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Mitigating Supply Chain Risk- How a Supplier Quality Management System (SQMS) Helps Minimize Supply Chain Deviations

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The following is a Supply Chain Matters Guest Posting is contributed by Alex Butler, Medical Device Product Manager, MasterControl

 The increase in international sourcing of drug production continues to rise in pharmaceutical manufacturing. With this increase, the FDA continues to document issues with supply chain breakdowns, errors, material quality and numerous other critical issues surrounding these activities. Supply chain issues have been further magnified in recent years as various to the degree that U.S. congressional committees have questioned the FDA in several instances in an attempt to uncover the root cause of these breakdowns.

Supply chain management for regulated companies is historically fraught with challenges, including many catastrophic instances impacting consumers. In 1937, more than 100 people, including many children, died from ingesting Elixir Sulfanilamide, which contained the deadly poison diethylene glycol. This caused President Franklin D. Roosevelt and the U.S. Congress to pass the Federal Food, Drug, and Cosmetic Act (FD&C Act) as an effort to prevent future catastrophes.

Leap forward to 2011, when the FDA produced a report titled, “Pathway to Global Product Safety and Quality,” and later, the European Medicines Agency (EMA) tightened their Good Distribution Practice (GDP) Guidelines and the Falsified Medicines Directive to improve supply chain management and minimize risk. At an earlier congressional meeting, the Principal Deputy Commissioner, Joshua M. Sharfstein, M.D., discussed the safety of the drug supply. He said, “Protecting Americans from unsafe or contaminated drugs is not just an important responsibility of the FDA—it is our core charge. Drug safety was the primary reason for the passage of our guiding statute.”[iii]

While problems that arose in the past may have been minimized by regulatory enforcement and the adoption of extensive quality control systems by responsible pharmaceutical companies, the industry is now experiencing a new era of quality-related dilemmas rising in the supply chain. Today, supply chain deviations have become a global threat not only to pharmaceutical companies, but potentially to healthcare professionals and public consumers as well, primarily due to the lack of the establishment of a quality culture in pharmaceutical supply chains.

The “white elephant” that the pharmaceutical industry is reluctant to address is counterfeit medications. Counterfeiting has become a massive issue worldwide. Detection and enforcement efforts are on the rise, and officials, regulatory bodies and watchdog organizations are not necessarily unified on best enforcement practices. Although there are many ways and reasons for why and how counterfeit materials and medicines are breaching the industry, one of the most troubling issues is when materials and ingredients are swapped with materials that are either inert or toxic. In some instances, these have made their way through the supply chain, resulting in harm and even death to patients. To date, these incidents are most commonly occurring in geographic locations like China and India. Because border agents and supply chain managers can’t always tell what’s been tampered with, regulators and governments are demanding tighter controls on the global supply, manufacturing, movement and storage of goods.

One thing is clear: it is the responsibility of pharmaceutical organizations to assume a leadership position in addressing and conquering the issue of counterfeit medicines and the challenges plaguing supply chain management. As the FDA states, the issue of managing a supply chain rests with the manufacturer, regardless of where deviations are generated in the supply chain.[iv]

The FDA’s Focus Shift

Historically, the FDA has focused its enforcement activities, including warning letters, seizures, injunction actions, consent decrees, criminal prosecution and so on, at U.S. facilities. However, recently the FDA’s enforcement focus has included facilities in other countries. This has resulted in a large increase in investigations into high-production countries such as China and India.

The pharmaceutical supply chain represents a new frontier for international enforcement activities. The FDA is beginning to increase its headcount in several countries, which signifies an increased emphasis on enforcement worldwide. Overall, the number of inspections has remained flat, but the investigators are being more thorough and are issuing more violations. Moving forward, we can expect to see continued enforcement against pharmaceutical companies with this heightened supply chain focus.

Supplier Quality Management System (SQMS) Software Solutions Can Help

Quality takes on different dimensions depending on the country in which a product is manufactured. Although nothing can take the place of a staff of quality professionals who are familiar with the regulations and the nuances of supply chain quality management and are well trained on the processes involved, the implementation of an SQMS software solution can be helpful.  An automated SQMS can help standardize vendor management processes and can provide efficiencies that give supply chain quality professionals more time—and a standardized process—to minimize the risk of supply chain issues that are breaching the borders and walls of pharmaceutical companies  and prevent problems before they arise.

Many organizations manage their supplier quality management processes using a paper-based or hybrid-electronic system.  While this system may be adequate and in accordance with FDA compliance requirements, it leaves room for significant errors and substantial inefficiencies.

