How Dependent Are We on Foreign Sourcing?

More than a few lines of copy on this page over the past six years have been dedicated to an examination of the differences between outsourcing and offshoring. A recent study by the U.S. Department of Commerce (DOC) attempted to determine just how dependent U.S.-based manufacturers have become on a foreign supply base—not just for an analysis of industry trends but from a national security point of view. The research was conducted by the DOC’s Office of Technology Evaluation (OTE) in the Bureau of Industry and Security.

According to the study’s authors, the research was designed to provide data “on the scope and pervasiveness of foreign dependencies within the U.S. healthcare and public health supply chain,”
focusing on pharmaceuticals, medical devices and surgical equipment marketed, manufactured and/or sold in the United States. The information will allow government and industry to monitor trends and take action to “mitigate potential problems caused by foreign sourcing and dependency issues.” From the thousands of potential healthcare-related products available, OTE identified 418 commodities (290 pharmaceuticals and 128 medical devices/surgical equipment) that they deemed “critical” to healthcare services in various emergency scenarios. If their availability were limited, it could present risks for the delivery of needed services by U.S. healthcare providers. According to OTE, the commodities were selected based on previous shortages or supply disruptions, inter-agency input, the World Health Organization’s List of Essential Medicines, and other sources. A total of 161 companies participated in the study—70 pharmaceutical manufacturers, 75 medical device and surgical equipment firms, and 16 manufacturers of both pharmaceuticals and devices. The medical device companies surveyed generated $232 billion in net sales in 2010. Most survey respondents are headquartered in the United States, although 26.2 percent of parent companies are located in other countries.

Based on survey responses, independent research and field interviews, OTE released interesting findings. According to the report, there is a “significant amount” of U.S.-based manufacturing for critical healthcare-related commodities, though authors noted a “very high degree of foreign sourcing and dependency for critical components, materials and finished products required for U.S.-based manufacturing operations.” In many cases, the study found, there is no U.S.-based alternate source available for the components, materials and products supplied from companies based outside the United States. Foreign dependencies are not concentrated in any one country, but are widely spread across the globe. For medical devices, there were suppliers in 41 countries. The top five countries are China, Germany, Japan, Mexico and the United Kingdom. Overall, survey respondents rely on many suppliers for the components, manufacturing materials, or finished products required in their manufacturing processes. Those surveyed are not heavily reliant on only one company, country or region for their critical components or materials. Instead, U.S.-based companies rely on a diverse set of foreign suppliers based in many different countries. Interestingly, pharmaceutical companies tend to maintain supplier contracts for longer periods than medical device companies do. Overall, total
delivered cost and product availability are the primary factors companies consider when they outsource or purchase overseas, the authors found.

Thirty percent of respondents experienced a “significant” supply disruption from 2007-2010, most commonly related to supply shortages, manufacturing quality issues, or delays in regulatory approvals. Exposure to supply disruptions is widespread, but many respondents consider it a price of doing business in the healthcare industry, the study found.

The study also found that only 34 percent of respondents (both pharma and medical devices) are taking steps to reduce their exposure to foreign sourcing. Companies find it difficult to reduce foreign sourcing because they claim the products they require are not available in the United States, study authors noted. Many companies maintain relationships with multiple suppliers to mitigate the risk of supply disruptions, but often are not able to do so for all the products because of availability, cost and regulatory requirements. Consistent with current industry rumblings about the U.S. Food and Drug Administration (FDA), respondents noted that the long lead-times to certify new suppliers with the FDA make it cost prohibitive to maintain alternate or second sources of supply for critical commodities. The authors said the competitive nature of industry makes it difficult to maintain multiple and/or domestic sources when the practice may add significant costs and regulatory obligations.

Those surveyed said the government could reduce foreign dependency issues by speeding up FDA approval times; reducing the costs and clarifying the process for FDA certification of suppliers; increasing enforcement of FDA regulations outside the United States; and modifying the corporate tax structure to encourage domestic manufacturing. The OTE recommended that the FDA hold public hearings to review the impact of regulatory requirements on foreign sourcing. Addressing these issues, the authors noted, may help promote dual-sourcing, allow for quicker transitions to new suppliers in case of a disruption, and increase the competitiveness of U.S. companies globally. That’s the takeaway that is music to the industry’s ears.

There are many interesting findings in this extensive report, which I’ll link to this column on the MPO website. If you have time, scroll through it. It provides unique perspective and a ton of data from a source that isn’t often counted among the usual cast of industry stakeholders.