On early Sunday morning an earthquake struck Northern Italy. The initial 6.0 magnitude tremor struck 36 kilometers (21 miles) north of the city of Bologna invoking wide scale damage. The quake occurred at shallow depth, estimated to be 5 kilometers, which adds to the magnitude of the destruction.  The quake was felt throughout Northern Italy. The region has suffered various damaging aftershocks including two on Sunday and another this morning. The area itself has had rare occurrences of major seismic activities, the last earthquake of similar magnitude being recorded in the 14^th century.

Thus far, five persons have been reported killed with thousands displaced.  Our hearts and prayers extend to all of the victims of this tragedy.

The impacted Finale Emilia region is an area known as an industrial heartland as well as the production of Parmesan and Grana Padano aged cheese. There is already one report indicating over $320 million in cheese inventory destroyed by the quake. Reports also indicate damaged factories and warehouses including the death of two workers at a ceramics factory.  A statement from Titan Europe indicates that work at its agricultural wheel factory located in Sermide and Finale Emilia has been suspended pending assessment of damage, but the plant appears repairable. According to the Titan web site, the company claims to be the leading manufacturer of high speed wheels for agricultural tractors. Production is in the process of being shifted to other facilities in France and Turkey.

Supply chains teams with value-chains extending to Northern Italy should already be assessing potential impacts to supply and supplier facilities. Insure that your suppliers are doing the same, since it many of the 2011 incidents of disaster, smaller suppliers took additional time to sense the magnitude of supply disruption. Industries impacted could range from food, industrial, aerospace, as well as retail businesses.

Supply Chain Matters will continue to monitor and feature additional commentary when other assessment information becomes available.

Bob Ferrari

Supply Chain Matters has been focusing on the implications of many recent major supply chain disruptions.  Beyond the immediate impact of an incident are the longer-term implications, both financial and operational in nature. Thus may be the case concerning the tragic grounding of the passenger cruise liner Costa Concordia that occurred in January.  This cruise liner with 4200 passengers and crew went aground off the coast of an ecological sensitive marine sanctuary area of the Italian coast on January 13, incurring the loss of 32 human lives with lots of open questions regarding ship safety procedures.  The incident itself should not only be of considerable concern to the cruise line and travel industry, but also to supply chain transportation teams who rely on ocean transport.  For it is the final magnitude of the monetary cost that will potentially impact shipping operations for years to come.

Beyond the obvious cost of human life is the rather unprecedented difficult challenges and ultimate financial cost of this tragedy in monetary terms.  The operator of the vessel, Costa Cruises, has since been forced to declare the 14 deck ship a total loss, giving-up ownership but maintaining “judicial custody”.  The original cost of the Concordia was reported to be €450 million (roughly $590 million).

The next phase will be a salvage operation that can only be described as incredibly challenging. Six bids were submitted and a contract has been awarded to a partnership of U.S. based Titan Salvage and Italian based Micoperi. Their proposal involves building an underwater platform beneath the sunken Concordia, repairing of the massive gash in the ship’s hull, re-floating the vessel using air bags, and towing it to a convenient port to begin salvage.  While all of this is happening, the contractor must take measures to both protect the existing marine sanctuary and restore any marine ecosystems that might have been harmed, such as posidonia, a protected species of seagrass.

This preparation and re-floating effort may take over a year to complete and being unprecedented in scope, there are no certainties that all can be accomplished without unforeseen setbacks.  In terms of financial costs, Bloomberg BusinessWeek originally reported that impact to the ship’s insurers to be upwards of $512 million. Costa’s parent company, Carnival Cruise Lines recently reported fiscal first quarter earnings which indicated incident expenses of $29 million, including a $10 million insurance deductible related to third party personal injury liabilities. The company recorded an insurance recoverable of $515 million (€384 million), which offset the write off of the net carrying value of Costa Concordia.  More importantly Carnival indicated that expectations for 2012 will be affected by the direct and indirect financial consequences of the incident.

