How the just-in-time economy failed to deliver against COVID-19

Drug and device manufacturers have relied on just-in-time manufacturing (JTM) manufacturing methods to reduce costs while maintaining product availability, but COVID-19 has shown one of the inherent weaknesses of this manufacturing approach: An inability to handle rapid, unexpected shifts in supply and demand. As Congress considers reforms to supply chain oversight, the FDA may have a broader role to play in ensuring available supplies.

By Aaron Badida, JD

What is just-in-time manufacturing?

Just in time manufacturing is a production method that originated after World War II that aims to reduce the costs of production and product storage by only producing the amount of product that is needed to meet projected demand. The method owes its creation to the management doctrines of W. Edwards Deming and Kiichiro Toyoda.

The appeal of JTM is relatively straightforward: If a company can better meet production demand, it can reduce unnecessary production (saving labor and production costs), storage and inventory costs, and unsold inventory. As the supply chain as a whole has embraced JMT to reduce costs, this has resulted in a generally “lean” process in which raw materials may only be made shortly before they are needed for production. Manufacturers will order only as much materials as is needed to meet anticipated demand.

The life sciences sector has embraced JTM as a means of meeting consumer demand while reducing their costs of production. Limiting excess supply can be important since pharmaceutical products can expire or degrade in storage. JTM can also help incentivize better manufacturing quality, since deficient products wouldn’t be able to be distributed, thereby disrupting product availability.

 

How has just-in-time manufacturing affected the US response to COVID-19?

Because just-in-time manufacturing relies on being able to anticipate known events that can disrupt supply chains, it can be ill suited to accommodate sudden, unknowable events.

As COVID-19 began to spread throughout the globe earlier this year, so too did its effects on a just-in-time supply chain. Some pharmaceutical production facilities needed to shut down for lack of staff. Some chemical constituents needed to produce active pharmaceutical ingredients were in short supply for the same reason. In some cases, countries prohibited raw materials from being exported in a bid to preserve needed supplies for their populations.

Demand for certain medical products has also increased sharply, exceeding the production capacity of companies to make enough of that product to meet expected demand.

The result of this dynamic has been product shortages, arguably exacerbated by the industry’s reliance on JTM. Because most JTM forecasting models don’t take into account rare events, they are difficult to plan for. Arguably, companies that did plan for such an event would need to price in the preparation into their product, making them less able to compete with those who did not.

A recent GoodRx analysis of drug shortages identified by the FDA and the American Society of Health System Pharmacists identified 23 shortages related to COVID-19.

 

How does the FDA regulate the supply chain?

While the FDA has many regulatory authorities related to oversight of the supply chain, it has relatively little authority related to just-in-time manufacturing. In particular, it does not have authority to regulate manufacturing capacity or to compel production of a medical product.

Instead, the FDA has several key pieces of authority over the supply chain:

  • Drug quality: The FDA enforces manufacturing quality regulations, more commonly known as the “Current Good Manufacturing Practices” (CGMPs). CGMPs control nearly every aspect of the pharmaceutical production process. The regulations outline necessary personnel, how buildings must be designed, how equipment must be cleaned and even what to do with returned product. As a result, the FDA establishes standards for products available on the market. Those standards can also act as a barrier to entry and slow the process of getting new manufacturers into the market to help increase production capacity.
  • Product movement: The FDA establishes and enforces requirements regarding the movement of pharmaceutical products throughout the supply chain. Specifically, under the terms of the Drug Quality and Security Act (DQSA), the FDA requires that products be labeled with standardized, unique identifiers, and that entities within the supply chain make note of the products they receive and sell to other entities.
  • Import and export: The FDA conducts inspections of facilities within and outside of the US. In some cases, facilities are found to have either deficient manufacturing processes or other significant deficiencies, and its products are considered to be misbranded or adulterated. In such cases, the FDA may prohibit the entry of those products into the US.
  • Product availability: Resolving drug shortages is an essential function of the FDA. While the FDA lacks the authority to compel a drug manufacturer to make more of a drug, it can help companies to resolve impediments causing a supply shortage, or encourage other manufacturers to make a drug. However, the FDA can’t control where the drug goes or the price at which it is launched or sold. In some cases, the FDA may also allow other types of companies to make a drug, such as pharmaceutical compounders.
  • Drug approval: As the US regulator of pharmaceutical products, the FDA has ultimate say over which products are approved for marketing, as well as their indications for approval and any restrictions of marketing, such as a Risk Evaluation and Mitigation Strategies (REMS) plan.

