Mitigating Raw Materials Risk for Supply Chain Continuity by Tom Dinka

Mitigating Raw Material Risk for Supply Chain Continuity Tom Dinka Doe & Ingalls of North Carolina, LLC April 23, 2009 What’s driving the focus on risk mitigation? • Globalization of the supply chain • Adverse events: e.g. heparin • Biopharmaceutical industry is maturing – Lean manufacturing practices – Process optimization – Scalability considered earlier – Companies want to save $$ • Competing demands for raw material resources • FDA has increased interest in risk mitigation Slide from Deborah M. Autor, Director CDER Office of Compliance, DCAT Mar09 Slide from Richard Friedmand, Director CDER Division Manufacturing & Product Quality, DCAT Mar09 To mitigate effectively, we need to understand total supply chain risk Crude oil (or other basic source) Industrial chemical factory cGMP repackager cGMP distributor Biotech manufacturing Systematic vs. Specific Risk Systematic Risks: affect the majority of your raw materials. Based on market conditions. Specific Risks: affect a segment of raw materials Key systematic risks today: Chemical market • Biotech industry is a small percentage of overall chemical market demand • Specialty producers still upgrading facilities to meet quality standards • Chemical industry consolidating • Chemical industry is a mature industry • Transparency to original source is major challenge • Many materials still do not have compendia • China is a net importer of many chemicals (isopropyl, benzene, acetone, methanol) Key systematic risks today: regulatory • Limited oversight from foreign drug regulators – Chemical manufacturers overseas supervised by other agencies • Limited FDA oversight overseas – FDA must be invited onto foreign soil to perform inspections – Manufacturer ―only‖ gets weeks advance notice of inspection – FDA has new and few foreign dedicated inspectors Reference: Challener/Vermont, Cynthia (2008). Inspections come under the microscope. ICIS Chemical Business. 20-21. Inspection of Foreign Manufacturing Facilities: 2001 - 2008 Reference: Globalization: Challenges and Recent Case Studies, Deborah M. Autor, Esq. Director CDER Office of Compliance, excerpt from a presentation given at DCAT 18Mar2009 Limited Oversight India 16% US 36% 0 500 1000 1500 2000 2500 3000 3500 China India US Inspections Facilities Source: Mansell, Pete (2008) . Supply chain globalization weighs heavily on FDA. In-Pharma Technologist.com China 2% Total: 714 Total: 410 Total: 3300 Example of a systematic risks we are currently facing • Acetonitrile and it’s dependence upon the automotive and housing industry – Co-produced with acrylonitrile – Acrylonitrile is driver of production Specific risk factors—upstream supply Risk Factor Basic Chemical Manufacturer cGMP Manufacturer / Repackager Distributor Industry Focus X X X Production Capacity X X Facility location X X X Materials source X X Product demand in all industries X Environmental risk X X X Geo-political risk X X X Financial risk X X X Audited quality systems X X X Track record with governing body X X Lead time X X X Sole Sourced material X X Transparency into supply chain X X X Management of Change X X X Disaster preparedness X X X Buying power of raw materials X Ability to maintain acceptable quality level X X X Leverage with suppliers X Alignment with suppliers and customers X Storage space constraints X X Supply chain management expertise X X Specific risk factors—upstream supply Risk Factor Basic Chemical Manufacturer cGMP Manufacturer / Repackager Distributor Industry Focus X X X Production Capacity X X Facility location X X X Materials source X X Product demand in all industries X Environmental risk X X X Geo-political risk X X X Financial risk X X X Audited quality systems X X X Track record with governing body X X Lead time X X X Sole Sourced material X X Transparency into supply chain X X X Management of Change X X X Disaster preparedness X X X Buying power of raw materials X Ability to maintain acceptable quality level X X X Leverage with suppliers X Alignment with suppliers and customers X Storage space constraints X X Supply chain management expertise X X Industry Focus X X X Sole-Sourced Material X X X Transparency into supply chain X X X Recent Case Where We Have Encountered Specific Risk • Potash strike and the elimination of source for high quality potassium – Not only North American issue – All major chemical manufacturers purchasing starting material from Potash Co – Effect on Multiple Industries Case example: IPA Reference: Chemical Market Reporter (2005). Chemical Profile – Isopropanol. • Limited number of suppliers produce 1.9 billion lbs crude IPA – Dow, Exxon, Shell and Equistar – Produced in only three U.S. locations – Shell is only Canadian producer of IPA • Two different processes used to produce IPA – Sulfuric acid Oxidation of propylene – Hydrogenation crude Acetone • Grades vary: technical, USP, ACS, semiconductor • Importance: grade and process impact your production process and suppliers’ production impacts your supply chain security Usage of IPA 46% 36% 13% 4% 1% Direct Solvent Usage Chemical Derivatives - MIBK/Isopropyl Acetate Household & Personal Care Pharmaceuticals Acetone Counterfeiting and contamination risk • Substitution