In an interview with Pharmacy hours at the National Association of Chain Drug Stores (NACDS) 2022 Total Store Expo, Kearney Partner Michael Zimmerman discussed his presentation, “Troubled Waters or Smooth Sailing—What’s Ahead for the CPG and Pharma Supply Chains?” In addition to increasing public awareness in recent years, Zimmerman said supply chain disruptions have “hyper-evolved” during the COVID-19 pandemic.
Q: Supply chain disruptions have been a hot topic in recent years. How has the problem evolved or changed?
Michael Zimmerman: Yeah, and it’s probably hyper-evolved in the sense that there’s always been supply chain disruptions, whether it’s trade wars, wars, earthquakes, hurricanes, there are many causes of supply chain disruption. But insurance companies have actually studied the incidence of supply chain disruptions and found that they have increased, so there are literally more causes for disruption. And I’ve named a few: natural disasters, conflicts, disputes that have disrupted supply chains. And so the supply chain professionals, you know, the logisticians, but also the people who are in the planning and the manufacturing, the distribution of goods, have had to deal with extremely increasing disruptions. Some of them, you know, are part of the international supply chain, and some of them are more local. You get a hurricane hitting the Gulf Coast, or Florida, or the East Coast, and those are more local disturbances. People flock to buy equipment. Infrastructure is disrupted. It’s, you know, a disruption of the local supply chain. But then the international supply chains, if you think about the war in Ukraine that’s going on, the products coming out of Ukraine, whether it’s wheat or gas for certain types of equipment. There is a lot of specialization in the world. So when one part of the world is affected – there was the tsunami in Japan that affected electronics supply chains around the world – you see ripple effects all over the world. And so, supply chains have to deal with more of these disruptions.
Q: How has public awareness of supply chain issues changed?
Michael Zimmermann: Yeah, I think that’s a very particular question in the sense that one thing is what’s happening, and the other is how is the audience informed 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 just more and more constant access to information. But in the case of a supply chain disruption, historically that’s something that people would rather not think about, that they took for granted, right? And the public has become more aware of supply chain disruptions because they have become more affected by it.
So with COVID-19 you’ve had a lot of self-isolation. People were working from home, they were dramatically reducing services, whether it was hospitality, vacations, travel, restaurants, entertainment, all of those activities and the expenses associated with it. I wouldn’t say they evaporated, but they were reduced considerably. And people started buying things. They looked around their houses and they wanted to renovate; they want new furniture. They wanted new lawn mowers and umbrellas. So there has been a huge increase in the demand for physical things. And because supply chains had been disrupted due to COVID-19 and companies had shut down capacity, both production and logistics, people were acutely aware of what they were taking for granted. I buy a sofa and I get it next week, or I buy a mattress and I get it in a few weeks, or I buy patio furniture and it’s available in stores and I can take it to the House. It all stopped suddenly. It takes 9 months to get a sofa, or the bikes are not available because they have to come from Asia and they are shipped in containers and you have to wait 6 months. Thus, people became hyper aware of these supply chain disruptions as it affected their daily lives.
Q: When we discuss supply chain, it can often seem like such a big, vague thing that it’s impossible to have any real impact. But how can pharmacies manage supply chain disruptions?
Michael Zimmermann: Well, the pharmacy supply chain is quite specialized because, of course, you have specific brand name drugs, you have generic drugs, and they’re produced all over the world. And when you think of a supply chain, it might intuitively be obvious to you that the more compact and valuable something is, the less transportation is important as a cost. So, for example, a sofa or a trash can, or some kind of piece of furniture, these are very bulky things. Packaging, ping-pong balls, these are bulky things that don’t have a lot of value so they tend to be produced more locally, and transport, because of the volume, can be quite expensive as a percentage of the value of goods. If you think of pharmaceuticals, these are produced by the millions and billions, they are tiny little pills, you can carry them all over the world without the cost being too prohibitive.
So, with pharmaceutical supply chains, there can be a place where a medicine is produced all over the world and it can be manufactured in India, Israel or Ireland. And these supply chains are very sensitive to local disruptions. So if there is a local disaster, a source can be disrupted for the whole world for a particular drug. But even if you ship these goods by air or sea during COVID-19, these modes of transport have become much more expensive. Air cargo has gone from $2-3 per kilo to $8-20 per kilo, as passenger planes carry about 48% of air cargo called belly cargo. It’s in the belly of an airplane. Pharmaceutical companies rely on air freight and airfreight to ship drugs all over the world. And so, the pharmacy supply chain found that cost was increasing and transit times were increasing because capacity was limited. Thus, even the supply chains of pharmacies in the specific areas of drugs, whether branded or generic, have been greatly disrupted.
Now if you count in the pharmacy everything that you might find in the pharmacy, all the products – you know, the convenience, the food and stuff, plus the retail aspects of the pharmacies – those have been disrupted in their way of working. all the others. So maybe the shipping containers took a lot longer to arrive, inventory ran out. So, in the end, the pharmacy industry saw their transportation costs increase dramatically, even though it was only a small percentage of the cost of the product. And then there were also significant downtime, empty shelves because supply chains were disrupted.