Supply Chain Matters provides yet another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains are failing to deliver reliable and life-saving supplies to doctors, hospitals and patients.

The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments and the shortage supply situation is getting more critical with each passing day.  It unfortunately remains rather clear that for this category of necessary life-saving drugs, supply chains are failing, and the reasons are becoming much more visible.  The time for industry action remains long overdue.

For background, readers can reference our previous updates by clicking on the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

Commentary Five

Probably the most visible aspect of this problem concerns the ongoing global shortage of Doxil, a generic injectable drug utilized to treat ovarian cancer in women. The drug itself is marketed and distributed by an operating division of Johnson and Johnson, but the production of this critical drug was contracted to Ben Venue Laboratories, a subsidiary of Boehringer Ingelheim.  Significant ongoing production quality problems that occurred at the Ben Venue production facilities in Bedford Ohio forced the complete voluntary shutdown of that facility pending the need to reconstruct a new wing of the facility.  According to the U.S. Food and Drug Administration, plant personnel failed to investigate more than 1,200 microbial contaminants over a 14-month period which presumably led to this situation.  A recent posting on FDA News.com notes that the full resumption of production at Ben Venue’s plant will not take place for another nine months as reconstruction of a new wing continues.  Meanwhile, the CEO of J&J has indicated to press and analysts that the company continues to seek other production alternatives, but also cautions about an extended shortage for the remainder of 2012. As we have noted in all of our previous commentaries, Doxil is not the only problem, and a discernible trend involving multiple generic injectable drug supplies is evident. The American Society of Health System Pharmacists reported shortages of 251 drugs in 2011, mainly generic injectable medications.

To add more credence to major symptoms of this problem, an article published in the Twin Cities Pioneer Press notes that according to FDA, nearly half of the existing shortages stem from quality problems at manufacturing facilities. Manufacturing and shipping delays, as well as shortages of active pharmaceutical ingredients, explained another 25 percent of shortages. Business decisions by manufacturers to halt production were factors in 8 percent of cases.  Experienced sourcing and operations management teams can easily conclude that over 75 percent of current problems are traced to supplier related operational effectiveness and quality processes.

One of the more insightful perspectives regarding this ongoing situation comes from a commentary penned by Catherine de Fontenay, Associate Professor at the Melbourne Business School in Australia. In this commentary, Risky Business: the human cost of outsourcing drug production, Fontenay rightfully concludes that many of the current shortages can be attributed to a classic problem involving other industry supply chains, that being outsourcing strategies.  The problem however is more acute since the production of these drugs is far more specialized and expensive, while capacity has become extremely tight. She notes: “For more traditional (non-biological) drug lines, the motive is cost-cutting. In-house production facilities do not always feel the same pressure to keep costs down as do external suppliers. With large drug batches, the pharmaceutical company can play several contractors against each other, and get very good prices.”  Professor De Fonternay also observes: “After a decade or so of outsourcing, one could argue the core competencies of pharmaceutical companies are now research and development, helping drugs through the regulatory approval process, and marketing, rather than manufacturing.”

That is a rather significant statement and more to the core of today’s problems. Certain pharmaceutical providers have concluded that operations and supply chain oversight are best outsourced under the umbrella of cost avoidance.  Rather than invest in increasingly more expensive in-house owned production and quality monitoring processes, outsourcing to contract manufacturing providers provides more favorable financial options.  The concept is similar to the semiconductor industry, where expensive owned fabrication facilities became too cost prohibited in favor of today’s outsourced fab facility.  Unfortunately, the pharmaceutical industry has far more quality and human health considerations.  Supply chain risk, namely having only a single source of global production, is another apparently overlooked consideration, as J&J has discovered.

As the current shortages continue into 2012, unscrupulous and unconscionable grey market operators take advantage of the supply and demand imbalance by offering hospital pharmacies outrageous pricing and highly questionable supplies. Supply Chain Matters praises the ongoing efforts of hospital and cancer treatment pharmacy teams in their extraordinary challenges to find safe and adequate supplies of these life-giving drugs.

More importantly for all of us as a global citizenry, patients continue at-risk.  Certain pharmaceutical supply chains need immediate fixing.  Procurement and sourcing teams no doubt have foreseen these problems occurring. The time for investing in production and supply chain related operational controls and balanced sourcing is way overdue.  If the industry deems that outsourcing continues to be a viable strategy than procurement teams need to be supplemented by experienced operational management and regulatory control resources. Conversely, if the industry feels that outsourcing to global regions where regulatory controls are less burdensome, than there will be more issues to deal with. Our view is that there needs to be a risk balanced strategy to assure continuous supply and lack of supply disruption.

