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A Supply Chain Matters Commentary Regarding Inventory Performance Trending

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Since our founding, we have always looked forward to the annual REL Working Capital Scorecard, and specifically its reporting of inventory performance.  We have provided Supply Chain Matters readers our observations and insights that were related to reported performance in individual industry sectors.

The data was collected by REL, which is now a division of The Hackett Group, and published each year in CFO Magazine. These indices, particularly the calculation of the metric Days Inventory Outstanding (DIO), are rather important because they reflect a generally accepted method for how CFO’s measured their supply chain inventory performance. While many in the supply chain community have adopted and are very comfortable with inventory turns calculation methods, DIO is, in our view and others, a broader financial indicator of inventory performance contrasted to annual sales trends. DIO reflects if inventory management is tracking to revenue performance, and that interests the C-Suite, stockholders and the Wall Street community.

Since CFO Magazine discontinued its sponsorship of the REL Scorecard, Supply Chain Digest took the initiative this year to actually perform the DIO calculations based on raw data supplied by REL.  A few weeks ago, Dan Gilmore issued a two-part commentary providing his analysis of 2012 inventory performance which our readers can review. Supply Chain Matters provides a shout-out to Dan and his editorial team for undertaking this calculation task and allowing our community to once again review performance. 

Gilmore discovered that the previous industry grouping categories were somewhat misaligned.  We also have been observing that since we began reviewing the annual reporting.  Gilmore further points out that mergers, acquisitions and private equity deals make the continuity of the industry groupings difficult to pin down. We speculate that the previous CFO Magazine industry groupings were formed to insure that readers in those industries would not rebel when reviewing specific industry results.  Supply Chain Digest was able to provide a DIO inventory performance view that spanned the years 2006, 2011 and 2012.  We reviewed our files and were able to review published data from 2008, 2009 and 2010.  Although we noted that there are problems in the continuity of the trend reporting, the numbers do provide important trend indicators.

An observation and insight we do want to share reflects on the marginally performing industry sectors, those whose performance reflects an increase in inventory when compared to revenue trends. A snapshot of the 6 year DIO inventory performance as reported by Supply Chain Digest reflects:

Construction Equipment                                                 58.4 percent increase

Chemicals and Gases                                                        27.2 percent

Metals Manufacturing and Distribution                      19.5 percent

Retail- Electronics and Home Improvement              12.5 and 11.6 percent respectively

Auto Parts and Components                                           12.7 percent

Toy Manufacturing                                                           10.2 percent

Apparel and Shoe Manufacturing                                  7.2 percent

Auto-Truck Related OEM’s                                             4.2 percent

Computers and Peripheral Manufacturing                  3.2 percent

 

Can you spot a common denominator?

Most of these industries plunged big-time into global sourcing and distribution of products and were subject to global economic developments, supply chain disruptions and slower transport times.  In 2011, the automotive and high tech sectors were significantly impacted by supply chain disruption. Apparel and toys have been forced to deal with exploding direct labor costs in China, and have since altered some sourcing of production. On a positive note, Consumer Packaged Goods, which also plunged into global markets, demonstrated a 7.3 percent decrease over six years.

We share one other comment regarding Aerospace and Defense Components, which according to the analysis had a 30.1 percent increase in DIO over 6 years. This should really not be all that surprising, given the multi-year delays encountered in the major new aircraft programs from both Airbus and Boeing that overlapped this period.  If there were a need for definitive evidence on the impact of these delays, particularly on aerospace component suppliers, it would be reflected in this DIO trending.

Despite all the technological and process advances in supply chain planning and inventory management, business factors often complicate overall supply chain inventory management.  It is not so much a reflection on the technology, but rather the implications of globalization and increased supply chain complexity and disruption.

What is your view?

Reviewing this six year trending data on inventory performance, along with your experience in having to manage inventory in these specific industries, do you believe that external business forces have been the real challenge?

Bob Ferrari

 


Johnson and Johnson More Transparent in its Supply Chain Transformation Efforts

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Dedicated readers of Supply Chain Matters are very aware of the many commentaries we have posted over the last three years regarding Johnson and Johnson.  A series of multiple product recalls dating back to 2009 involving a significant amount of the company’s over-the-counter medicines uncovered what appeared to be systemic process and other issues that reflect directly on its supply chain. It also forced the temporary closure of an entire production facility and the company being slapped with a number of consent decree findings from the U.S. Food and Drug Administration.  Readers can refresh their knowledge by reviewing some select Supply Chain Matters postings:

Another Product Recall Involving Johnson and Johnson

Johnson and Johnson Making Progress in Addressing Previous Product Quality Issues

Another Set of Product Recalls and Challenges for Johnson and Johnson

 

Much has occurred in this period, and yesterday, during the J&J’s formal earnings briefing with equity analysts, a lot more behind the scenes details were shared regarding efforts to address J&J’s supply chain business process and information technology challenges.

