's BC/DR investment and provides governance control.
  • A formal physical protection policy assures that all plants which produce strategic products are protected to the greatest extent possible.

Mitigation progress and continuing challenges are reported at least annually to the Risk Council.