On Wednesday, the White House blog announceda long overdue initiative, A National Strategy for Global Supply Chain Security. Overall, Supply Chain Matters applauds this initiative, and we urge our fellow supply bloggers, chain social media influencers, and professional groups such as CSCCMP to do the same.

The initiative, outlined in a White House PDF document, acknowledges that:” The global supply chain system that supports trade is essential to the United States’ economy and security and is a critical global asset.”  The effort is directed at articulating policies to strengthen inbound and outbound supply chains within the U.S. and its trading partners. The outlined document provides further details including the key objectives needing to be addressed in an implementation plan which readers can review.

The strategy includes two goals:

1. Promote the efficient and secure movement of goods, protecting the supply chain from exploitation and reducing its vulnerabilities to disruption.  This goal is described as strengthening the security of physical infrastructures, conveyances and information assets.
2. Foster a global supply chain that is prepared for, and can withstand, evolving threats and hazards along with recovering rapidly from any disruptions.  This particular goal umbrellas the management of overall supply chain risk through layered defenses.

The timetable for this initiative is rather aggressive and calls for the Departments of State and Homeland Security to provide recommendations in six months, with implementation of recommendations to begin immediately upon its release.  We believe that one of the most important aspects of this initiative is a White House encouragement of input from key stakeholders, including governmental and private sector interests and agencies.  The Department of Homeland Security has setup a custom web site that outlines how key stakeholders can submit recommendations.

What immediately concerns us is that this long overdue initiative has to address two very major issues, either of which would justify its own set of comprehensive initiatives.  This includes the threat of a major disruption event such as severe natural disaster or terrorist related, as well as countering a growing proliferation of goods that are illegitimate and not what they are represented to be.  The other aspect is that six months is not a lot of time to gather and assimilate stakeholder input, but we suppose that a longer timetable would only elongate this effort without near-term governmental actions in place.

Our hope is that industry bodies such as the Supply Chain Risk Leadership Council and the Global Risk Network shepherded by NYU will elect to be active contributors to this effort since each has developed much key learning and recommendations on supply chain resiliency and threats.

A final observation relates to the current toxic political climate that surrounds Washington DC.  No doubt, some on the right may elect to seize on the headline of this initiative as an election year political stunt, or another effort directed at more government regulation and oversight.  Supply Chain Matters emphatically declares that this initiative is much too critical to be tossed into the current toxic political discourse, and is rather one of the most important efforts needed to insure the economic viability of the U.S. economy.  Reflect back on the incidents of Hurricanes Katrina and Rita that previously impacted the U.S. Gulf coast and the tragic tsunami and floods that impacted Asia in 2011.  Consider the current vulnerabilities of the U.S. west coast or southwest, the U.S. power grid, and other potential threats.

In the coming months Supply Chain Matters will do its part to detail more of the activities and highlights of this effort.

Let us all enthusiastically get behind the President’s initiative on protecting global supply chains.

Bob Ferrari

We have all been reading the tragic circumstances surrounding the accident involving the cruise liner Costa Concordia, and we at Supply Chain Matters posted our related commentary, Should We Be Concerned About Ship Safety?

Earlier this week, the Wall Street Journal printed edition published the article Carnival CEO Lies Low After Wreck.  (paid subscription required or free metered view) The article begins with the question: Where is Mickey Arison?  Mr. Arison is the chief executive and chairmen of Carnival Corp., which owns ten cruise lines, one of which is Costa Crociere, the designated operator of the Costa Concordia. According to the WSJ, it seems that as events continue to unfold, Mr. Arison is allowing Costa Crociere CEO Luigi Foschi to be the public face to corporate responsibility and to account for the on-scene response. Mr. Foschi has already blamed the ship’s captain for causing this tragedy.  The article notes a Carnival company statement that Mr. Arison is “in continuous contact” with Costa executives, but the CEO decided that the Costa team is best suited to handle the response.  A longtime acquaintance of Mr. Arison is quoted as stating: “He wants to distance Carnival from this disaster.” “If he talks, Carnival is Speaking.” Others are quoted as to Mr. Arison’s calming, behind the scenes influence.

All of this however, once again raises the question of corporate reach-out in times of crisis, especially considering this new era of enhanced social media profiles.  Although remaining out of public view, Mr. Arison has leveraged company news releases and has utilized Twitter to express condolences to the victims and families involved in the incident. He has also provided “personal assurance” that Carnival would “take care” of passengers, crew and victims. The WSJ notes that some have questioned the wisdom of Mr. Arison not taking a more public role in the wake of this tragedy, and one crisis communications consultancy executive notes that you cannot be invisible when the spotlight is shining.

