The following commentary also appears on the Supply Chain Expert Community web site.

About a month ago,we penned a Supply Chain Expert Community commentary reflecting on how any sort of news, positive or negative, emulating from Apple’s supply chain, can directly impact a company’s stock valuation.  That applies not only to Apple itself, but also its suppliers. The sheer scope and volume of Apple’s value-chain should cause any supplier to covet Apple’s business and volume scale.  Where the phenomenon of a negative market valuation drop was once attributed to a major supply chain disruption or snafu, when it comes to Apple, it can be any negative news deemed significant by equity markets.  Our readers are probably aware that both Apple and Samsung provide a rather unique industry relationship. While they each compete in the same markets for consumer electronics devices, Samsung has been a long-term key supplier of various supply components for Apple.

Thus, in yesterday’s financial media, are reports of the near $10 billion drop in the market valuation of Samsung, after a Taiwan based publication reported that Apple placed a rather large contract order for 12 inch DRAM chips with Japan based Elpida. As was noted in our late April commentary, Elpida, a DRAM chip competitor with Samsung and Hynix Semiconductor, among others, previously filed for bankruptcy protection, and has become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech”, because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.

A Reuter’s article reporting on the Samsung impact quotes an Asia based equity analyst indicating that the shift in supply contract implies that Apple does not want Samsung or Hynix to dominate this market segment.  Reuters also reports that U.S. based Micron Technology Corp. are in talks to acquire Elpida, and the prize has just become more valuable.

In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base. In a March Expert Community commentary, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.

Here’s another evidence point. Financial media is today reporting that Apple is sourcing a bigger screen for the upcoming new release of the iPhone. This 4 inch diagonal screen (contrasted with the current 3.5 inch screen) is reported to be sourced at suppliers LG Display Co., Sharp Corp. and Japan Display Inc. Consider that in March, Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn, invested $800 million to take a 46.5 percent stake in Sharp’s LCD production facility in Sakai, western Japan. Japan Display was previously formed from the merged LCD production entities of Sony, Toshiba and Hitachi, that each decided to consolidate as one to garner more volume scale. If sourcing reports turn out to be accurate, Apple would, in essence, be balancing geographic related risk (Korea and Japan sourcing), and supplier and scale risk in having LCD supply alternatives beyond Samsung.

Being the goliath in terms of volume and scale of the consumer electronics value-chain comes with tremendous influence for long-term revenue and capacity planning.  At the same time, such influence must include a balance of risk and influence.  We should all take notice of Apple since it continues as a benchmark in these practices.

Bob Ferrari

In October of last year, Supply Chain Matters advised senior supply chain executives to initiate scenario plans and contingencies in three potential areas of global supply chain impact. One of these areas directly involved emerging developments reflected in the Eurozone financial crisis with the potential impact on financing of inventory and working capital.  Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain would experience difficulty in acquiring affordable access to credit and loans.  Our belief was that a worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies.

This week, the Wall Street Journal reported (paid subscription or free metered view) a significant reminder to this impact, one that is impacting multiple aircraft manufacturers.  Spanish based manufacturer Alestis Aerospace SL, an airframe supplier to Airbus, Boeing and Embraer, has been forced to slow production because of a lack of access to working capital. This Seville based manufacturer was placed under court administration, the Spanish equivalent of bankruptcy protection, earlier this month.  Alestis was formed in 2009 from the merger of several smaller aeronautic manufacturers within Spain. The company produces composite aircraft ribs, panels and skins for the Airbus A320 and A380 aircraft, among other supply contracts. The WSJ also notes that the company has gained valuable capabilities in the building of parts from composite carbon materials, supporting today’s new wave of lighter, more fuel efficient aircraft models. Alestis has gained at least one long-term supply contract from Airbus.

The financial crisis impacting Alestis was ultimately prompted last week, when the government of Spain ordered all banks to raise provisions against potential losses tied to real estate loans. That dried up available capital to companies such as Alestis. The other twist to this situation is that the company resides in an economic area that is primarily driven by credit requirements stemming from tourism, services and real estate vs. high-tech manufacturing. Because aerospace projects tend to have longer time windows, the local banks, struggling to survive themselves, can no longer afford or unable to finance loans tied up for multiple years.

Global aircraft manufacturers have accumulated customer orders that have provided years of capacity and production backlog for this industry.  Supplier failure, especially related to competency in new technologies is not something that the industry needs right now.  The WSJ reports that Airbus procurement teams are paying special attention to prompt payment and are monitoring Alestis’s key supplier network as well. Supply Chain Matters is of the point of view that alternative financing solutions will also have to explored, including the option of acquisition.

This is yet another reminder that in this era of global value-chains, an economic crisis in one geography will often spillover to other regions. We once again advise senior supply chain executives to insure that risk contingency planning is actively practiced, especially concerning ongoing developments in Europe.

