Trump's Next Supply Chain Target: Big Pharma

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U.S. President-elect Donald Trump takes questions from members of the media during a press conference at Trump Tower in New York, U.S., on Wednesday, Jan. 11, 2017.  Photographer: John Taggart/Bloomberg

In a press conference today, Donald Trump launched an attack on the pharmaceutical industry. He called for their manufacturing facilities to return to US production.

“I think a lot of industries are going to be coming back. We have to get our drug industry coming back. Our drug industry has been disastrous. They’re leaving left and right. They supply our drugs, but they don’t make them here.”

The criticism related to the foreign production and supply chain operations of some of the largest companies in the world. In response, to his criticism, NASDAQ Biotechnology Index is down 3%.

Interestingly, the President-Elect appears to be identifying poor procurement techniques as the chief contributory factor for creating a ‘disastrous’ drug sector.

“And the other thing we have to do is create new bidding procedures for the drug industry because they’re getting away with murder.”

Although it is not clear, the government seems to be the primary target of these remarks. Those in the public sector are commonly fingered for dysfunctional purchasing processes.

“[T] there’s very little bidding on drugs. We’re the largest buyer of drugs in the world, and yet we don’t bid properly. And were going to start bidding and were going to save billions of dollars over a period of time.”

A lower price is not always a better price

As seasoned supply chain watchers and procurement enthusiasts are keen to point out: tendering is not the only answer to sourcing goods. Undoubtedly, it is an excellent technique to lower price. But tendering is best applied to commodified markets of relatively similar goods.

Other purchases, such as complex service contracts, are more difficult to place in a price-focused tender. The output is harder to specify and price becomes a less reliable measure of quality.

The position of drugs upon this spectrum of complex to commodified markets is debatable. Although certain drugs are well-studied with clear effects, their overall impact upon patients is not always guaranteed. Moreover, the buyer is not buying the drug itself, but the clinical outcome.

The actual subject of a tender is the change in an individual’s quality of life. Here, we enter a difficult even philosophical discussion regarding the value of a person and the improvements of a patient’s life chances.

To simplify the process, economists use the term ‘quality-adjusted life-year’ or QALY in order to measure the impact of a medical intervention upon a person over the course of a single year.

QALYs and other quality measures can be brought to bear in tenders in order to enrich the procurement officer’s understanding of a drug and its impact. Such practices can be deployed in order to identify ‘best value’ and not simply race to the bottom for the cheapest product.

This is not to say that tenders or prices are inappropriate components of deals, nor to absolve big pharma of any criticism. In fact, there is much evidence to suppose there are wide variations in the prices that government health authorities pay in public tendering as a result of ‘divide and conquer’ tactics by healthcare salesmen.

However, a single-minded focus on reducing price can lead to some unwanted outcomes. If you incentivise buyers to seek out the cheapest, they may procure drugs that deliver sub-optimal results for patients. Moreover, suppliers aware of the drive for lower prices, save margin in other areas, such as reduced post-contract support and care.

First automotive, now pharma

It has been an extraordinary few weeks for followers of the supply chain function. This pronouncement follows from a series of spats Trump has held with the automotive industry, urging manufacturers to produce in the USA.

Donald Trump, although not yet formally at the reins of power, has arguably initiated significant change in the American economy through his Twitter account.

On 3rd January, as Trump dispatched the following tweet: “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”

General Motors responded in a somewhat bemused fashion, citing the minimal role of Mexico in their production arrangements and their large commitment to manufacturing within the USA. But already the beast was out and competitors moved quickly to exploit the lowered standing of a rival.

First to seize the initiative was Ford, who announced new plans to invest $1billion in the US. Trump showered them with praise. On January 4th he tweeted: “Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning – much more to follow.”

Who’s next?

The fabric of the global economy has been enabled by a free-flowing supply chain, whose threads can weave in and out of countries without cost. The system has spread goods wider, at lowered costs and created employment for the world’s poorest.

But defending the benefits of globalization rarely wins votes. Indeed, entire political movements are founded upon a distrust of foreign economic enterprise.

The shared feeling of injustice across communities, who feel their jobs and opportunities have been wrongly prised from them, is galvanizing protectionism.

This trend is wrong-footing many businessmen. Their business models are founded upon the arbitrage of lower wages in developing economies. Even a slight alteration to this will slash profits, which, ironically may reduce job opportunities in the US.

Yet, this is not a time for cool economic calculus. Trump is emboldened by his success with automotive and may be looking for new sectors and new scapegoats upon which he can pin the blame of economic underperformance.

The debate has mostly related to manufacturing. The jobs created by making goods are clear to visualize and easily valued. But machined industry is also most easily automated. Manufacturing is reaching an unnerving new era of enormous, unmanned factories or busy robots churning out produce at all hours.

Perhaps the most likely target for ‘bringing back’ job may be the service sector. The Indian call center is a frequent focus of nationalist ire and such jobs cannot be so easily replaced by machines.

Services sectors that have quietly expanded their global supply footprint, from customer relations to law firms to management consultancies, may also begin to review their own supplier portfolios. Indeed, all US business would be prudent to review their own globalized footprint and prepare for a Trump tweet of their own.

Follow me on twitter: j_p_webb

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