Supply Chain Matters

Supply Chain Matters has had multiple posts since February regarding the incident of contaminated supplies of the drug Heparin being shipped to the U.S. from China.  In insuring due diligence, we highlight in this post the latest update from the U.S. Food and Drug Administration (FDA) as reported today in an AP story.

“We have put in place processes that we believe can ensure the safety of the heparin supply within the United States” declared U.S. Health and Human Services secretary Mike Leavitt in an interview on Monday in Shanghai.  ‘What you will see from the United States is a substantial change in our strategy” noting plans to station FDA inspectors in China and other countries. Mr. Leavitt however further cautioned “we believe the system that we have for ensuring safety is a good one but completely inadequate for the future”.

As commented in our Drug Imports from China- Controls Are Mandatory, as well as Drug Imports From China- a Wider Problem posts, this again reiterates that regulatory agencies are ill equipped to keep-up with the pace of current outsourcing of the pharmaceutical and drug supply chain, and risk mitigation must stem from internal and external controls built within such supply chains.  Sourcing materials solely for pure cost savings, is penny wise and pound foolish in the drug manufacturing value chain.  The sourcing or procurement group, nor the U.S. FDA do not hold the sole bag for product quality, the complete value-chain, and all groups involved, collectively need to own that responsibility.

Bob Ferrari

 News of Monday’s massive earthquake that struck central China continues to filter in through various media and Internet-related news sources.  The 7.8 magnitude earthquake is considered a catastrophic event, and already initial reports indicate in excess of 9000 dead, and thousands injured. Surely more tragic numbers will follow.

The quake was located about 60 miles northwest of the city of Chengdu, in Sichuan province and an AP story indicates that 80 percent of the buildings had collapsed in Beichuan county. The city of Chengdu alone has a population of 10 million, larger that that of New York City. In 1976, China’s most deadliest earthquake in modern history killed 240,000 people.

In addition to the tragic loss of life and human injury, the overall disruption and impacts to industry supply chains will most likely present itself over the coming days and weeks.  There are already reports of a chemical plant collapse in Shifang city, sending more than 80 tons of toxic liquid ammonia leaking from that site. Power, water, telecommunications and other utilities within the quake area have all been temporarily disrupted.

Sichuan province and the area of Chengdu provide an important industrial base for China. While the area accounts for only 3.9 percent of the country’s overall GDP, it is a growing area, with aerospace, aluminum, chemicals, cutting tools, fertilizer, machinery and metallurgy presence. This area also provides a growing high technology manufacturing and semiconductor packaging area, offering high tech manufacturers a lower-cost alternative to the Shanghai coastal region. Intel has constructed a large semiconductor packaging facility, and Motorola is in this area as well.

In transportation, Chengdu serves a major rail hub with links to 12 major cities including Beijing and Shanghai. According to a report by the Xinhua news agency, China’s Ministry of Railways reported that 31 passenger trains and 149 cargo trains had been stopped because railway bridges or rail beds had been damaged or destroyed.

Stories of natural disaster for the Southeast Asia region continue at an unprecedented rate.  There were major snowstorms in China in January and February, the tragic cyclone that struck the country of Myanmar with 32,000 deaths reported thus far, and now this earthquake in China.  The overall impact to China’s and certain industry supply chains from this latest tragedy bears close scrutiny as to any effects on today’s just-in-time and lean focused supply chains.

Bob Ferrari

Today’s keynote delivered by SAP co-founder, Hasso Plattner, was quite interesting and for me, informative. Hasso is, by all dimensions, the original technical icon of SAP. He serves in multiple roles as technical emeritus, Supervisory Board Chairman, advisor and professor. Readers who have seen Hasso present at previous conferences can conclude that he has a unique style, can sometimes extend a subject with vast amounts of detail, and is never, ever scripted.  For me, Hasso brings a collection of grounding points between the historic legacy of the company, the technology foundation, and the future path for SAP.

Rather than talk around the announced delay in the planned release of SAP Business by Design, Hasso embraced the subject.  Rather than talk around ERP upgrades as nasty and costly disruption for customers, he acknowledged that this was no longer acceptable.  He clarified that he was “selling the idea, not the solution” for this audience. The talk outlined the original design principles for SAP Business by Design in leading-edge transactional, analytical, and virtual search capabilities. He admitted that the original design principles called for limited functionality in order to enhance the hosted by SAP infrastructure footprint, and in retrospect, customers really wanted more functionality in this application suite.  Many a software demo assistant has been white knuckled attempting to follow a script in a Hasso talk, but Ian Kimball did a fantastic job of  providing humor, interplay, and cool technology overviews to today’s supporting demos of planned search, mash-up services, and on-demand analytical analysis features that can come from this new suite.  Hasso stressed the critical role that “in-memory database technology” will contribute to the performance of the suite, and made a bold statement that yesterday’s on-stage demo by Business Objects of retrieving one billion lines of code in mere seconds was one of the most impressive software demos in the company’s history.  I also had a similar reaction- see yesterday’s Part 1 post. 

