Building Resilience Brick by Brick: The Power of Supply Chain Diversification

Key takeaways:

• Supply chain disruptions are ongoing and there is a broad range of potential supply chain risks over the next year.
• Building in redundancies and diversifying production and sourcing can help mitigate risk and reduce overreliance on any single supplier, country or region.
• Premier has been a leader in developing innovative strategies and solutions for greater supply chain diversification, including advancing policy initiatives to help minimize disruptions and build greater resiliency in healthcare.

The implications of manufacturing and labor disturbances, extreme weather and a host of other global disruptions can have far-reaching consequences – affecting the production, distribution, availability and pricing of critical medical devices, pharmaceuticals and other vital healthcare supplies.

Driven by sporadic, and often unpredictable disruptions – PINC AI™ data shows healthcare providers are still experiencing shortages of hundreds of different products in the post-pandemic environment.

A critical issue exposed by the COVID-19 pandemic, and exacerbating challenges today, is the lack of supply chain diversity in finished products and inputs for healthcare supplies and drugs.

Future-forward supply chain management requires building in redundancies and diversifying production and sourcing to mitigate risk and reduce overreliance on any single supplier, country or region.

The Challenge:

Economics pushed many manufacturers of healthcare supplies and drugs overseas, where tax incentives and lower-cost labor enabled cheaper production. Over time, this led to a dynamic where 80 percent of all personal protective equipment (PPE) was sourced from East Asia, primarily China.

Today, there are still too many healthcare products where one supplier, country or region accounts for most of the manufacturing. Concerns also exist around a lack of diversification in the inputs and raw materials from one country or sole manufacturer, including:

• The critical minerals used in medical devices;
• The key starting materials (KSMs) and active pharmaceutical ingredients (APIs) used in the production of pharmaceuticals; and
• The raw materials used in PPE production.

As another example, East Asia also accounts for 73 percent of global semiconductor capacity, with virtually all indirect spending in the industry touching Chinese and Taiwanese supply chains. Taiwan is a crucial player in semiconductor production, dominating the global chip industry with 65 percent ownership and producing 90 percent of the world’s most advanced chips.

New U.S. and global public and private sector manufacturing investments aim to curb these geographic concentration risks, but most initiatives are in the initial stages – and in some cases – may take years to come online.

Redundancy and longitudinal visibility across the supply chain can help avert shortages and supply chain issues caused by a variety of disruptions – not just a global public health emergency. From geopolitical events to facility stoppages and shutdowns or a destructive weather event like a tornado, diversification across global healthcare supply chains can help reduce the negative effects of adverse events.

The Solution:

Geographic diversification in production and sourcing – including reshoring – continues to gain momentum.

Recent reports demonstrate a broad trend of manufacturers looking to shift production away from China and source facilities in other Asian countries, Mexico and the U.S. Notably, 96 percent of manufacturing CEOs are evaluating reshoring their operations, have decided to reshore or have already reshored – an increase from 78 percent in 2022.

At the same time, relying solely on reshoring presents risk as not all raw materials can be found on U.S. soil – and an overreliance on domestic manufacturing is still overreliance on a single geographical area. True diversification requires a balanced approach of reshoring on U.S. soil, nearshoring with trusted trade partners and global sourcing – for greater redundancy, contingency planning and to minimize disruptions.

Yet, further complicating matters is a lack of data and transparency around supply availability, including raw materials, production and distribution locations. Simply put: we cannot truly measure or account for risk we cannot see.

To combat these challenges, a broad cross-section of U.S. healthcare and supply chain leaders from across group purchasing organization (GPO) affiliations shared their strategies via Premier’s 2023 Supply Chain Resiliency Guide and survey:

• Sixty-two percent are multi-sourcing critical product categories for greater redundancy, and 33 percent are geographically diversifying supply sources. Many are also looking for opportunities, and alongside Premier, to bring new, trusted suppliers online and disrupt traditionally unhealthy markets – when a category has two or fewer manufacturers representing 80+ percent of market share.

• Three out of four healthcare and supply chain leaders say domestic manufacturing is an “extremely” or “very important” component to their organizations’ supply chain resiliency strategies.

