Strategizing in pharma often means weighing out the advantages, pitfalls and cost of various alternatives.
Since the past two decades, pharma companies have leveraged outsourcing as a great option owing to the labor advantage that countries like India and China provide. This is understandable as manufacturing was highly labor intensive and hence access to cheap labor (for huge manufacturing needs of pharma giants) was essential. However, considering the extent of automation and quick adoption of robotics in manufacturing by big players like Merck, the importance of cheap labor is waning. Companies are focusing their efforts on innovation and research, and nearshoring is helping them tap the opportunity to save cost and re-route it toward R&D.
Nearshoring, though a subset of offshoring, is viewed quite differently than offshoring and has its own advantages:
- Country-based opportunities: Companies can explore the advantage that a specific country can offer in terms of low wages, transport and travel costs and an overall conducive regulatory landscape. For example, countries like Poland and Bulgaria rank as the top destinations in terms of tax incentives, outsourcing opportunities and stabilized economies, etc. Western European countries like Germany and UK, which are home to some big names in pharma, have a lot to offer.
- Shared laws: The countries come under the purview of EU which means the laws related to labor and transport are common. This is especially important since pharma companies require certain adherence to quality and it can go amiss when outsourcing to countries like India and China where the laws are different and is often a matter of concern for the pharma sponsor.
- Geographic advantage: Nearshoring means functioning in the same time zone and hence having real-time situation control. Transportation and faster shipments are possible due to proximity and lesser transportation barriers as compared with overseas movement. Talking about the population, low-cost countries like India and China have been tried and tested a multitude of times for clinical trials. It acts as an advantage to get an entirely fresh population, like from Poland or Bulgaria, to conduct a clinical trial for the drugs.
- Supply chain management: The closer the manufacturing counterparts are to the home country, the better the chances are to oversee the activities. Communication becomes easier and the time to bring products to the market is reduced. There are lesser chances of error, and there is more control and greater flexibility since options related to transport and shipments are increased due to reduced distance between the parties.
The decision whether to nearshore or offshore one’s manufacturing is not easy. Though nearshoring acts as a viable option in most of the cases, the volume of business, the final market and subsector within pharma are some important parameters to be considered:
- Final market: If the market where the company decides to sell its products is Asia, then it is better off offshoring the manufacturing since that will save cost substantially than reaping near-home benefits
- Volume of operation: If the volume of manufacturing is not high, nearshoring is a better option than offshoring it to a country halfway around the globe since it would not help save any cost by doing small business with a partner offshore
- Type of business: Disposable items like gloves, catheters and tubes which are produced in high volumes are perfect for offshoring. This is because they are usually manufactured in great volumes and the counterpart does it at a great profit for the contractor
Companies, a decade or two ago, started with the trend of offshoring since it gave them the benefit of availing low-cost labor for vast manufacturing. Now, since automation and robotics are slowly taking over, companies are quickly realizing the benefits of nearshoring. The benefits include geographic proximity, ease in supply chain management, low transportation costs, etc. Compare this with offshore partnership that only provided the benefit of low-cost labor. The decision to nearshore is obviously dependent on many factors like scale of operations, final market and business type, which need to be analyzed before outsourcing to a neighboring country.