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Report Card on Supply Chain Matters 2013 Predictions- Part Two

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On the eve of the beginning of the chronological New Year, it is our time to reflect, look back and scorecard our Supply Chain Matters 2013 Predictions for Global Supply Chains which we published nearly a year ago.      Supply Chain Matters Blog

Readers are welcomed to review our predictions for 2014 which we outlined previously in a series of detailed commentaries. But now is the time to look back and reflect on what we previously predicted and what actually occurred in 2013.

In our previous Part One posting, we scored our first five predictions for this year.  We now move toward the final five of our predictions and how they fared.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.

 

2013 Prediction Six: Supply Chain Organizations Must Either Embrace and Augment Resiliency or Deal with the Consequences of Poor Business Outcomes.

Rating: 3.0

This particular prediction was motivated by the constant volatility in product demand, supply, and other unplanned events impacting industry supply chains. Volatility exposes the vulnerabilities of existing planning, execution or S&OP processes. Throughout 2013, there were increased incidents of supply chain disruption including a major port strike, the threats of port strikes on involving the U.S. west and east coast ports, major factory and warehouse fires along with continued incidents of unprecedented natural disasters. Just this weekend, a fire destroyed the workshop of internal movement parts-making supplier to Swatch Group and other competitive watch suppliers. Swatch supplies roughly 60 percent of movements used in all Swiss watches. As we pen this update, it remains unclear as to the extent of the damage or parts disruption.

Throughout 2013, we observed more and more evidence of manufacturers investing in people, process and technology augmentation that would address resiliency and more predictive decision-making capabilities. This was further reflected in robust software sales from vendors and services providers that concentrated in enabling resiliency, risk-mitigation and more responsive supply chain decision-making capabilities.

We predicted that Supply Chain Control Tower (SCCT) initiatives, beyond those in high tech and consumer electronics supply chains, would come more to the forefront this year.  That turned out to be not the case.  There were various reasons including the need for further education, organizational readiness to take on such as an initiative and technology vendors themselves who moved away from articulation of SCCT concepts in their product marketing.  This area was a missed prediction for us but we continue in our efforts to provide broader market education in this area.

 

2013 Prediction Seven: Chinese based Manufacturing and Service Firms will Markedly Increase Their Presence and Influence within Industry Supply Chains

Rating: 4.0

The essence of this prediction stemmed from China’s leadership which was encouraging more companies to buy assets overseas and to make strategic investments across targeted industry supply chains. Having in excess of $3 trillion of foreign-exchange reserves helped in the bankrolling of such investments. While natural resource and energy continue to be the predominant strategy our belief was that other industry or geographic penetration strategies would play out in 2013, and that indeed turned out to be the case.

Chinese firms indeed turned their attention toward machinery interests across Europe, making select investments in distressed companies.  Zoomlion Heavy Industry Science and Technology, a state owned construction equipment producer acquired German equipment maker M-Tec inDecember. Sany Heavy Industries has quietly acquired two German based firms, Putzmeister and Intermix and entered a joint venture with Austria based Palfinger.  In the United States, Sany invested in a $60 million office building and adjoining warehouse outside Atlanta in an effort to develop a more significant presence in the U.S. construction equipment market. According to a Wall Street Journal report earlier in the year, Sany has been “scouting for acquisitions and joint ventures to gain a broader product line, more sales and rental outlets.”

Tianjin Pipe has invested in a $1.3 billion manufacturing plant in Texas to produce seamless-steel pipe for the oil and gas industry. That plant is expected to be completed in 2014. Hisense USA, the subsidiary of home-appliance and electronics producer Hisense Electric is branching out to become a stand-alone brand of flat panel TV’s and mobile handsets from a plant in Georgia. A growing number of China based textile producers including Keer Group and JN Fibers have been investing in new production facilities in the U.S. southeast to supply fabric yarn to Central America apparel producers. Energy costs in the U.S. have become far cheaper not to mention transportation cost advantages for shipping yarns and industrial fibers to Central America, an evolving low-cost manufacturing alternative for the Americas market. These strategic investments allow Chinese yarn and fabric producers a means to overcome existing U.S. tariff barriers for fabric composition.

The most visible and noteworthy investment was the acquisition by China’s largest meat producer, Shuanghui Group, of major pork producer Smithfield Foodsfor approximately $4.7 billion. The primary purpose of this acquisition was stated as fostering more export of Smithfield branded pork products towards China’s booming consumer market. The reality however is now the presence of a prominent Chinese based food producer within an important segment of the U.S. pork products supply chain.  The deal also won approval from U.S. regulatory bodies. Since the Smithfield acquisition, there has been added speculation about added acquisitions in the dairy sector.

We believe we nailed this prediction and thus provided ourselves a generous rating.

 

2013 Prediction Eight: The Executive Level Voice and Shared Accountability of Supply Chain will Extend into Three Broader Areas

Rating: 2.0 (see below qualifier)

The basis of this prediction was our belief that evolving needs for product design, customer fulfillment and customer service now umbrella, voluntarily or involuntarily, more accountability for the supply chain leadership executive. Visible incidents of botched new product introductions because of initial quality issues or premature component failures across automotive, aerospace and consumer electronic brands during 2012 led us to this broader prediction. The new era of Service Lifecycle Management where OEM’s or capital equipment manufacturers offer customer pay by use or pay by hour leasing options was yet another motivator for broadening the accountability umbrella of the supply chain organization.

Throughout 2013 there were continued developments of premature quality and component failures among the above mentioned industry groups. While Ford Motor has introduced quite a number of new vehicle models, its quality indicators are slipping precipitously. Business media headlines were consumed with continuous reports of additional component failure incidents involving Boeing’s 787 Dreamliner aircraft. Other incidents that have escaped media visibility continue.

