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

The Wall Street Journal featured a troubling article today, one which adds more credence to the growing problem of quality and conformance lapses that exist in certain industry supply chains. The article, Pratt Discloses Faulty Testing (paid subscription required or free metered view ) reports that United Technologies Corp.’s Pratt & Whitney unit has disclosed that it had uncovered an alleged fraudulent-testing scheme by a sister United Technologies business unit, Carmel Forge Ltd..

The scheme is reported to involve previously unreported multi-year efforts to doctor metallurgical tests involving the production of tens of thousands of engine parts used on business jets and turboprop aircraft.  The alleged period is from the mid-1990’s to the summer of 2011, when a disgruntled whistleblower employee of the Israeli Carmel Forge unit provided an insider tip to Pratt officials.

The WSJ characterizes this disclosure as one of the aerospace industry’s longest and most –pervasive examples of improper testing.  While the report indicates that the parts in question do not pose any safety hazard, Pratt officials acknowledged that the extent and duration of the testing irregularities shocked them, and has prompted a reassessment of quality control and oversight processes among suppliers.

The U.S. Federal Aviation Administration (FAA) launched a formal administrative proceeding after it was informed in September 2011, which is reported to be closing without any imposition of fines or other penalties. The WSJ reports that United Technologies and Pratt officials have worked aggressively to get to the bottom of these reported testing irregularities and has since replaced the top management structure at Carmel Forge.

The obvious question, at least for Supply Chain Matters, was why was this alleged fraudulent testing undiscovered for as long as it was, and why has it taken this long for these details to emerge. The article quotes Pratt officials as indicating “that all the subject parts produced over the years met basic engineering specifications ensuring their safety, though many weren’t properly subjected to Pratt & Whitney’s tougher internal testing requirements.”  Perhaps, a statement dictated by a panel of lawyers, and not very comforting. Readers and industry players can certainly draw their own conclusions.

From our perspective, yet more evidence that the notion of lean supply chains seems to include lean or minimal controls on supplier and testing conformance. For the aerospace industry, already dealing with numerous challenges of backlogged supply chains and the ramifications of the ongoing grounding of Boeing’s 787 Dreamliner, yet another disclosure adds additional stress to supplier relationships.

Bob Ferrari

It would appear that when it comes to certain cases related to food safety, the wheels of justice turn mighty slow.  Supply Chain Matters readers might recall the early 2009 incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by the now defunct Peanut Corporation of America (PCA).  That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.

National Public Radio reports that four former executives of PCA and a related company are now facing criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria.  The 76 count indictment was unsealed last week in a U.S. federal court in Georgia. The charges include conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials allege that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA). The four people indicted include Stewart Parnell, the former company president; Samuel Lightsey, former Blakely plant operations manager; and Mary Wilkerson, a quality assurance manager. Also indicted was Michael Parnell, who worked as a food broker on behalf of PCA. If convicted, these executives could face up to 20 years in prison.

In our coverage of this past peanut butter contamination incident, we noted government investigations that indicated that the timeline for the actual contamination was much broader. The actual occurrences of reported sicknesses actually occurred as far back as October of 2008.  It wasn’t until early January of 2009 that various state and federal government officials were able to triangulate the 430 reported sicknesses and 5 deaths to peanut products being produced by the PCA facility in Blakely Georgia.

In February 0f 2010, roughly one year after the major recall, we made note of an article appearing in the Atlanta Journal Constitution indicating that little had changed since the incident, with Georgia state legislators amending a plan calling for increased food inspections, including peanuts, by allowing companies to conduct their on food safety audits in lieu of inspections. At the time, the bill exempted plants whose end product was a raw agricultural product, which included peanut growers who at the time represented about 46 percent of the U.S. supply.  Also reported was that the Georgia Bureau of Investigation had decided to defer any ongoing investigation of PCA to federal authorities.

Here we are, four years since the original incident, and the indictments have now come forth. It seems that the wheels of justice do turn slow, but at least they are turning. It would be rather interesting to observe what additional information comes to light when these indicted executives have their trials.  That is, of course, if they reach the trial stage. Daniel Kilgore, who served as a plant manager from 2002 through 2008, has already pleaded guilty in the case.

Bob Ferrari

This is another Supply Chain Matters update on our ongoing coverage of the latest crisis involving Boeing’s 787 Dreamliner program, that being the grounding of all 50 operational aircraft, and the impact to the backlog of over 800 customer orders. Readers can reference our most recent previous commentaries here and here.

Before we begin this week’s update commentary, we need to complement the coverage of this incident exhibited by The Wall Street Journal.  Since the 787 grounding began, the WSJ has featured near daily coverage of all aspects of ongoing investigations as well as developments within Boeing.  They have certainly provided extraordinary coverage and should be complimented for doing so.