Top Benefits of Implementing an Electronic SQMS

Although most leading pharmaceutical organizations have transitioned to using a software- or cloud-based SQMS, the majority do not. With the tremendous growth happening in the pharmaceutical industry, small and midsize businesses (SMB) have new opportunities to secure previously unforeseen or unavailable shares of the market with their proprietary drugs, generic drugs and advancements. Unfortunately, the inability to capitalize on these new market shares is often due to the fact that the SMBs have not yet shifted over to a software- or cloud-based SQMS. Here are some of the most mission critical ways that a software- or cloud-based SQMS can mitigate or prevent supply chain problems that commonly lead pharmaceutical companies to deliver or accept counterfeit medicines:

  1. Maintain All Supplier Quality Data in a Centralized Location: A repository for automating, maintaining and controlling all supplier quality data and documentation – from non-conforming material reports and audit observations to contracts and service level agreements – is an essential component of maintaining security and compliance. A secure, centrally-accessible storehouse allows pharmaceutical companies to more easily and efficiently manage and monitor supplier statuses and ratings, records, corrective actions and approved vendor lists (AVLs).
  2. Smoother Internal and External Audits: An SQMS can automatically track and store information derived from supplier management audits to help ensure that regulatory guidelines are followed. With an electronic SQMS, pharmaceutical companies can securely store and maintain all information related to supplier management audits, including audit approval statuses, recent data derived from supplier audits and links to quality assurance auditing and analytics reports.
  3. Improved Communication and Collaboration: All departments involved in supplier management—including authorized external parties—can stay connected across geographically dispersed locations, which facilitates better communication and collaboration with vendors and minimizes complications relating to specifications and materials. In this manner, pharmaceutical companies can gain greater visibility into supplier quality, reduce errors caused by miscommunication and, ultimately, receive higher-quality materials or parts.

No system, paper-based or software-based, is foolproof.  However, pharmaceutical companies that implement SQMS software solutions, are seeing meaningful improvements in supplier and supply chain quality issues, significantly mitigating supplier risks, and gaining a higher return on investment for their efforts.

 

MasterControl Inc. produces enterprise software solutions that enable life science and other regulated companies to deliver life-improving products to more people sooner.

 

 


Breaking: Amazon to Acquire Whole Foods- An Obvious Industry Inflection Point

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In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.   FBA sized Breaking: Amazon to Acquire Whole Foods  An Obvious Industry Inflection Point

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Some Positive Supply Chain Food Safety Efforts at Chipotle Mexican Grill

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Supply Chain Matters has featured several streaming commentaries focused on Chipotle Mexican Grill, and on the business and supply chain impacts related to the past series of food related illnesses including E-coli, salmonella, and norovirus that date back to 2015. Finally, we have some positive and more encouraging news to share with our readers.  Chipotle logo Some Positive Supply Chain Food Safety Efforts at Chipotle Mexican Grill

Excuse the pun, but our biggest beef with the restaurant chain has consistently been its outward arrogance, and in not communicating definitive efforts to mitigate food safety concerns across the entire supply chain. Our take was one that management initially had not publicly grasped the full magnitude of its brand crisis, and supply-chain wide implications. The elephant in the room has been consumer perceptions of ongoing food safety and whether this chain had taken all necessary measures to ensure that the series of incidents that occurred in 2015 would not be repeated, at least by insuring that controlled, network-wide management and quality focused practices were being addressed.

Our observations have questioned why this company has relied solely on sales and marketing tactics to bring previous loyal patrons back. Our last update related to Chipotle in December of last year, echoed reports of building pressures on senior management manifested by continued disappointing financial performance results. Monies spent on new marketing initiatives were not resonating with loyal patrons. Employee turnover at restaurants was reported as 130 percent, defeating efforts for increased employee training on food safety measures. Declining sales and profits seemed to be defeating efforts of following through on supply chain food safety initiatives.

However, new information now encourages us.

In March, the Director of Food Safety for the restaurant chain, recruited shortly after the crisis, addressed the Food Processing Suppliers Association Annual Conference. A published April report by FoodBusinessNews.net highlights efforts that have taking place since the 2015 incidents. Dr. Dale Dexter, Manager of Food Safety Programs indicated that the company has come a long way in the past 16 months, but it was also an interesting ride.

Noted was that the food safety initiative scoured every ingredient that suppliers utilize. While previously, raw beef was brought into restaurants, two of chain’s beef suppliers are now required to practice sous-vide cooking to control food-borne risks prior to shipping to individual restaurants. Efforts were also made to initiate similar practices on raw chicken, but that effort was curtailed because the quality of taste did not pass the standards of founder Steve Ells. Chorizo sausage supplies are now subject to high pressure processing before being shipped to restaurants. For produce, two employees at individual restaurants are typically brought in two hours before opening to blanch raw fruits and vegetable in a five-second boil to kill any food borne bacteria.

Restaurants are now equipped with in-duct air purifiers and ice machine sanitation systems. A partnership with Ecolab includes food safety audits and mentioned is utilization of a Supplier Management and Traceability program. The chain has now adopted a paid sick leave policy and restaurant employees are monitored for signs of sickness, supported by a hotline of on-call nurses.

