Among many of the major U.S. consumer product goods (CPG) manufacturers the annual Consumer Analyst Group of New York Conference (CAGNY) held in February is a “big deal’.  It is the opportunity for senior management of these companies to share strategic plans with the major Wall Street analysts who follow and advise investors in these companies, and is often a venue where financial news headlines are often created.

This year’s event was no exception, and the biggest financial news headline stemming from the CAGNY conference concerns Procter and Gamble (P&G) and its announced plans to cut an additional $10 billion in overall costs by 2016. P&G’s net profit plunged 49 percent in the last quarter as consumer markets presented a far more competitive challenge for the company.

Supply Chain Matters views the global supply chain related headline of these Latest P&G announcements as a fundamental realignment of the company’s global supply chain strategy as a response to a revised business strategy. A new emphasis will be on optimizing supply and product fulfillment within the more developing markets across the globe while doubling down on cost and efficiency needs within the developed markets supply chain.

P&G senior management informed analysts that the company’s strategic goal over the coming years is to significantly grow revenues from the developing markets as contrasted with developed markets. The reasons are obvious.  These markets are growing at double digit rates and P&G estimates an increase of 700 million more consumers in these markets by 2020. Currently, roughly 17 percent of overall sales stems from these regions, and P&G’s goal is to grow product margins in these regions to double digit dimensions. Being a recognized leader in supply chain capability, P&G management has also come to the realization that in order to tap this increased emerging market opportunity, supply chains must be adjusted in resource, productivity and cost dimensions.

The $10 billion in overall cost reduction by 2016 will originate from three broad areas:

• $6 billion in cost of goods sold reduction (COGS)
• $3 billion in overhead cost reduction
• $1 billion in savings through increased marketing efficiencies

Supply chain focused COGS reductions include improvements in product design and formulation, in essence leveraging product concentration, weight and efficiency opportunities into global scale production efficiencies. The best analogy would be the beverage industry where syrup concentration is utilized as a base compound for global-wide final packaging and distribution needs. Other areas cited include increased manufacturing efficiencies through a combination of product and process quality initiatives, manufacturing platform simplification and more efficient packaging to reduce global material and logistics costs.

Overhead cost reductions include targeted headcount reductions in the amount of 4100 positions by fiscal year 2013, including aggressive cuts in executive level positions.  These headcount cuts are incremental to the previous announced reductions of 1600 positions in the current FY12 fiscal year, making a total targeted headcount reduction goal of 5700 positions by FY13, and a total impact of $800 million on P&G’s balance sheet.  In its reporting, the Wall Street Journal quoted Yannis Skoufalos, P&G’s global product officer, as indicating that the company will continue with plans to hire between 3000 and 5000 manufacturing employees associated with the opening of  new manufacturing plants in countries such as Brazil, China, South Africa and Eastern Europe.

Headcount reductions at P&G are not a common occurrence, and industry watchers note that this may only be the second time in the company’s history that such measures have been undertaken.

The area of increased marketing efficiencies is also significant and deserves its own separate commentary.  In the CAGNY briefing package, P&G CEO Bob McDonald pointed out the soaring rate of marketing expenses, which is approaching 17 percent of sales in the current fiscal year.  A good portion of these marketing initiatives were targeted to P&G’s developed markets such as the U.S. and Europe vs. developing markets such in Asia, Africa, Russia and others.  New initiatives in this area are to be focused on increased global reach, frequency and digital marketing tools directed at multi-brand scale.  We would not be surprised if this also includes more leveraged use of social-media based marketing tools.

Supply Chain Matters has observed too often in past months a pattern among many CPG companies to target aggressive cost cutting goals in various areas of the supply and value-chain to fund needed offsetting increases in marketing budgets to drive top-line revenue growth objectives. These marketing budget increases tend to lack an overall strategic goal, and consequently CPG companies find themselves in the situation of cutting in the operational supply chain areas needed to sustain future growth such as supporting the increased channel complexity involved within distribution to the developing markets.  That effect alone leads to increased tensions among CPG focused supply chain planning, operations, and marketing teams in coming to consensus over the aligned sales and operations plan related to geographic growth. P&G has however on the surface, placed context to both its strategic market growth and overall cost reduction needs in what appears to be a balanced perspective across all of its corporate functions.

