24 March 2020

Guest blog by Dr Sam Roscoe, Senior Lecturer in Operations Management and Research Leader for the Supply Chain 4.0 Hub at the University of Sussex.

COVID-19 has exposed a number of fundamental issues in grocery and pharmaceutical supply chains.  The grocery sector has been particularly hard hit because of its ‘lean’ just-in-time delivery supply chain model, panic buying and labour shortages. Over the past two decades, the UK grocery sector has adopted the lean, just-in-time, supply chain model from the automotive sector. This rapid replenishment model focuses on minimizing inventory and delivering new products to store shelves as soon as a product is purchased at the tills. The advantages of this system are lower inventory carrying costs, reduced product handling and smaller store rooms. The disadvantage, as seen today, is that any unforeseen surge in demand makes it difficult for stores to quickly replenish shelves as inventory is not readily at hand.

Groceries

While many analysts rightly point out that there is enough stock to absorb sudden shocks to the system, it is more difficult to fulfil the unforeseen demand spikes from prolonged panic buying that lasts for weeks or months. This is because of what I call ‘unspent demand’, or when consumers go to buy a product, such as toilet paper, and it is not on the shelf.  These consumers either wait to buy the product tomorrow or next week, or go to another store. The issue that unspent demand creates is that retailers and manufacturers cannot forecast this demand, because it is not visible at the point of sale.  Moreover, grocery companies cannot use past sales data, or experiential learning, because a pandemic like this has not happened in living memory.

Companies may be tempted to build buffer inventory into the supply chain, but how much? Is it 10%, 40%, 60%? When the panic buying slows, grocery firms are simply left with excess stock. Achieving the balance between buffer inventory and excess stock is very difficult during emergencies due to the phenomenon of unspent demand.

Another very important issue in grocery supply chains at the moment is labour shortages.  Companies such as Tesco and Sainsbury’s may want to hire temporary staff to overcome panic buying , but store workers, drivers and warehouse employees do not want to work for fear of catching the virus, or because they have to stay home to look after their kids. Labour shortages will ripple across the supply chain including stores, suppliers, transportation companies, wholesalers, packaging companies and manufacturers.

Border closures add another layer of complexity as lorries are stuck at border crossings alongside the thousands of people trying to get home.  COVID-19 is therefore similar to a No-deal Brexit scenario for companies that run just-in-time supply chains or sell perishable products.  Border delays result from heightened screening and staff shortages, leading to further stock outs at stores and the expiration of perishable products. Labour shortages are not industry specific and will affect all businesses selling finished goods to consumers.

Pharmaceutical products

The delivery of pharmaceutical products has also been affected by COVID-19, especially those medicines that address its symptoms (paracetamol/asprin) and the underlying health conditions that the virus exploits (diabetes medication, asthma inhalers, heart medication).  The pharmaceutical supply chain is more global than that of standard grocery staples and is therefore more affected by COVID-19’s quick spread around the globe.

Many of the active ingredients that go into pharmaceutical products are sourced and manufactured in China and then shipped to India for formulation and packaging.  When the virus emerged in China it quickly shut down pharmaceutical manufacturing facilities, directly impacting medicine supply.  And while much of China’s manufacturing is now coming back on line, contract manufacturing organisations in India are now being forced to shut because of the government mandated lock-down, which will further impact production and disrupt supply.  Pharmaceutical supply chains therefore face two major supply disruptions within a three month period.  Pharmaceutical supply is further restricted due to labour shortages in the wholesale and distribution of generics and other pharma products to UK pharmacies, as well as shortages with pharmacy staff.

Finally, panic buying has led to a spike in demand for medicines directly linked to the symptoms of COVID-19 and the upper respiratory system. Long globalized supply chains, with already disrupted supply, will have difficulty in quickly responding to huge spikes in demand.  The one saving grace of the pharmaceutical industry is that Pharma companies tend to hold significant amounts of inventory in the supply chain, often up to 6 months, meaning that they can fill demand if the panic buying situation stabilizes in the next few months.  However, if excessive demand in the UK couples with decreased supply from India, there could be significant shortages of key medicines in the near future.

The pharmaceutical industry should take instruction from the grocery sector on how to avoid stockouts of key medicinces  (paracetamol, asprin, insulin, heart medication, salbutamol) in the near future. First, pharmacies and other retailers could introduce maximum purchase quantities immediately.  Second, pharma companies could reduce the number of product variations that they make, as is being done at Tesco, Asda and Sainsbury’s for grocery items. For example, instead of having 100ml, 250ml, 500ml bottles of paracemotol that are regular and extra strength, pharma companies could prioritize the manufacture of a standard size bottle of regular strength paracetemol.  By reducing the product range now, pharma firms will be able to produce larger volumes by having longer production runs. Moreover, pharmacies will reduce the risk of stock outs because they will be holding fewer stock keeping units in stores, and will have higher volumes of a particular product type.  Third, pharma companies can begin collaborating with UK based Contract Manufacturing Organizations to ramp up local production volumes.  This will reduce the risk of supply delays at border crossings and the likelihood that overseas governments will restrict the export of medications to their own populations.

This blog was also published on Business Reporter under the title ‘How Coronavirus is disrupting key supply chains when we need them the most‘.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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