Meanwhile the investigation into the accident continues as authorities are looking into the actions of nine individuals, including Francesco Schettino, the captain of the Concordia, who remains under house arrest on suspicion of manslaughter and abandoning ship.  He has denied any wrongdoing in the accident. Both the European Cruise Council (ECC) and US-based Cruise Lines International Association (CLIA) have conducted initial operational safety reviews and have issued new standards regarding the supply of life vests on cruise liner decks, adhering to prescribed navigation routes and the banning of visitors to a ships bridge when the vessel is operating. The open question is whether these new guidelines are strong enough to avoid future accidents, loss of life or considerable monetary and ecological damage.

While the cruise line industry is uniquely different than ocean container and bulk freight movement, the potential for spillover impacts is possible in terms of longer-term insurance and operating costs implications. Related events in the coming months will obviously provide the total scope of implications, including the ultimate verdict of trials and whether the extraordinary salvage operation is successful.

Bob Ferrari

Lately, there have not been a lot of positive stories related to overcoming major supply chain disruption, so when one comes along, credit should be given.

On Sunday, April 15, after a series of 97 tornadoes impacted the state of Kansas causing widespread damage, Spirit AeroSystems, a major airframe subcontractor and high profile supplier to Boeing, had to suspend operations at its Wichita Kansas facility. Spirit CEO Jeff Turner initially indicated that most, if not all, of the company’s buildings located across its production campus were damaged.  Fortunately, there were no fatalities and only one reported worker injury.As initially reported in the Wichita Business Journal, the company suffered a complete suspension of power and gas, with the consequence of the interruption of all phone and computer connectivity preventing any off-site coordination of response.  Spirit employees utilized personal cell phones and emails to communicate with one another. Initial assessments indicated that while there was much structural building damage, product equipment and inventory appeared to be undamaged.  A Boeing defense facility just east of the Spirit complex also sustained damage from the storm, forcing Boeing to suspend operations.

Among other products, Spirit was producing upwards of two Boeing 737 barrel fuselages per day, supporting a Boeing production rate of thirty five  737 aircraft per month. Initial speculation was that production plans could be impacted for a few weeks.

Two days after the incident, Seattle PI cited CEO Turner as indicating by a series of Twitter feeds that after completed assessments, overall damage was not as bad as initially feared. Turner’s indication was that getting production restarted would involve clearing debris and making sure everything was safe.  The SeattlePI posting provides an actual photo of one of the main production assembly facilities. One of the CEO’s Twitter feeds indicated “We are gaining confidence hour by hour”. Last Friday, The Wichita Eagle featured an article that noted that over 1000 construction workers were marshaled from across the country by Eby Construction to make immediate repairs.  There are photos and  a video that readers can view that highlights actual damage recovery activity.

Yesterday, Spirit reported that it has resumed normal production operations roughly 10 days after the major incident.  Coincidently on the same day, Boeing formally reported its first quarter operating results and Boeing CEO Jim McNerney was quick to note that the impact from Spirit was “manageable”.

Supply Chain Matters sends its congratulations and best wishes to the entire Spirit AeroSystems production and operations teams for their outstanding proactive response to the tragedy, and for a praiseworthy demonstration of around the clock supply chain disruption response.  We also praise CEO Turner for his leveraged use of social media tools to communicate timely status and a can-do perspective for both customers and employees.  Spirit seemed to have a response plan that started with executive leadership with access to many required levels of information in a timely manner.

This is indeed a positive outcome that could have been far different given the uncontrollable forces of the unprecedented storms that have impacted the U.S. Midwest these past few years.

A final note for supply chain and operations executive readers. Have you thought about what your organizational response plan will be when a disaster severely impacts your production operations? Have you thought about the possibility that one of your largest suppliers could be impacted?

Suppliers like Spirit truly demonstrate positive supplier responsiveness.

Bob Ferrari

The following is a guest blog commentary appearing on the Supply Chain Expert Community web site.

It seems that each passing week brings our community fresh new reminders on the existence of potential risks in the supply chain as well as the upstream and downstream implications on business outcomes. This week alone, there are two additional streaming events that are capturing the interest of business media, and should capture the continued following of supply chain cross-functional teams.

