Drug shortages: These factors lead to supply bottlenecks in the pharmaceutical industry

In a recent study, Prof. Dr. Kai Hoberg (KLU), Prof. Dr. David Francas (University of Applied Sciences Worms) and Stephan Mohr (Frankfurt School of Finance and Management) looked into which conditions affect the availability of drugs in Germany. One key finding: while competition between generics manufacturers may lead to diversification of risk and improved reliability, it also makes supply chains more vulnerable.

For the past several months, pharmacies, doctors and impacted citizens have been sounding the alarm: various pediatric drugs like fever-reducing syrups are hard to come by, and the supply situation is tense. While health legislators plan to use new laws to alleviate the situation, KLU has been investigating the underlying reasons for medication shortages since early 2021 and has now released its findings.

Kai Hoberg, Professor of Supply Chain and Operations Strategy at Kühne Logistics University (KLU), and his co-authors conducted the study “On the Drivers of Drug Shortages: Empirical Evidence from Germany.” Their goal: to get to the bottom of the supply bottlenecks in Germany – the fourth-largest pharmaceutical market after the USA, China and Japan.

To do so, they relied in part on data from Germany’s Federal Institute for Drugs and Medical Devices (BfArM), which has documented these bottlenecks. The basis was provided by data from 2017 to 2019 – and intentionally not including the pandemic years as a one-off influence. Using this and other sources, like data on sales and the patent situation or reporting duties in Germany, they created a statistical model that allowed them to identify accumulation points.

Competition, dosage form & reporting deadlines are critical indicators

According to the study, patented products, which are only available from a single manufacturer, are less prone to bottlenecks than products no longer protected by patents, and therefore also available as generics from various providers. “As soon as there’s competition, the respective companies are forced to boost their efficiency. When that happens, even minor disruptions can more quickly lead to bottlenecks, as they have fewer capacities and safety stock,” says Hoberg, explaining the results.

Another conclusion: the susceptibility to supply problems is associated with the dosage form, as certain forms are more difficult to produce, making disruptions more likely. More specifically, the production process for injected drugs was found to be the most complex. Consequently, the risk of contaminations or other problems that can produce bottlenecks is higher. Drugs that are subject to varying demand are also more vulnerable.

In addition, the experts analyzed when those pharmaceuticals companies that are required to report bottlenecks for critical drugs to the BfArM in Germany actually do so. Surprisingly, they found that in many cases, bottlenecks were only reported six to eight weeks after they had hit the market. “We were all surprised to learn this,” says Hoberg, who calls for a more stringent policy on reporting deadlines.

Early-warning systems and more transparency as potential solutions

In this regard, one question frequently raised is whether higher prices could prevent bottlenecks for drugs – and for Hoberg, the answer is clear: “All that this strategy does is to redistribute the problem: when you prioritize companies on the German market, then the drugs aren’t there for other European countries.” In Hoberg’s eyes, a far more promising approach involves more differentiated incentivization that is contingent on the use of resiliency measures, which in turn serve to ensure production in the long term and reduce risk.

The experts consider the next, very practical steps to be establishing an early-warning system and improving transparency throughout the supply chain, which to date has solely been the responsibility of manufacturers. “Although transparency alone won’t solve the bottleneck problem, it’s essential as a basis for developing adequate resiliency measures for companies,” he concludes.

Original publication: Francas, D., Mohr, S. and Hoberg, K. (2023), "On the drivers of drug shortages: empirical evidence from Germany", International Journal of Operations & Production Management, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOPM-09-2022-0581