Joining J&J’s Chairmen and CEO Alex Gorsky on yesterday’s briefing was Sandy Peterson, Group Worldwide Chairman. Ms. Peterson joined J&J seven months ago in December 2012, shortly after Gorsky was appointed CEO of the company.  Her prior credentials were chief executive officer of Bayer CropScience AG in Germany and other senior leadership roles in healthcare systems and consumer product goods companies, including leading procurement activities for Nabisco. She was obviously recruited for specific leadership skills.

Readers may recall our previous commentaries related to senior executive changes made at J&J after the initial product recall crisis, particularly those involving the company’s consumer and OTC product businesses.  Of major significance, in addition to being the newly appointed head of J&J consumer businesses, Peterson has leadership responsibilities for both company-wide supply chain and information systems efforts.  That is a significant change from the prior structure, one that by our view, will help to bring accelerated change efforts for the company.

In the earnings briefing, CEO Gorsky specifically called on Ms. Peterson to update analysts on the progress that has been made in the three areas of her responsibilities. She began her briefing by noting that she has spent considerable time since joining on visiting and speaking with customers and visiting a number of global-wide production and other facilities, including those in emerging markets. She emphatically stated that her organization’s goal is to restore a reliable supply of U.S. OTC products, and by the end of 2013, J&J plans to deliver consistent supply of 75 percent of product brands previously suspended from production.

Of more significance, Ms. Peterson outlined the overall scope of the challenge inherited. Supply chain scope was described as over 120 manufacturing sites, 500 external contract manufacturers and 450 distribution centers.  She indicated that there were 60 different ERP systems supporting 275 operating companies. That is a mind-blowing statistic but perhaps common for a global-based pharmaceutical and healthcare company that is vested in aggressive growth via acquisition.

Five priorities were outlined for U.S. OTC products:

1.      Deliver on FDA consent decree milestones

2.      Ensure reliable supply of OTC products to retailers and consumers

3.      Achieve brand leadership

4.      Rebuild customer trust including top retail customers

5.      Execute a return to market plan for core U.S. brands and SKU’s

In terms of organizational progress, J&J began to centralize its supply chain efforts over three years ago.  That effort continues with the new singular leadership model. The company has plans to evolve a supply chain model that will leverage a global network in sourcing, logistics, transportation and distribution management.  Best practices are being shared among and across various business entities. Readers who reside in centralized supply chain teams may view the above as a no-brainer, but consider that supply chain best practices are often not the priority of large pharmaceutical and healthcare companies.

In the area of overall quality, the J&J goal is to have one quality and compliance operating model. Teams are incorporating the new quality and compliance operating model across all products and geographies, while strengthening oversight with supplemental internal audits. Thus far, the company continues to deliver on all planned milestones outlined by the FDA.  Ms. Peterson described a rigorous review of external suppliers which has led to a consolidation of external manufacturing by a third. 

In the systems area, a four year program has been outlined to consolidate the overall systems landscape.  Business continuity planning is also being actively addressed, and we witnessed evidence of that in the recently held Supply Chain Council’s Supply Chain North America conference.

One of the core goals of Supply Chain Matters is to provide readers education, not just to a single event or development, but to the continuity of events and the subsequent learning.  In the case of J&J, our commentaries have evolved from sharing frustrations related to signs of organizational paralysis and significant evidence of deep systemic supply chain issues, to now being able to comment on meaningful leadership and progress in remediation. An improvement framework addressing People, Process and Technology factors is now defined and ongoing.  Make no mistake, significant work remains and active executive leadership and commitment is essential.

The events surrounding J&J these past months will no doubt become the basis of new case study in business schools and supply chain circles.  The numerous occurrences of product recalls reflected other significant supply-chain wide issues that needed to be addressed across multiple business units. J&J has obviously reached-out to seek external advice and assistance. The work across J&J will obviously continue and we trust that more positive outcomes will unfold in the coming months.

Readers residing in Pharmaceutical, Medical Products and Life Sciences industry settings should take special note of how a lack of understanding on the overall importance of consistent and reliable supply chain practices can lead to negative business outcomes.   Once more, consider the length of time outlined to remediate and transform the existing supply chain. If supply chain cross-functional and IT teams were in need for evidence on the importance of consistent practices and responsive information technology tools, they can cite the ongoing J&J case study.

Supply chains do matter, especially for this regulated industry.