One thing is certain. If the industry continues to not feel or demonstrate an overt sense of urgency, then government agencies should do all in their power to demand that sense of urgency.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

Today, there is rather significant supply chain related news involving one of the most highly recognized supply chains, that of Apple.  The Wall Street Journal conducted an unprecedented interview (paid subscription or free metered view) with Apple CEO Tim Cook, who for the first time in probably anyone’s memory, disclosed much more intimate information regarding Apple’s suppliers as well as Apple’s current efforts in the area of supplier responsibility and working environments. Cook indicated that his company “has long aimed to be more transparent and believes the steps it is taking- including nearly doubling the number of supplier audits it does- are “raising the bar” for the industry.”

Supply Chain Matters reviewed Apple’s latest 2012 Progress Report on Supplier Responsibility and we were positively impressed. We urge our readers to read the report themselves at the following web link. The report notes that the company recently became the first technology provider accepted by the Fair Labor Association (FLA), and that Apple will open its supply chain to the FLA’s independent auditing team who will measure performance against the FLA’s Workplace Code of Conduct, with results appearing for public view.

During 2011, Apple’s Supplier Responsibility teams conducted 229 audits, an 80 percent increase over 2010. More than 100 involved factories that had not been audited before. Each year, Apple audits all final assembly manufacturers (contract manufacturers).  The report notes that audits are targeted to suppliers with the highest risk factors where findings and corrective actions can make the biggest difference.  Apple considers the most serious breach of compliance to be a core violation which would include underage or involuntary labor, falsification of audit materials, worker endangerment or intimidation or retaliation, along with threats to the environment. The report identifies many of the core violations including 2 facilities terminated because of involuntary labor practices and 5 facilities with unintentional use of underage labor because of insufficient verification methods. We were also positively impressed to note core violations involving the 2 incidents of combustible dust explosions that occurred in 2011. An explosion at Foxconn’s Chengdu factory took the lives of four workers and an explosion at a Pegatron component supplier facility in Shanghai injured 59 workers.  As we speculated, Apple immediately investigated the circumstances, cited the suppliers for core violations, and later established new process requirements for the handling of combustible dust including aluminum and plastics.

Supply Chain Matters has featured multiple commentaries related to Apple’s social and worker responsibility policies.  Unlike certain other blogger commentaries, we did not elect to blast Apple for lack of responsiveness to certain work practices among its supplier base or for benefitting from enormous financial success for the sake of unsafe or unspeakable supplier practices.  Our commentary in September of 2010 reflected on a Bloomberg BusinessWeek article where reporters were granted unprecedented access and interviews focused on remediation practices that would address the level of unacceptable worker suicides at contract manufacturer Foxconn.  Our commentary in May of 2011 opined that being rated as the foremost supply chain comes with immense social and business responsibility, and while Apple is not without certain faults, it was doing more than a lot of other manufacturers. Apple purposely sources manufacturing in low cost regions even though it continues to benefit from higher pricing and fatter margins.  Thus, it has little alternative but to be serious about being an active advocate for labor and environmental standards.

We believe that this latest transparency initiative is a clear sign that Apple is raising the stakes for supplier compliance.  How many CEO’s can you think of who can articulate their company’s supplier responsibility programs?

In publishing a full listing of suppliers, and providing unprecedented detail related to supplier compliance, Apple has sent a clear message that if you want to continue to be a member of Apple’s value-chain, you will need to conform to these standards of performance.  Being an Apple supplier comes with certain rewards for production volume and potential financial gain but it increasingly comes with accountability standards.

Apple’s cause for social responsibility practices could also benefit from increased sourcing in countries that take labor standards conformance rather seriously.  Perhaps now is the time for Apple to also consider more sourcing among U.S. and European supplier locations since that would also add more emphasis on its commitment to trade profits for consistency in worker safety and environmental practices.

We all know how challenging standards within low-cost manufacturing regions can be, and as a community, we should thank Apple for taking an active leadership role.  Now it is time for other technology providers and manufacturers to re-double their efforts as well, since change comes from the power of many. In the end, the global workforce benefits.

What’s your view?  Should Apple be praised for its proactive outreach and auditing standards?

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.

We continue with Supply Chain Matters commentary relative to the current announcements of Q1 related revenues and earnings by reflecting on the page one headline article in last Thursday’s published Wall Street Journal, World Revs Up U.S. Profits. (paid subscription required) It again reinforces how the sustaining growth in the emerging economies has fueled a new boom in U.S. manufacturing output, and consequent revenues and profits. In the article, the chief U.S. economist for Deutsche Bank noted: “Manufacturing has been growing gangbusters.”