While these latest P&G headlines are certainly the concern for existing P&G employees, the takeaways for the broader supply chain community are that the company may be set a new industry benchmark for focusing on broader strategic vs. short-term results, and a balanced, integrative perspective on product, people, supply chain and marketing requirements required to support a longer-term strategic plan.

Time, degree of execution and future consumer demand will prove to be the ultimate report card for P&G’s strategic supply chain shift. It may also portend other industry shifts in the coming months.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Supply Chain Matters provides our February update commentary regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand in the fall of 2011. Our last early 2012 update in January reflected on the initial quantifiable impacts across industry supply chains. As the period of end of year earnings announcements concludes, we are getting a far more quantifiable picture of the cascading global supply chain impacts as a result of the floods.

We begin with the overall financial impacts.  According to a recent Insurance Journal posting, noted rating agency AM Best indicates that the insurance losses resulting from the floods in Thailand could be considered one of the five costliest insured loss events in the past 31 years.  Thai authorities now estimate that flood damage costs could be up to $15 billion, involving more than 400 manufacturers and households. A study from Aeon Benfield indicates that the amount of structural damage is actually “four times greater than what resulted from Japan’s earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption.”  The implication is that many smaller suppliers or manufacturers may have self-insured.  The more sobering news for sourcing and procurement professionals to be concerned about is an indication by Best that the Thai commercial insurance industry “will likely face sharply contracted (coverage) capacity, higher pricing and tighter terms for coverage with the Sian and Japanese reinsurance renewals in April.” The takeaway, in our point-of-view, is that existing suppliers in these regions will probably face significant higher insurance or liability costs by virtue of their location in a disaster-prone region.

From an economic standpoint, the financial impact to the overall economy of Thailand was far larger than expected. That economy contracted at the annual rate of 9 percent in the final quarter of 2011 which is quite significant. According to the National Economic and Social Development Board of Thailand, the manufacturing sector alone declined 23 percent while net exports fell at an annual rate of 6.1 percent compared to a 17.3 growth rate in the previous quarter.  Beyond Thailand, the economy of Japan contracted a worse than expected 2.3 percent in the final quarter of 2011 and government authorities pointed to a strong yen, falling overseas demand and the impacts from the Thailand floods as hampering production and exports.

The financial impact among individual companies has also come to light.  Western Digital, initially the most impacted manufacturer with 60 percent of its global hard disk drive (HDD) manufacturing sourced in Thailand, indicated that in its fiscal second-quarter, earnings fell 36 percent while overall HDD shipments dropped a substantial 45 percent. That volume drop equates to a shipping shortfall of over 52 million hard drives from the year earlier quarter.  Overall revenues were down 20 percent from the previous quarter. The news from Western Digital was generally well received by Wall Street given the dour initial news immediately after the floods. Company officials noted that while manufacturing levels are on the increase, manufacturing capacity levels will not reach pre-flood levels until at least the September quarter, and that supply chain pipeline inventories are not expected to reach normal levels until the first-half of calendar year 2013.  Meanwhile, rival Seagate Technologies Inc. who had far more limited production presence in Thailand reported better than expected earnings, margins and shipments for the quarter ending in December.  Seagate shipped almost twice the volume of Western Digital, 47 million HDD’s in comparison to the 28.5 million for Western. Seagate’s gross margins increased nearly 12 percentage points from a year earlier as limited overall supply chain supply led to higher prices. According to IHS iSuppli, the average selling price for HDD’s increased on average 28 percent in Q4 of 2011 and will only decline slightly in the current quarter. In our January update, we noted reports of pricing spiking as much as 50 to 100 percent at the retail level in Asia.

