In the period between 2008-2010, pharmaceutical and healthcare products provider Johnson & Johnson, and in particular, its McNeil Consumer Products operating unit, faced a building crisis involving multiple branded OTC healthcare remedies such as Tylenol, because of quality and process issues focused on a specific production facility in Fort Washington Pennsylvania. After numerous product recalls, that plant was subsequently shutdown for remedial actions and has yet to re-open.
This week, McNeil announced an agreement with the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the U.S. Department of Justice to resolve the previously disclosed government investigation relating to the manufacturing of certain over-the-counter products at its Fort Washington facility. The company agreed to pay a $20 million criminal fine and forfeit $5 million. Under this agreement, McNeil reportedly pleaded guilty to a misdemeanor violation and accepted responsibility for the inadequate filing of required documentation during the manufacturing process. In its announcement, McNeil states in-part:
“McNeil has been implementing enhanced quality and oversight standards across its entire business to ensure we are best able to meet our commitment to consumers, patients and doctors who rely on our products.”
In a July 2013 Supply Chain Matters commentary, we highlighted all of the efforts that were underway to transform all of Johnson & Johnson’s supply chain processes. Senior executive changes were part of that transformation effort along with a declaration of five strategic priorities:
- Deliver on FDA consent decree milestones
- Ensure reliable supply of OTC products to retailers and consumers
- Achieve brand leadership
- Rebuild customer trust including top retail customers
- Execute a return to market plan for core U.S. brands and SKU’
J&J subsequently centralized its supply chain efforts under a singular leadership model, along with a singular quality and compliance model. In the systems area, a four year program was outlined to consolidate an overall systems landscape that was described as 60 different ERP systems supporting 275 operating companies
The McNeil statement indicates: “this plea agreement fully and finally resolves the federal government’s investigation, and closes a chapter on actions that led the company to review and significantly improve its procedures.”
In its reporting, The Wall Street Journal cited the U.S. Justice Department as indicating that McNeil continues working to bring the Fort Washington facility into regulatory compliance and plans to re-open the facility once it gains approval from the U.S. Food and Drug Administration. McNeill’s other production facilities are reportedly running under a 2011 permanent injunction and Consent Decree. McNeil indicates that a third party cGMP expert has now submitted written certification to the FDA after determining all sites are conforming with applicable laws and regulations.
Seven years and a considerable financial sum later, J&J continues in its organizational wide efforts to address consistency in good manufacturing practices.
No doubt, this has been an expensive lesson for Johnson & Johnson, as well as a rather important learning for the remainder of the industry regarding the critical importance of consistent product quality and supply chain wide standards in avoiding negative business outcomes.
Lumber Liquidators is reported to be one of the largest and fastest growing retailers of hardwood and laminate flooring in North America. This weekend, a broadcast report from CBS News’s 60 Minutes program turned a public light on this retailer’s supply chain and the consequences are becoming quite troublesome from a brand and financial perspective.
The 60 Minutes report concluded that:
“Much of its (Lumber Liquidator’s) laminate flooring is made in China, and as we discovered during our investigation, may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.”
All laminate flooring carried by Lumber Liquidators bears a label indicating that it is CARB Phase 2–compliant, referring to the California Air Resources Board, which sets standards for formaldehyde emissions in wood flooring.
The program reported these findings after conducting its own sanctioned tests of select flooring and after interviewing workers among various China based suppliers. An executive director of a nonprofit group was teamed-up with a prominent environmental attorney, to test the Chinese-made laminate flooring. Chinese suppliers were interviewed by a 60 Minutes reporting team posing as buyers and using hidden cameras. Employees of three Chinese mills indicated they were using core boards with higher levels of formaldehyde to save the retailer up to 15 percent on price. Three mills further admitted on camera to falsely labeling products as CARB 2–compliant. The report then concluded:
“While laminate flooring from Home Depot and Lowes had acceptable levels of formaldehyde, as did Lumber Liquidators American-made laminates, every single sample of Chinese-made laminate flooring from Lumber Liquidators failed to meet California formaldehyde emissions standards. Many by a large margin.”
Lumber Liquidators’ founder and chairman, Tom Sullivan, indicated to 60 Minutes that the tests weren’t valid and said the company isn’t required by law to test finished products, as the program did. In a filing with the U.S. Securities and Exchange Commission on Monday, the company reiterated that the testing method on which the CBS program based its report was improper. It said it is fully compliant with California standards. “Our laminate floors are completely safe to use as intended” the filing said.