of excipient glycerol by counterfeiters: repeat incidents in Haiti, Panama and Bangladesh • Counterfeit Heparin supplied by a Chinese manufacturer - Changzhou SPL s Reference: Mansell, Pete (2008). GMP an unnecessary burden for excipients. In-Pharma Technologist.com. Environmental risk • Hurricane Katrina exposed vulnerabilities along the gulf coast: sucrose and caustic soda producers • Impact on transportation and logistics Unforeseen production changes impact availability: Helium • Many of the world's 16 helium extraction plants are not running at full capacity  supply shortages • U.S. helium demand up > 80% in the past two decades • Demand growing > 20% annually in developing regions such as Asia • Up to 45% increase in cost in two years National events affecting Supply Chain logistics • Olympics in China led to transportation and manufacturing restrictions • The restrictions started in May … Olympics were in August • List 257 chemicals that only authorized firms could sell and transport • Effects felt all over the world Financial Risk – Economic Meltdown • Chemical factory shut downs – Dow consolidating manufacturing facilities • Major chemical suppliers filling bankruptcy – LyondellBasell and Chemtura filling for bankruptcy • Lack of ability to refinance debt – Financial concerns on balance sheets A robust procedure… Planning a risk assessment 1. Attain a clear idea of your objective 2. Decide on scope – Do you plan to analyze all materials or all materials related to a particular project? 3. Involve the appropriate people – Purchasing, materials planning/management, process development, quality, company leadership, supply chain partners 4. Set a timeline 5. Set clear & concise goals Overview of the assessment process 1. Prioritize materials that will be assessed 2. Determine the risks factors in supply chain 3. Set your tolerable risk levels 4. Assess risk likelihood, detection ability and severity of each factor 5. Compare actual against targets for risk 6. Create risk mitigation action plan 7. Re-assess Prioritizing materials 1. Map each material to its use • Determine criticality of material to process • Rank materials by priority for assessment Material S Phase III product G Polysorbate 80 Material R Material A Material Z Material M Material J Material J Material Z Material Z Polysorbate 80 Commercial product P Phase I project X Polysorbate 80 Prioritizing assessment Late stage, commercial applications Low R&D HighCriticality to process Phase I/II/III/IV material used Assess first Assess second Assess second Assess last Polysorbate 80 Polysorbate 80 Plot materials in decision cube Risk likelihood Severity Detection ability Highest priority mitigation High priority mitigation Medium priority mitigation Medium priority mitigation Medium priority mitigation Medium priority mitigation Low priority mitigation/no mitigation Polysorbate 80 Create risk mitigation action plan 1. Look at materials most significantly out of range first 2. Devise immediate actions to mitigate – Risk mitigation inventory – Approval of alternative source 3. Consider long-term actions to mitigate – Capacity agreements – Supplier agreements – Regular audits 4. Do a cost-benefit analysis – Cost to mitigate versus cost of failure – Many options; pick the one with greatest ratio of benefit over cost 5. Re-evaluate risks 6. Set up monitoring program Balancing risk mitigation and lean manufacturing Risk Lean •Hold additional inventory •Qualify smart sources •Invest in market intelligence •Conduct regular audits •Minimize inventory •Reduce redundancy •Reduce costs •Do the job with fewer people Initiatives that strike the balance Risk Lean •Hold additional inventory •Qualify smart sources •Invest in market intelligence •Conduct regular audits •Minimize inventory •Reduce redundancy •Reduce costs •Do the job with fewer people • Use same raw materials for multiple products • Initiate Kanban process • Total chemical management program • Use consistent set of qualified suppliers Reassess materials using decision cube Risk likelihood Severity Detection ability Highest priority mitigation High priority mitigation Medium priority mitigation Medium priority mitigation Medium priority mitigation Medium priority mitigation Low priority mitigation/no mitigation Polysorbate 80 Implications of decisions made from the risk assessment • What are the additional costs associated with your decisions for each part of your supply chain? • Could there be alternative ways to reduce risk? • Who should pay for the added costs? • How does this effect the way you do business with your supply partners? • Do your supply chain partners lose any flexibility managing their business? Takeaways: how to secure your supply chain • Understand complete supply chain back to basic manufacturer • Know how decisions impact the supply chain • Smart sourcing: best decisions start as early as PD • Biotechnology companies require: – complete transparency from chemical manufacturers – alignment with supply chain partners with expertise, understanding and capabilities to mitigate their risks ―Efficiency is doing things right; Effectiveness is doing the right things.‖ Peter Drucker Contact information for follow up questions: Tom Dinka tdinka@doeingalls.com (919) 282-1990