To provide one example, my wife and I have been on previous cruises from rival Norwegian Cruise Lines and both just received a direct email message from that company’s CEO stating safety as the number one priority and further providing a listing of that company’s existing policies and measures directed at assuring safety and training of captains and crew.

Supply Chain Matters has provided previous commentary on the leveraged use of social media tools when corporate crisis occurs, specifically the early 2011 incident surrounding Rolls Royce PLC’s Trent 900 series aircraft engine was involved in a near tragic in-air uncontrolled blowout involving a Qantas Airways A380 super jumbo aircraft. During the events related to the actual incident, and later events tracing the cause and remediation, Rolls Royce executives were publically silent, choosing instead to allow airline senior executives such as the CEO of Qantas to be the public persona of the incident and its consequences to the aircraft’s safety.  The complete research report involving this particular incident can be downloaded free of charge in our Research Center.

Business and supply chain executives, like it or not, exist in a new and highly viral medium of communication fueled by social media and mobility.  In tragedy, those equipped with smartphones can beam live video of an incident in a matter of minutes, and victims can leverage social media applications such as Twitter and Facebook to express first-hand emotions. A corporate response and persona is becoming a mandatory component to these incidents, along with timely communication of what is being done.

In the specific case of Carnival, we believe that readers can and will form their own opinions relative to the public profile and subsequent actions of Mr. Arosin.  The fact that high profile business publications now openly question a senior executive’s presence in the social based narrative is the more important takeaway.

Travel counselors and future cruise consumers are savvy enough to know or to figure out which cruise lines are owned by which large operators, and as the post-accident investigation and consequences become more apparent, will easily connect the dots.  Consumers will henceforth add safety considerations to their cruise vacation selection process.

The lesson is that the right combination of personal and social media outreach during and after a crisis incident, along with a narrative of concern and active response, is becoming a key component to any risk disruption and mitigation plan.

Bob Ferrari

©2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

Supply Chain Matters provides another reader update regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand and other Southeast Asian countries in the Fall of 2011. Readers might recall that beyond the tragic loss of life, the flooding impacted over two-thirds of the country’s provinces and that seven of country’s important industrial manufacturing parks were severely flooded. While some factories have restarted operations, others continue to struggle with various issues.

In our previous general update in mid-November, we honed in on the specific impacts that both the high tech and automotive industries would potentially encounter. As we enter 2012, these impacts continue, although the picture appears to be a bit more optimistic.  On the other hand, as noted in our 2012 Predictions for Global Supply Chains, the broader and more far reaching implications concerning the Thai flooding and other 2011 disruptive events are raising significant new considerations for strategic and other product sourcing decisions in the months to come.

For high tech and consumer electronics, all eyes remained focused on hard disk drives (HDD) production.  Western Digital, initially the most impacted manufacturer, re-started some partial HDD production in its Thai Bang Pa-in facility in the first week of December, one week ahead of schedule.  That facility had been submerged under six feet of water.  Western Digital expects to ramp-up production at this facility during the March 2012 quarter. Other of the company’s production facilities in Thailand are in the process of re-starting.  The expected impacts on reduced overall HDD supply and pricing are underway.  Both EMC and HP increased large-scale storage system pricing in late December in the range of 5 to 15 percent, but supply shortages have amplified price levels even further. In Asia, there are reports that HDD pricing at the retail level has spiked as much as 50 to 100 percent. The Semiconductor Industry Association (SIA) released a statement in early January noting: “Supply chain disruptions resulting from the floods in Thailand have impacted semiconductor sales in the near term, however OEM’s are expected to recover production losses over the course of the next few months.” Industry leader Intel attributed its latest quarterly decline in revenues to the impact of supply brought about from the result of the floods.

Computer OEM’s such as Apple, HP, Lenovo and Dell remain publically silent concerning an ongoing shortage of disk drives but we are sure that internal supply planning teams have been hard at work sorting out disk allocation and various product offering scenarios.  As anticipated, most of the available supply is being allocated to higher priced, more profitable PC products.

Regarding other industry impacts, reports from Japan indicate that the country experienced a 2.6 percent month-to-month drop in factory production for November, which was worse than had been predicted. According to an AFP report, production of passenger cars and mobile phones were among the hardest hit because of the supply shortage impacts emanating from Japanese-plant sourcing in Thailand. However, Japanese automotive providers were reported to be more optimistic for December and January production output levels. Both Toyota and Honda have now acknowledged that the combination of massive supply disruption brought about from the earthquake and tsunami that impacted Japan in March, and the Thai monsoon related floods, have caused both to lose market share because of reduced vehicle output.

