Supply Chain Matters notes yet another installment in the continued risk of counterfeit drugs and goods within supply chains.

The Financial Times reported that leading generics drug producer Teva Pharmaceutical is stepping-up quality inspections of its products across Europe after discovering a sophisticated counterfeiting operation involving a popular off-patent heartburn treatment medicine.  The fake versions of the drug Omeprazole were discovered by Ratiopharm, a subsidiary of Teva after being alerted from a patient in Germany, who noticed spelling mistakes on the label of the packaged drug. Apparently, the drug contained genuine ingredients but was not produced by the manufacturer stated on the label. While the counterfeit version of this drug does not appear to pose a health risk, it has exposed weaknesses in government drug discount reimbursement programs based on the volume of drugs sold. A spokesperson for Teva was quoted as noting that this company was somewhat surprised to discover this counterfeiting scheme involving one of its products. Stepped-up efforts now include random testing of the company’s products that are in distribution, along with other products.

The alert has now triggered other manufacturers of Omeprazole to make further discoveries of fake versions of both the 20 milligram and 40 milligram packs of this drug.  One other manufacturer mentioned included Hexal, a subsidiary of Sandoz.  Here again, it is noted that while the unit cost of this drug is relatively low, thieves have been able to generate substantial profits through volume distribution of the counterfeit version.

Bob Ferrari

The Wall Street Journal featured a troubling article today, one which adds more credence to the growing problem of quality and conformance lapses that exist in certain industry supply chains. The article, Pratt Discloses Faulty Testing (paid subscription required or free metered view ) reports that United Technologies Corp.’s Pratt & Whitney unit has disclosed that it had uncovered an alleged fraudulent-testing scheme by a sister United Technologies business unit, Carmel Forge Ltd..

The scheme is reported to involve previously unreported multi-year efforts to doctor metallurgical tests involving the production of tens of thousands of engine parts used on business jets and turboprop aircraft.  The alleged period is from the mid-1990’s to the summer of 2011, when a disgruntled whistleblower employee of the Israeli Carmel Forge unit provided an insider tip to Pratt officials.

The WSJ characterizes this disclosure as one of the aerospace industry’s longest and most –pervasive examples of improper testing.  While the report indicates that the parts in question do not pose any safety hazard, Pratt officials acknowledged that the extent and duration of the testing irregularities shocked them, and has prompted a reassessment of quality control and oversight processes among suppliers.

The U.S. Federal Aviation Administration (FAA) launched a formal administrative proceeding after it was informed in September 2011, which is reported to be closing without any imposition of fines or other penalties. The WSJ reports that United Technologies and Pratt officials have worked aggressively to get to the bottom of these reported testing irregularities and has since replaced the top management structure at Carmel Forge.

The obvious question, at least for Supply Chain Matters, was why was this alleged fraudulent testing undiscovered for as long as it was, and why has it taken this long for these details to emerge. The article quotes Pratt officials as indicating “that all the subject parts produced over the years met basic engineering specifications ensuring their safety, though many weren’t properly subjected to Pratt & Whitney’s tougher internal testing requirements.”  Perhaps, a statement dictated by a panel of lawyers, and not very comforting. Readers and industry players can certainly draw their own conclusions.

From our perspective, yet more evidence that the notion of lean supply chains seems to include lean or minimal controls on supplier and testing conformance. For the aerospace industry, already dealing with numerous challenges of backlogged supply chains and the ramifications of the ongoing grounding of Boeing’s 787 Dreamliner, yet another disclosure adds additional stress to supplier relationships.

Bob Ferrari

Supply Chain Matters recently had the opportunity to speak with Pamela Passman, President and CEO of CREATE.org on her recent visit to the Boston area.  The Center for Responsible Enterprise and Trade (CREATe.org) is a non-profit organization dedicated to helping companies, their suppliers and business partners reduce counterfeiting, piracy, trade secret theft and corruption. Pamela’s formal training is law, with a recent 15 year background serving as both Associate General Counsel and Corporate Vice President and Deputy General Counsel for Microsoft.  As readers can well imagine, Pamela has a wealth of knowledge that can be offered in these important areas.

We were candidly not familiar with the work of this organization until we began working on our 2013 Predictions for Global Supply Chains.  Our Prediction #9 declared that higher and more expensive incidents of counterfeit products, physical and IP theft would motivate industry players to step-up their mitigation activities.  The CREATE team pointed us to some important survey data conducted by The Conference Board. In our conversation, Pamela reinforced how her organization has indeed run across more increased senior management concern and interest in these areas. She further communicates her belief that more and more manufacturers have the opportunity to leverage their supply chains to combat corruption, counterfeiting and trade secret theft.

Pamela and I had a great conversation touching upon the history of intellectual property theft, especially relating to direct manufacturing or distribution presence within China.  As a supply chain research director for IDC, executive surveys conducted as far back as 2006 had identified protection of IP as one of the top risk concerns for manufacturers with supply chain activity extending to China. Pamela and her team provide more insights as to what has transpired in these areas and where continued risks currently exist.