While this retailer vociferously insists that its flooring is safe and meets certain standards for environmental safety, the initial fallout among investors has been severe. Shares of the company’s stock closed down 25 percent today, and were halted through the morning ahead of a planned news release. A published report from MarketWatch indicates that this retailer blamed the attacks as the work of short sellers, “who are working together for the purpose of making money by lowering our stock price.” This report further indicates that short interest in Lumber Liquidators stock reached 30 percent ahead of the CBS program’s airing, according to FactSet data. The company is reportedlybeing sued by environmentalists, backed by a group of Wall Street short sellers, who accuse the company of violating California’s toxic-warning statue.
Beyond the Wall Street and legal messiness, this incident is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards are cited. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring. Supply chain focused snafus or product quality issues continue to cause reverberations for brand loyalty and investor confidence. The fact that news networks can place hidden cameras and conduct interviews of a company’s suppliers is further cause for concern.
No doubt, the situation at Lumber Liquidators will continue to reverberate among business headlines in the days to come.
Prediction Ten of our 2015 Predictions for Industry and Global Supply Chains declares that service focused supply chains will garner increased attention and new investment interest. We noted two prime motivations, protecting the brand especially in the light of continuing massive amounts of product recall activity as well as taking advantage of the new opportunities brought forward with connected devices.
This week, in conjunction with the annual North American International Auto Show being held in Detroit, The Wall Street Journal featured an article, Massive Recalls Force Part Makers to Track Defects (Paid subscription of free metered view). The article observes that auto parts makers such as air bag inflator supplier Daicel are investing millions of dollars to improve tracing and lot identifiers of component parts. There are mentions of parts suppliers Aisin Selkl, and Jtekt Corp. significantly investing in parts traceability. Observed is while automotive OEM’s and their associated brands take the bulk of the consumer and regulatory heat around product recalls, quality defects more often reside within parts suppliers. OEM’s are now influencing parts suppliers to amp-up quality measures including easier means to identify production lots and trace parts history. The CEO of NHK Spring, who is also the chairmen of Japan Auto Parts Industries Association is quoted: “Now that supplier names are being mentioned widely, the range of responsibilities that we face is expanding. Not only do we need to face auto makers but also consumers.” In other words, brand risk has taken on new dimensions in the lower tier of automotive supply chains.
It struck us that such efforts focused on supply practices need to be further complimented by increased capabilities by OEM’s to analyze such quality tracking and tracing data at a far more timely pace. Providing more prescriptive tagging to such data is a further consideration.
The takeaway is that indeed, service supply chains are indeed ripe for investment, but require coordinated efforts to leverage input, output and prescriptive information insights that insure more timely identification and response to parts quality or design defects.
Adhering to One’s Declared Standards for Quality: Chipotle Mexican Grill Suspends Regional Pork Supplier
In today’s restaurant and fast food industry, consumer impressions about one’s brand are more and more governed by the quality and standards of the food supply chain. Chipotle Mexican Grill has incurred explosive market growth because of its branding emphasis on “food with integrity” translating to higher quality, ethically based food ingredients served at its various restaurants.
Thus, business and general media were quick to feature the headline that on Friday, Chipotle suspended the use of pork sourced from an unnamed regionally based pork supplier. According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors. The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards. A spokesperson indicated to media outlets: “This is fundamentally an animal welfare decision, and is rooted in our unwillingness to compromise our standards where animal welfare is concerned.”
The result is that an estimated one-third of its current 1700 restaurants now feature signs indicating that the Carnitas menu item is temporarily suspended due to a shortage of supply. This evening, this author visited a suburban Boston area outlet and witnessed such a sign, along with a very long line of queued patrons.
One has to admire a company that is willing to adhere to its supply standards in spite of the consequences, especially in the light of the realities of mass food production and of Wall Street’s short-term focus on profits. A published report from Reuters indicates that move could possibly hurt the chain’s first-quarter results. The report indicates that the move underscores the clash among the U.S. agriculture industry, commodity brokers and food companies as consumers continue to become increasingly concerned about the sources and practices of food supply. One equity analyst has already cut first quarter earnings expectations for the chain. Readers may recall that global restaurant chain McDonalds recently terminated the Chinese subsidiary of a long established beef supplier after discovering the altering of food expiration date labeling.
For its part, Chipotle is now hard at work seeking added supply from other existing suppliers. One AP syndicated report indicates that Niman Ranch, Chipotle’s oldest and largest pork supplier insists that it is not the supplier in question. Instead, it is working to get additional supply to fill-in for the current shortages.
We often are reminded on today’s realities that consumers and customer have more power and influence in buying decisions. This development concerning Chipotle Mexican Grill is certainly a testament to the meaning of such power.