Bob Ferrari

 

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


Supply Chain Matters Impressions of MIT Crossroads 2013 – Part Two

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Supply Chain Matters recently had the opportunity to attend the MIT Crossroads 2013 conference sponsored by the MIT Center for Transportation and Logistics (CTL).  In our Part One commentary, we highlighted both a UPS presentation and a multi-industry panel discussion of supply chain management futures.

For Supply Chain Matters, Tom Linton, Chief Supply Chain Officer for global based contract manufacturer Flextronics provided the one of the highlights of the conference in his vision of supply chain evolution. Mr. Linton provided a deep level of experience and insights in many aspects of supply chain management along with perspectives of having been based in Asia for nearly 22 years.  At Flextronics, his responsibilities span all of procurement (direct and indirect materials), materials management operations, logistics and fulfillment, including managed supply chain for customers. Mr. Linton, in a Dave Letterman Late Show Top Ten delivery style, provided his Top Ten listing of the trends driving the future of supply chains.

We will not steal all the thunder of Linton’s delivery but will highlight what we believe were highlights of his insightful observations.  Number 10 on his listing was the adoption of cloud computing, along with his message that this is indeed an emerging low cost and reliable trend in technology adoption, that “apps” for supply chain is an up and coming trend that most firms will utilizing within the next five years. Number 8 was the prediction that global labor costs would equalize, the implication being that labor arbitrage is a declining trend.  According to Linton, we are reaching a point where direct labor costs across major geographic manufacturing regions is reaching parity and that leaders of tomorrow will leverage and manage a regional geographic footprint predicated on customer and product fulfillment needs.  Strongly related to this prediction was number 5, the new emergence of regional and local sourcing.  Mr. Linton observed that as many manufacturers shifted manufacturing sourcing to China, the component supply chains of many industries also shifted toward a China concentration.  With the emergence of a renewed manufacturing presence in the U.S. , the challenge is to re-building a competitive supply ecosystem becomes more important.  Readers may recall that Supply Chain Matters has observed these same implications and has called for similar investment in supply eco-systems.

Number #6 reinforced the need for supply chain skills specialization and new areas of skill needs in cloud computing, supply chain design, supply chain cost analysis and other areas. The  number 4 prediction was the emergence of control towers, described as virtual integration of the supply chain supported by advanced cloud technology.  For further descriptions of what is implied in control tower capabilities, readers can review any of previous Supply Chain Matters commentaries tagged with the “supply chain control tower” category. Number #3 prediction concluded that predictability becomes the competitive advantage. For Linton, predictability is defined in three fundamental questions:

  • How safe is my supply chain?
  • How fast is the supply chain/
  • How cost efficient is the supply chain?

Finally, Linton’s number one prediction was that non-zero supply chains win, that transparent supply chain ecosystems focus on win-win balance for success vs. win-lose.

We want to also highlight the presentation delivered by Jim Cafone, vice-president of supply network services at Pfizer, who spoke on the challenge of managing highly flexible supply networks in healthcare markets, and how a cloud-based system backbone deployed by Pfizer has helped to overcome challenges of information latency and integration. Like other pharmaceutical and life sciences manufacturers such as Johnson & Johnson, Pfizer has centralized its global supply organization to help drive acceleration in required transformation. One of the unique challenges for Pfizer  and pharma supply chains is that because of regulatory requirements, recipes are country specific. As an example, four variants of the highly popular cholesterol control drug Lipitor translate to 800+ global sku’s.  Lipitor has recently come off global patent which moves the strategic focus toward a more cost-efficient and effective supply chain. Centralized control helps Pfizer to move toward more agile, cost-focused supply chains, built on enterprise supply platforms.  Pfizer has also identified  both transactional and analytical supply chain control towers as a long-term capability.

The Pfizer supply chain team has moved toward the cloud to provide what is described as a “device agnostic’ layer of information retrieval, one that spans current existing backbone ERP systems.  Pfizer now requires all of its highly specialized logistics providers to automatically send tracking information into the Pfizer cloud that is supplied by GT Nexus. The described advantage was the ability to “plug and play” logistics providers into the network, drive differentiated operating parameters and a new “network” information model.  A previous Supply Chain Matters commentary on building foundational supply chain control tower capabilities, stressed the critical importance of a singular information utility that spans the cross-organizational business processes and physical boundaries of the extended supply chain. The Pfizer presentation was a great example of that principle in action and garnering positive business outcomes.

For us, the MIT Crossroads 2013 presentations were the manifestation of industry supply chain executives reinforcement that our community has reached important crossroads into even newer and expanded dimensions of needs for agility, responsiveness and risk mitigation. We once again extend appreciation to the MIT CTL team for inviting Supply Chain Matters to this great annual event.

Bob Ferrari

 


Chinese Regulatory Agencies Step-Up Multi-Industry Probes

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Chinese regulatory agencies have launched three separate investigations across separate industries, all in a matter of a week.  Supply chain teams need to remain diligent to the potential short and longer-term implications of these probes.