Today, Boeing is expected to meet with U.S. regulators to outline a series of proposed fixes related to the suspected issues concerning the aircraft’s lithium ion batteries and standby electrical system.  The timing is good since reports surrounding ongoing investigations from various government agencies seem to be without any conclusive root cause indicators as to why thermal runaway conditions occurred in the two previous incidents that participated the grounding decision. The WSJ reports that several airline officials are predicting 787’s could be flying as soon as April.  However, United Airlines announced this week that it has suspended all schedules involving use of their new 787’s until early June. While today’s meeting is being positioned to not result in any decisions, it may represent a changed perspective in finding some middle ground among all parties involved as to the direction and outcome of the ongoing investigations, and on Boeing’s efforts to assure investigators that it has a workable resolution.

Reports indicate that Boeing is calling for a redesign of the battery to increase separation between cells as well as to measure individual voltage and temperature. Plans call for the battery housing to be more ruggedized and fire-proofed, with the ability to vent any heat or vapors externally. Battery supplier GS Yuasa will be required to extend the testing cycle of newly produced batteries from the current days to a number of weeks. Flight crews would be ordered to conduct repeated in-flight checks on the status of the onboard batteries and land immediately if a significant problem is indicated. Thus, it is becoming clear that Boeing, unlike Airbus, will stick with its original design plans calling for lithium ion battery power.

We call Supply Chain Matters reader attention to a front page Wall Street Journal article featuring a candid interview with Boeing CEO Jim McNerney. (paid subscription or free metered view). It includes some revealing aspects of the ongoing crisis.

Regarding the overall stakes for Boeing, CEO McNerney is quoted: “This airplane is our near- and medium-term future and ultimately speaks to our reputation and our brand.” That statement speaks volumes.  Reporter Monica Langley probes deeply as to why McNerney has not been more openly visible during the ongoing crisis. The implication drawn is that the CEO has an inward style and prefers to be behind the scenes actively managing a sense of action and resolution. The lead director of Boeing’s board of directors is quoted as indicating that the CEO is out front with the constituencies that matter.  But, there is no mention of the general flying public as a constituency partner. In our view, the lack of active CEO visibility may indeed be something that will continue to be written about.

Other revelations in the WSJ interview include CEO McNerney’s personal reach out reach to the CEO’s of General Electric and General Motors seeking loan of their best battery experts to assist internal teams in their ongoing investigations. That is in addition to the government battery experts that the NTSB and the FAA invited as part of their ongoing investigations. However, in all of the current reporting, we have not noticed any mention of participation of experts from battery supplier GS Yuasa.  Perhaps that was oversight, but it certainly requires clarification.

The WSJ interview describes a candid conversation between CEO McNerney and the chief technology officer of the 787 program who was apparently convinced that nothing happened to pose a risk to the aircraft or the passengers. McNerney corrected the staff member that the real issue to address was the perception of the safety and confidence of the aircraft and of the brand, and it cannot happen again. Well stated as well since many readers can relate to conversations held with engineers and developers that can often dwell too much on justifying the merits of the technology vs. the implications to tbusiness plans.

Two separate war rooms which are called “Root Cause/Corrective Action” and “Return to Flight” are identified in the article.  These war rooms are described as featuring lots of visual decision trees and graphs.  We trust Boeing is making good use of integrating its product lifecycle management (PLM), manufacturing shop floor, and service management information for effective analysis.

Finally, McNerney speaks to the supply chain ramifications of the ongoing crisis. Boeing has rightfully elected to continue with its operational production schedule of 5 787 Dreamliners per month, even though the company will not be paid for these aircraft until the grounding is lifted and delivery is made. Thus, lots of expensive finished goods inventory is being queued. The WSJ reporter describes this week’s visit by CEO McNerney to the Everett Washington final assembly facility where he told senior executives: “we’ll have a lot of 787’s stacking up around here if we don’t get this done sooner or later”.  That is a statement to extract executive motivation but the reality is that Boeing’s 787 suppliers have lots of concerns regarding not being paid for all of this building unpaid inventory.

This may or may not be a key turning point week in the ongoing 787 grounding crisis. One thing is certain though.  There will be fresh learning on the ability to more quickly assimilate and analyze lots of information from numerous structured and unstructured information sources.  In this hyper environment of around the clock news and social media enhanced news cycles, providing a visible executive persona in managing a brand critical crisis is sure to come up in the post crisis discussions. Finally, the importance of the extraordinary efforts of people, suppliers and external investigators in coming together to resolve this crisis and move forward with what remains to be done, will be the ultimate determinant of whether this crisis is just a temporary blimp, or another setback in a previously troubled innovative aircraft program.

Bob Ferrari

Our European based and other readers are probably very aware of the news last week that Swiss frozen foods producer Findus was forced to recall its beef lasagna products in the United Kingdom after it was determined the product contained horse meat. This is not exactly a savory development, to state the least, and British and European media have been quick to call more oversight in food product quality.