• Nearly half are planning to use data and advanced forecasting technology solutions (48 percent) for greater visibility.

• Supplier collaboration and risk assessment continue to gain traction – 42 percent are monitoring supplier risk weekly.

Premier’s industry-leading contract portfolio, initiatives to diversify production and sourcing, disaster preparedness and response program, and the PINC AI™ technology suite are serving as a collective shield to help our members minimize risk and strengthen their supply chains.

• Premier recently analyzed 500 categories across our Medical and Surgical contract portfolio, and the vast majority are sourced from a geographically diversified supply chain – where critical products either have multiple reported manufacturing locations, or there are multiple contracted suppliers with crossable offerings. Overall, Premier is committed to contracting with suppliers that demonstrate manufacturing resiliency, redundancy and quality investments.

• Supply chain diversification includes bringing manufacturing back to the USA. Through collaborations with Prestige Ameritech, DeRoyal Industries Inc, Honeywell, PRINCO LLC, VGYAAN Pharmaceuticals and Exela Pharma Sciences, Premier and our members are bolstering domestically made medical supplies and pharmaceuticals for providers and patients – while supporting U.S. job creation and stronger local economies. Via these initiatives and leveraging advanced automation capabilities, healthcare providers can diversify supply sources at a price point competitive with overseas manufacturing. In addition, these suppliers have increased their production to help protect providers from shortages.

• Historically, hospitals lacked the ability to navigate supplier risk and predict when a product might become short. The award-winning, artificial intelligence powered PINC AI™ Supply Disruption Manager is aiding members in predicting demand surges and product shortages far in advance with over 90 percent accuracy.

• Leveraging Premier data that informs our weekly product watch list, Premier’s Advocacy team continues to work closely with the White House, Congress, federal and state agencies and industry organizations on strategies to enhance supply chain resiliency.

To that end, Congress should pass legislation that supports the economic conditions for diversification and enables agencies to use their authorities to promote diverse trade, manufacturing and sourcing in healthcare supply chains.

Some examples of legislation and policy proposals that can help create the necessary framework include:

• Leverage tax credits to encourage domestic manufacturing.
  • Congress should implement a 30 percent tax incentive for investments to support the domestic manufacturing of critical medical supplies and drugs, including their raw materials.
  • Existing domestic manufacturers of critical medical supplies and drugs should also be provided a 10 percent tax credit on the income generated from the sale of domestically manufactured goods.
  • Tax credits will not only incentivize domestic manufacturing, but they will also help make the goods price competitive with globally sourced products.
• Expand policies that differentially reimburse providers for purchasing domestically made products.
  • In 2023, the Centers for Medicare and Medicaid Services (CMS) finalized a policy to pay a differential reimbursement for domestically manufactured NIOSH-approved N95 surgical masks.
  • Given the success of this policy, Premier urges CMS to institute a similar policy for differentially reimbursing domestically manufactured critical medical supplies and drugs.
  • A policy of this nature would incentivize providers to support domestic manufacturing and supply chain resiliency.
• Pass the Medical Supply Chain Resiliency Act (S.2115/H.R.4307).
  • The bill would permit the establishment of trusted trade partners to diversify sourcing for medical devices and pharmaceuticals and enable timely access to the vital supplies providers need to care for patients during a public health crisis or national security threat.
  • The framework of the agreement can help reduce or eliminate barriers to trade – diversifying and expanding supplier networks.
• Enable agencies to build trade capacity and enact reforms.
  • To proactively address this issue, the Development Finance Corporation (DFC), State Department, United States Trade Representative (USTR) and the United States Agency for International Development (USAID), among others, should receive additional support.
  • With more capacity, these agencies can help create the conditions necessary to help build trade capacity with allied nations and support supply chain resiliency well into the future.

Our nation’s healthcare system requires an agile, secure supply chain that supports timely, high-quality and cost-effective care delivery to patients.

Supply chain diversification represents a unique opportunity for both Congress and private industry to address a key healthcare challenge – and national security issue.

Effectively diversifying supply chains will take a coordinated public-private sector effort to help ensure the appropriate strategies and incentives now and into the future.

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