Outsourcing with ethics and sustainability in mind

14-Oct-2015

An increasing number of pharma businesses are taking steps to reduce costs and streamline operations by outsourcing to the developing world. Supply chain specialist and Lime Associates’ Client Director James Cooper outlines the importance of considering sustainability and ethical issues

As soon as any pharmaceutical business outsources production to another company, it relinquishes an element of control over the manufacturing, purchasing and supply chain process. When outsourcing to low-cost regions in the developing world, this raises serious issues surrounding the sustainability and ethics of business practices of which the pharmaceutical industry needs to be aware. It is easy to underestimate the social, environmental and economic impact of outsourcing, but failure to consider this can have a real impact on a company’s reputation, as well as the quality, safety and long-term viability of its products.

The social impact of outsourcing is impossible to overlook. All too often the benefits of outsourcing, such as lower production and manufacturing costs, come with a human price attached. Lax employment laws, exploitation, sweatshop production and unsafe working conditions are still commonplace in many regions, and pharma companies must maintain vigilance across their entire operations, including outsourcing. This doesn’t just mean looking at outsourced manufacturing plants – it also means thinking about suppliers’ purchasing habits. Unless companies look specifically into the raw material purchasing processes, it is entirely possible for inappropriate or even illegal practices to be overlooked, and it is unlikely that any supplier will admit to unethical sourcing unless pushed.

In developing countries, the further up the raw material chain one looks, the more likely one is to encounter social sustainability issues. The legislation and infrastructure surrounding the farming, cultivation and processing of crops and raw materials is underdeveloped, with child labour, poor nutrition and exploited workers commonplace in many regions popular with outsourcers.

Ultimately, it is the outsourcing pharmaceutical company’s responsibility to ensure that all its practices are above board

Ultimately, it is the outsourcing pharmaceutical company’s responsibility to ensure that all its practices are above board, and in line with its own ethical standards. Should a company’s consumers or other business buyers in the West discover that a business has been involved in unethical or even illegal practices then blaming a supplier is no excuse.

Pharma companies looking to outsource to low-cost regions, such as the Far East, Central and South America would do well to heed the hard lessons learned by the textiles and sportswear industry. The negative impact on reputation caused by consumers discovering that a company has been involved, either directly or indirectly, with sweatshops, child labour and pittance wages can have a serious impact on any business. This is especially true for the pharmaceutical industry with its core focus on patient welfare – consumers and business partners are unlikely to miss or forgive the hypocrisy, which can have a serious effect on business performance.

Over the past decade, the industry as a whole has taken big steps to reduce the environmental impact of its operations, but more can be done, especially with regard to outsourcing.

Pharma companies looking to outsource to low-cost regions, such as the Far East, Central and South America would do well to heed the hard lessons learned by the textiles and sportswear industry

Outsourcing comes with its own environmental considerations. Just as in the food industry, intensive cultivation, unsustainable harvesting, overfishing and tropical deforestation have huge long-term implications for indigenous peoples, endangered species and the environment in the developing world. If a supplier is sourcing local raw materials, it is crucial that these are sourced in a sustainable manner.

The environmental impact of outsourced operations can also have a long-term financial impact. Diminishing local supplies of raw materials or tightening legislation can have a knock-on effect on the sustainability of future production, jeopardising on-going continuity of supply.

Even secondary aspects of product outsourcing can come with sustainability issues attached, and it is easy to overlook aspects that can have real impact. For instance, if a business is outsourcing its packaging, where is the wood used to create that packaging taken from? Fail to check and there could be the chance that it is from South American hardwood, taken by clear-cut logging from the Amazon rainforest.

Raw material and packaging supply chains need to be examined

Raw material and packaging supply chains need to be examined

Ensuring that products are sourced and manufactured sustainably comes down to developing a full understanding of the materials that outsourcers are using, and keeping a careful eye on their purchasing processes, sources and systems. In the search for new treatments and medical breakthroughs, pharma manufacturers are increasingly utilising more complex ingredients and unusual raw materials, which can come from niche and potentially unsustainable sources. Many choose to outsource small aspects of the production or processing, but no outsourcing is without risk. When outsourcing production or processing of materials like these, it is vital that pharmaceutical manufacturers look into the economic sustainability and scalability of the product and suppliers.