In the wake of this development, global consumer goods provider Nestle indicated that it has intensified the screening of and traceability of its food products. Nestle CEO Paul Bulcke indicated to business media that the horsemeat scandal will affect the entire industry even though Nestle product is not directly involved. In a Financial Times interview, Bulcke noted: “We check our suppliers very carefully, and of course, when something like this happens we intensify our procedures. But everything under our labels is not affected.”

Of course, every CEO of a consumer goods company wants to insure traceability across the supply chain but then again, how many have funded the proper tools and resources to insure such traceability? Once more, when the threat of acquisition and cost cutting looms large, will traceability needs see the light of day?

As investigations related to the European horse meat scandal run their course, companies may again discover that traceability and conformance extends to the lowest tiers of the supply chain. It is not about a primary supplier attesting to product conformity, but the supplier to that primary supplier. The rub often comes when negotiating supply contracts, when the customer refuses to acknowledge the need for added costs to insure product traceability and quality conformance.

In many of our past Supply Chain Matters commentaries related to specific food or drug product recalls, a common pattern is the eventual breakdown in quality conformance monitoring, latency in detecting unusual patterns, and waiting too late before a governmental regulator forces a product recall. In the specific prior case of the numerous Johnson & Johnson product recalls, an internal audit pointed to cuts in key quality conformance resources as the catalyst.

Many companies have painfully discovered that indeed, traceability is the key to food safety as well as protecting the brand. Europe now has a pointed reminder to that principle.

Bob Ferrari

This is a weekly Supply Chain Matters update on our ongoing coverage of the latest crisis involving Boeing’s 787 Dreamliner program, that being the grounding of all operational aircraft.

In our previous Commentary Four posting on February 4^th, we noted that the U.S. National Transportation Safety Board (NTSB) had reached out to experts within Naval Surface Warfare Center and a battery expert from the U.S. Department of Energy in conducting ongoing tests of the lithium-ion battery and its related electrical systems. The NTSB was further made aware by Boeing of the prior battery replacement history of the aircraft and will use these data to determine any relevance. After formally reporting quarterly earnings, Boeing’s CEO Jim McNerney indicated confidence that a root cause will be determined and further played down reports that the aircraft had a succession of battery problems that led up to the grounding. He is also quoted as indicating that “we have no idea yet’ what caused the batteries to burn.

In its weekly update last week, NTSB chairwoman Deborah Hersman confirmed that that agency has concluded that the battery involved in the 787 fire that occurred on a Japan Airways aircraft in Boston was involved in a “thermal runaway”, causing that battery to reach an internal temperature of 500 degrees Fahrenheit. The NTSB however continues to not know what caused a short-circuit in the battery to prompt the reaction. Chairwoman Hersman indicated that the NTSB was weeks away from being able to conclude as to what caused the battery “thermal runaway” and what corrective measures will need to be taken. The Japan Transport Safety Board investigating the separate in-flight fire involving an All Nippon Airways 787, after conducting CAT scans of the damaged batteries in the ANA incident concurred with the ‘thermal runaway” condition. Their analysis found damage to all eight cells of the battery.  However, both agencies appear to be pursuing different paths as to root cause. Investigators are now reported to be diving into additional parts of the aircraft’s electrical system.

Meanwhile, The Wall Street Journal reported a significant new twist last week, with indications that Boeing is pursuing possible design changes.  These include increasing the separation between cells in the lithium-ion batteries, design changes to keep the cells more rigid and an enhanced containment box to house the battery and contain chemicals or fire escaping from the battery. According to the WSJ, Boeing indicated that hundreds of engineering and technical resources are working around the clock to resolve the battery issue. The U.S. Federal Aviation Agency (FAA) granted Boeing’s request to conduct a special test flight which was completed on Friday of last week. (See Boeing photo which was tweeted) If Boeing were to come-up with an interim design change involving the battery system, it would have to be approved by regulators and verified in flight testing, all of which will take-up additional time. The WSJ speculated that: “Barring a breakthrough, some pessimists predict that designing and installing a new battery system could take as long as a year.”

The WSJ indicates that carriers around the globe with grounded 787’s are receiving regular update briefing, which is a credit to Boeing. However, given these pessimistic indications of coming up with an approved fix, Boeing current 787 customers and Boeing’s 787 supply chain has some difficult challenges in the weeks and months to come. With last week’s statement from Boeing indicating its intent to stick with the production schedule of 5 Deamliners per month, this OEM is positioning lots of staging space to inventory some expensive semi-finished airplanes while investigations continue.

One other interesting development stemming from the ongoing 787 crisis comes from rival Airbus. This weekend, the Financial Times reported that Airbus has confirmed that it was re-considering its use of lithium ion batteries on its new A350 aircraft, opting instead for use of traditional nickel cadmium batteries.

Bob Ferrari