For business leaders who are not focused on the remarkable changes happening in supply chain management, February’s M&A announcement from Novo Nordisk should come as an eye-opener. The Danish pharmaceutical giant is spending $11bn to acquire three manufacturing plants from US drug producer Catalent, in a complicated deal that also involves its parent company, Novo Holdings.
Significant M&A transactions in the pharma industry are, of course, common, but deals usually center on intellectual property and patents. Pharma companies pay high prices for drug patents in the hope of handsome long-term returns. This particular transaction, in contrast, is not directly driven by hope of future profits; rather, it simply gives Novo Nordisk increased manufacturing capacity. The Danish company is paying the best part of $4bn for each of the three facilities, far more than it would cost to build the same factories from scratch.
Novo Nordisk is driven to spend that money by one key market dynamic: supply chain bottlenecks are preventing it meeting huge demand for its diabetes and anti-obesity drugs, respectively, Ozempic and Wegovy. Novo Nordisk made record sales last year and is now Europe’s largest company. However, it had not anticipated such a steep rise in demand and its supply chain cannot cope. In such circumstances, buying new facilities is evidently a more expedient solution than building them.
This is not how it was supposed to be. For years, pharma businesses, in common with their peers in many other sectors, were determined to sweat their supply chain assets, often looking for the cheapest outsourcing contracts they could find. It made more sense to keep supply chain costs low while investing in areas of the business that would drive growth.
However, while that approach worked perfectly when businesses had good visibility of future demand patterns and had time to structure their supply chains accordingly, it does not offer much flexibility or agility. In an era of ongoing volatility and unpredictability, supply chains need to exhibit far more of those qualities.
It’s not only a question of being able to scale up production rapidly to meet unforeseen levels of demand. Take another example from the pharmaceuticals industry: Pfizer spent much of last year adjusting its sales forecasts amid plunging take-up of COVID-19 vaccinations worldwide. That led to some very difficult conversations with manufacturing suppliers.
In this new world, vertical integration of the supply chain suddenly makes much more sense. Novo Nordisk is not alone in bringing more of its manufacturing in-house so that it can exert greater control.
In the automotive industry, where every large company is scrambling to reorient itself toward electric-vehicle (EV) production, there is real concern about the security of battery supply. This has prompted a number of large automakers to make significant investments in EV battery factories of their own, reducing reliance on third-party suppliers.
Others in the same industry are also thinking on their feet. Tesla, for example, has invested in semi-conductor and software-engineering expertise, giving it the ability to re-program standard chips to run in its vehicles. That has given it an edge over rivals that have struggled to get hold of vehicle-ready chips at a time when semi-conductor companies have been prioritizing customers in other industries, such as mobile-phone manufacturers.
In retail, meanwhile, Amazon was an early mover in terms of implementing vertical integration. It developed an in-house supply chain and logistics operation that covers everything from warehousing to ship charters and last-mile distribution. Its aim has been to avoid vulnerability to disruption affecting third-party supply chain partners.
Such thinking is becoming ever more common. Business leaders had naturally hoped that the supply chain disruption they experienced during the COVID-19 pandemic would be a temporary phenomenon. They assumed that, once the world’s economies reopened, conditions would normalize. Had this been the case, rethinking their approach to supply chain management might not be necessary, given that pandemics are “black swan” events.
But it did not turn out that way. The pandemic eased, but Russia’s invasion of Ukraine brought new problems. More recently, conflict in the Middle East – and the disruption that has brought to shipping in the Red Sea – has underlined the risks posed by geopolitical tensions.
“Many businesses are now starting to think about their supply chain strategies in a different way.”
In any case, even without such exogenous shocks, many businesses are facing markets that look very different to anything they are used to. The rush for anti-obesity drugs is just one example of demand-side volatility that is far more extreme than previously. Consider the race to acquire the raw materials necessary for greener energy production, for example, or the headlong rush of consumers into ecommerce.
Businesses facing these radically changed market conditions have two options. They can invest in forecasting, improving their ability to prepare for shifts in demand. This will allow them to organize their supply chains accordingly. Or they can invest in building greater agility into their supply chains, so that they can react to those shifts with greater speed, whether through more vertical integration or in other ways.
These are not mutually exclusive courses of action. Many organizations will now want to maintain both types of supply chain management, albeit giving them different weightings. Forecasting demand is undoubtedly more difficult than ever before, given today’s market conditions, but some businesses will feel they can do a better job in this area. Others will take the view that making predictions they can rely on is just too difficult – and that the risks of getting it wrong are too large.
The stakes are high and many companies are finding that, under such pressure, their customers begin to behave in counterintuitive ways. During the COVID-19 pandemic, for example, condom manufacturers assumed sales would soar, given that so many people were stuck at home, looking for ways to amuse themselves. In fact, demand slumped as the lockdowns limited people’s social lives and public healthcare providers pulled back from non-essential services.
Today, meanwhile, food and beverage companies are wondering about those sales of Ozempic and Wegovy. Will demand for such products mean consumers feel less restricted in what they can eat and drink, or will such treatments be part of overall lifestyle changes that significantly affect consumption habits?
One thing is clear, however. Many businesses are now starting to think about their supply chain strategies in a different way. Their decisions previously considered the cost dynamics of different strategies – of outsourced production compared with in-house facilities, for example. Now, they are beginning to focus on measures such as revenue at risk. Could a failure to meet increased demand affect future sales patterns?
That shift changes the conversation. Spending $11bn on ready-to-operate production facilities may not make much sense for a pharma company under normal circumstances. But the price tag looks much more affordable when sales are increasing at rates of above 30% a year and revenues already total more than $8bn a quarter.
There is another shift to consider here, too. Supply chain management moved up the C-suite agenda during the pandemic and shows no signs of sliding back. CEOs and CFOs will want much greater visibility and understanding of their supply chain challenges, given the risks their organizations continue to face in this regard – and the sizeable investments often required to mitigate them.
In other words, supply chain leaders should expect to undergo far more rigorous and urgent interrogation than in the past, and to play a much more prominent role in corporate strategy. More than ever, they will be responsible for steering the ship – and they will want to ensure it is heading for the brightest possible future. Supply chain management will be integral to their taking that route.
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