Moving up the supply chain, computer providers Dell and Hewlett Packard has released each of their latest quarterly earnings with noted admissions to the financial impact from interruption of HDD supply.  Dell’s fourth quarter 2011 results indicated that while revenues rose 2 percent, earnings fell 18 percent. Dell CFO Brian Glidden acknowledged that the flooding in Thailand financially hurt the company during the quarter.  Not only were available hard drives expensive, Dell could not fulfill its desired needs for higher capacity drives. HP announced that for the quarter ending in January, PC related profits were down 31 percent, and server related profits declined 32 percent.  Overall profits declined 31 percent, and HP’s CFO in-turn acknowledged that the HDD shortage hurt both PC and server sales, and that the impact would continue through the first half of this year.  Readers should recall that both of these companies previously downplayed any significant disruption in supply or pricing.  This again brings credence to the concept of whether in times of significant supply chain disruption, it may be better to bring forward the worst and best case impacts, setting appropriate expectations, rather than waiting for the actual results to occur.  In the case of Western Digital, prior announcements of significant impact, followed by better than expected performance, was well received by Wall Street, in spite of not so positive financial news. Apple on the other hand, most likely from its huge influence in volume buying agreements, has publically indicated little supply impact and had stellar financial results in its latest quarter.  Interesting enough, both Western Digital and Seagate are listed suppliers on Apple’s supplier responsibility report.

Moving down the supply chain, a Forbes hosted article penned by semiconductor industry analyst Jim Handy noted the effects of the HDD supply disruption on the other components of global PC and server supply chains.  Handy notes that  about 40 percent of the total semiconductor market is made up of data processing applications, and because limited supplies of HDD restricted PC build schedules, other components such as LCD screens and DRAMS went into oversupply.  He predicts that other PC components will enter oversupply this quarter which will have a negative impact on semiconductor component prices both in the current quarter and perhaps the remainder of the year.  Supply Chain Matters would add that this may also reflect a situation where longer-term volume buying contracts could not be adjusted or that supply chain planners were challenged with maintaining current build plans while hoping for the best in HDD supply.

As more quantitative and other data attributed to this one significant major supply chain disruption becomes ever more visible, the consequences for re-examined strategic sourcing, supply chain risk mitigation and other planning become more obvious in the months to come.

We can all collectively hope for a less disruptive remaining 2012, but that may be wishful thinking.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog, all rights reserved.

To follow-on with our previous posting, we provide another important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains. When legitimate essential drugs become scarce, unscrupulous activities unfortunately take advantage.

During these past few weeks, regulatory agencies have been alerting doctors and healthcare providers that in the light of severe shortages of hundreds of drugs, there are now clear signs that unauthorized or counterfeit versions of these drugs are infiltrating global supply chains. The U.S. FDA recently alerted to the appearance of “non-FDA approved injectable cancer medications.”  These include non-authorized versions of Faslodex, Hercetin, Neupogen and Rituxan.

The most visible headlines among traditional business media regarding the appearance of counterfeit versions involve the drug Avastin, prescribed to treat brain, colon, lung and kidney cancers.  Last week Swiss drug maker Roche, and its Genetech unit, the global producers of Avastin, indicated that counterfeit versions of its top-selling cancer drug, ones without any active ingredient, were being circulated in the U.S. Patients receiving this counterfeit version would thus not received required therapy. The FDA has further alerted 19 U.S. medical centers about purchases made from suspect distributors.

What is ever more concerning to supply chain management teams is the global based chain of custody now involved in these suspect drugs, adding many more points of vulnerability.  As shortages of life-saving drugs become more acute, healthcare providers are  turning to secondary channels in hopes of securing essential supply, sometimes not knowing the reliability product sourcing of such smaller wholesalers. In the specific case of Avastin, the counterfeit version flowed through wholesalers in Switzerland, Denmark and the United Kingdom before entry into the U.S.  According to an article published in the Financial Times, the Medicines and Healthcare products Regulatory Agency (MHRA) in the U.K. is further investigating whether the source of the counterfeit drug originated from a supplier in Egypt. It was also reported that some of these wholesalers never saw nor physically inspected the drug.  In essence, the existence of a counterfeit gets passed unnoticed all along the chain until it reaches the healthcare provider pharmacy. In its reporting, the Wall Street Journal included a graphic which indicates the multiple alternative wholesaler paths that were reported for distribution of the suspect Avastin.