Candidly, our rating of this prediction has been a challenge since we have had difficulty in securing anecdotal or hard evidence of clear increased or broader functional accountabilities among industry supply chain teams. Our intent was to develop a detailed research study to explore this area in 2013 but a lack of time and a specific research sponsor thwarted our efforts.  Therefore, we cannot in good conscience provide ourselves an overly positive rating even though our gut belief is that we were on the right track with this prediction.  We therefore defer to our readers to add further commentary and perspectives as to whether broader and increased accountability indeed occurred during 2013. Look for flash poll early in the New Year to ascertain if a broader umbrella of accountability is underway.

 

2013 Prediction Nine: Higher and More Expensive Incidents of Counterfeit Products, Physical and IP Theft or Grey Market Activities Would Motivate Stepped-Up Mitigation Efforts.

Rating: 3.0

The incidents and challenges surrounding the continued existence of counterfeit products, physical and intellectual property theft, and grey market activities unquestionably continued across multiple industry fronts throughout 2013. In 2012, U.S. Customs and Border Protection alone seized over $178 million in counterfeit goods coming into the United States. Among pharmaceutical and healthcare supply chains, the U.S. Food and Drug Administration (FDA) had to once again alert physicians and healthcare providers to yet another batch of the cancer fighting drug Avastin early in 2013. In March, U.S. Customs officials seized $3.6 million in counterfeit Viagra and Cialis in a warehouse in South Carolina. That same raid also uncovered a large quantity of counterfeit golf clubs within the same warehouse. Counterfeit drugs were not just in proprietary but generic versions of drugs as well. Generic manufacturer Teva Pharmaceutical had to step-up quality inspections of its off-patent heartburn drugs across Europe after healthcare providers and patients noticed miss-spellings in the drug labels. The World Health Organization (WHO) disclosed that there is still no accurate estimate of the global scale of counterfeit medicines.  Reports by others groups suggest that the size of the global counterfeit drugs industry could run into hundreds of billions of dollars.

The United Nations Office on Drugs and Crime concluded in an April report that counterfeit goods, mainly originating from China, have become as profitable as illegal drug trafficking for Asia based criminal gangs. The UN agency concluded that counterfeit goods traced to China are the direct source of about two-thirds of the world’s counterfeit goods.  Many watchdog agencies have concluded that counterfeiters have become far more sophisticated in their methods of production and distribution. China is also the primary area of the most concern regarding intellectual property (IP) protection, and has become a primary motivator for current decisions to near source design and manufacturing to other consuming regions such as the United States.

Despite all the above evidence and incidents, industry supply chains such as the pharmaceutical industry continue to battle a rising tide. While many firms have specific compliance leadership and staff resources, efforts generally were directed at certain controls within current budgetary parameters.  They include early detection, audit and product packaging techniques to make it more difficult for counterfeiters to distribute fake goods. Calls from governmental agencies for stricter or mandated tracking, inspections and controls remain muted and subject to political lobbying. Private industry must step-up and come up with enhanced solutions.

Meanwhile, consumers, patients and services providers continue to remain the victims. While we correctly predicted the wide-scale scope of the ongoing problem, stepped-up mitigation efforts apparently lagged.

 

2013 Prediction Ten: Cloud Computing and Managed Services Options Continue to Gain More Traction Provided that Vendors Resolve Lingering Customer Concerns.

Rating: 3.0

The year 2013 featured the ongoing shift of influence and the ultimate decision in technology buying moving away from IT and towards the business side, with the continued counsel of the CIO and IT teams. The fate of technology investments to enable expected and more timely business outcomes is quickly shifting into the hands of business and supply chain teams. At the same time, huge multi-year technology transformation initiatives were shunned in favor of targeted, tactical business process change initiatives of average 3-6 months duration that phase-in capabilities toward a desired multi-phased end-goal.  This fostered a greater attraction toward cloud computing, managed services or best-of-breed selection options that

provided teams managed scope and much quicker time-to-benefit.

During the year, industry analyst and other published surveys pointed to less resistance for certain supply chain mission critical processes moving toward hybrid or public clouds, provided that vendors could ensure strict security standards, less onerous contract language and quicker implementation methodologies. However, the November-December incident involving the security breach of retailer Target’s point-of-sale systems will most likely significantly re-ignite security concerns again in 2014.

In 2013, many supply chain technology vendors continued their wholesale shifts at providing customers broad cloud-based options in planning, B2B collaboration and execution management. Thus far, customers seem to be comfortable with adopting such options, but again, in managed scope.  Tight budgets for technology adoption also contributed to the attractiveness for cloud-based options since technology investments can be funded within business operating budgets.

 

This concludes our 2013 Predictions scorecard. We trust that you, our readers, secured benefit from these predictions as they transpired this year. While we did not hit a home run on every prediction, we were certainly in the game.

Readers are invited to add their observations in the Comments area regarding our predictions for this year and our self-rating.

Sincere thanks for your continued loyal readership throughout 2013 and we extend our wishes for a productive and rewarding 2014.

Bob Ferrari, Executive Editor and Managing Director

© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.

 


Incidents of Counterfeit Heatburn Treatment Drugs Discovered in Europe

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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


A Stunning Public Disclosure from Pratt and Whitney Regarding Faulty Supplier Testing

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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


Consider the CREATE Organization for Needs in IP Protection and Corrupt Practices Mitigation

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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 ChainsOur 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

 

 


Four Years After: Peanut Corporation of America Executives Face Criminal Indictments

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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

 

 


The Existence of Counterfeit Electronic Parts Gains Wider Alarm

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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


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