On the eve of the Thanksgiving Holiday here in the U.S., a holiday to look back and reflect on the blessings of family and life, it is also our time to reflect and scorecard our Supply Chain Matters 2012 Predictions for Global Supply Chains which we published nearly a year ago. Our annual process is to first scorecard the current year’s predictions before publishing our upcoming 2013 predictions during December.

Our scoring process this year will be 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 were we thinking?

In our Part One posting, we reflected on the initial three predictions issued nearly a year ago.

In this Part Two posting, we move on to Predictions Four.

2012 Prediction Four: Three specific industry sectors, B2C, Pharmaceutical and High Tech, will be especially affected by significant supply chain challenges or turmoil in 2012.

Score: 3.7

In 2011, we correctly predicted that two industry sectors, B2C and Pharmaceutical/Healthcare would be especially affected by significant impacts. For 2012, we added High Tech / Consumer Electronics as a third industry facing significant supply chain challenges. We also mentioned a fourth ‘wild card’ industry addition, that being the Aerospace industry, depending on how unplanned events occurred during the year.

The B2C sector continued to be impacted by the momentum in online multi-channel, or what some refer to as Omni-channel commerce. Retailers were impacted as consumers continued to shift their buying preferences to online channels and at the same time, demanded more options on order fulfillment, including both in-store pick-up and same-day delivery.  Brick and mortar retailers began to deploy strategies for stocking unique SKU’s at stores while enhancing customer in-store experiences, all collectively designed to provide more uniqueness to the in-store shopping experience. Retailers have also increased investment in online capabilities by adding more items and attempting to collectively manage inventories across the various multi-channels of fulfillment.  Two retailers have garnered unflattering visibility in 2012. Best Buy, which has struggled with the effects of customer show-rooming and consequent buying online encountered a senior management shake-up and is preparing to meet the challenges of the upcoming 2012 holiday buying period. JC Penny, who brought in the former leader of Apple retail outlets to be their new CEO, reeled from consecutive revenue shortfalls in 2012 as consumers failed to respond to the far different boutique store-within-in-store merchandizing strategy being deployed. Specialty retailer Macy’s on the other hand, seems to have found a successful formula for blending both in-store and online consumer buying preferences. Meanwhile, Amazon marched forward in online fulfillment while Google, thus far, has not established any significant online presence.

There should be little doubt that the B2C sector encountered significant challenges and as noted, the final test comes in the upcoming six weeks of the 2012 holiday buying surge when consumers will again make a statement on buying expectations and preferences.

There should be little doubt as to pharmaceutical and healthcare supply chains continued industry challenges throughout 2012, which involved major supply disruptions, as well as increased concerns for counterfeit and illicit drugs penetrating industry supply channels. Severe and rather publically visible shortages of injectable cancer fighting and other chronic disease treatment medicines dominated all forms of media in the first half of the year.  In the U.S., government agencies instituted higher levels of scrutiny concerning the appearance of fake cancer treating drugs appearing in foreign and U.S. based supply chains. Other U.S. enforcement efforts directed at suspected illegal drug trafficking involving prescription drug abuse, ensnarled supply chain players such as major distributor Cardinal Health, drug retailers CVS and Walgreens.  Last week, Supply Chain Matters commented on what The Wall Street Journal reported that both FedEx and UPS may be cited for improper notification, and also be subject to enforcement implications. This is an industry which will continue to experience major challenges in the months to come.

High tech and consumer electronics supply chains generally raised to the challenges of severe short ages in the supply of hard disk drive components brought about by the Thailand floods in 2011.  Hard disk OEM’s were also adroit in demanding premium pricing for hard products for the majority of 2012, and as a result, were able to demonstrate generally positive financial results toward the latter part of 2012.  High tech OEM’s for the most part, demonstrated high levels of agility in offering and promoting personal computing and other products with components that were in adequate supply vs. short supply. Thus, as predicted, component prices did spike for a good part of the year, but active procurement and supply mitigation efforts buffered any significant revenue shortfalls due to supply constraints.

Finally, our wildcard industry, that being Aerospace, played out as one with very active challenges in 2012, and thus was a good call. There has been public admission that the current backlog of sold new aircraft is “disturbingly healthy”, noting that it is hard to sell more airplanes when potential delivery times extend out in years, almost 8-10 years at this point. There is finally open admission that the industry has a capacity problem that needs to be addressed which implies a need for expanded supplier process capability and increased investments in production output capability. All of these admissions however came in an economically challenged global environment where finding additional working capital funds are an increasing challenge. In many cases, suppliers support production needs of Airbus, Boeing and other OEM’s.  This caused Supply Chain Matters to declare the entire industry in stress.