The CREATE organization ican provide companies online assessments, independent evaluations, training and other resources designed to  benchmark and improve  processes for safeguarding Intellectual Property (IP) protection and preventing corruption. This organization has built a knowledge base from more than 100 companies that have been translated to a series of assistance tools.

If your organization is in need of a specialized external resource to springboard initiatives related to mitigating risks in the IP protection or corrupt practices area, you may want to consider the CREATE organization as a resource.

In the coming months, Supply Chain Matters will leverage some of the content and generalized assessment learning of this organization to aide in broader education related to these critically important areas and to shed more light on the actions that supply chain teams can undertake to mitigate risks in these areas,

Bob Ferrari

It would appear that when it comes to certain cases related to food safety, the wheels of justice turn mighty slow.  Supply Chain Matters readers might recall the early 2009 incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by the now defunct Peanut Corporation of America (PCA).  That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.

National Public Radio reports that four former executives of PCA and a related company are now facing criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria.  The 76 count indictment was unsealed last week in a U.S. federal court in Georgia. The charges include conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials allege that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA). The four people indicted include Stewart Parnell, the former company president; Samuel Lightsey, former Blakely plant operations manager; and Mary Wilkerson, a quality assurance manager. Also indicted was Michael Parnell, who worked as a food broker on behalf of PCA. If convicted, these executives could face up to 20 years in prison.

In our coverage of this past peanut butter contamination incident, we noted government investigations that indicated that the timeline for the actual contamination was much broader. The actual occurrences of reported sicknesses actually occurred as far back as October of 2008.  It wasn’t until early January of 2009 that various state and federal government officials were able to triangulate the 430 reported sicknesses and 5 deaths to peanut products being produced by the PCA facility in Blakely Georgia.

In February 0f 2010, roughly one year after the major recall, we made note of an article appearing in the Atlanta Journal Constitution indicating that little had changed since the incident, with Georgia state legislators amending a plan calling for increased food inspections, including peanuts, by allowing companies to conduct their on food safety audits in lieu of inspections. At the time, the bill exempted plants whose end product was a raw agricultural product, which included peanut growers who at the time represented about 46 percent of the U.S. supply.  Also reported was that the Georgia Bureau of Investigation had decided to defer any ongoing investigation of PCA to federal authorities.

Here we are, four years since the original incident, and the indictments have now come forth. It seems that the wheels of justice do turn slow, but at least they are turning. It would be rather interesting to observe what additional information comes to light when these indicted executives have their trials.  That is, of course, if they reach the trial stage. Daniel Kilgore, who served as a plant manager from 2002 through 2008, has already pleaded guilty in the case.

Bob Ferrari

Some time ago, Supply Chain Matters brought attention to the growing problem of counterfeit electronic parts within defense-oriented and other supply chains. Our first introduction to this growing problem was from a prior MIT supply chain forum, and we have since added stepped-up efforts to mitigate counterfeit parts infiltrating multiple industry supply chains to Prediction Eight of our Supply Chain Matters Annual Predictions for Global Supply Chains.

The latest visible evidence of the fact that counterfeit parts are compromising supply chains comes from the U.S. Senate Armed Services Committee.  On May 21, this Committee issued a report indicating that a year-long investigation found evidence of 1800 cases of bogus electronic parts supplied by more than 650 suppliers. This Committee also cites China as the principal source of the majority of these bogus parts and calls for that government to take more concerted steps to stop counterfeiting operations that are carried out openly in the country.

The Senate Committee report outlines eight sobering conclusions as a result of its investigation, and high tech supply chain teams need to be aware of the issues brought forward:

• Conclusions One and Two indicate overwhelming evidence indicating that China as the dominant source of bogus parts.  A statement from the U.S. Trade Representative (USTR) states: “…China’s global manufacturing capacity “extends to all phases of the production and global distribution of counterfeit parts””. A witness indicated he observed whole 10,000-15,000 employee factories in China setup for the purposes of counterfeiting, and that parts are sold openly in public markets.
• Conclusions Three, Four and Five casts doubts on the U.S. Department of Defense and its contract buying agencies on their ability to determine the extent of the overall problem, as well as be able to track specific vendors and occurrences. It further identifies some deficiencies in the way contractor’s recover costs incurred as a result of rework or replacement of identified counterfeit parts.
• Conclusion Six notes that the defense industry’s reliance on unvetted independent parts distributors results in unacceptable risks to national security. In one cited instance of a part used in Electromagnetic Interference Filters (EIF) utilized on U.S. Navy large helicopters, the non-conforming parts changed hands five times before a subcontractor to defense contractor Raytheon had acquired the parts. Raytheon nor the Defense Department were aware of where the part was originally manufactured, prior to the Committee’s investigation. Our readers can also recall that in the ongoing shortage of critical generic injectable life-saving drugs involving the pharmaceutical industry, buyers have had no choice but to turn to secondary buying channels to locate critical supply.  Incidents of increased occurrence of counterfeit drugs stems from these secondary channels, with again, ignorance to the original production source.
• Conclusion Seven and Eight cite ongoing weaknesses in testing procedures which are exploited by counterfeiters. A lack of uniform testing or sampling procedures opens the door for bogus parts to penetrate the supply chain. What blew our minds was the Committee conclusion that the vast majority of the cited 1800 cases of suspect parts were apparently unreported to the Defense Department or to criminal authorities. “Many cases were not reported to the Government-Industry Data Exchange Program (GIDEP), a DOD program where government and industry participants can file reports about suspect counterfeits”.