These are positive steps, and should be commended.

From our lens, communication and updates of such efforts should not only been shared at an industry forum, but broader platforms as-well including general media. Such initiatives and progress reports should have been the mission of Chipotle’s marketing and public relations efforts month ago.

This week, Chipotle announced the appointment of a Chief Restaurant Officer. Scott Boatwright was a prior senior vice president of operations at Arby’s Restaurant Group. The announcement indicates that Mr. Boatwright’s responsibilities will be- “enhancing the guest experience, developing and leading field leadership teams, developing strong teams inside the restaurants, and enhancing operational efficiency.”

There is no mention of insuring that ongoing food safety initiatives are consistently implemented and maintained across all restaurants.

Here again, a communications and mission commitment opportunity lost.

As a supply chain social medium, we are now willing to add some praise to Chipotle’s ongoing efforts to address supply chain wide food safety mitigation. But the job is never complete.

For food related industry, and for food related supply chains, marketing efforts are not only about products and services, but also about food safety efforts across the entire supply chain, including restaurants.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


2017 Industry Specific Prediction- Consumer Packaged Food and Beverage Supply Chains

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In our recently unveiled 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and already, industry dynamics of activist investors surrounding the industry are once again underway, and the supply chain stakes are becoming far higher and likely destructive.

Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. They demand healthy food choices containing natural and sustainable ingredients. Throughout 2016, these trends continued to be reflected in the business and financial performance of globally branded food producers who now continue to be challenged in achieving single-digit top-line sales and profitability growth. Global observers such as the Economist question whether the global expansion and presence model has run out of steam because of diminishing financial returns.

As what occurred in 2016, declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods. A report from Fortune describes the 3G Capital playbook as a “meritocracy” that is on track to consume the food industry. The model includes wholesale replacement of an existing senior management team and what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets. This model is further described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.

When 3G acquired Heinz, upwards of 7000 job cuts were initiated while five production facilities were shuttered. Earnings Before Interest and Taxes (EBITA) improved by 8 percentage points over an 18-month period. Heinz then acquired Kraft in 2015, and reports point to upwards of an additional 5000 in headcount reductions. A recent published Fortune report cites research firm AllianceBerstein as indicating that Kraft-Heinz is already 88 percent towards its goal to cut an additional $1.5 billion in annual costs by the end of this year.

Acquisitions govern growth as opposed to just organic sales growth.  The CPG industry is now consumed with the threat of 3G, and as Fortune observes: “The entire food industry is “3G-ing” itself before Kraft-Heinz can do it to the companies.” Fortune writes: “The whole food industry is speculating who’s next.” We concur and we predicted that there will indeed be another major acquisition involving a major branded CPG company in 2017.

Little did we know that it would come so soon and with far broader scope.

Dynamics Already Underway and the Stakes Increase

Last week featured the news of what our prediction included although the target and size was a big surprise. Kraft-Heinz issued a $143 billion acquisition offer for global CPG provider Unilever. While the offer was quickly rejected as insufficient, and subsequently withdrawn, the implications are far larger and once-again reverberating across the industry while all await the next shoe to drop. The Economist headline was: Barbarians at the Plate: 3G Missed Unilever but its methods are spreading.

Within the past few days Campbell Soup and General Mills reported disappointing sales and earnings. Campbell’s cited mistakes in its fresh-foods business unit that included a recent product recall and decision to harvest carrots while they were still small. Late last week, General Mills reported weaker than expected revenues from sales of yogurt and soup along with weakened consumer demand. The firm’s outlook for the remainder of its fiscal year that ends in May is expected to decline by 4 percent.

Today, The Wall Street Journal reported that Unilever is now pivoting from the Kraft-Heinz attempted acquisition with its Board now deliberating on options to deliver greater short-term value for shareholders.  That could include the sale of the firm’s current food division or attempting an acquisition of its own in the personal care area.

Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.

With such a backdrop, pressures increase on remaining CPG food and beverage companies along with associated food suppliers.  By our lens, the survivors are those that embrace innovation and find ways to best accommodate today’s consumer choices.

Industry Supply Chains Buffeted from the Impact

In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This will unfortunately, continue and at a more intense pace.  At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products. Thus, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.

All the above will be the primary agenda for CPG and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. Many will need to be equipped to deal with our other 2017 predictions such as responding to the perfect storm in the requirements for skilled supply chain talent across many supply chain, procurement and distribution dimensions along with the needs for advanced technology to support more predictive decision-making.

Bottom-line, the CPG industry remains in a state of defense and apprehension, and by our Supply Chain Matters lens, industry supply chains will pay the inevitable price in needs for further cost and headcount reductions along with blocked efforts to instill added product, process, and resilience to overall business support capabilities.

Stating the Obvious

Sometimes, a blog such as ours needs to be blunt in viewpoint to provoke additional thinking or changed mindset. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time.  CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers.  This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.

One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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