At the beginning of January, Supply Chain Matters commented on certain signs of supply chain structural changes that were being attempted by noted disruptors Google and Walmart. We specifically observed how Google, having muscled its way into branded smartphones announced that it planned to sell such phones directly to consumers, bypassing major carriers and electronics retailers.  By establishing an online store, Google planned to offer an ‘unlocked version’ of its Nexus One phone for $529 which consumers could purchase and later enable with a wireless carrier of choice.

From the get go, Google experienced multiple issues related to consumer difficulties in purchasing and activating phones.  Google’s worldwide contract manufacturer, HTC of Taiwan, was also placed in a rather difficult position to attempt to support worldwide fulfillment and returns generated from online store purchases.  Now, nearly four months later, the initial results of this attempted disintermediation are presenting themselves.  A recent Financial Times article, Google backtracks on phone strategy, (free preview sign-up or subscription required) indicates that the company has decided to sell the Nexus One in Europe through mobile operators rather than its online store. A Google spokesperson notes: “We have decided that the best and fastest way to get Nexus One into the hands of European consumers is through our partners.” The article further quotes industry analysts as noting that the wireless carriers can make or break a device, and Google is not an exception. One analyst speculated that Google sold just 135,000 units in the first 64 days.  Google is of course, refusing to disclose any sales numbers.

In a related development,  a posting on SiliconValley.com notes that Google indicated that it is dropping plans to produce a version of its Nexus One smartphone for Verizon Wireless, the U.S.’s largest mobile carrier. A Google spokesperson noted that the new Droid Incredible, a smartphone Verizon will begin offering this week with the same Android operating system and made by the same manufacturer as the Nexus One, made production of a Nexus One for Verizon superfluous.

In our view, Google’s ill conceived product marketing strategy coupled with a not well thought out supply chain fulfillment and channel partner strategy have all come home to roost.  I suppose it would not shock readers if I described Google as “arrogant” but attempting to go it alone in worldwide distribution and marketing of smartphones tips arrogance to a new dimension.  Google needs to invest in people who understand all the tenets of responsive global supply chain management vs. just being disruptive for the sake of making a statement.

Bob Ferrari

One of the very first supply chain risk and disruption incidents that the Supply Chain Matters blog noted during its inception a little over two years ago was the incident involving contaminated heparin that occured within China.  We were literally taken aback that product contamination incidents would be occurring in the most regulated and safety sensitive of supply chains.  If these quality breakdown incidents were occurring in this segment, what about other less regulated supply chains?  It did not take long to gather other evidence after the incidents of quality breakdowns in drug-related supply chain continues.

In one of our summary commentaries in March of 2008, Drug Imports from China- Controls are Mandatory, we noted that government inspections cannot be relied upon to be the sole quality control point for drugs, medicines and medical materials being imported from China. At that time, there were over 700 Chinese drug makers registered with the U.S. Food and Drug Administration (FDA), with just 14 inspections completed.

Two years since, a recent Wall Street Journal article, FDA Faulted in Heparin Case (paid subscription may be required) indicates that U.S. congressional investigators have observed that the “FDA failed to pursue several “specific and credible leads” that might have identified culprits in China” during the 2008 heparin contamination incident.  The overall incident was ultimately linked to 80 deaths impacting the most medically critical area of drug delivery.  This article further notes that “one red flag that the FDA allegedly ignored was that a foreign “respectable regulatory government agency had shared “a significant finding” that a Chinese company was making counterfeit crude heparin to be shipped to the U.S. under another firm’s label.” The FDA never issued a definitive finding as to who or what was responsible for the heparin contamination incident, that in essence there were too many sources of potential contamination. Even more problematic is that the Congressional letter further observes “that the FDA faces legal and linguistic hurdles in conducting probes overseas.”

The obvious question therefore remains, has the pharmaceutical industry learned anything from previous deadly and shocking incidents of contamination?  Have new, more adequate controls been put into effect to both control or detect the presence of contamination from either foreign or domestic production sources before reaching patients? I believe that the answer is sketchy at best.

The newest conflicting evidence involves the incident of McNeil Consumer Healthcare, a division of Johnson and Johnson Inc., that is working in consultation with the FDA in implementing a voluntary recall of infant and children’s liquid products due to manufacturing deficiencies which may affect quality, purity or potency. The products include certain liquid infant’s and children’s Tylenol®, Motrin®, Zyrtec®, and Benadryl® products which were produced in U.S. facilities. According to an ABC News Report (video) an FDA inspection found a wide range of problems at McNeill’s Pennsylvania production facilities triggering a number of  “red flags”.  In this incident, the FDA actually did its job and called for action by the manufacturer.

As we noted previously, quality and safety will have to come from highly controlled and monitored processes, managed by the brand owners themselves.  Two years after the heparin contamination incident, the U.S. government is still engaged in a finger-pointing exercise and pharmaceutical companies have breakdowns in quality control and monitoring processes. Patients and consumers have to figure out for themselves what drugs are safe, and a highly regulated supply chain shows signs of breakdowns among its various players.  The industry has to solve its problem of quality controls both from domestic and international production sources, and it cannot just punt to the FDA to be the continual watchdog. The FDA has a finite number of resources and cannot be expected to cover all international sources of production.  As noted, the FDA is busy enough just trying to monitor and control domestic incidents.