Today’s keynote outlined a bold and exciting objective for SAP Business by Design, but the real proof will be in more timely execution and delivery, especially in light of SAP’s competitors march in this same direction.  Hasso concluded that SAP has the business advantage in-hand, and made the analogy that the company’s in-memory technology will have the same industry impact as the Apple iPod has had in consumer electronics.  We all will obviously have to wait to observe the results.

Bob Ferrari

Before 25,000 reported attendees, SAP today kicked-off its portion of the 2008 annual Sapphire and ASUG (SAP U.S. User Group) conferences.  I had the opportunity to view all three of the keynotes, from both Co-CEO’s Henning Kagermann and Leo Apotheker, as well as John Schwarz, the CEO of Business Objects.  Having been a Sapphire attendee and observer for many years, I will share some of my observations regarding today’s presentations.

• In the previous three Sapphires, Mr. Kagermann had provided his audience specific development and application release timetables, but today, they were missing. No doubt the recent announced 12-15 month delay in the long hyped Business by Design suite for SMB customers may well have contributed. More importantly I believe, these timetables not only provided SAP customers with clarity and direction for their own systems planning, but also a timetable motivation to internal SAP groups who actually develop these systems. Both Mr. Kagermann and Mr. Apotheker had multiple customer testimonials as part of their keynotes. These testimonials included a stellar list to include BASF, Coca Cola, Harley Davidson, Mahindra, Procter and Gamble, and Valero. The coolest event of all was the CIO of Harley Davidson enter the stage on a Harley, reportedly a down payment on a new SAP application. But with the SAP marketing theme “SAP for Great Companies, Not Just Big Companies”, I wonder why they could not parade one SMB company to be part of a keynote. Also missing was a consistent strong endorsement of the broader SAP partner community, although Mr. Apotheker did make one mention of the SAP development and industry eco-system.
• It was again good to see that supply chain business scenarios were once again recognized in the executive keynotes. Mr. Kagermann’s presentation included a demonstration of the future Collaborative Supplier Management application. This demo was a walk-through of an on-boarding of new suppliers, as existing supplier contracts come-up for renewal. It was unfortunate that the demo script included an unrealistic drill-down scenario utilizing Alibaba. For further details, you can read Jason Busch’s Spend Matters post- Sapphire Dispatch 5. Mr. Apotheker’s keynote included also included a warehouse pick automation scenario from Coca Cola, which featured wireless transmission and integration capabilities.
• Today’s final keynote was the premiering of SAP’s largest acquisition, business intelligence vendor Business Objects. CEO John Swartz talk outlined how Business Objects will fit in the overall SAP strategy of intelligent information across business networks. This presentation really impressed me in bringing forth the real requirements for analytical and business intelligence applications, and the need to bring together all forms of data, structured and unstructured, not just transactional data. Rather than dashboards or collections of data that indicate what had happened, business intelligence is really about assimilating key information that can best determine what will happen, and how to best mitigate business decisions. Also brought out was Business Objects use of SAP BI Accelerator to springboard data integration plans. BI Accelerator, and in-memory data technology, originated from the earlier needs of SAP’s Advanced Planning application (APO) to consume large amounts of data and any given time. The use of this technology in Business Objects may at some point be of benefit to large APO users. Other observations from my perspective was the implication that SAP Global Risk and Compliance (GRC) and Master Data Management (MDM) applications will be eventually supported by the Business Objects platform.

Overall it was an interesting but not profound day of keynotes. The themes were those orchestrated to SAP product strategies. The Supply Chain Matters community can again take notice that while SAP continues to understand the importance of supply chain capabilities in business enterprise strategy enablement, overall implementation timetables will need to be understood and factored by the SAP supply chain community at large.

Bob Ferrari

Phil Fersht’s Horses for Sources business process outsourcing blog recently posted soon to be released highlights of IBM’s recent survey involving the current perceptions of 1100 CEO’s.  These include the conclusion that the vast majority of CEO’s recognize the need for a climate of business change, and are prepared more than ever to be bold and adopt measures that can drive rapid change.  In his post, Phil points out five differences from previous survey highlights, with somewhat of an outsourcing bias.For this author, the important take-away from this latest survey relates to the continuing cross-industry movement toward global supply chain adoption and its associated implications.  The conclusion that there is a scarcity of talent to manage offshore resources and the need for more global intelligence to foster more-timely decision-making is becoming more obvious with each passing day.  I cannot help but ponder the fact that this environment in which CEO’s must deliver quick business results, driven mostly by the short-term focused Wall Street community, may well be having its own  impact on the overall management of supply chain risk. 

