Offshoring can endanger pharmaceutical quality, Clemson researcher says

CLEMSON, SC – September 29, 2011 – The over-the-counter or prescription medication provided in the United States may not be as safe as consumers are led to believe, according to the research findings of Aleda Roth, the Burlington Industries Professor of Supply Chain Management at Clemson University.

Findings of “Quality risk in offshore manufacturing: Evidence from the pharmaceutical industry,” are published in “The Journal of Operations Management” and show a significant association between the offshoring of manufacturing and quality risk to the product.

Roth and her co-authors also determined that industry executives might underestimate the costs of quality risks when choosing offshore production. According to Roth, “policymakers should strengthen the Food and Drug Administration’s authority and overall ability to intensify its inspection focus on international manufacturing as well as to tighten the overall security of pharmaceutical supply chains. It is not unreasonable for companies wishing to sell drugs in the United States that are manufactured elsewhere to pay for the incremental costs of maintaining the same level of product integrity.”

This empirical research provides insights into the effect of major location decisions on quality risk and uses Puerto Rico as the testing ground.

“It is often difficult for executives to fully understand the day-to-day challenges faced by operations managers as they attempt to meet delivery pressures with both low cost and low quality risk,” Roth said. “Many top-level executives may be easily blindsided by the numerous perceived upsides of offshoring and may too easily dismiss the downside operational risks beyond the obvious. The operational task of managing and transferring knowledge is extremely challenging, and the actual costs are likely to be dramatically underestimated.”

Roth and her co-authors, John V. Gray and Michael J. Leiblein from the Fisher College of Business at Ohio State University, sampled 30 pairs of regulated drug manufacturing plants in the United States and Puerto Rico matched both by parent firm and by product standard industrial code. On average, Puerto Rican plants operate with a significantly higher quality risk than matching plants operated by the same firm located in the United States. This finding persists above and beyond potentially important factors, such as geographic distance and the local population’s general and industry-specific skills.

“Our research highlights the need for manufacturing firms to carefully consider increased quality risk associated with the offshoring of production, particularly with regard to process-sensitive products like drugs, which lack 100 percent testability,” Roth said.

The creation of an organization with low quality risk requires the implementation and reinforcement of a mindset and processes that can be difficult to accomplish from afar, especially when an offshore location possesses employees bringing a different culture to the workplace. These difficulties are apt to be exacerbated in lower-cost, more distant offshore operations, especially if the employees at these locations presume that their primary contribution to the business is reduced cost and not quality.

“As pharmaceutical companies are rapidly moving drug manufacturing to China and India, this research suggests that quality risks will be heightened significantly,” Roth said. “In some countries, the FDA must announce audits in advance, whereas the auditing process in Puerto Rico is unannounced as in the United States. Moreover, the standards and regulatory environments are similar between the U.S. and Puerto Rico.”

Roth is a prolific researcher in supply chain management and service operations strategies. Her research productivity in leading academic journals in the area of service operations is ranked seventh worldwide; and in terms of overall productivity she ranks in the top one percent. Her research has been recognized with more than 65 awards. She co-authored the 2010 Global Manufacturing Competitiveness Index Report in conjunction with Deloitte Touche Tohmatsu and the U.S. Council on Competitiveness to report how more than 400 manufacturing CEOs worldwide view their industries and national competitiveness.

Roth came to Clemson in 2006 from Arizona State University, where she held the W.P. Carey Chair in Supply Chain Management. Previously, she was an Endowed Chair at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. She is a member of the Conference Board’s Business Performance Excellence Council and the Supply Chain Thought Leaders Roundtable.