Regarding individual OEM’s, Boeing continues with efforts to dramatically ramp-up supply chain wide production volumes to overcome continued chronic backlogs with the 787 Dreamliner and other programs. Similarly, Airbus has been dealing with supply chain issues related to the A350 program. For Boeing, both major suppliers of engines for the 787 had unexplained incidents of engine malfunction while other suppliers such as Spirit AeroSystems Holdings, are running into financial challenges as a result of continued product production delays.  As noted in our Prediction One commentary, the ongoing financial crisis involving the Eurozone countries has caused a squeeze in credit availability across Eurozone banks, which has also impacted some major Airbus suppliers. Airbus, announced the intent to open a manufacturing facility in the United States, to help boost output as well as take advantage of U.S. manufacturing efficiencies and technological capabilities.

Readers are again encouraged to share their observations regarding general predictions and what actually occurred among industry supply chains in 2012.

Bob Ferrari

As I pen this posting, the weekend is approaching is there is lots of breaking news concerning industry supply chains.

Probably the biggest bombshell was that The Wall Street Journal reported today (paid subscription or free metered view) that both FedEx and UPS have been targeted by the U.S. Drug Enforcement Agency (DEA) in that agency’s continued crackdown on illegal prescription drug sales.  The WSJ report indicates that according to company disclosures, each has have been served with subpoenas starting as long as four years ago, and the latest probe is reaching a head.  The WSJ quotes Fed-Ex’s in-house legal counsel as indicating that that company could soon face criminal charges related to this latest probe. A spokesperson for FedEx is further quoted as indicating that the ongoing investigation has become “absurd and deeply disturbing” and that the government wanted to “deputize” FedEx personnel to report on suspected illegal shipments. UPS on the other hand, seems to be in talks about settling the case with the U.S. Justice Department.

Our Supply Chain Matters readers might recall that in our 2012 Predictions issued almost a year ago, we predicted stepped-up efforts in 2012 to mitigate supply chain unscrupulous activities. Many industries would be impacted not the least of which was the pharmaceutical industry which was already reeling from a number of significant supply chain related supply and enforcement issues. Throughout 2012, U.S. regulatory and legal authorities have been, as the WSJ rightfully describes, moving up the prescription drug supply chain in its current enforcement crack-down efforts concerning the flow and distribution of illicit prescription drugs.  Administrative cases were pursued with retail drug chain CVS and Walgreens, each targeted for suspected large volumes of potential illegal prescription drug sales in Florida. The 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 alleged that Cardinal has failed to follow agreed-to procedures to monitor misuse of controlled substances such as oxycodone. Cardinal has since agreed to a settlement.

More developments concerning legal proceedings involving the two largest global shipment carriers will most likely come to the attention of business media in the days to come.  The timing is not exactly deal, given the height of the holiday buying and shipping period.

In any case, one thing is certain, the U.S. Justice Department is serious about cracking down on either the knowledge and/or aiding of the sale and distribution of illegal prescription drugs, and the enforcement path involves multiple members of the overall supply chain.

Bob Ferrari

This commentary is a continuing update to our ongoing Supply Chain Matters series related to the rather troubling trend of counterfeit life-saving drugs entering U.S. and global based supply chains. Our commentary update in late-February noted the disturbing trend in global based chain of custody adding more points of vulnerability to potentially fake drugs. The supply chain gaining the most visibility has been that of the cancer drug Avastin, where fake versions of this life-saving cancer drug began showing up in U.S. supply chains late last year.

Last Friday, The Wall Street Journal published a rather comprehensive but disturbing special report: How Fake Cancer Drugs Entered the U.S. (paid subscription or free metered view). This article provides a sobering perspective of how the crackdown of pharmaceutical and life sciences companies on a particular Canadian based drug wholesaler led to a cascading series of events leading to increased sourcing of drugs, outside the controls of U.S. regulatory agencies and the increased likelihood of counterfeit drugs entering the supply chain.  In our view, this WSJ article needs to be mandatory reading for those residing in pharmaceutical supply chains, healthcare organizations securing these drugs and legislators who oversee industry controls. We urge the WSJ to make this article more visible since the events portrayed provide ample evidence of the dysfunctional nature of the cascading events that a highly regulated supply chain can incur when the participants focus on self-interests.

