We noted in our Q1-2011 quarterly newsletter that throughout 2010, the most visible occurences of supply chain disruption and lack of supply chain risk mitigation concerned healthcare and medical products provider Johnson & Johnson.  A company that had a previous stellar reputation for quality and rapid response to crisis sadly lost its way with little public evidence of broad management accountability and response.

The CEO of Johnson and Johnson, William Weldon, conducted yet another interview which was published in Monday’s Financial Times. (paid subscription or free preview account required)  In the interview, Mr. Weldon stressed that all divisions were performing strongly with previous issues of quality controls now taken in hand.  Mr. Weldon further indicated to FT that he has taken on personal responsibility to oversee the resolution of quality issues and FDA oversight with products made at three separate production facilities.  The article quotes Mr. Weldon, “I think we want to get the consent decree behind us” and later, “We feel that by the second half of this year, and early next year, we’ll have the products (Motrin, Tylenol) back on the market.” Mr. Weldon once again publically rejected financial media, blogosphere and regulatory agency criticisms that J&J’s de-centralized management approach or pressures to reduce costs had led to the McNeill Consumer Products widespread quality issues involving the Fort Washington Pennsylvania production facility, rather “it was not paying attention to some of the details”.

The real question still remains, are these statements enough to restore consumer confidence?

Supply Chain Matters has published many previous commentaries related to the ongoing quality and subsequent product recall incidents that have occurred in multiple product divisions of J&J, including its McNeil Consumer Healthcare business.  Our most recent commentaries can be viewed here and here.

The fact that quality issues have occurred across multiple divisions, some with the same suspected causes such as chemical leaching from wooden pallets or improper dosing, points to systemic process issues that involve multiple J&J supply chains and operating entities.  They have an end-to-end supply chain context.

The April Bloomberg BusinessWeek cover article concerning J&J noted a highly de-centralized management culture and a pattern that is at odds with its public persona. Supply Chain Matters finds it somewhat difficult to understand how the evidence of multiple quality issues across multiple divisions would not be attributed to systemic breakdowns in quality control processes or cost-cutting efforts that perhaps cut too much in quality control, consistency and compliance. Singular team actions or a singular plant focus does not uncover potential end-to-end process abnormalities in either medical, pharmaceutical or OTC value-chains.

Tylenol, Motrin and other J&J brands commanded premium prices because of their reputations for quality and effectiveness, but events related to quality lapses have opened the door for competitive products. Think of babies and infants, and what was the first brand that came to mind.

Public relations and fistfuls of money do not fix systemic process issues. Management leadership, accountability, openness, and a sense-of-urgency from the highest level are what will regain the trust of customers and employees that systemic issues will and are being addressed.

Bob Ferrari

An announcement today adds another dimension to last November’s mid-air explosion involving a Qantas Airbus A380 superliner equipped with a Rolls Royce Trent aircraft engine that could have resulted in a large loss of life without the actions of a well-trained flight crew.

Qantas announced today that is has reached a 95 million Australian dollar ($100 million USD) confidential settlement with Rolls-Royce to cover the airline’s disruption costs.  Readers may recall our previous Supply Chain Matters February commentary regarding monetary quantification of the engine failure incident caused by a suspected manufacturing defect.  With this announced settlement with Qantas, the Rolls-Royce costs are now at $190 million, including nearly $90 million in 2010 direct costs incurred by Rolls in directly dealing and responding to this one incident. A statement from Rolls-Royce indicates it expects “some small additional costs” in 2011.

Rolls currently holds a 65 percent market share among the combined Boeing 787 Dreamliner, Airbus A380 and A350 programs.  Airline customers continue to favor a ‘power by the hour’ model where carriers lease engines from a manufacturer and pay for operational use.  Innovation and technical engineering must therefore be balanced with engine reliability and near zero defects in quality.  In this new era of powerful social media, airline passenger perceptions of safety and reliability also play a more important role in passenger selection of air carriers and aircraft flights.  Our research arm authored a research insights report reflecting on the social media impacts for Rolls Royce and other aircraft engine manufacturers. The report is titled:  Rolls Royce: Another Evolving Lesson in the New Social Aspects of Risk Management for Supply Chains, and can be downloaded free with user registration within the Supply Chain Matters Research Center.

During the Paris Air Show being held this week, there have been numerous financial media articles indicating that repowering of aircraft models have become a new and more influential buying criteria for airlines that continue to be focused on lowering both fuel consumption and operating costs. Unstated and perhaps another consideration are the operational disruption costs brought about by engine malfunction. Airline carriers are already burdened by disruption costs caused by natural disasters such as recent severe earthquakes, volcanic dust clouds or increased occurrence of severe weather. Add to this dimension newer aircraft composite materials such as carbon fiber, considerably larger aircraft, and the man-made costs related to ongoing reliability and performance add a newer, less-tolerant dimension of disruption.

Bob Ferrari

Many days of torrential rains are affecting millions of people across six different provinces of southern China including Guangdong province.  According to a report in the China Daily, the floods have cut-off roads, breached dikes, caused mudslides and multiple deaths. Flash floods forced nearly 1,000 enterprises to suspend production within Zhejiang province.  Many airline flights at airports such as Shanghai have been cancelled or delayed.

