COVID-19 has posed a significant challenge to every industry, as its implications span from changing of health protocols to blocking of imported goods. The medical device industry specifically faces a unique situation, as companies are pressured to rethink risk to the medical device supply chain, work around new regulations, and even retool other consumer products companies. The ongoing conversation about how supply chains will weather this unforeseen trade disruption has brought significant regulatory changes and possible solutions.
The United States has seen recent developments in trade and global supply chain regulation. This includes the ongoing U.S.-China trade war, tariff barriers, and recent action regarding FEMA (Federal Emergency Management Agency) and the USMCA (United States-Mexico-Canada Agreement).
The U.S.-China Trade War
The electronics sector is stuck between two massive threats: continuous tariffs coupled with a pandemic that is testing conventional supply chain management practices. There are considerable changes being implemented that will likely affect U.S. technology manufacturing. First, the U.S. has ended its special trade relationship with Hong Kong, and there is a new executive order to change labeling of these imported products to “Made in China”. Big name brands face a challenge in the possibility that this labeling produces a negative impact on brand perception.
Diversification of manufacturing networks is essential to mitigating the risk of trade disruption that another unprecedented situation like COVID could bring. Sourcing issues have risen as the main cause of product delays, rooted in the inability to solidify the cost and availability of components between engineering and procurement teams.
In August 2018, the USTR (United States Trade Representative) proposed a list of Chinese-produced essential healthcare products, that included masks, gloves, gowns, and wipes, that would be less readily available, unknowingly setting the U.S. up for failure in fighting future needs. Several months after the pandemic started, the inability to find health-related products in U.S. stores persists. Companies like GM that retooled required products in the transition to making ventilators that they could only obtain from China, and these specific materials were under a 25% tariff. These tariffs make it especially difficult to import items for building medical devices and equipment.
The process for FDA-regulated medical devices is very lengthy, including the development of environmental controls, facility upgrades, purchasing equipment, and many audits. The exception to this process is the case in which Emergency Use Authorization (EUA) is granted. EUAs are expected to become more common after the pandemic, as they spiked in response to sudden need for PPE and respirators. Regardless, with the goal of procuring supplies from other countries or increasing production at home, it is necessary that supply chains diversify beyond China. This will be especially difficult because these materials aren’t exactly readily available in other nations, and China is the largest exporter of PPE.
FEMA Develops Voluntary Agreement
In mid-August, the Federal Emergency Management Agency created a five-year voluntary agreement with the private sector under the Defense Production Act to address the manufacture and distribution of “critical healthcare resources”. This includes medical equipment and technologies, as the U.S. has developed a significant shortage amid the COVID-19 crisis. These products include to ‘personal protective equipment, pharmaceuticals, respiratory devices, vaccines, raw materials, supplies, and medical devices ‘, specified an agency spokesperson.
FEMA noted that this development falls under Section 708 of the Defense Production Act of 1950, aiming to create a “unity of effort” between the federal government and the private sector; this specifically entails efforts to maximize on the ability to manufacture and distribute critical healthcare resources. FEMA has revealed that they are considering individuals, partnerships, corporations, associations and private organizations that have the capability and/or resources to achieve their mission. Invited parties are under no extreme pressure to sign and may withdraw at any time. The organization is currently encouraging more companies to join the agreement which will be effective to fight against COVID-19 and future pandemics for the next 5 years.
USMCA Takes Effect, U.S. Presence in Asia-Pacific Falters
The U.S.-Mexico-Canada Agreement went into effect in early July after three years of negotiations, trade disputes and amendments by the U.S. Congress. This leaves many global shippers in question of how the transition away from NAFTA will impact their economy. Though the two are very similar, there are some key changes that could pose a challenge or a reward, depending on the preparedness by supply chain managers. A new level of complexity has been implemented in rules of origin requirements, along with changes to de minimis rates and the Sunset Clause. Section 202 of the USMCA Implementation Act entails the rules of origin followed in deeming if a good qualifies as an originating good under the Agreement. Supply chain managers should take the necessary steps to remain prepared for these changes, including investing in visibility tools and ensuring that their current suppliers are compliant with the USMCA deal. Companies especially need to consider the implications on their supply chain following the possible termination of the deal after 16 short years per the Sunset Clause.
In November, China and 14 other countries have signed what is considered to be the world’s largest trade deal, the Regional Comprehensive Economic Partnership (RCEP); it encompasses almost a third of the world’s population and GDP. US trade officials have since taken note of their absence in the Pacific Rim. This has prompted discussion in revisiting the Trans-Pacific Partnership that the US pulled out of in 2017 or finding another way to solidify presence in the region. It is expected that this discussion gains momentum in 2021.
To counter these advancements, companies of all industries have specifically had to be versatile in their efforts to help the medical supply chain. Some of these include retooling nonessential companies to produce essential medical goods, reshoring foreign operations, and maintaining a resilient infrastructure.
This disruption of global trade accompanied by increasing demand calls for the retooling of manufactures of traditionally nonessential goods to produce essential products. Companies such as Ford, GM, Hanes, and Zara all have contributed to the cause. (GlobalData, 2020) Ford designed an air-purifying respirator, GM contributed ventilators, and many retail companies made masks. This transition is very appealing to global consumers that are influenced by the social responsibility taken by a company.
Retooling compensates for global trade disruption by looking to local manufacturers to restructure for the pressing needs at hand. It is also important to note that this repurposing of infrastructure can be leveraged in future situations of crisis and will likely be necessary in the future. Since many consumers are less inclined to buy the non-discretionary products that these companies traditionally produce, alternate revenue channels can be favorable when creating a more in-demand supply. If not produced for profit, companies can at least improve social responsibility efforts through the free distribution of necessary healthcare products.
This pandemic has proven a significant disruption to the medical technology supply chain, and there is a likelihood that future events will continue to do the same. Many corporations and public sector bodies are calling for their supply chains to come closer to American soil, either in Canada or Mexico or the US itself. This practice is much easier said than done, due to extensive labor costs and overall challenge of creating this change. It is possible, though to adopt a more hybrid version of this model and is becoming widely popular.
Reshoring or nearshoring have seen the largest positive increases on the reshoring index since the early 2000’s. Not surprisingly, COVID-19 has largely influenced many companies that traditionally source offshore. 64% of 879 North American manufacturing and industrial leaders claim to likely to bring manufacturing production and sourcing back to North America. There is risk associated with nearshoring in Mexico with USMCA in place, as wages could rise. As significant risk rises when only utilizing one supply channel, it is relevant to note that diversification of a vendor base will promote more supply chain resilience. Diversification and nearshoring are not mutually exclusive and should be mixed for optimal strength against future unforeseen disturbances.
Resilience is Key
Despite significant supply chain complications, it is necessary to remain agile and be transparent about the future of medical device. A responsible, innovative mindset can both help solve our current crisis and put infrastructure in place to protect against future issues. Modernization and digitization of the workforce can create a liaison between traditionally face to face communication among healthcare providers and medical device companies. It is necessary that these digital capabilities create speedy results and supply chain resilience though expanded visibility and advanced diagnostics. The temporary solution to the shortage of life-sustaining products is simple. Simplifying design to improve adaptability to ambiguous situations can help companies capitalize on their maximum productivity and efficiency capabilities.
Contributions by Alexandra Hatsios.