Other industry impacts have come to light.  PPG Industries has indicated that production of certain optical components prevented that company from satisfying supply contracts and conducting normal business.  Goodyear Tire and Rubber warned in December that impacts of the Thai flooding could result in “a potential global shortage” of aircraft tires.

Beyond the tragic loss of life, the World Bank estimates that flood damage has reached $45 billion and rebuilding efforts are estimated at about $25 billion. This loss, along with the unprecedented magnitude of loses emanating from certain areas of Asia and Australia has motivated major global insurers and re-insurance firms to reduce their exposure to certain catastrophe prone areas.  The Financial Times recently reported that exposures in Australia, Indonesia, Taiwan and Vietnam have all experienced large insurance premium rises during key early January policy renewal negotiations.  Noted were premium rate increases in the range of 10 percent to as high as 35 percent in these countries, with certain exposures in Australia rising in the range of 40-75 percent, and New Zealand 80-150 percent.

Supply Chain Matters continues to believe that these developments will motivate CFO’s and Chief Supply Chain Officer’s to revisit near and longer-term sourcing strategies that directly relate to regions deemed high risk for natural or catastrophic future incidents.  Beyond the cost of direct labor and transportation, a new, more sobering financial input has been added to the evaluation of strategic sourcing, and that should be prompting strategic sourcing teams to begin to revisit sourcing strategies.

The year 2012 has not added to the confidence of a year that was not like 2011 in terms of global supply chain disruption.  Last week, a 7.2 magnitude earthquake that struck of the coast of Indonesia prompted a brief tsunami warning.  Luckily, the tsunami did not occur and damage was reported as minimal, but nerves were definitely rattled.  The bottom-line is that the probability for global supply chain disruption prompted by natural disasters and catastrophe events remains high and manufacturers are about to actively re-examine global sourcing strategies weighting a new and financial sobering aspect of geographic exposure to regions more prone to these incidents going forward.

Bob Ferrari

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

Here we go again with news media lit-up today with the joint announcement by Novartis Consumer Health, Inc. (NCH) and the U.S. FDA  that the company is voluntarily recalling all lots of select bottle packaging configurations of Excedrin® and NoDoz® products with expiry dates of December 20, 2014 or earlier as well as Bufferin® and Gas-X Prevention® products with expiry dates of December 20, 2013 or earlier, in the United States.

NCH is taking this action as a precautionary measure because the products may contain stray tablets, capsules, or caplets from other Novartis products, or contain broken or chipped tablets. The concern is that potential mixing of different medication products in the same bottle could result ingesting an incorrect product or receiving a higher or lower dose than intended. The products in question involve nationwide distribution in the U.S. . Wholesalers and retailers are being asked to stop distribution of effected products, and consumers to stop taking these effected products and return them to Novartis.

The medicines in question were produced at the Novatis Lincoln Nebraska facility which produces and distributes products primarily to the U.S. market.  The FDA press release indicates that the involved plant has suspended operations and further states: “At this time, it is not possible to determine when the plant will resume full operations and the full financial impact of these events.”

Our Supply Chain Matters readers, who often understand production operations and quality control will no doubt form an initial impression, as we did, regarding how a packaging quality control system would compromise basic controls in product packaging without some checks and balances.  A report issued from MSNBC acknowledges that the problem is a result of major manufacturing problems and that the Lincoln plant was shut down about a month ago. The article cites FDA officials as indicating that some over-the-counter pills may have accidentally been packaged with prescription pain killers sold by Endo Pharmaceuticals, also made at the same facility, including Percocet®.  In a posting in the eFood Alert Blog, Phyllis Entis, a food safety microbiologist for 35 years, adds a broader timeline of events leading up to this latest recall, and cites rather profound FDA inspectional findings.  One finding is reported as noting: “Your Quality Assurance Unit has consistently failed to review critical complaints for drug products manufactured and packaged at your facility. For example [for 2011], 223 critical complaints have not been properly reviewed out of 223 critical complaints received by your firm…”

We believe the fact that NSD indicates that it is taking a one-time $120 million charge related to improvement work at the Lincoln facility speaks to the potential magnitude of the problem.

Similar to Johnson & Johnson’s McNeill Consumer Healthcare recall incidents involving Tylenol® and Motrin® which dated back to 2009, there will likely be much more to come involving this incident and what led up to the recall. In the J&J incidents, an independent auditing body later concluded that reductions in staffing led to significant breakdowns in quality control processes.

Interesting enough, as a result of the high awareness placed on J&J recalls, consumers had turned to brands like Bufferin® as alternative pain relievers. This incident will only add more frustration and more concern among consumers as to the overall quality and safety processes involving drug manufacturers.

How many wake-up calls does the industry need?

