Back to NewsNavigating the future: building a de-risked supply chainChandan P. Shirbayye, VP & head of supply chain at Aragen, reviews the key themes and issues of the new emerging supply-side model and how can mitigate the risks.
November 15, 2024
As the global supply chain landscape continues to evolve, the potential enactment of the BIOSECURE Act has raised significant concerns, particularly in the pharmaceutical and specialty chemicals sectors. While the Act has not been framed within this context specifically, it will reshape the pharma supply chain by limiting outsourcing to select China-based CDMOs. Understandably, both Big Pharma and Biotechs are looking to reassess their strategies due to growing uncertainties around relying on China. A knock-on effect is that businesses are also pursuing alternatives to reduce dependency on China for raw materials and intermediates.
We see this directly with our clients who are demanding stricter supply chain controls, with some clients even requesting fully China-independent solutions. This trend, which started post-COVID and has gained momentum post the BIOSECURE Act, presents an opportunity for Indian CDMOs to grow their market share by addressing the need for secure, diversified supply chains. India is perhaps one of the few countries in the world where a CDMO could look to build and source ingredients and starting materials locally – without any need to be reliant on China-based sources to fill-in gaps.
Diversifying supply
Remove the current narrative around BIOSECURE – which can cloud thinking – and this trend has long been rumbling along post-COVID. Companies had become overly dependent on Chinese supply chains for most of their requirements. Hence, they started focusing on enhancing supply chain resilience, gaining more control, and achieving sustainability targets. By sourcing locally, they are not only improving turnaround times and inventory management, but also contributing to reduced carbon emissions, a key component of many companies’ sustainability strategies.
In this article, we will review the key themes and issues of the new emerging supply-side model and how we can mitigate the risks. For example, a major component of de-risking involves addressing single-source dependencies and geographic concentration. Even if multiple suppliers exist, they can pose risks if concentrated in China. To mitigate this risk, companies are taking steps to identify alternatives, both locally and globally.
In cases where alternatives outside China are unavailable, companies are turning to backward integration, either internally or through partnerships. This involves technology transfer to local manufacturers or in-house production units. Backward integration offers control and stability, balancing commercial viability with operational efficiency. However, cost considerations often arise when comparing in-house manufacturing with external options, particularly for commercial molecules where the overhead costs may be prohibitive. In other words, where low-cost molecules are involved, external manufacturing tends to be more commercially viable. Key factors to focus on with this is to identify reliable and competent partners who have appropriate systems, processes and technology in place to ensure smooth operations and data integrity.
Opportunities in India
Another strategy involves not only shifting sourcing from China to India but also localising within India itself. For example, companies divide procurement into two categories, one domestic sourcing across India and the second, hyper-local sourcing within 200 kilometres of facilities. This approach brings multiple benefits, including faster turnaround times, reduced transportation emissions, and stronger local economies. Having partners nearby also reduces the need for extensive inventory and minimizes lead times.
To improve the domestic India based supply chain, we also need supportive Government regulations in addition to the well-implemented PLI scheme. Under the leadership of Aragen’s CEO, Manni Kantipudi, a group of Indian CDMOs have come together to form an alliance that will work closely with the Government and suggest areas to streamline the regulatory processes or create other supportive regulations. The main objective of this initiative is to enhance the eco-system of local production and hence reduce import dependence.
Another example is the support provided to micro and small custom synthesis start-ups, founded by technically skilled entrepreneurs and located in the vicinity of our facilities. These start-ups are being given business opportunities to help scale up their operations and grow mutually. Admittedly, it is cheaper to produce in China; however, with proper support, these Indian startups are being equipped to punch above their weights in achieving similar cost advantages locally.
While these strategies offer a blueprint for reducing dependency on China, the transition will certainly not be without its challenges. China’s pharmaceutical and specialty chemicals industry has achieved significant cost competitiveness over the past 15–20 years. It will take time for other markets, including India, to fully replicate the cost and efficiency gains achieved by Chinese suppliers.
Ongoing initiatives
Utilizing these strategies, Aragen has lowered spending on non-domestic suppliers from over 40% in 2017–2018 to just 19% today, sourcing 81% of our raw materials and indirect supplies domestically. By doing so we have also reduced cost of goods significantly for our customers and contributed positively to reducing carbon emissions
To cite a specific example, a customer previously sourced a raw material from a Chinese CDMO at a significant cost and wanted to shift the project to India. While maintaining their existing supply chain in China, we executed the project locally. During development, our team discovered that by adopting a different route of synthesis the same output could be achieved at a much lower cost with local Indian raw material supplies. As a result, the raw material is now being developed in India, leading to a 70% cost reduction.
However, when working with new suppliers, maintaining continuous improvement is critical. At Aragen, all incoming materials are tested by our quality and analytical teams to ensure compliance with specifications before release to the factory floor. We use a monthly scorecard to evaluate suppliers across six key metrics, including delivery performance, quality, sustainability, and credit terms. This open and transparent process leads to stronger supplier partnerships, helping both parties improve performance.
Any effective de-risking strategy revolves around four key pillars: collaboration, consolidation, competition, and contracting.
- Collaboration involves strategic partnerships with suppliers to secure stable supply chains.
- Consolidation focuses on reducing the vendor base, enabling deeper engagement with higher-performing suppliers to ensure long-term sustainability.
- Competition fosters innovation, drives cost reduction, and improves technical efficiency, as suppliers who offer enhanced capabilities and better synthesis routes become increasingly valuable.
- Contracting, while complex due to limited long-term project visibility, can be facilitated through backward integration and technology transfer to third-party suppliers, who can execute contracts locally and provide more certainty over the long term.
In addition to supply chain resilience, sustainability is becoming a critical focus for pharmaceutical companies. Local sourcing reduces carbon emissions and supports local economies, while large pharmaceutical companies now expect their outsourcing partners to meet stringent environmental standards. To rank sustainable products, we have implemented green procurement initiatives based on factors like green certifications, life cycle assessments, and compliance with green chemistry principles. All strategic supply partners have also been trained to include the green procurement status in the quotes they submit for each product.
At Aragen, we’ve taken significant steps to reduce our carbon footprint. For example, we’ve partnered with DHL to use sustainable aviation fuel for shipments.
Another trend gaining traction is the integration of AI and machine learning into procurement and supply chain processes. Around 30–40% of our customers now inquire about AI/ML capabilities during sourcing discussions. To meet this demand, we’re developing systems that incorporate AI\ML application into our sourcing activities, enabling smarter, more efficient supply chains.
Conclusion
The future of pharmaceutical supply chains will depend on continued innovation and adaptability. As regulatory pressures like the BIOSECURE Act reshape global sourcing, companies must explore new strategies beyond traditional models. AI and machine learning will play a key role in optimizing procurement processes, while sustainability will remain at the forefront. For Indian CDMOs, this is a unique opportunity to lead the way in building resilient, diversified supply chains that meet both customer demands and environmental goals.