 

What has the FDA done to address product shortages?

Despite its limited role in supply chain regulation, the FDA has taken some steps to respond to the significant shift in demand driven by COVID-19.

For example, the FDA has issued several guidance documents allowing for the broader use of pharmaceutical compounding to address the reduced availability of certain drugs, including hydroxychloroquine and drugs used to ventilate individuals like propofol.

The FDA has also expanded the scope of its 506(c) reporting requirements. Under this regulation, manufacturers of certain products are required to notify the FDA of disruptions in their manufacturing capabilities or supplies that could lead to a potential shortage, something that the data-driven JTM methods could facilitate.

In addition, the FDA often works with manufacturers to expedite changes to bring additional manufacturing capacity online. It may also identify drugs not approved in the US and allow them to be imported under its “enforcement discretion.”

Manufacturers are also expected to develop Risk Management Plans under the recently-passed CARES Act. These plans are intended to identify and evaluate “risks to the supply of the drug, as applicable, for each establishment in which such drug or active pharmaceutical ingredient of such drug is manufactured.” These plans would be reviewable by the FDA, and are expected to be implemented within 180 days of the passage of the CARES Act, which occurred on March 27, 2020.

However, while companies are required to plan for contingencies, there are no such requirements for them to act on those plans.

 

How might legislators work to reform the supply chain?

The urgent need for medical supplies to confront COVID-19 has already resulted in increased interest by legislators in the supply chain.

In addition to the risk management plans noted above, Congress also gave the FDA additional authority to require certain medical device companies to report shortages and require additional drug shortage reporting by manufacturers of active pharmaceutical ingredients. While the FDA still does not have the power to mandate production of a specific drug, these powers do allow for better supply chain oversight to assist the government in resource planning, allocation of resources, and determining incentives.

Proposals are also on the table in Congress from Sens. Marco Rubio (R-FL) and Tom Cotton (R-AR) to decrease US reliance on foreign manufacturers, especially for products deemed to be essential for national security. The legislation, the Strengthening America’s Supply Chain and National Security Act (S. 3538), would require manufacturers of approved drugs to report to the FDA each year the sources of active and inactive ingredients for their drugs. The bill would also call for the identification of drugs essential to national security. The CARES Act contains a similar requirement for a report, to be authored by the National Academies of Sciences, Engineering and Medicine. Representative Michael Waltz (R-FL) has introduced companion legislation in the House of Representatives.

Sen. Cotton has also proposed the Protecting Our Pharmaceutical Supply Chain from China Act of 2020 (S. 3537), which would require federal health programs to reduce their reliance on drugs manufactured in China. By 2022, the programs would need to purchase drugs with at least 60 percent of their active pharmaceutical ingredients manufactured outside of China. Representative Brian K. Fitzpatrick (R-PA) has introduced a similarly aimed house bill.

 

What’s next for just-in-time manufacturing and the supply chain?

While the FDA remains central to many plans to address the security of the supply chain, it seems unlikely to gain substantial new powers to oversee it under recently-passed or proposed legislation. Proposed legislation has largely given it expanded information reporting power, which can be effective at preventing shortages, but is largely ineffective at resolving them quickly.

The biggest impact on the supply chain—and on the FDA—may depend on whether legislators fundamentally re-examine the US’ broader trade strategy and American reliance on foreign manufacturers and supply chains. These policies could have substantial impact on global supply chains at a minimum, and might also result in changes to product availability and cost. However, it seems unlikely that such changes could happen quickly. New manufacturing facilities and supply chains take a long time to establish, and the FDA must also re-inspect and qualify the facility before it can distribute drug products.

Because manufacturers rely on a steady supply of essentially on-demand raw materials and APIs, disrupted trade with global suppliers (such as those in China) may mean market volatility for pharmaceuticals produced using JTM methods. Controls on the use of suppliers may restrict the ability of companies to source materials quickly—or at the same amount of cost.

Just-in-time manufacturing, though, seems likely to endure. It may, however, be augmented by greater stockpiling and surveillance measures meant to allow the US to better endure supply shocks. For example, the US Strategic National Reserve may be leveraged to ensure that there are larger stockpiles of essential drugs to meet the needs of future crises.

To contact the author of this analysis, please contact Aaron Badida (abadida@agencyiq.com)
To contact the editor of this analysis, please contact Alec Gaffney (agaffney@agencyiq.com)

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