Prediction Ten of our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains calls for increased attention and new investment interest for service focused supply chains in the coming year. This includes after-market business process services, service parts and service delivery supply and demand business processes.
The obvious reasons are the unprecedented increases in occurrence of product recalls that add large amounts of consumer negativity towards a brand, especially in the U.S. automotive sector. Too often, there has been a “throw it over the wall” mentality involving service beyond product sale and thus the after-market service supply chain has lagged in process modernization and investment.
Yesterday, the New York Times published an article, Auto Industry Galvanized After Record Recall Year (paid subscription but complimentary metered view with sign-up). This article reminds readers that about 700 individual recall announcements involving more than 60 million motor vehicles occurred in 2014 across the United States, double the previous record logged in 2004. The rate of recalls was the equivalent of one in five vehicles currently in the road. Many of our readers can probably attest to the current situation.
Auto manufacturers have been forced to clean-up years of defects that were either undetected or ignored amidst heightened regulatory scrutiny.
The result is obvious, service supply chains swamped with requirements for numerous replacement parts and service networks buffeted by consumer rage as to why their perceived unsafe vehicles cannot be immediately repaired. In the care of the massive recalls involving airbag inflators sourced from supplier Takata, product recalls are prioritized for warm region sensitivity along with broader U.S. wide needs.
The Times article observes that sending out notification letters does not suffice, requiring more direct interaction with consumers. That, by our lens, implies more timely information and visibility as to the prioritization of repair campaigns and availability of required repair parts for specific regions. The article further hints to underreporting of potential product defects or failures.
OEM’s such as Toyota are overhauling safety and product recall practices as well as processes incorporated within its service networks. Supply Chain Matters has previously highlighted General Motors new brand survival emphasis on up-front product quality and more responsive tracking and detection of potential product problems. Social media will play a very important role in these new methods including the transmission of product recall information directly to consumers and their individual vehicles. Legislators continue utilizing the big-stick of criminal prosecution of executives and a means to motivate automotive OEM’s to be more responsive to product quality and overall vehicle safety.
Crisis often brings opportunity, and in the case of service networks, the opportunity is the ability to leverage today’s more advanced technologies related to vehicle sensors, predictive analytics, advanced simulation and scheduling, demand sensing and item-level B2B business network wide visibility among service focused supply chains.
The forces are indeed in motion for greater attention to service supply chain capabilities in the New Year.
The business-to-business (B2B) network has become the new opportunity for fostering stronger supply chain and product business relationships with suppliers. More often today, this includes integrating new product management and introduction (NPI) with product design, collaborative manufacturing design and supply chain fulfillment.
Recently, Supply Chain Matters has highlighted a number of current day examples of the critical importance of these relationships. We highlighted recent accident investigation findings from previous Boeing 787 Dreamliner lithium ion battery fires along with findings from a joint FAA and Boeing study published in March which reviewed the broader 787 build program. Among report findings was added credence to the reality that globally extended aerospace and complex equipment supply chains need to consider more timely two-way integration of product lifecycle management (PLM) and manufacturing process test information across B2B supply chain networks.
In the high tech and consumer electronics sector, product lifecycles are far shorter and NPI cycles occur more frequently. The recent unexpected bankruptcy of a prototype Apple supplier of sapphire glass provided yet another example. Apple’s peak and valley tendencies for extraordinary new product ramp-up and corresponding large-scale production volume surges that correlate with condensed product release cycles place enormous pressures on suppliers and any last-minute product design changes can be a disaster without timely two-way information integration and change assessment. Within automotive supply chains, recent unprecedented levels of product recalls are a reflection of the exposure of common product platform strategies, where common component design is leveraged across multiple models or brands. Many if not all of these multi-industry examples point to the product and production information alignment disconnect.
Under sponsorship of E2open Inc., our research parent The Ferrari Consulting and Research Group recently published an E-Book, The Case for Tightly Integrating New Product Introduction and Supply Chain Management. This document identifies the new opportunity for leveraging the end-to-end supply chain business networks not only for synchronizing planning and fulfillment execution but the new opportunities for incorporating two-way NPI process information as well. Certain B2B networks provide the ability to support a hub-and-spoke, federated data model that spans these broader process areas and bridge the gap in existing PLM and ERP systems for integrating broader forms of process information across extended supply and demand networks.
The E-book is available for complimentary downloading with registration at the following E2open web link. Later this month, we will also feature this E-book in the complimentary section of the Research Center associated with this site.
Disclosure: E2open, Inc. is both a Named Sponsor of Supply Chain Matters and a client of the Ferrari Consulting and Research Group.