Since there are currently no clear signs of improvement in overcoming critical shortages of life-saving injectable drugs, the emergence of increased distribution of unapproved or counterfeit drugs will only increase.

If there were ever a time for increased ‘track and trace’ or serial number control processes to assure legitimacy of supplies, it is clearly now.  While the industry has been generally dragging its feet on these initiatives, limiting such efforts to conform to specific U.S. state or national mandate schedules, current alarming events will only force legislative regulators to mandate increased controls for authentication., or possibly accelerate implementation timetables.  The problem is global in scope, meaning that tracking processes and standards must accommodate global supply chain distribution channels.

There is little question that pharmaceutical and drug supply chains have fallen down in insuring adequate and reliable supply of life-saving injectable drugs. Obviously, there are many ongoing problems to resolve, not the least of which is too much single sourcing and lack of adequate supplier monitoring of quality and consistency.  One big problem invariably leads to others, and now, an alarming trend for increased appearance of non-conforming or counterfeit versions leads to yet another problem, insuring authenticity and reliability of supply.

The bottom line, in our view, is that all members of pharmaceutical and drug supply chains, industry and regulators, need to bring serious attention and resources to bear on processes related to sourcing, supply planning, supplier monitoring and product authenticity.

We encourage comments from readers within the industry dealing with these problems.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

We provide a brief but important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains.

Yesterday the U.S. Food and Drug Administration (FDA) approved two additional suppliers for two life-saving cancer drugs that have experienced short supply because of the unplanned shutdown of contract producer Ben Venue Laboratories, a division of Germany based Boehringer Ingelheim GmBH.

To respond to the critical shortage of ovarian cancer treatment drug Doxil, distributed by Johnson and Johnson, the FDA has approved temporary importation of the replacement drug Lipodox as an alternative to Doxil.  The FDA has authorized a limited arrangement specific to Mumbai India based Sun Pharm. Global FZE and its authorized distributor, Caraco Pharmaceutical Laboratories Ltd., based in Detroit. In its press release, the FDA reinforces that temporary importation of unapproved foreign drugs is considered in rare cases when there is a shortage of an approved drug that is critical to patients and the shortage cannot be resolved in a timely fashion with FDA-approved drugs.

Another drug that is in critical short supply in the U.S. drug supply chain is the drug methotrexate, prescribed to treat many forms of cancer and chronic disease. Their have been recent media reports indicating that only two weeks of supply of the drug remained to fulfill patient demand. The FDA has additionally approved a preservative-free generic equivalent manufactured by Illinois based APP Pharmaceuticals, a division of Fresenius Kabi AG based in Germany. Drug maker Hospira additionally expedited release of additional 31,000 vials of methotrexate, described as the equivalent of one month’s demand for this drug. The FDA is also working with other drug producers to free-up additional supplies.

The FDA also issued additional guidance to drug manufacturers regarding more detailed requirements for both mandatory and voluntary notifications to the FDA regarding future drug shortages or potential drug shortages.

Supply Chain Matters applauds these latest actions coming from both the FDA and the industry.  The fact remains however that the potential for stockouts of any critical life-saving drug remains unacceptable, and the industry continues to find itself in a situation of too much sourcing risk, without contingency plans for augmenting supply.  We also strongly suspect that the new FDA directives regarding notification of short supply will only increase the visibility to other drugs in short supply, adding more embarrassment, patient and healthcare provider mistrust concerning the U.S. drug supply chain.  We fear that this will only add to the growing problem of counterfeit and grey market supplies of critical drugs.  We hope that we are proven wrong.

Bob Ferrari

Many past accolades have been written and cited regarding Apple’s supply chain capabilities including recognition in most any industry analyst’s top supply chain ranking, including our own at Supply Chain Matters.