Supply Chain Matters will continue to monitor this ongoing development involving Novartis since there will surely be more to this story in the coming months.

Bob Ferrari

One of our 2012 Predictions for Global Supply Chains in 2012 calls for additional challenges and turmoil for the high tech and consumer electronics industry.  The issues  began manifesting themselves in a highly visible way in 2011 with the severe earthquake and tsunami that struck northern Japan and more recently, the effects of the severe monsoon related floods that impacted Thailand.  Supply Chain Matters provided multiple commentaries reflecting on these problems. This author had the opportunity to provide expert background commentary in a recent Fortune-CNN Money commentary regarding the new fragility of global supply chains.

The latest public acknowledgement of the turmoil that is occurring from behind the scenes comes from chipmaker Intel, who had to lower its fourth quarter sales outlook by $1 billion this week.  The CFO of Intel noted that reductions in inventories are occurring across the high tech supply chain, particularly over the last two weeks as OEM’s continue to adjust plans to deal with a significant shortage of hard disk drives in the first half of 2012.  Behind the scenes, personal computer OEM’s have been assessing how severe the shortage may be and appear to be allocating what supply they will have to higher margin, full featured and more expensive PC’s.  The cascading effect has apparently now reached Intel in its planned supply of microprocessors for OEM’s.  The Silicon Valley.com article notes industry analyst firm IDC indicating that PC sales volume could be 10 to 20 percentage points lower in Q1 of 2012.  That IDC number was in the range of 9 percent just a few weeks ago, which indicates that the severity of supply shortfalls are becoming more understood.

Meanwhile, Western Digital now indicates that it has been able to resume production at one factory much sooner than anticipated while also shifting some sourcing and production arrangements. The company will manufacture head sliders in both Thailand and Malaysia. Western Digital also indicated  a preliminary estimate of losses of $225-$275 million, beyond what it may recover from insurance coverage.

The Wall Street Journal has also reported that ON Semiconductor, which produces chips for audio and power management used in mobile phones, autos and portable electronics, has now indicated that it will end all production at its Sanyo Semiconductor production facilities in Ayutthaya, Thailand, and provide limited production at its Bang Pa site.  Most production will be moved to Malaysia, the Philippines and China.

We will certainly hear from more high tech OEM’s and component suppliers as the aftereffects of the Thailand floods continued to cascade across high tech and consumer electronics suppliers.  While larger companies may well have the financial and other resources to mitigate business impacts, it may well be a variety of smaller suppliers who suffer continued impacts or have to succumb. Time will tell.

As we noted earlier, if you plan to buy a new PC, you might want to do it now vs. postponing that decision to 2012.  The price may well be a lot higher, and availability to bit more scarce.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

In a previous commentary posted in October, we alerted our Supply Chain Matters readers to prepare contingency and risk mitigation plans concerning the deepening financial crisis occurring in Europe. In the commentary, we outlined three potential areas of risks in the coming months, and highlighted the ongoing broader risks for currency and cross-border trade. The biggest risks however unfortunately fall on small and mid-sized manufacturers.

A recent Financial Times article (paid subscription required or metered free view) brought to light a stunning effect of these risks.  A Swiss based manufacturer with a 350 year record of continuous operations was forced to outsource the majority of its production activity.  Cham Paper Group, a specialty producer of packaging papers indicated it would cease all production in the village of Cham Switzerland because of the dramatic appreciation of the Swiss franc.  Two-thirds of the company’s 312 jobs would be lost when production is moved to Italy, a country in another fragile financial state as well.

While larger firms can often adsorb financial and currency shocks, smaller as well as some larger firms can succumb. To buffer an unprecedented level of speculation among currency traders concerning the “safe-haven” Swiss franc, The Swiss National Bank has been actively supporting a SFr1.20 floor for the Euro against the franc, but that level may be too high for firms to do business with external customers. The Swiss franc has already appreciated upwards of 9 percent. Manufacturers have had to raise prices, cut costs, raise productivity or shift production to lower-cost regions. Many Swiss manufacturers are forcing workers into longer work weeks for the same or no overtime pay in order to buffer the effects of the currency appreciation.

The FT article also makes mention of Bobst, a SFr1.3 billion producer of packaging equipment with over 90 percent of its sales focused outside of Switzerland. That company has been forced to shed 8 percent of its 5300 workers, mostly in Switzerland.

In today’s global based economy, there are just a handful of companies that boast of a 350 year existence in one manufacturing location.  It is therefore a tragedy to read how a company like Cham Paper has had to forced to adjust and respond to the ongoing European financial crisis. It is yet another stark reminder that in today’s highly uncertain and turbulent business environment, no company is immune to risk.

Bob Ferrari