This last set of conclusions is a disturbing indicator that this problem may well be much bigger than anyone is willing to admit.  It also should be an alarm to all electronics-related supply chains that a concentrated focus on identifying and mitigating the existence of counterfeit parts should be an obvious priority.

To give readers a further sense of the hidden nature of this problem, Supply Chain Matters came across a related article published by a publication associated with Warner Robbins Air Force Base. In that article, a top base supply official implies that the problem of counterfeit parts is not as pervasive as the Senate’s panel would indicate. That official notes: “We have not seen significantly increasing volume of suspect counterfeit parts in the weapon system items we support.  None of the cases we have seen has caused a known operational incident or impact”. Our reaction to that quote was that it represents a perspective of the problem does not exist until an occurrence, or until it is reported.  One wonders if this perspective ignores the hidden problem of unreported or untracked incidents reported in the Senate investigation.

While this Senate report should be a serious wake-up call to defense procurement teams, one wonders if legislators and DOD procurement teams are also willing to re-visit policies that call for automatic selection of lowest-cost suppliers in defense supply contracts.  It seems that some qualifier for integrity of supply needs to be factored in procurement policy, one that overrides lowest visible cost.

Bob Ferrari

One important aspect to our blog which provides commentary on global supply chain management is to keep an eagle eye on developments both before, during, and sometimes considerably after a significant supply chain related event.  Our focus is to share learning or takeaways from these various incidents.

When we launched Supply Chain Matters back in 2008, one of our first series of commentaries concerned supply chain risk management, specifically the issue of the tainted pharmaceutical drug heparin that originated from Chinese based suppliers.  Readers may recall that tainted batches of the prime API compound that produces heparin, a key life-saving drug utilized as a blood thinner, were found to later contain oversulfated chondroitin, an altered version of the required chondroitin sulfate.  Instead of sourcing this active API from designated pig intestines, the tainted API apparently came from shark cartilage.  This specific incident attributed to death of 80 persons and many others became very ill.

Our 2008 commentary, Will FDA Inspectors in China Solve Product Safety Issues?, questioned whether regulatory agencies were ill equipped to keep up with the pace of global outsourcing of pharmaceutical compounds and specifically getting a handle on the increasing occurrence of counterfeit or non-conforming products. At the time, the FDA had just announced the deployment of 15 inspectors to monitor hundreds of Chinese food and drug related suppliers that were supplying U.S. destination supply chains.

It was thus with keen interest that we came upon a recent Wall Street Journal published news story titled Suppliers Linked to Impure Heparin. (paid subscription or free metered view).  The article notes that 14 Chinese suppliers are suspected of supplying contaminated raw material to make heparin, but an FDA spokesperson stresses that the agency does not have any hard evidence that these same companies are currently supplying tainted material. The 14 companies have reportedly been placed on an import alert list, with 8 other suppliers that allows FDA and other governmental inspectors to stop shipments from any of these suppliers at the U.S. border.

In our view, the takeaway is that four years after the original incidents, our 2008 commentary still resonates, namely, can the FDA or other regulatory agencies police supply chains for the existence of non-conforming or unsafe products, or is this a prime responsibility of the industry itself.  Since 2008, the FDA has managed to specify a test that can reportedly detect the existence of any heparin contaminate and is now reminding heparin manufacturers to police their supply chains.

The WSJ article quotes the same FDA spokesperson as indicating the following: “The heparin supply is safe.  It’s one of the most protected drugs out there.” Perhaps this statement is predicated on an assumption that the industry will invest in the proper processes and tools to be able to detect unsafe or non-conforming materials, and that the FDA can somehow accelerate its monitoring of foreign-based suppliers.

The final takeaway question is this: Is it really possible for regulated industries such as drugs and medicines to continue their current pace of global-based outsourcing without significant investments in counterfeit and non-conforming materials protection?

Supply Chain Matters is of the point of view that evidence of the current pace of mitigation efforts related to detecting counterfeit materials seems inadequate.  Four years is a very long time to wait for concerted action plans. Investments in global based product pedigree, track and traceability and centralized supplier intelligence could have long been implemented with an investment cost far below the current costs of liability and damaged brand identities.

Perhaps other industry participants, regulators  or service providers can share some perspectives on what exactly is the problem here?

Bob Ferrari

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