The flooding has been described as the worst in decades, similar to what has been reported in the U.S. Midwest and Mississippi River region.  Farmers have been severely impacted and the Xinhua news agency reports that annual vegetable production may have been impacted by as much as 20 percent, which is not good news for China’s consumers.  There was already widespread concern regarding the rising cost of food prices and associated inflation and these floods could add more increased price pressures for food and staples. Depending on the overall impact of agricultural damage, these floods in China could also impact global prices if China has to increase imports of food and vegetables over the coming months.

In case you might have missed the Wall Street Journal report last week (paid subscription may be required) a Chinese court sentenced three people to prison terms for collaborating to steal information from a supplier to Apple’s iPad2 products. In this case, the head of a Chinese electronics accessories manufacturing firm Shenzhen MacTop Electronics Co. allegedly paid a former employee of Hon Hai Precision Industry research and development employee for information relative to the iPad2 back cover, in order to get a jump on producing protective cases for this device. Xiao Chengsong was sentenced to 18 months in prison and fined 150,000 yuan. Lin Kecheng, the former Hon Hai employee was sentenced to 14 months in prison and fined 100,000 yuan.

Supply Chain Matters has commented often on the secrecy surrounding Apple’s vale-chain and how any and all information leaked from various nodes of Apple’s supply chain are often valuable to financial, competitor and other manufacturing groups.  In March, a former Apple Supply Manager pleaded guilty to 23 counts of felony and fraud in connection with an alleged kickback scheme involving multiple Apple suppliers. The recent Galleon trial involving the exchange of massive amounts of insider information also included supply chain related sources.

This latest verdict appears to be sending a message from China’s legal system that leaks are to be taken seriously.

Last week I had the opportunity to attend the Crossroads 2011 conference which was sponsored by the MIT Center for Transportation and Logistics, a very visionary forum in researching and predicting the future of global supply chains.  The goal of Crossroads 2011 was for select MIT faculty to outline the disruptive innovations that could shape the future of global supply chains and the talks were fascinating. The presentations addressed ultra-low power design technology and self-powered applications, personal health devices, advanced robotics, alternative energy and other technologies. While some attendees may have questioned the overall timing and disruptive tendencies of these technologies, they were certainly fascinating and made one think about the notion that technology marches forward, even if we are sometimes not ready to embrace its implications.

One presentation that especially captured my interest was that delivered by Dr. Joseph Coughlin, Director of the Age Lab at MIT.  Dr. Coughlin’s presentation addressed our global aging population trends and how these trends will manifest themselves in supply chain innovation.  As an example, some sobering statistics that were noted by Dr. Coughlin include:

By 2050, there will be more people over 60 than children in the world.  That implies that there will be more walkers and wheelchairs required and produced than baby carriages.

The ‘baby boomer’ population remains a key target for companies targeting new and innovative products and these innovations, according to Dr. Coughlin will come in the areas of implantable sensors, wearables,  and interactive health applications such as smart toilets. Single person and aging households are among the fastest growing demographic which Dr. Coughlin feels will drive a new era of shopping and home-based logistics.  Big box stores in mega shopping centers may be something of the past as one person households seek a more personal urban or rural shopping experience and consumer products providers practice just-in-time to the home shelf. Large chains such as Wal-Mart and Target are already experiencing the initial effects of this trend. Products ordered on the Internet will not only be delivered but setup and serviced by the logistics provider. Dr. Coughlin’s terminology was “brown meets the geek squad”. Whether the likes of a Fedex or UPS can make money on direct home logistics is another matter altogether.

One other myth that Dr. Coughlin debunked was the notion of the aging workforce, and how older, experienced workers have to step aside to make room for a surging and aggressive group of younger workers. Aging populations will have to work far longer in their careers, and our greatest challenge as a society will be the constant retraining of older workers in newer technologies. That statement really resonated with this baby boomer since I have too often observed recruiters and hiring professionals practicing subtle but obvious age discrimination, regardless of a person’s experience factor. Dr. Coughlin’s take was that there are not enough members of a younger workforce to cover workforce skill requirements.

That also led me to ponder on last week’s Supply Chain Matters commentary reflecting on the interim report from President Barack Obama’s Council on Jobs and Competiveness.  Among the immediate goals outlined by the Council was an all-hands-on-deck strategy to train 10,000 new American engineers every year.  In an editorial commentary printed in the Wall Street Journal, Council co-chairs Jeff Immelt of General Electric and Ken Chenault of American Express noted that there are currently more than two million open jobs in the U.S. that are unfilled in part because employers cannot find workers with advanced manufacturing skills.  It is not rocket science to conclude that some of these open positions were created by older and highly experienced workers retiring.  Would it not be great if industry and academia can find a way for these experienced workers to transfer their knowledge as part-time instructors or mentors, and at the same time, afford the opportunity to continue to be gainfully employed.  Instead of automatically screening resumes and job applications for age and salary, would it not be more beneficial to screen for needed skills, allowing candidates the opportunity to sell their skills in an interviewing setting.  Bold vision could be a recommendation for additional governmental incentives for hiring older workers.

This age of social media too often brings a short-term lens, a focus on the ‘now’ vs. a focus on goals and objectives. Technology will continue to provide all of us profound benefits but at the same time, technology needs to have a context.  People, human relationships and developed skills will always matter in managing complex global supply chains.

Congratulations to the MIT CTL team for assembling a great program.

Bob Ferrari