If you have not been keeping-up of late, Apple has entered, perhaps not to its liking, a fairly new phase of global-wide visibility to its supply chain capabilities. The current phase can best be described as a phase driven by public relations and perception, one that will once again challenge Apple’s internal supply chain management teams.

The watershed events leading to this current phase were triggered by two media events.  One was Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, and the other was a rather revealing and candid article published in the New York Times revealing Apple’s certain production and supply chain practices which was not complimentary.

Since that time, Apple’s senior executive and public relations team have been hard at work depicting two sides of Apple’s corporate culture.  The first is one that protects the Apple brand for innovation and corporate responsibility.  The second is the ability to exercise corporate name and power to influence whom in traditional and social media Apple deems to grant access and visibility.

A recent blog posting penned by Wall Street mogul Henry Blodget on the Business Insider blog speculates that instead of thanking the Times for focusing attention on why so many high tech and consumer electronics companies have no choice but to deal with the implications of supply chain sourced in Asia, Apple has been  retaliating by offering competing traditional media outlets like the Wall Street Journal, or blogger friendly outlets like John Gruber’s blog, increased access to Apple senior executives for interviews. The takeaway conclusion is noted as access journalism.

The newest chapter comes tonight in the U.S., when an ABC News’s Nightline broadcast will air what is hyped as an unprecedented glimpse inside the contract manufacturing facilities of Foxconn.  Reporter Bill Weir has penned a fairly revealing perspective of what will be aired on tonight’s program. Weir provides the context for the invite to ABC News as a direct invitation by Apple to actually observe Foxconn final assembly lines as the Fair Labor Association (FLA) conducts its first ever audit of Apple’s supplier responsibility practices. Weir questions the fact that ABC News is owned by Disney Corporation and Disney CEO Bob Iger serves as a member of Apple’s board of directors.

Readers will note Weir’s statement that Apple promised complete access to factories, but denied repeated requests for interviews with either Apple CEO Tim Cook or senior vice president of industrial design, Jony Ive.  The remaining commentary provides eye-popping admissions that reveal how past events have led to Apple having no choice but to increase its oversight of supply chain working conditions.

Sound bites that are sure to resonate from tonight’s airing include the statement that Foxconn’s production campus “employs 235,000 people, roughly the population of Orlando Florida. “  That should hit a sour chord with current U.S. unemployed high tech workers. He notes that during the recent wave of worker suicides that occurred on Foxconn’s campuses, Tim Cook rallied a team of psychiatric experts for advice for dealing with this situation.  Readers may recall that recently the Times expose noted that Tim Cook secretly traveled to Foxconn for first-hand meetings.  There are many more revelations, but , in our view, probably the most revealing are stated quotes from FLA audit inspector Ines Kaempfer.  In the context of Apple’s decision to join and engage FLA in what is reported to be a six figure cost, Kaempfer states: “We call it the ‘Nike moment’ in the industry.  There was a moment for Nike in the ‘90s, when they got a lot of publicity, negative publicity.  And they weren’t the worst.  It’s probably like Apple. They’re not necessarily the worst, it’s just that the publicity is starting to build up. And there was just this moment when they just started to do something about it. And I think that’s what happened for Apple.”

Weir concludes his preview by replaying the  video interview with a production worker as he pulls out his personal iPad and shows photos of his children in America. He asks that worker: “For all the people in America who buy one of these, what do you want them to know about you?”  The reply is impactful: “I want them to know we put a lot of effort in this product so when they use this please use it with care.”

Thus by this airing tonight and the observations and impressions made by viewers, Apple is indeed orchestrating a new and far more visible perspective on its global supply chain.  This is a perspective not as Supply Chain Matters has previously penned as managed by extraordinary supply chain business process, procurement strategy or advanced technology.  It is one that will come from global consumer perceptions of the labor and supplier social responsibility practices within Apple’s supply chain.

The open question for Apple’s supply chain management community is how to manage in a public relations vs. overall improvement framework context.  Tune in tonight and share your own perspectives and observations.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.