The Hungarian pharma industry is an important regional logistics hub serving mostly Eastern European countries. The sector directly employs more than 14,000 people and indirectly provides support for 34,000 families (see here more); it is represented by the MAGYOSZ association on behalf of local manufacturers, and the Association of Innovative Pharmaceutical Manufacturers (AIPM) representing 26 R&D oriented pharma companies.
The Hungarian pharmaceutical sector has been greatly impacted by the Covid-19; a new challenge has emerged on how to ensure continuous product supply through closed borders, with a shortage of workforce and prolonged lead-times for customs and border control. An issue that impacted on all European and global supply chains, and which has been analysed in many articles and studies (see for example the analysis on the food supply chain published on the Int. J. Production Res. )
The impact of Covid-19 on logistics
Covid-19 is having a dramatic effect of the health of many economies, especially in Europe, further exacerbating the recession dynamics already present before the pandemic. The global economy is expected to contract 3% in 2020, according to the IMF, thus a second wave could be expected in the incoming months as for demand.
“Today’s global value chains require greater resilience and efficiencies in the flow of goods between and within countries”, writes the International Finance Corporation (IFC), part of the World Bank Group, in its analysis on the impact of the pandemic on logistics. Big logistics players are less affected than the smaller ones, also thanks to the strong increase in services linked to the e-commerce explosion, even if players such as DHL or Ceva Logistics in April 2020 declared Force Majeure and closed contracts due to the unexpected circumstances.
According to an article by E. Mazareanu published in Statista, the gross value added by the logistics industry may fall 6.1% in 2020 due to the Covid-19 pandemic. Italy is expected to suffer the stronger impact (-18.1%), while China (-0,9%) appears to have almost completely recovered from the spring values; North American sea and air freight forwarding market is expected to contract by 12.1% and 9.5% respectively compared with 2019.
Interconnected global supply chains forms a complex network often difficult to be fully acknowledged even by central institutions (see the article on the EU Pharmaceutical Strategy in this newsletter). According to IFC, logistics costs may reach 25% of GDP in some developing economies, compared to 6–8% in OECD countries.
China is the main supplier of active, ingredients, excipients and raw materials for the pharmaceutical industry, as well as of many components used in manufacturing plants. The first wave of the pandemic, in Chinese Wuhan city, almost completely blocked exports from the country towards Europe and other global destinations. The closure of borders between EU countries characterised the second wave of Covid-19, greatly limiting the movement of goods in the Single European Market. Green lines have been established by the EU Commission to ensure delivery of essential goods, among which are pharmaceuticals and medical devices.
Ocean, land and air transportation
Ocean, land, and air are the three key global transportation segments. The first one saw in the first months of 2020 a drop of 10.1% for total container volumes handled at Chinese ports, says IFC. Other key exporter countries (e.g. Brazil, India, and Mexico) have been similarly impacted, resulting in many blank sailing (cancellation of the call of a vessel at a certain port or certain region, or the entire leg) due to the weak demand towards Europe and the US.
Even if land transports continued operations during the hot spring months, extremely long queues formed at closed borders in the EU; lockdowns and the viral infection itself and related restrictions also impacted on the number of truck drivers available for service. Food and pharma/medtech supply chains belong to the essential flow of goods preserved even during the emergency, but the impact on the components needed for manufacturing, for example, might in many instances proved to be a critical issue for many companies. Rail transport increased in correspondence to the difficulties experience by road services, mentions the IFC report.
In the US, “hot spot” areas highly impacted by the virus saw the complete disruption of local supply chains, resulting in transport of good from distribution centres located far away and in the subsequent creation of a supply/demand imbalance for trucking companies, tells KPMG’s expert Yatish Desai.
Air freight transportation was also affected by the first phase of pandemic in China (-19% in March 2020), to then recover both in capacity and volumes in the following months. According to E. Mazareanu, the weekly number of international scheduled flights declined by roughly 46.4% during the week of March 23, 2020, and of 69.9% in the week starting May 4, 2020 compared to the corresponding weeks of 2019.
The opportunity to implement new models
Cargo shipments are in many cases the only still open activities in many ports and airports worldwide, that are experiencing the almost complete reduction of passenger’s transportation. The IFC report identifies the need for a closer collaboration between governments and third-party logistics companies to solve the remaining bottlenecks and facilitate clearances. The long-term costs of transportation may increase, say the authors of the report, due to the tighter cross-border processes and controls.
New safety protocols and social distancing in warehouses have been put in place to safeguard the health of workers, but this type of intervention is considered by IFC not enough to guarantee protection against outbreaks in these confined spaces. The crisis of passenger’s flight induced many airlines to convert their aircraft for cargo in order to reduce losses, and the same might occur for many warehouses and groceries switching their focus towards more essential products.
No-contact delivery options (e.g. including robots) are also under experimentation, and investments in information technologies would be required for logistics companies to maintain their competitive position. According to KPMG, in future new operating models (e.g. 4PL and 5PL) based on the collaborative portfolio mindset may substitute the more classical insource vs. outsource provider models and benefit from the potential of AI, cognitive/ML, blockchain, drones, cloud solutions, warehouse management systems, etc.
Disruption of critical supply chains, as the pharmaceutical one, may be prevented by nearshoring (diversification through alternative partners) or reshoring (bringing home of strategic value chains), says IFC. Both these alternatives will bring to shorter supply chains, leading to countries having good manufacturing capacity (e.g. Mexico, India and Colombia) to become valuable alternatives to China.
KPMG suggests the steps to keep in mind to face logistics emergencies, both on the short and medium/long-term perspective. The availability and activation of contingency plans and an improved communication with carriers supports the prompt management of emerging issues. Key and alternative suppliers in primary and secondary locations should be also identified, as well as key transport lanes, distances, and lead times. An analysis of carrier capacity and service is useful to prevent shortfalls and constraints, and to determine mitigation strategies. New short-term contracts with third parties may help to provide additional capacity when needed. A recovery assessment of the transportation network and operations may be helpful to prepare to mid- and long-term scenarios, suggests Yatish Desai. Micro Supply Chains of strategic suppliers should be the final outcome of this exercise, which may also benefit of a modelling software analysis to better identify cost and service impacts.