Outsourcing Practices Raise Security Concerns

Could lean strategies help improve the national security of the United States?

While lean produces great business benefits, asking if it could affect national security may seem a bit much. However, I raise this issue after reading an intriguing article in The New York Times about outsourcing by drug manufacturers.

Outsourcing often occurs because manufacturers believe the cost of production is less in other countries. That isn’t always true, when all costs (transportation, lead time, etc.) are taken into account. But even when it is, lean can be a powerful means of streamlining production in this country, removing waste to the point where costs can be competitive with those of foreign producers.

The article, by Gardiner Harris, notes that the majority of drug manufacturing has disappeared from the U.S.

Decades ago, most pills consumed in the United States were made here. But like other manufacturing operations, drug plants have been moving to Asia because labor, construction, regulatory and environmental costs are lower there.

The critical ingredients for most antibiotics are now made almost exclusively in China and India. The same is true for dozens of other crucial medicines, including the popular allergy medicine prednisone; metformin, for diabetes; and amlodipine, for high blood pressure.

Of the 1,154 pharmaceutical plants mentioned in generic drug applications to the Food and Drug Administration in 2007, only 13 percent were in the United States. Forty-three percent were in China, and 39 percent were in India…

Drug labels often claim that the pills are manufactured in the United States, but the listed plants are often the sites where foreign-made drug powders are pounded into pills and packaged.

The situation has real security implications.

Officials have said that during a pandemic the United States would not be able to rely on vaccines manufactured largely in Europe because of possible border closures and supply shortages. And the situation is similar with antibiotics like penicillin...

The Centers for Disease Control and Prevention has a stockpile of medicines with enough antibiotics to treat 40 million people. If more are needed, however, the nation lacks the plants to produce them. A penicillin fermenter would take two years to build from scratch, said Enrico Polastro, a Belgian drug industry consultant who is an expert in antibiotics.

Dr. Yusuf K. Hamied, chairman of Cipla, one of the world’s most important suppliers of pharmaceutical ingredients, says his company and others have grown increasingly dependent on Chinese suppliers. “If tomorrow China stopped supplying pharmaceutical ingredients, the worldwide pharmaceutical industry would collapse,” he said…

The world’s growing dependence on Chinese drug manufacturers became apparent in the heparin scare. A year ago, Baxter International and APP Pharmaceuticals split the domestic market for heparin, an anticlotting drug needed for surgery and dialysis.

When federal drug regulators discovered that Baxter’s product had been contaminated by Chinese suppliers, the F.D.A. banned Baxter’s product and turned almost exclusively to the one from APP. But APP also got its product from China.

So for now, like it or not, China has the upper hand. As Mr. Polastro put it, “If China ever got very upset with President Obama, it could be a big problem.”

The question I am raising is whether drug manufacturers would have kept production in this country – enhancing our security – if they had been pursuing a lean transformation to become more competitive, rather than running around the world in pursuit of lower costs.

However, it is also true that China distorted the situation through incentives set up to attract the manufacturers.

China’s position as the pre-eminent supplier of medicines is a result of government policy, said Guy Villax, the chief executive of Hovione, a maker of crucial drug ingredients with plants in Portugal and China.

The regional government in Shanghai has promised to pay local drug makers about $15,000 for any drug approval they garner from the F.D.A. and about $5,000 for any approval from European regulators, according to a document Mr. Villax provided.

“This shows that there has been a government plan in China to become a pharmaceutical industry leader,” Mr. Villax said.

While I believe government should tread very lightly in offering incentives to businesses or industries, it might make sense to offer support – in the form of lean consulting, as is currently provided with the quasi-governmental Manufacturing Extension Partnership – as an incentive to companies to encourage them to remain onshore.

Your thoughts?