First was a probe involving the pricing practices of over 60 pharmaceutical and drug companies, either indigenous to China or foreign-owned.  Multinational firms that were reported to be involved included U.S. based Merck, U.K. based Glaxo-SmithKline and Japan based Astellas among a group of smaller firms. This probe is similar to other emerging market and developed economy probes that strive to keep a lid on explosive drug costs within their nations.

That was followed by a highly visible country-wide pricing investigation involving baby formula makers. A continuing implication of the 2008 melamine milk scandal has been a known fact that Chinese consumers continue to no longer trust Chinese milk and baby formula producers leading to a boom in foreign based brands that have stricter controls on the dairy supply chain. These foreign brands are in such demand that the government has been forced to institute buying controls to avoid hoarding and price speculation. The brands themselves have garnered a premium pricing. According to business media reports, the latest probe involves checks of manufacturers, wholesalers and retailers and especially any efforts from manufacturers to place price thresholds at the retail level.  The Financial Times reported last week that Nestle agreed to slash prices in China by up to 20 percent immediately after investigators announced the baby formula probe. It further reported that sales of foreign baby formula brands have grown more than 20 percent annually since the 2008 scandal, and is expected to double again in the five years.

The latest reported probe is an antitrust investigation against food companies with European maker Tetra Pak as the initial target.  Reports indicate that company officials acknowledged that Chinese regulators are seeking additional information but that no formal notice of investigation has been received.

Industry and Chinese legal watchers were quick to point out to FT that the latest probes are more about efforts to curb rising inflation and demonstrate to Chinese consumers that the government is looking after their interests.  However, the new involvement of China’s State Administration for Industry and Commerce (SAIC), the agency responsible for registering industrial and commercial companies is a more concerning sign of regulatory activism.

The takeaway for supply chain and product management teams is to expect additional fallout from this new phase of regulatory activism.  Consumer markets across China have been a source for growing revenues and profits, offsetting declines in certain other troubled economies such as the Eurozone countries.  Increased scrutiny often leads to further regulatory conditions and China has demonstrated in previous actions that it will protect its domestic corporate brands and supply chains.


Another Product Recall Involving Johnson and Johnson

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Just when we began believing that Johnson and Johnson was on the road toward more responsive quality and production management, it has happened again, yet another major product recall.

J&J is voluntarily recalling 32 million packages of the birth control pill Cilest, which is primarily distributed to patients in Europe, Asia and Latin America. This product is produced and distributed by business unit Janssen Pharmaceuticals Inc..  The recall was initiated because one active ingredient did not lead to a “defined specification” in a designated quality check.  In other words, there is a problem with the consistency or composition of a batch of active ingredient. The recall involves 179 lots or batches of product that were manufactured in or after 2011.  Each lot contains 180,000 packages.

That, in our view, it a rather long cycle of production exposure. 

J&J has been quick to note that the product remains safe and effective but apparently has not elected to issue a formal press release announcing this recall.  Cilest is not sold in the United States.

This latest recall was initiated higher in the supply chain, at the wholesaler and pharmacy level, and requires supply chain channel partners to return all unsold product. Thus, J&J is trying to avoid a direct consumer-facing recall campaign that further

Frequent readers of this blog will be all too familiar with the history of quality and production snafus originating across multiple J&J business units.  A long series of past product recalls in over-the counter (OTC) medicines involving Tylenol, Benadryl, Motrin and Zyrtec date back to 2009 and resulted in the outright temporary closing of a manufacturing facility in Pennsylvania. In July of 2011 there were revelations of an internal investigation led by Johnson & Johnson’s independent directors which points to a direct connection from certain headcount reductions, along with “periodic headcount freezes’ as contributing factors related to product quality breakdowns at the company’s McNeill Consumer Healthcare unit. In May of 2012, there was yet another product recall involving the McNeill OTC unit. Efforts to resolve these issues and re-dedicate efforts toward insuring various past supply chain and product quality issues were permanently addressed in various company-wide performance improvement initiatives were launched.  Unfortunately, in now appears that more process issues remain to be addressed. A posting on Domain-b.com makes note that the recall of Cilest comes a month after J&J recalled children’s Tylenol products in South Korea for containing an overdose of medicine while India based health officials revoked a license to manufacture cosmetics at a facility in Mumbai after determining that an unauthorized process was utilized to sterilize a baby powder product.

In our last Supply Chain Matters January commentary regarding J&J, we applauded the company for its continued renewed initiatives in addressing quality and supply chain production conformance issues.

It would now appear that more work, concentrated leadership and dedicated efforts remain.

Bob Ferrari


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


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