Bob Ferrari

In mid-February, Supply Chain Matters provided commentary regarding a looming legal showdown as U.S. governmental regulators began a crackdown on major drug distributors and larger corporations to fight rampart prescription drug abuse in the U.S..  Specific incidents involving four pharmacies located in the Sanford Florida area suspected of selling “staggering” volumes of the controlled drug oxycodone lead to strong suspicions of a huge black market in this specific area.  The U.S. Drug Enforcement Administration (DEA) took the unusual step of targeting the supplier to these pharmacies, Cardinal Health Inc., the second largest U.S. wholesale pharmaceutical distributor, by seeking to block distribution of controlled substances from Cardinal’s distribution facility located in Lakeland Florida. The DEA alleges that Cardinal has failed to follow agreed-to procedures to monitor misuse of controlled substances such as oxycodone. The DEA also targeted retail chains CVS Caremark Corp. and later Walgreens in this effort.

This morning, the Wall Street Journal is reporting (paid subscription or free metered view) that Cardinal has agreed to a settlement with the DEA that involves a two-year suspension of its DEA license to ship controlled substances from its Lakeland Florida distribution center, along with efforts to improve this distributor’s anti-drug-diversion procedures. The WSJ also reports that this new settlement could also affect DEA’s ongoing litigation with CVS , which alleges that the drug retailer’s  two retail facilities in Florida sold suspiciously large volumes of pain pills received from the Cardinal Lakeland distribution facility.

While further details will follow, this report would indicate that the DEA and U.S. regulatory agencies are placing serious teeth to the ongoing efforts of flagging and enforcing obvious illicit drug distribution through available U.S. retail channels.  It is an obvious sign that distributors and retailers had better invest in analytical tools that can flag unusual or excessive patterns of controlled substance retail sales, coupled with actionable regulatory reporting and mitigation control.

Bob Ferrari

As patents on proprietary medicines increasingly continue to expire, the pressure on pharmaceutical supply chains continues to rise to meet business expectations and outcomes.

In late November, the very popular cholesterol-lowering drug Lipitor, which at its peak, generated over $12.9 billion in global revenues, became open for production by generic drug manufacturers. Generic drug producers Ranbaxy Laboratories, based in India and Watson Pharmaceuticals made plans to produce and distribute generic versions of Lipitor during 2012.  Drug maker Pfizer, the original patent owner came up with a novel idea to continue promoting the drug while piloting a direct distribution model to patients and their insurance carriers. To hold market share, the company made plans to sell Lipitor directly to patients at generic prices by partnering with Diplomat Specialty Pharmacy to mail the drug directly to patients via online prescription fulfillment.  A dual tier pricing model would be maintained, with generic pricing for Diplomat and higher pricing for existing Lipitor channels. The feeling at the time was that if Pfizer’s model was successful, it could become a model for other drug makers whose popular drugs came off patent. According to a recent Wall Street Journal article, after spending more than $87 million promoting Lipitor, Pfizer is quietly suspending its efforts to negotiate new contracts to sell this drug to health plans because these same health plans are signing up generic versions of Lipitor at far lower prices.

Another important area in proprietary drug development and production has been the area of cancer fighting drugs.  As we all know, these drugs have been extremely expensive, not only because of their rather large research and development investments but also the rather complex production and quality requirements involved in the drug’s supply chain. Many pharmaceutical manufacturers view the large populations and emerging economies of China and India as a new revenue growth opportunity for these drugs.  However, recent announcements from generic producers point to other challenges.

One of India’s largest generic drug makers, Cipla Ltd., recently announced that it would cut prices on its cancer medications by as much as 75 percent. According a Wall Street Journal report, the company indicated it would cut the price of its generic version of liver cancer medication Nexavar to $128 for a one month supply. Drug maker Bayer’s proprietary drug costs the equivalent of $5236 per month. Cipla also reduced the price of lung-cancer drug Iressa by as much as 60 percent, and the generic version of brain-cancer drug Temozolamide by 75 percent. Cipla’s chairmen attributed the cuts as a means to bring less costly cancer drugs to world populations, similar to what the company accomplished ten years ago for HIV medications. Cipla also indicated its plans to sell these generic versions in other developing countries where there are no intellectual property restrictions.

Supply Chain Matters recently called attention to an announcement from Samsung BioLogics, a division of South Korea based Samsung, that plans to produce generic versions of certain monoclonal anti body drugs by 2015. The company is targeting the opening of a new Korea based manufacturing plant by June, and seeks international regulatory approvals for the plant by the end of this year. A Samsung executive made note that while certain pharmaceutical companies excel in drug innovation and sales strategies, they may lack volume and process based manufacturing expertise. Governments among economically challenged populations are willing to support price disruptors in order to provide affordable healthcare for their citizens.