In the automotive sector, a recent fire that occurred at an Evonik Industries AG manufacturing plant in Marl, Germany has had cascading impacts related to the overall global supply of nylon-12, a rare resin that is utilized in the manufacturing of fuel tanks, brake and fuel lines. Nylon-12 has been extensively used because of its superior capabilities to be highly resistant to the corrosive effects of gasoline and brake fluid.  Evonik represented over 25 percent of the global supply of the building block specialty resin that eventually makes-up nylon-12, and was also a supplier to another nylon-12 producer, Arkema SA. The Wall Street Journal reported that Evonik executives estimate that it may take more than six months before repairs can be made and production can resume.  Industry observers and participants estimate that there may be no more than one to two months of available inventory in the pipeline, causing industry wide concern, with the potential of disruption of multiple auto final assembly plants in the coming weeks.  The scope of this disruption rivals the same magnitude of the paint pigment disruption that occurred as a result of the tsunami in Japan, or the disruption of upwards of 30 percent of hard disk drive components capacity caused by the floods in Thailand.

Earlier this week, in a rare move, executives from eight separate auto producers and 50 parts suppliers met in Detroit with the purpose of drafting an alternative specification and sourcing plan in order to seek an interim replacement for nylon-12. In the spirit of six sigma crisis response, six joint membership committees were formed to develop, evaluate and fast track an industry-wide substitute. Any final outcome as to industry-wide mitigation or impacts to business results are yet to play out.

In the pharmaceutical and drug segment, Johnson and Johnson announced its Q1-2012 fiscal operating results this week which included even more stark reminders of the impacts of a combination of quality process breakdowns and supply disruptions.  J&J’s McNeill Consumer Healthcare unit, responsible for the production of brand names such as Tylenol, Motrin and Benadryl, continues to deal with the impacts of cascading quality snafus and product recalls that forced the closing of an entire manufacturing facility. The unit has been operating under an FDA Consent Decree affecting 3 manufacturing plants, including the Fort Washington Pennsylvania facility which was shutdown for a complete overhaul over a year ago.  In its recent briefing to analysts, J&J executives disclosed that Fort Washington, originally planned to resume operations late this year, may not be able to resume production until 2014.

A blog commentary penned by Ed Silverman posted on the Pharmalot blog titled, Gang That Couldn’t Shoot Straight, draws an analogy of completely renovating a gourmet kitchen to produce “a shiny new bistro ready for an Iron Chef showdown “only to discover a conundrum that the homeowner is using the same recipes geared for the older worn down kitchen. Silverman continues: “ (But) rebuilding an entire plant takes a lot of effort and tech transfer can be an imperfect science if the underlying processes were problematic in the first place.”

While all of this is occurring, McNeill sales are estimated as falling over 2 percent during this past quarter as consumers turn to alternate brands for their medication needs. J&J has also be forced to spend additional monies in market education initiatives to restore trust in its OTC brands

On the pharmaceutical side of J&J, the supply of the cancer fighting drug Doxil remains on severe allocation caused by the unexpected shutdown of J&J’s prime contract manufacturer for this drug.  The result has been over an 80 percent decline in revenues of this drug.  J&J executives do not anticipate Doxil to be available until late 2012 while restoring a reliable supply of the drug remains “our most urgent priority.” J&J further indicated that it was pursuing both longer-term as well as shorter-term options to restore supply.

So what can readers’ takeaway from these latest reminders of unplanned disruption and impacts on business results.

• First, identification and early warning visibility to disruptive and costly supply risk must be extended to multiple tiers of the supply chain.
• Efforts of cost control directed at consolidating suppliers must also factor important considerations of sole supply risk.
• When an incident occurs that has the potential to severely impact upstream and downstream supply and/or demand, marshal required cross-functional and cross-business resources and get all pertinent information into the process of mitigation response. Physically rebuilding or overhauling a plant or contract manufacturing facility or production line must also include a re-visit of underlying process, technology, people and decision-making processes that are attached.