Quantifying and strategizing value-chain risk is an area that I trust will be reflected in CEO actions today, and far into the future.  In his additional later comments, Phil points out that there are three groups, the CIO, CFO, and Chief Supply Chain Officer, that the CEO needs to bring together to take advantage of globalization.  In other words, risk strategy must be transferred to consistent execution.  I could not agree more. I would also hasten to add that having a cross-functional risk identification and mitigation team in place should be one of the top items on the CEO to-do list.

Bob Ferrari

On Sunday, SAP will kick off its premier annual users conference for the U.S.  With the assistance of SAP Communications, Supply Chain Matters will be connecting to the various sessions and blogsphere posts through the virtual and live streaming world of the Internet.  Our focus will be interesting news and insights effecting SAP supply and value-chain support technology.  SAP has already indicated prior to the conference that that the anticipated Business by Design product launch will be delayed for another 12 to 15 months.  

So stay connected to Supply Chain Matters for SAP Sapphire posts next week.

Supply Chain Matters has been focusing on some key themes in this blog, one of which has been the existence of quality and compliance risks in certain industry value-chains.  Since our launching, it did not take long to latch on to the severe problem of the contaminated supplies of the drug Heparin which first appeared in mid-February. We have since published three different posts on that problem, each unfortunately describing more loss of life. [See post 1, post 2, post 3.]

My spouse, a school system executive, called my attention to yet another problem, namely sub-standard steel being utilized in the construction of a gymnasium in San Pedro, California, and who knows where else.  This topic was featured in a recent Lou Dobbs CNN series, and you can view the actual broadcast here.   While I believe that Dobbs tends to go a bit overboard on his rants, the story does bring to light the same parallels that I cited in the Heparin calamity.  Everyone in the supply chain “assumes” that the product meets specification, and when the media latches on to the story, the headlines turn to lack of oversight, inspection, and the negatives of low-cost sourcing. 

In constructing new buildings and/or bridges, government agencies that are mandated to seek lowest bids select building contract projects that invariably source steel from China. Why? Because for steel, “lowest cost” leads to China.

Let’s review some facts around steel supply.  Over three years ago, China’s steel industry was already in an over capacity situation.  In 2005, China was a net importer of 13 million tonnes of steel, but that quickly shifted to being a net exporter by the end of 2006.  In spite of the huge boom of building projects across China, more and more capacity was being added, that more than exceeded domestic demand.   Estimates in 2006 were that there were 300 million tonnes of domestic demand vs. over 420 million tonnes of capacity production. This led to exporting steel to other countries, particularly the U.S..  During this time I know of a rather large school building project was delayed because of the availability of steel supplies coming from China.  When the general contractor was asked whether there were U.S. sourced options for the steel, the answer was no, not at the contracted budget. During that delay, the price jumped 15-20% before the steel actually arrived to the site.  Who knows if anyone actually inspected the steel, since that obviously was not part of the contractor’s stated responsibilities.

So what we have unfolding is yet another example of a supply risk, that can lead to more concerning issues of compliance, product liability and safety.  While the U.S. addresses it’s needs for replacing declining infrastructure in deteriorating bridges, school and government buildings, we now have concerns on the actual worthiness of the structural steel being used to construct these facilities.  In San Pedro California, school district officials indicated that all defective steel was removed from their building. I just wonder how often (and unnoticed) this steel supply problem has been or will be repeated in other cities and towns.

Bob Ferrari

I had the opportunity to listen in on the Kraft Foods Q1-2008 earnings results conference call this morning, and there were significant messages reinforced for supply chain management professionals residing in food-related and consumer goods supply chains.Many readers are aware that Kraft is one of the largest global food and beverage companies, with 2007 revenues of more than $37 billion, commanding a strong brand presence in many markets. Kraft has also made continual investments in supply chain process efficiency as well as supporting technology.

From a supply chain strategy, planning, and execution perspective, I heard some significant messages which need to be reinforced for supply chain professionals.  First, the extraordinary high costs of food commodities, or input costs, remain a huge challenge.  I was struck by a chart that reflected the 2008 year-to-date commodity market prices above the average price for the last 10 years (1998-2007):

U.S. Barrel Cheese up 36%

Coffee- NY ‘C’ up 60%

Wheat Chicago up 199%

Soybean Oil up 152%

Paper Packaging up 31%

Resin Packaging up 58%

Crude Oil up 152%

Kraft continues to overcome these price increases with certain price increases to retailers, but at these extraordinary levels, cost reductions must come from other areas of the supply chain, especially continued price hedging of supply, working capital and efficiency gains.