It portrays how online distributor Canada Drugs became a vital link to U.S. consumer needs for more affordable drugs, and to be subsequently targeted as a powerful enemy by large drug companies for cutoff in supplies in 2003. That led to a series of interlocking initiatives where Canada Drugs initiated a web of international subsidiaries to secure needed supply from other internationally based sources. In the specific case of Avastin distribution, the WSJ reports that the maze of subsidiaries included Clinical Care, Bridgewater Medical, Montana Healthcare Solutions, River East Supplies Ltd., Quality Specialty Products and Volunteer Distribution. These subsidiaries opened the door to sourcing of suspect drugs from cheaper countries, such as Turkey, where regulatory controls are not as strict.  Drugs were purchased in bulk from foreign souces and then re-packaged for U.S. customers, which is a break in the chain of traceability. Buyers assumed valid wholesaler licenses from U.S. state regulators.

In our February commentary we called for increasing the timetables for “track and trace” processes and that consideration should be made for global supply chain distribution channels. We called for all members of pharmaceutical and drug supply chains, industry, regulators, and buying groups to bring serious attention and resources to bear on processes related to sourcing, supplier monitoring and product authenticity. After reading last week’s WSJ report, we wonder aloud whether certain drug manufacturers and distributors are more concerned about individual business interests rather than the safety of drug supplies

Bob Ferrari

When you are responsible for a blog, you try to be objective and even-handed.  You do not necessarily want to ‘pile-on’ not so flattering commentary regarding any one specific company. Thus, Supply Chain Matters has always had these perspectives in our published commentaries.  But alas, certain company seems to continue go out of the way in accumulating not so flattering headlines, and unfortunately, thus continues the saga of Johnson & Johnson these past months.

On May 22, J&J was the recipient of yet another warning letter from the U.S. Food and Drug Administration (FDA) related to plant inspection and unresolved findings concerning its Skillman, New Jersey facility.  The products cited involve multiple OTC offerings used by women and come under K-Y, Reach, Stayfree and OB branding names.

We learned about this development from a commentary penned by Dr. Ronald Riker on the OTC Product News web site. Dr. Riker has not held back on not so flattering comments related to J&J.  He notes the significance of this latest finding in that it comes in the shadows of the long-standing consent decree between J&J and the FDA. The finding involves a plant other than the previous McNeill OTC facilities located in Pennsylvania and Puerto Rico. What is also noted as different is that the products cited are not regulated as drugs, but as medical devices.

Supply Chain Matters also reviewed the subject FDA warning letter and noted similarities to previous findings related to certain breakdowns in J&J quality monitoring processes. Among various findings in the latest letter are:

• Failure to establish and maintain adequate complaint files and procedures for receiving, reviewing, and evaluating product complaints.
• Failure to promptly review, evaluate and adequately investigate complaints reported to the FDA
• Failure to document results of design reviews
• Failure to establish and maintain adequate procedures for implementing corrective and preventive actions to ensure that such action is effective and does not adversely affect the finished device.

The letter indicates a specific K-Y branded product has been misbranded and significant changes were made without submission of proper product submission documentation

In a further but separate development, today’s Wall Street Journal reports (paid subscription or free metered view) that J&J’s Ethicon business unit  is stopping sales of surgical insert versions of its branded Gynecare mesh products marketed to relieve pelvic discomfort in women. The WSJ notes that the decision comes after numerous reports of injury and several deaths, and that the J&J meshes are subject to hundreds of product-liability lawsuits according to a recent company securities filing. J&J has asked the FDA to allow the company to keep selling these products under abdomen surgical insertion procedures, and in the article, a J&J spokesperson is quoted as indicating that this is not a product recall but rather a discontinuation in light of changing market dynamics. J&J will be stopping sales over the next 3-6 months with the goal of completing the process by 2013.

Despite all the assurances of a new CEO and multiple executive re-alignments, J&J continues to exhibit findings and incidents of lax quality monitoring and regulatory process conformance. Evidence of a concentrated focus and cross-functional accountability for addressing clear evidence of systemic quality issues and troubled processes is not apparent from the lens of consumers and patients. As a result, the company’s previous stellar reputation for quality continues to erode at a rapid rate. This is not a condition that any healthcare or medical device products producer wants to be involved in, especially one ranked #22 in Gartner’s latest Top 25 Supply Chain ranking.

Bob Ferrari

Supply Chain Matters provides another update to our ongoing series of blog commentaries related to the continued unacceptable shortages of life-saving cancer treating drugs. Readers can refresh on this topic by referencing our prior commentaries by clicking here and here.  Because this is a blog that focuses on business issues from a supply chain lens, our commentaries have reflected on the conflicting stakeholder interests across the healthcare supply chain, and on sourcing and supply decisions that have proven to be incredibly lax in insuring the reliable supply of these life-saving drugs.