In a recent example, a start-up manufacturer, backed by a blue chip major, was developing a product that included a type of non-commercial chitosan, sourced from a specific species of crab. Although the raw material itself was available from a number of different suppliers, the raw material’s phytotoxicity meant that it had to be specially processed to minimise the risk of allergic reaction in patients. Unfortunately, by the time the start-up had completed the development process, the source for this processed product had completely dried up. The start-up was unable to find an alternative supplier and the backers saw no commercial advantage in establishing in-house production facilities that would allow for the safe development of commercial quantities. This led to the funding being withdrawn and the project being cancelled.

Before outsourcing any aspect of production to a supplier, pharmaceutical companies need to take steps to ensure that the product is scalable and economically viable

Before outsourcing any aspect of production to a supplier, pharmaceutical companies need to take steps to ensure that the product is scalable and economically viable, and that the supplier will be able to meet future demands for the product. Where possible, sharing sales goals, strategy and aspirations with suppliers to ensure that they are geared up to meet the on-going and future supply needs is essential. Discussing long-term projections, capacity, timing plans, regulatory hurdles and core business practice will reduce the chance of sustainability problems later down the line.

It is also good business practice to identify alternative (and sustainable) back-up sources, and to think about the timing plan to bring them on stream before committing to outsourcing. Understanding just how important a piece of outsourced business is to each supplier is a core aspect of the process.

A few years ago, Lime Associates was working to help optimise a medical device company’s supply chain. The company had outsourced the development of a new product to one of Europe’s leading chemical companies – but due to inconsistencies in the manufacturing process, no two batches were identical, thus leading to technical issues. Instead of saving money, outsourcing had ended up increasing costs substantially, once reprocessing and product batch rejection were taken into account. To try and solve this, the MD travelled to Germany to see the Business Unit Manager to ask just how important the account was; the Manager replied, ‘about 1½ days of production per year’. It was an insignificant amount of work to the supplier, and was treated as such.

Looking back over the past decade, there have been plenty of high profile safety and sustainability cases within the pharmaceutical industry that outsourcers can learn from. The deaths of 100 children in Panama and 80 in Haiti due to the inclusion of diethyl glycol in medicines instead of pharma grade glycerine shouldn’t be forgotten. Both these cases were traced back to Chinese chemical companies that were not certified to manufacture pharmaceutical ingredients. State-owned and certified exporters then sold the diethylene glycol to European manufacturers, who resold it without identifying the original source.

Had any of those manufacturers taken the time and due diligence to ensure that the right processes were being followed, it is likely that this could have been avoided.

Operating in or outsourcing to regions that don’t share the same regulatory systems increases the risk of safety issues

Operating in or outsourcing to regions that don’t share the same regulatory systems increases the risk of safety issues like this, which is why it is so important to take extra care when vetting suppliers. There are clear themes that run through all the different aspects of sustainable outsourcing – the importance of understanding materials, where they come from, and taking steps to mitigate the potential ethical, social and economic issues.

When outsourcing, it is essential to spend the additional time and effort required to understand the supply chain and materials in exactly the same way as if manufacturing in-house. Conducting web searches and identifying potential suppliers is only the very start of the process. Manufacturers then need to consider the wider picture and make a thorough audit of all the different suppliers involved. Picking a cross functional team, with native language speakers if outsourcing abroad is a good starting point that will help with every aspect of the planning and vetting process. With the latter, it pays to be thorough. In addition to vetting suppliers, (looking at facilities, working practices, employment issues, accreditation, capacity and regulatory compliance) it is good practice to examine the purchasing, and the source of materials.

Identifying the key material drivers, looking at where components are manufactured, and taking a keen interest in how a company chooses and vets its own suppliers will minimise risk down the line. It is also important that outsourced suppliers understand and share in the same values and standards when it comes to sustainability, ethics and the environment. This may mean undertaking an education process, and setting out clear, unequivocal guidelines when it comes to acceptable working and purchasing practices.

Taking steps to secure the supply of materials and components by building relationships with suppliers, finding alternatives or investing in companies will help to provide a sustainable long term supply.