Many other medicines have drug patents expiring this year including Diovan, for the treatment of high blood pressure, Plavix, for the treatment of blood clots, Singular, for treating asthma, and Tricor, for treating high cholesterol.  Each has been a high revenue generator, generating large numbers of patients.  With current building global-wide pressures directed at health care cost control, each of these medicines can be lucrative for volume oriented generic producers.

To combat these trends, some pharmaceutical companies have turned toward a merger and acquisition strategy to replace or augment their proprietary drug pipelines.  Some manufacturers have called for a tiered pricing strategy, offering a drug at different pricing, depending on a country’s level of economic development.  That, however, provides an opportunity for an increase in grey market supplies, as drugs purchased in lower-priced countries are re-distributed to more lucrative higher priced countries.

Generic manufacturers are also shifting to meet increased scale value-chain efficiency challenges. Watson Pharmaceuticals recently announced a $4 billion acquisition deal with European based Actavis Group, with the potential to become the third largest global generics manufacturer.

In all cases, pharmaceutical and drug supply chains will have to rise to the challenges of an increasingly disruptive market place reflecting higher levels of global competition and innovation in supply chain production and distribution. In addition to M&A Supply Chain Matters advises the industry to also consider additional investments in global supply chain value-chain efficiencies, business intelligence and response management.

Manufacturers may gain by adding a new proprietary drug to their product portfolio, but will always need globally competitive supply chains to sustain industry competitiveness and agility.

Bob Ferrari

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

The following is a guest blog commentary published on the Supply Chain Expert Community web site.

The automotive industry continues to encounter some significant learning regarding major supply chain disruption and mitigating global supply chain risk.  In 2011, the effects of the massive earthquake and tsunami that impacted northern Japan, followed by the massive flooding in Thailand brought about by an unusually strong monsoon event led to a new awareness of supply risk that extended to critical components at the lowest tiers of the value-chain. In March of this year, Supply Chain Matters provided updated commentary regarding this learning, along with efforts being taken by major Japan based Automotive OEM’s to mitigate such risks in the future.

Last week, major automotive manufacturers in Japan reported results from their March ending fiscal year closings, collectively forecasting record production volumes and increased profits for the coming fiscal year.  Toyota and Honda, both severely impacted by supply disruption, reported optimistic forecasts for the upcoming 2013 fiscal year, but not without the need for aggressive sales campaigns. The Financial Times reported that Toyota produced 2.5 million vehicles in its March ending fiscal year, surpassing both Volkswagen and General Motors annual output. The company however incurred a 2.2 percent decrease in annual revenues and a 24 percent decrease in operating income. According to its annual reporting, Honda produced slightly under one million units (988 thousand), noting increased output for the North America market but decreased output in Asia due to the ongoing effects of the Thailand floods. Honda had both of its Thailand car assembly plants totally underwater directly after the floods. Honda’s profitability levels within its automotive group have recovered to just under FY10 levels.

The most significant headline, however, is that of Nissan, which reported robust 7 percent increase in operating income, exceeding the results of its larger Japanese rivals. Both the Financial Times and the Wall Street Journal noted that Nissan was the quickest of Japan’s big three auto makers to recover. With this headline comes the reminder of the two sides of major supply chain disruption, turning disaster into an industry opportunity because of more agile and responsive supply chain capabilities. Two weeks after the quake struck Japan, Nissan indicated that it had assessed all of its suppliers and production facilities and determined that the situation was not as dire as some had originally predicted. Nissan resumed partial production on March 24, 2011 utilizing inventory of components and parts, supplemented by parts from overseas factories. The majority of Nissan’s global production capacity was external to Japan and Thailand. In early April of 2011, Nissan took bold actions in shipping V6 engines from its U.S. based Tennessee engine factory directly to Japan to keep its assembly plants operating. The same agility occurred after the Thai floods struck. In February, Nissan’s COO asked all of its suppliers to disclose details of their component supply network.

After these incidents, Honda has since announced its intention to shift a major portion of its production capacity into North America over the next few years, as a hedge to future major supply disruptions.  Toyota remains committed to a significant manufacturing presence within Japan and has embarked on an aggressive goal aimed to restore any of its manufacturing operations in just two weeks after the occurrence of a major disaster.  Preliminary analysis uncovered that some 300 production and/or supplier locations could be at risk.

One year after the original Japan quake, the financial and operational impacts to supply chains, to the bottom line, and to stock price remain. As noted in our March commentary, we as a supply chain community need to continue to have a more risk aware perspective to the profile of the global value-chain, along with an assessment of what sourcing, analytical assessment and risk response areas need to be shored-up for mitigating such events in the future.

The evolving lessons from the automotive industry continue as an ongoing reminder of the importance of identifying and mitigating risk.

