A Chicago Tribune article entitled “Drug shortages prompt hospitals to use older treatments, pay more when they do find a supply” from this weekend caught my attention. The article describes how hospitals are encountering major challenges with “the worst shortages” of pharmaceuticals in at least a generation.

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The article implies that the causes of these supply shortages are primarily manufacturing issues and quality control problems that are apparently being increasingly discovered due to “the federal government’s crackdown on drug safety.” With reports of hospitals paying “double or more for certain drugs because they are working with a supplier that normally doesn’t supply them with large volumes of a product” and the US government proposing “legislation that would require drugmakers to give the FDA an early notification ‘when a factor arises that may result in a shortage,’” (i.e., the government doing the medical industry’s supply chain visibility for them), I began to think: “Does health care procurement need it’s head checked for being so inept?”

Well, before making such a conclusion, I needed a second opinion.

Doing a little research, I found that the American Society of Health-System Pharmacists actually had a set of formal guidelines on managing shortages in the pharmaceutical supply chain. Were these guidelines good? Could they be applied to other industries as well?

Let’s check the vitals of these guidelines together…

The guidelines start out by identifying 11 of the contributing factors of pharmaceutical supply chain shortages. Here are a few of those that I feel can be adapted to almost any industry (including yours):

  • Raw and bulk material unavailability. Disruptions in the supply of raw or bulk materials are especially problematic when the primary or sole source experiences production difficulties or discontinues production, affecting multiple manufacturers…Availability
    problems can arise when armed conflict or political upheaval disrupts trade, animal diseases contaminate tissue from which raw materials are extracted, climatic and other environmental conditions depress the growth of plants used to produce raw materials, or raw materials are degraded or contaminated during harvesting, storage, or transport.
  • Manufacturing difficulties and regulatory issues. Drug product shortages can also occur when the primary or sole manufacturer of a drug product halts or delays production
    in response to a Food and Drug Administration (FDA) enforcement action concerning noncompliance with current good manufacturing practices (cGMPs). Contributing
    factors may include antiquated manufacturing equipment, a shift of resources from maintenance of equipment and facilities to research and development, loss of manufacturer personnel experienced in production and compliance issues as a result of company mergers or retirements, cGMP-related problems with subcontractors who supply products to multiple pharmaceutical manufacturers, and limited FDA resources for timely inspections of manufacturing sites.
  • Manufacturers’ production decisions and economics. Manufacturers’ business decisions are based on a variety of factors, including the availability of generic products, market size, patent expiration, drug-approval status, regulatory compliance requirements, and anticipated clinical demand. Occasionally, manufacturers temporarily or permanently reduce production quantities of certain drug products as they shift production efforts or reallocate resources to other products. A manufacturer’s reasoned, sound business decision to discontinue production of a drug product because of insufficient financial return or a
    high cost to correct manufacturing issues can cause an unanticipated, serious shortage, especially in the instance of a sole-source or medically necessary product.
  • Industry consolidations. Manufacturer mergers often result in decisions to narrow the focus of product lines or move a production line to a new facility, resulting in the discontinuation or delayed availability of drug products. Mergers between two companies that manufacture similar product lines typically result in single-source products. As the number of manufacturers of a product decreases, resiliency in the supply
    the chain also decreases, making product supplies more vulnerable.
  • Inventory practices. Communication and transportation efficiencies throughout the supply chain have allowed inventory reductions at all levels. Most manufacturers, distribution centers, and health systems use “just-in-time” inventory management to reduce the cost of inventory on hand and optimize cash flow. This strategy is recognized as sound business management for all stakeholders, but an unexpected shortage at any point in the supply chain can significantly affect the end user and patient.
  • Unexpected increases in demand and shifts in clinical practice. Occasionally, the demand for a drug product unexpectedly increases or exceeds production capacity. This may occur when a new indication is approved for an existing drug product, when usage patterns change in response to new therapeutic guidelines, when a substantial disease outbreak occurs, or when unpredictable factors influence demand.
  • Natural disasters. Natural disasters can have a profound effect on the availability of drug products. Damage to manufacturing facilities, particularly those that are the sole source of a drug product or category of products, is likely to cause long-term shortages.

After reading this, my blood pressure returned to normal levels, with me getting some confidence that the healthcare industry actually had some procurement savvy for managing drug shortages. However, my temperature rose once more when I got to a section entitled “Phased approach to planning for drug product shortages.”

In this “planning for shortages” section, I was a bit appalled by a figure that illustrated the process for dealing with shortages. Guess what the first step was…

It was “Drug shortage identified.”

In other words, no action is taken until a shortage is identified. That’s a little late to start figuring out what to do, don’t you think?

Though the guidelines themselves state that “Health systems should develop a contingency planning strategy to prepare for the possibility of a prolonged drug product shortage. Although it often is not possible to predict when shortages will occur, the process for dealing with them can
be defined in advance,” the rest of the guidelines do not describe such a proactive approach but rather a reactive approach.

Compounding the insanity is the guidelines’ recommendation against increasing inventory in anticipation of a predicted shortage (generally, when done well, an effective strategy in competitive industries). The report points out the downsides of such stockpiling – it may direct quantities to a location where they are not needed instead of a location where they are and it may result in spoilage/obsolescence due to overbuying – but it doesn’t address the upsides, which include sparking a demonstrated demand in the supply chain that would compel manufacturer’s to beef up production. This recommendation kind of promotes a “let’s all be screwed together” approach rather than one in which the smartest health care procurement system comes through for its patients while the dumber ones fail (and might actually learn a procurement lesson in the process).

As we teach in our online course, “14 Purchasing Best Practices,” risks should be identified and strategies be put in place to mitigate those risks in advance.

With this recent reading that I’ve done, I have to say that I’m a little disappointed with drug procurement in the healthcare industry – an industry that has taken strides to improve its procurement practices but, apparently, still needs a prescription for better procurement performance.

Charles Dominick, SPSM, SPSM2, SPSM3

Charles Dominick, SPSM, SPSM2, SPSM3 is an internationally-recognized business expert, legendary procurement thought leader, award-winning entrepreneur, and provocative blogger. Charles founded the Next Level Purchasing Association in 2000, oversaw its incredible growth, and successfully led the organization to its acquisition by the Certitrek Group in 2016. He continues to blog and provide advisory services for the NLPA on a part-time basis as he incubates his upcoming business innovations. Charles is also the co-author of the wildly popular, groundbreaking book, "The Procurement Game Plan: Winning Strategies & Techniques For Supply Management Professionals."

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