This new boom is being fueled by stronger sales related to the building of new infrastructure in emerging markets, which includes heavy duty trucks, building, farming and mining equipment. Also noted is a quote from an economist at PNC Financial Services Inc. stating: “The economy would be limping along, at best, without the strong manufacturing sector…”   Large global manufacturers such as Caterpillar, Eaton Corp., Honeywell International and United Technologies are each cited as example companies that are benefitting from booming sales outside of the U.S.

However, as in all aspects of this ‘new-normal’ of business recovery, there are many caution signs that could derail the current boom. Growing unrest in the Middle East, the rapid rise in energy and other key commodity products, the growing threat of inflation will all test the resiliency of this U.S. manufacturing boom. The recent earthquake that occurred in Japan has driven home the critical aspects of product sourcing risks. The crisis itself could provide either positive or negative consequences for U.S. manufacturers.

On Thursday and Friday of this week, this author is pleased to be designated as the master of ceremonies for the 2011 OpsInsight Leadership Forum being held at the Hyatt Harborside in Boston.  The conference program features a great line-up of speakers including eight different keynote speakers addressing many operations leadership topics.  Fourteen other speakers will address various topics related to product innovation, lean methods, business process best practices, management and operational leadership.

In the conference opening address, I will be touching upon where we are as operations  and supply chain executives in this ‘new normal’ of ups and downs and how important a role operations management will play in innovation and future growth for manufacturers.

I’m looking forward to the program and hope to run into some of our readers.

If you desire more information on the conference, you can click on the conference icon located on the right-hand panel of this blog.

U.S. manufacturing is on the rise but uncertainty and risk remain for the coming months.

Is your organization prepared?

Bob Ferrari

The following commentary can be viewed and commented upon on the Supply Chain Expert Community web site.

As many of the supply chain management community are acutely aware, the after-effects of the earthquake in Japan will have far reaching impacts on multiple industry and global value-chains.  A lot of commentary can be found in the blogosphere and in traditional media, and we at Supply Chain Matters have also added our own perspectives which can be reviewed here and here.

Before continuing with this commentary, we should again emphasize our empathy for the people and victims within Japan who have and continue to endure the effects of this calamity.  Our thoughts and our prayers should continue to be focused on their recovery.

Unfortunately, tragedies bring implications and that is on what this commentary will reflect.

At this particular time in this evolving crisis, the one important unmistakable conclusion is that just like the 2008 global financial crisis, the Japan event will ultimately seed a number of significant watershed changes for industry supply chain strategies and capabilities going forward. The open question is how significant and how deep.

In this commentary, we reflect on a few of the more significant implications.  Jason Busch of Spend Matters called attention to a Paul Martyn, commentary published on Forbes.com that noted an estimate that it would be 9 to 12 months before production can return to pre-disaster levels. That seems to be a reasonable general estimate and there certainly could be some outlier exceptions, particularly in electronics and automotive sectors.  In his commentary, Martyn predicts three major shifts as a result of this crisis:

1.       A lessoning of the rigidity of zero inventory policy that many companies have been following these past few years.

2.       The entry of new players takes advantage of the crisis to seize new revenue opportunities.

3.       Bullish upside for U.S. and perhaps North American based manufacturers that stand to gain in the short-term as alternative suppliers.

Regarding point three, Jason Busch opines that then again, U.S. manufacturers may once again be unable to respond to the new business opportunities because of a lack of required capabilities in key people skills such as machining, welding, design and other specialized manufacturing.  Needs for updated capital equipment are also expressed. Steffora  Mutschler, contributing editor on EDN notes in a commentary a specific prediction from Dale Ford, senior vice-president of market intelligence at IHS iSuppli where Ford asserts his belief that for the semiconductor industry as a whole, the earthquake will provide the biggest impact in the history of the industry. None of the previous natural disasters have been as broad in multiple supply chain impacts.

We would add our prediction that this crisis, when the dust finally settles, will also challenge the very foundations of procurement and outsourcing strategies which will cause product development, strategic sourcing and supply chain management teams to reassess their policies and processes in product and component sourcing.

The crisis will be another critical reminder to the importance of having solid supplier relationships, including how priorities during a crisis will always lean toward established and loyal customer and supplier relationships. While previous strategies were primarily motivated by lower cost considerations, Supply Chain Matters believes that the current realities of business risk and changing end-markets will challenge previous management motivations. The era of the CFO dictating supply chain strategy is about to be shaken to its core.