Supply chain risk mitigation is not a singular supply chain process, it is rather an enterprise-wide response to a significant business problem.

Bob Ferrari

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

Two massive earthquakes triggered back-to-back tsunami warnings for Indonesia and surrounding Indian Ocean waters this morning, local time, sending panicked residents fleeing to high ground in cars and on the backs of motorcycles. The 8.7 magnitude earthquake that struck off Indonesia, raised fears of another huge tsunami but authorities are currently indicating there are no reports suggesting a major threat.  That quake was followed by an 8.2 magnitude aftershock, which many would characterize as fairly severe.

According to the US Geological survey, the initial quake struck 500km southwest of the city of Banda Aceh, on the northern tip of Indonesia’s Sumatra Island, at a depth of 33km.  Indonesia’s governmental authorities have indicated that power was down in Aceh province and people were gathering on high ground as sirens warned of the danger. A tsunami warning was issued from the Pacific Tsunami Warning Center in Hawaii advising countries all along the rim of the Indian Ocean, from Australia and India to as far off as Africa, that a tsunami could be generated. Thus far, no activity has been reported.

This incident is yet another indication of heightened major earthquake activity within Asia coastal regions. The latest was a series of severe quakes that struck off the coast of Japan in March.

Supply chain teams should continue to monitor this situation for any further developments.  It seems  that all of us in the global supply chain community have gained a new sensitivity to the occurrence of these events.

Bob Ferrari

Our readers with association to the pharmaceutical and drug industry may recall that in mid-February  both major drug distributor Cardinal Health and drug chain CVS pharmacy had certain southern Florida facilities temporarily shut down. 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 had failed to follow agreed-to monitor misuse of controlled substances such as oxycodone. Cardinal has attempted to appeal and overturn the injunction on controlled substance shipments from its Lakeland distribution facility but has thus far been unsuccessful in doing so. An administrative hearing is scheduled to occur next month.

Business and traditional media are reporting yet another major development in the ongoing crackdown of prescription drug abuse among U.S. regulatory agencies.  On Wednesday of this week, the DEA searched six Walgreen retail locations as well as the company’s distribution center in Jupiter Florida. The agency is investigating whether Walgreen allowed suspiciously high levels of prescription pain pill retail sales.  Walgreen represents one of the largest U.S. pharmacy and drug chain with over 8000 locations across the U.S.

In this latest crackdown, federal officials are probing for larger amounts of cash sales, as opposed to insurance reimbursement sales. The Associated Press reported that DEA records indicate sharp increases in oxycodone purchases at each of the targeted Walgreen retail outlets. One example, the pharmacy located in Ft. Myers went from a volume of 95,800 units of oxycodone in 2009, to more than 2.1 million units in 2011, accounting for 67 percent of that drug’s purchases within the same zip code. Walgreen manages its own distribution, and as was the case with Cardinal, a potential shut down on controlled substance and prescription drug supplies from its Florida DC could have an economic and store service impact.

In its reporting, The Wall Street Journal notes that Florida has had a long history for pill mills that offered one-stop shopping for controlled substance abuse.  A recent state-wide crackdown on these private facilities may be forcing the abusers to turn their attention to retail pharmacies.

This should be concerning news for the broader pharmaceutical industry, along with its supply chain distribution partners. Regulators are clamping down on the requirement for policing unusual purchase volumes, and are holding drug distribution trading partner’s feet to the fire to perform such actions. For their part, distributors believe that the DEA has not been clear on what policies need to be adhered to, or the granularity of sales information that needs to be tracked.

Supply Chain Matters is of the view that drug retailers and distributors will not be successful in their current defense strategies, so stop making the lawyers wealthier. Instead, stakeholders need to quickly come together in an effort to track higher levels of granularity of prescription drug demand and supporting disease data and be prepared to take appropriate action to target and mitigate abuse. The good news is that current technology is more than able to enable these needs.

Overcoming cross-industry organizational and business performance obstacles should be the focus.

Bob Ferrari