We came across a publication from the Group Purchasing Organization interests of the Healthcare Supply Chain Association (HSCA) that provides alarming background and statistics related to this ongoing problem. A 2011 survey conducted by the American Society of Health-System Pharmacists (ASHP) and the American Hospital Association (AHA) reported that almost half of 820 hospitals experienced 21 or more critical prescription drugs in short supply. Many of these drugs are in the category of generic sterile injectables used for treating cancer, emergency medicine, anesthesia, and other critical ailments. All reported at least one critical shortage over the past six months. That continues to be an overt indicator of a specialty supply chain that is failing its customers, a supply chain whose mission was always to never fail the patient. The situation also leads to opportunities for others to take advantage of supply shortfalls with the addition of counterfeit and bogus drugs, or price-gouging practices.

Many of the supply interruptions have been attributed to breakdowns in quality and manufacturing control processes. The HSCA report notes that 54 percent of the current shortages are linked to these serious quality problems. Our ongoing commentaries also point to these same issues.

The situation has reached a point where many doctors, patient advocate and other group are calling for definitive action from the U.S. government. An article published on the Everything Jersey site provides one poignant example. This article describes an oncologist who has been forced to inform patients that the preferred drug to treat their cancer condition is unavailable, and that the alternative drug will not be as effective and will cause additional side effects. A profound quote from this article: “In the U.S. we’re having two conversations (with patients) that produce the same result. One is that the drug is too expensive and you may not be able to afford it and the other is the drug to too expensive to make, so we can’t get it anymore”. The latter part of that quote is an obvious indicator of the conflicting stakeholder interests and the building indictment of pharmaceutical manufacturers in their failure to be sensitized to the fact that healthcare is being jeopardized by the ongoing shortages. A pharmacy operations coordinator is described as spending between six to eight hours per day on the telephone scrounging for medicines such as methotrexate, utilized to treat childhood and other cancers. Other articles note that each of the four manufacturers of methotrexate has had some type of production issue, compounding a reliable flow of supply.

The U.S. Congress is the process of finalizing legislation headlined as helping to ease these shortages.  When enacted, this legislation will require overhauls of the U.S. Food and Drug (FDA) approval process for alternative supplies and will also require drugmakers to issue timely warnings of drug shortages or discontinuation. In its recommendations, the HSCA calls for collaboration between governmental regulators and manufacturers to increase manufacturing quotas during drug shortages, and allow the FDA to define a broader definition of medically necessary drugs.  Another recommendation calls for immediate allocation by the manufacturer and authorized distributors to minimize speculative purchasing or hoarding of critical drugs in short supply.

It is fairly obvious that the political and humanitarian pressures on drug manufacturers are accelerating at a rapid pace. A Minneapolis Star Tribune article observes that doctors and industry experts indicate that economics drives many of the current shortages, namely that manufacturers have been cutting back on the production of generic labeled drugs that do not earn a sufficient profit. It also references state and federal prosecutors of accusing drugmakers of “pay of delay” deals that delay the availability of cheaper generic drugs from augmenting supply chains. Keep in mind that inventory benchmarks among pharmaceutical supply chains have consistently pointed to excess inventories on an aggregate basis.

As I hear presentations from pharmaceutical supply chain and other executives, the challenge of an increased governmental regulatory climate constantly is mentioned as a barrier.  Yet, one has to question whether current industry practices continue to lead to outcries for even further regulatory controls. In essence, the industry brings upon itself the need for increased regulation and oversight.

In this series, Supply Chain Matters commentaries have been focused on the supply chain business processes that are obviously contributing to the problem. We, however, are coming to the opinion that the industry, while experiencing obvious supply breakdowns, is more consumed by very real stakeholder alignment obstacles that ultimately are manifested in the supply chain.  Budgets get prioritized for either new drug discovery or acquisitions of other companies, including generic drug manufacturers themselves. Profitability shortfalls lead to headcount cuts and supplier cutbacks, often directed at supply chain and production process oversight areas. That has been a consistent history, and without any major industry-wide motivation to address this issue, these problems will persist.

No doctor, and certainly no patient, should ever have to be placed in a situation where treatment is compromised because of the lack of reliable supply of a generic or branded drug.  Yes, each and every one of us should be adding our voices to the fact that “This is crazy!” We continue to urge our readers to add their voice and pass along a call for concerted action.

We suspect and trust that many pharmaceutical and drug distribution supply chain professionals share in this frustration.  They need the attention and support of their senior business executives to address conflicts in the goals of profitability with assuring reliable supply of life-saving drugs.

Most every supply chain text or certification exam asks the fundamental question of why does the supply chain exist?  The answer is that it exists to serve the needs of customers.  Needs to satisfy other stakeholder interests remain a conflict to that goal.

Proven multi-industry practices within supply chain business process and advanced technology can be directed at identifying and mitigating supply shortages. That unfortunately cannot happen without this lack of industry and stakeholder  alignment.

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