Hearing the breakdown of quarterly performance of individual product sectors further reinforced other supply chain implications:

• Profitable growth today stems from non-U.S. markets- Kraft experienced 9.5% organic revenue, and 47.7% income growth in Europe, with double digit growth rates in coffee, cheese, and chocolate brands. Developing markets also grew revenue by 21.7%, with profits up. Coincidentally, P&G today also cited continued emerging market double-digit growth rates in the high teens.
• In an environment of frequent price increases, and more complex global retail channels, future volume forecasting across product lines will become a more significant challenge. The need for more sophisticated forecasting and demand planning tools will be paramount.
• The management and optimization of both inbound and finished goods inventory remains essential. To Kraft’s credit, they had the foresight to invest in inventory optimization technology in the U.S., and are in early stages of deployment in Europe. While the overall inventory to sales ratio has remained flat, it has not deteriorated in this volatile and challenging environment.
• Manufacturing and quality enhancements were cited by Kraft senior management as positive contributors to working capital improvements, reinforcing the message that we can never take our eye away from lean and six sigma improvement.

If we believe Warren Buffet’s latest predictions, the U.S. economy may well have a longer recessionary period.  For food and consumer goods supply chains, past and current investments in supply chain analytical and intelligence based processes and technology tools will play a more critical role in bottom-line results for consumer goods companies.

Bob Ferrari

In a previous post (Boeing Again Delays the 787- Another Lesson in Supply Chain Risk Management), we pointed to some of various industry views regarding the management of supplier innovation across the extended supply chain being played out within Boeing, and how these circumstances lend themselves to lessons in supply chain risk management.  I pointed out that it was unfortunate that the supplier management teams surrounding the 780 Dreamliner program did not have the opportunity to transfer the learning of Airbus in 2006.  More information and blogsphere commentary continues to be shared regarding this ongoing situation. 

Over on Spend Matters, (Boeing: When Your Suppliers Fail You Buy Them!) Jason Busch references a recent Aviation Week article that describes more detail regarding the need for Boeing to acquire Vought Aircraft Industries’ 50% share of builder Global Aeronautica (GA) in North Charleston, S.C., to apparently mitigate Vought from its de-facto burden as the complex airframe systems integrator. 

In his post, Jason points to lessons learned, that when suppliers fail you in the middle of a complex project, it’s essential to take all actions necessary to control the situation, and a more subtle learning is that when chances of supplier challenges increase by an order of magnitude, sourcing professionals should always be prepared for the worst-case scenarios. 

But the Aviation Week article reveals another important lesson in overall risk management, which is adopting the appropriate management processes to monitor and buffer complex risk within the supplier network.  Consider the two contrasting views. Boeing’s Vice President and 787 General Manager cited the need to work with Alenia to apply proven lean manufacturing expertise in an effort to improve efficiency and productivity.  “One of the lessons they learned is that they haven’t retained talent here to know if that work is being done properly.  They went too lean on their staffing models to even be able to adequately supervise this assembler model” stated Ray Goforth, executive director of the Society of Professional Engineering Employees in Aerospace. 

So let’s add another lesson for Supply Chain Matters readers.  The application of lean methodologies certainly has its applicability when efficiency and cost are the overriding objective. But in matters involving joint supplier innovation as well as complex business model change across the extended supply chain, embracing supplier partnership and risk assessment practices may be a more appropriate objective.  In addition to the learning at Airbus, Boeing can well adopt the learning of supplier collaboration and risk mitigation practiced at Toyota.

Bob Ferrari

Apple announced financial results for its fiscal 2008 second quarter ended March 29, 2008, announcing a blowout revenue and profitability picture (revenues up 43% and profits up 36%),.  In a previous blog entry (Apple’s iPhone Shortage Dilemma), I cite Apple as a great example of a manufacturer who practices all the characteristics for an agile and responsive supply chain, in spite of product supply and/or demand imbalances.The latest quarterly results provide yet more evidence:

• 10.6 million iPods shipped in latest quarter vs. 22.1 million in the previous holiday quarter
• 2.3 million laptops and desktops, virtually the same as the previous holiday quarter, indicating building volumes in this segment
• 1.7 million iPhones vs. 2.3 million in the previous quarter, somewhat reflecting the current shortage dilemma

To put this in some perspective, these shipment volumes represent an overall average of 235,500 shipments per day, from Apple’s direct sales outlets, retail partners, and other channels. Apple has additionally executed long-term supply contracts, in some cases up to the year 2010, for critical NAND memory and other supply.

Apple’s ability to ramp and sustain extraordinary high volumes of shipments, flex with market conditions, while maintaining an edge in truly innovative products is a benchmark for supply chain excellence.

Bob Ferrari