Sick and dependent patients, children, and all of us, deserve better. The Pharmaceutical industry needs to step-up in efforts in quality monitoring and control, as well as risk detection.

Bob Ferrari

With the bulk of Q1 earnings reports being publicly announced, we thought it would be interesting to take a snapshot of the downstream, upstream and transportation component areas of global supply chains. The goal of this three-part series to assess trends and determine how major supply chain participants are currently experiencing and viewing 2010 business levels, and how the general post recessionary recovery is manifesting itself among industry supply chains.

We certainly do not pretend to be trained economists, and please do not view these postings as a basis to plan for the remainder of the year. It is, however, interesting to put information points into a context, and begin a commentary on what lies in store for the remainder of 2010.

Since many of these companies represent the initial stages of supply feeding multiple industry supply chains, we will snapshoot what can be considered downstream bell weather companies for important signs of recovery,

In reporting of quarterly results from the March ending period, companies in chemicals, metals and semiconductor seem rather positive in their perspective for a much improved 2010.  Many of these reported results reflect that companies have clearly begun a renewed production cycle, and these are all strong indications that supply chains are replenishing inventories or increasing production levels from that of a year earlier.

Let us review the following highlights:

BASF

Revenues up 26% to $20.6 billion, up from $16.1 billion a year earlier

Profits considerably improved- $1.36 billion vs. $495 million a year earlier

Positive but cautious outlook for the remainder of 2010

Demand increased across all regions, particularly Asia

Renewed demand from almost all customer segments particularly automotive, electric and electronic instruments

Chemical sales rose due to significantly improved demand and higher prices, and earnings were significantly higher due to improved volumes, high capacity utilization and improved costs.

Plastics is steadily recovering on higher volumes

The Oil & Gas segment saw lower sales and earnings during the quarter, weighed by significantly lower natural gas prices

Agricultural solutions earnings declined from a year earlier due to negative currency effects.

Baosteel (China’s largest steelmaker)

Revenues up 37.1%

Profits of 3.93 billion yuan compared to 88.98 million yuan a year earlier: Reported as best quarterly profit in two years

Production volumes of iron up 22%, steel up 28.4%

Indicated that first half profits may surge sis to tenfold as Chinese demand for metal used in autos and appliances rebounds

Dupont

Revenues up 23% to $8.5 billion on 19% higher shipping volumes

First quarter profits doubled on higher selling prices

Asia Pacific sales up 65%

Raw material, energy and freight costs were 2% lower vs. prior year and are expected to increase to 5% for full year

Sales in performance electronics sector up 73%, performance materials up 63%, performance chemicals up 32%

Increased full year earnings and profit expectations

Nucor

Revenues up 40% to $3.65 billion

Profit of $31 million vs. loss of $189.6 million a year ago

Capacity utilization improved to 73% compared to 45% a year ago

Reduced total energy costs by $10 per ton from a year ago

U.S. Steel

Revenues increased to $3.9 billion, up 16% from Q4

Total steel shipments of 5.4 million tons vs. 3.23 million tons a year earlier. December quarter shipments were 4.65 million tons

Loss of $157 million, significant improvement from $267 million loss in Q4, and $439 million loss a year earlier

Flat roll steel shipments up 12% in the quarter, up 68% from a year earlier, an indicator of demand from automotive and appliance sectors.

Intel

Revenue surged 44% to $10.3 billion from $7.1 billion a year earlier

Profits quadrupled to $2.44 billion compared with $629 million a year earlier

Strongest Q1 since the company was founded in 1968

Little slowdown in Q1, which is traditionally a slow quarter

Plans to hire 1000-2000 new workers, first substantial hiring increase in five years

Demand improved in all regions of the world

TSMC

Sales revenue $92.19 billion Taiwan dollars vs. $39.50 billion a year earlier. Expects current quarter revenues to hit an all-time high

Profits increased to $33.66 billion Taiwan dollars vs. $1.56 billion a year earlier, the highest since Q4 of 2007

Gross margin impact of .9 percentage point due to the damage effects of Taiwan earthquake on March 4th

Total wafer revenues by geography: North America 68%, Asia Pacific 15%, Europe 11%, Japan 4%, China 2%

Consumer segment had strongest sequential growth, 9%; Communication and Industrial both grew 2%; Computer-related declined 3%

Expecting global semiconductor industry to grow 22% in 2010

If this representative sample is any indication, overall in Q1, the downstream supply chain is doing just fine.  This reflects what I believe to be a somewhat positive, but cautious outlook for 2010.  Semiconductor stands out as the most optimistic reflecting consumers still want their new smartphones, HD TV’s and other electronic gadgetry. There may be many causation factors, the most significant being the continued effects of governmental stimulus programs effecting certain industries, as well as some consumer buying resurgence in consumer electronics and automobiles.  Geographic factors can certainly be noted, as Brazil, China, India and other Asian regions continue to stand out as leading the way toward recovery. The important take away is to determine if this current downstream momentum translates to upstream results by the end of 2010.

In our second posting, we will focus on a brief snapshot of major industrial manufacturing companies, the middle layer of global supply chains.

In the meantime, feel free to add your own observations.  How is your organization viewing current business conditions?

Bob Ferrari