For the longest time, supply chains have been constantly reacting to all forms of crises, either internally or externally driven.  The voice of the supply chain has been hampered perhaps by an inability to converse with the boardroom and articulate desired business outcomes with required capabilities in planning, agility, procurement policy and customer fulfillment. Too often and too frequently, supply and value-chain strategy directed at needs for specific business driven outcomes have been rather viewed in a ‘cost center’ or ‘shared service’ mentality…  “We will not have inventory!  We do not have the time or budget resources to address specific risk or needs for process agility! Planning on spreadsheets can get the job done just as effectively!”

Traditional industry analysts harp on being more demand-driven or customer focused, and can well cite numbers of multi-national companies who had the foresight and budget to invest.  The crisis involving the after effects of the Japan disaster is a supply-driven crisis, with many implications to all sizes of manufacturers and service providers relative to customer demand, industry competiveness and perhaps the role and fabric of the supply chain.

How have the events in Japan changed thinking in your company, or has it neglected to change any thinking?

Weigh in and let’s get a conversation started.

Also, take the time to participate in our Supply Chain Matters interactive polling question of the month and ascertain how other teams may be impacted by Japan.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

We have penned a number of commentaries regarding Apple’s extraordinary supply chain operational management capabilities, the latest being last week’s posting, Apple’s Secret Sauce Should Be No Surprise to the Supply Chain Community.  This week, more public news has surfaced regarding Apple’s strategies and capabilities, specifically two different developments. Keep in my mind, Apple’s corporate culture is one of high secrecy and information in the public domain only scratches the surface to what’s actually going on. Apple continues to cast a very wide net in assuring production capacity and capability, and at the same time, is becoming a more influential force for overall consumer electronics supply chains.

Over on the International Business Times web site, Carl Bagh noted that Apple is again plugging strategic and tactical holes in its long-term supply strategy, placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics.  As noted in our previous commentary, while competitors scramble to launch alternative products in tablets and smartphones, Apple continues to aggressively negotiate long-term supply contracts with strategic suppliers, potentially locking-up key industry capacity.  In his commentary, Baugh cites DigiTimes as reporting that LG Display will benefit from a 35 million unit order for iPad displays in 2011, but also is not able to singularly meet Apple’s growing thirst for these displays. Also noted are Apple’s co-investments with key suppliers in building more manufacturing capacity, including Sharp Corp.’s $1.2 billion investment to build a new production facility for small and medium sized LCD displays.

On the supply chain social responsibility front, SiliconValley.com reported yesterday that last June, at the height of the incidents of worker suicides at Foxconn International, Apple’s largest volume contract manufacturer, COO and now acting CEO Tim Cook was quietly dispatched to China to personally meet with Foxconn management. The extraordinary but non-public visit of Apple’s highest ranking operations executive was intended to send a rather serious message, Apple was not going to tolerate these worker suicide incidents and wanted a remediation plan.  An Apple social responsibility report noted that Cook was accompanied by two experts in suicide prevention, which spawned later interviews of more than 1000 Foxconn employees. Keep in mind that some other companies might have issued a wide distribution press release noting such a visit.

The article also highlights other social responsibility actions that Apple has undertaken, including 97 first-time supplier audits in 2010.  Of particular note, 40 percent of these suppliers noted that this was the first time any large customer had audited their facilities.

Apple continues to cast a rather wide and profound influence across consumer electronics supply chains.  The question remains, are these strategies forcing Apple’s competitors to struggle for their required capacity and inventory, and will the industry be challenged with yet another year of supply and innovation challenges?

Supply Chain Matters readers, add your observations.  Has Apple’s continual influence in product innovation and supply contracting increased the stakes for competitors, or has it benefitted the industry as a whole?   Can consumer electronics players all benefit from Apple’s strategies?

Bob Ferrari

We at Supply Chain Matters have been somewhat remiss in continuing to feature more commentary relative to positive news coming out of supply chain networks.

In that light, its was great to read a recent Wall Street Journal article (paid subscription may be required) noting that after previously cutting its workforce by 8 percent, aerospace technology provider Rockwell Collins plans to expand by 4 percent this year.  In the article, the Chairmen and CEO of Rockwell noted that his company plans to hire 800 staff this year because many of its aerospace customers including Airbus, Boeing and Bombardier are preparing to ramp-up production of existing aircraft orders.

What is also rather interesting is the characterization of current discussions with supporting the chronically late Boeing 787 Dreamliner build program, which is described as “rate-readiness”, meaning can the supplier support an accelerated build program.

Rockwell Collins is also a supplier to China’s Commercial Aircraft Corporation which is building the future C919 passenger aircraft, a potential competitor to the Boeing 737 and Airbus A320.

It seems to us that Rockwell Collins has placed itself in the catbird seat of aerospace suppliers.

Bob Ferrari