Bob Ferrari

Supply Chain Matters joined over three hundred attendees for the The Future of U.S. Manufacturing Conference, jointly sponsored by the MIT Leaders for Global Operations, MIT Industrial Liaison Program, and MIT Forum for Supply Chain Innovation.  In our previous Dispatch One commentary, we provided some initial impressions from the first day of the conference. In this commentary, we highlight day two as well as some important takeaways.

Last evening, upon reviewing our notes from day one of the conference, it was a bit difficult to synthesize some overarching themes and messages emanating from the many presentations.  In day two, the themes became clearer.

The morning began with remarks from MIT President Susan Hockfield, who reminded the audience  that manufacturing represents over 12 million jobs for the U.S. and that manufacturing companies employ two-thirds of scientists and engineers in the economy.  She also provided a reminder that when MIT was founded in 1861, its initial mission was to speed the industrialization of the U.S.. That mission has morphed to global perspectives, but at the same time, MIT has recognized its role to help in the current research related to the new importance and required competitive capabilities of U.S. based manufacturing.

Ms. Hockfield than introduced U.S. Secretary of Commerce John Bryson, who spoke to the critical importance of the upcoming recommendations related to the President’s Advanced Manufacturing Partnership (AMP) of which MIT is among a small group of premier academic institutions contributing to this initiative.  Secretary Bryson highlighted three important areas that will be addressed in the first report of AMP:

• Improving the business climate for manufacturing companies
• Improving the talent pipeline for required manufacturing skills and talent recruitment
• Enabling further innovation within manufacturing.

The Secretary also reminded the audience that manufacturing economy has helped to lead the U.S. out of global recession, accounting for over a half million jobs.  That may be interpreted by some as a political statement in a Presidential election year, but none the less, it is a profound statement that reinforces the fact that the U.S. needs to refocus on moving toward a broader based manufacturing economy. The Secretary also added that Washington does not have all the answers, and that it must continue to look to partnerships of private industry, labor and academia to provide recommendations and roadmaps.

Cindy Estrada, Vice President of the United Auto Workers provided a passionate but eloquent perspective on the changing role and voice of unions in this ongoing dialogue. She thanked the conference organizers for inviting labor to overall discourse and reminded the audience on the actions and collaboration that the UAW played prior to and during the 2008-2009  auto crisis in the U.S..  Ms. Estrada also reminded the audience on the overall negative impressions that unions seem to have in media and business reporting, and that actions of the past are not necessarily reflections of today and the future. Her statement was that unions seek a level playing field, not just in fair wages and benefits, but collaboration and voice from the shop floor.  Her most profound statement, which we tweeted, was that you cannot have a legitimate conversation regarding the future of manufacturing without worker input regarding eliminating waste, improving quality or fostering more process innovation. We would add, union and non-union. That statement was later reinforced by Diana Tremblay, Global Chief Manufacturing Officer of General Motors who provided some praise for the new collaborative actions of UAW members in identifying and helping to solve manufacturing related problems.  A sobering reminder was Ms. Estrada’s observations that much additional work remains within the automotive value-chain where some suppliers have yet to reach beyond previous management and labor behaviors of obstructing worker participation in joint problem-solving.

There was an outstanding presentation delivered  by Joseph Jimenez, CEO of Novartis on the defining moment on the future of manufacturing in the U.S., which outlined  some rather significant manufacturing process investments not only being made in the U.S., but also on some potentially game-changing joint research with MIT on transforming pharmaceutical manufacturing from previous specialty batch to a more innovative and far less costly,  continuous manufacturing process.

Another significant highlight was a panel discussion focused on workforce of the future, moderated by William Green, Executive Chairmen of Accenture.  The panelists were:

• Diana Tremblay of General Motors
• Cindy Estrada of the UAW
• Denise Johnson of Caterpillar
• Professor Thomas Kochan, Co-Director, Institute for Work and Employment Research, MIT Sloan School of Management.

These panelists provided many insights on what may be required to fill the requirements of an entirely different skilled manufacturing workforce, on the complementary needs for joint leadership skills among manufacturing managers, and how to get younger people from the K-12 to the community college level far more attracted to a career in manufacturing. The panelists observed that the current perceptions of manufacturing among younger people is sometimes reflected in negative connotations of being a non-rewarded occupation in a sometimes dirty environment that requires long hours that begin early in the morning. Professor Kochan reminded to the realities of current data indicating that the U.S. needs 20 million jobs just to return to post-recession levels, and that 5-7 million of these jobs have to be contributed from the manufacturing sector. This requires political will and commitment to make the necessary investments in programs and initiatives and better alignment of all stakeholder groups.

This concludes our commentary of day two of this important and timely conference.  Our final commentary will reflect on our view of the key takeaways that both the conference and audience dialogue brought forward.

Bob Ferrari