The following also appears as a published guest commentary on the Supply Chain Expert Community web site.

The one year anniversary of the tragic earthquake and tsunami that impacted northern Japan was by many accounts a game changing event for global supply chains. In a recent Supply Chain Expert Community blog posting, blogger Jim Fulcher makes mention of recent research findings from the Business Continuity Institute indicating that one year after, 82 percent of companies that reported supply chain disruption have confirmed some changes to their supply chain strategy, with 12 percent indicating significant changes implement.

The notion that no company is immune to such risks, even one that has incredible influence and buying power was brought forward last week in conjunction  with the announcement from Apple of its latest generation iPad tablet computer. The Wall Street Journal featured an article that extracted from two individual teardown analysis of the new iPad performed by firms UBM TechInsights and IHS iSuppli. The UBM analysis “found components with the same functions made by at least three manufacturers in different tablets.” Specifically, Apple has multiple tablet production sources for device memory and high-resolution display. NAND flash memory came from Micron Technology, Hynix Semiconductor along with Toshiba Corporation, a previous high volume supplier of memory for Apple iPhones. The new highly touted iPad high resolution displays were determined to be sourced from Samsung Electronics, LG Display and another company not conclusively identified.

While the strategy may not be a surprise for those who may know of Apple’s internal supply chain practices, the fact that a diversified sourcing strategy is expanding is another indication of the new importance of active supply chain mitigation has become. UBM and the WSJ both noted that the breath of suppliers is one of the most notable elements of the recent teardown of the next generation iPad and further speculate that the reason may be a sign that Apple is more actively practicing supply risk mitigation because of the past Japan and other disruptive incidents.  A glance at the suppliers of mention also triggers the thought that each supplier’s main operations are located in different geographic regions.

On Supply Chain Matters we recently dwelled on the one year anniversary and noted specific actions that automotive manufacturers Toyota and Nissan have implemented as a result of learning from the recent quake. Toyota alone discovered that approximately 300 production locations could be at risk and has now asked these specific suppliers to implement risk mitigation measures. Last week, community blogger and Kinaxis executive John Westerveld added his commentary that it is shame that if often takes a significant event to make all of the organization sensitized to the importance of assessing supply chain risk and developing risk mitigation strategies.  Jim also argues that supply chain risk management should be integrated under the umbrella of the Sales and Operations (S&OP) planning process because of its current scope, process frequency and data utilized to make decisions.   This author happens to agree with Jim and encourages our community to have a dialogue of its own regarding this important topic.

What we are now beginning to understand is that even Apple, the largest global supply chain influencer, who managed to come through the Japan tsunami and later Thailand floods incidents relatively unscathed, has implemented discernable supply chain risk mitigation.  The takeaway for all others is that like other areas of supply chain capability, the gap among leaders and laggards continues to widen, and supply chain risk mitigation is another critical capability within this gap.

Once again, are you educating and influencing your senior management to the need for more active risk management identification and mitigation strategies?

Do you believe that this responsibility falls under the umbrella of supply chain management, as opposed to finance or enterprise risk management?

Do you view the S&OP process as a natural extension to inclusion of supply chain risk mitigation?

One year is a long time in the current dynamic clock speed of business.

Bob Ferrari

Just about one year since the first anniversary of the devastating 9.0 magnitude earthquake that struck northern Japan, there are yet new earthquakes occurring in the region.  At least three new earthquakes impacted areas of Japan earlier today.

According to the Japan Meteorological Agency, an initial magnitude 6.8 earthquake occurred near Hokkaido Island, 146 miles south of Kushiro in the far northern region. This quake occurred six miles below the sea surface and triggered a small tsunami that caused minimal damage. Initial tsunami warnings forced evacuations of some coastal regions.

A second 6.1 magnitude quake occurred off the coast of Chiba just east of Tokyo, where a moderately strong 5.7 quake had occurred three hours earlier.  The 6.1 quake was estimated to be 9 miles below sea level.  Two runways at Tokyo’s Narita International Airport were temporarily closed for inspection along with suspension of bullet train service.

An International Business Times posting provides video and news reporting of these incidents.

Reports from each of the impacted regions initially indicate minimal property damage.

These continued earthquake occurrences add more anxiety, not only for the people of Japan who have already endured the suffering of the aftereffects of last year’s disaster. but also manufacturers and their supply chains originating from the impacted regions.

Supply chain teams need to continue to closely monitor Japan in light of continued occurrences of tremors and aftershocks.

This posting provides another update to our continuing commentaries reflecting on the causes of unacceptable supply shortages of critical life-saving drugs among various pharmaceutical and life sciences supply chains.

Our most recent Supply Chain Matters commentary reflected on the FDA’s latest alert to healthcare providers indicating that some non-approved, potentially counterfeit versions of the cancer treating drug Avastin as well as other medicines has begun to further infiltrate both U.S. and global supply chains. That development added ever more heightened concerns to the existing problem of limited supplies of critical life-saving injectable drugs.  As healthcare providers attempt to find all means to save patient lives, they sometimes have little choice but to explore all available means, with the unintended consequence of exploring grey market or foreign based distribution supply sources.

This situation however seems to have developed additional complications.  Pharmaceutical supply chains have long been challenged by conflicts in stakeholder interests and some of these conflicts may be compounding themselves in both leading up to as well as resolving the current problems. The drug manufacturers themselves, in an effort to respond to cost control directives, may have placed too much emphasis on singular points of production, which have suffered breakdowns in quality and production consistency.  This placed healthcare providers in the precarious position of stockouts and lack of adequate response from certain drug manufacturers.  The other conflict involves a high pricing imbalance among geographic markets, which has fostered an alternative grey market supply chain.

Last week the Wall Street Journal published an article (paid subscription or free metered view required) observing that the importation of low-cost foreign pharmaceuticals into the U.S. may be at the core of the current concern for safe product.  Noted were investigations of Canadian based distributors who have long histories in the providing of alternative low-cost drugs for U.S. consumers. One Canadian distributor is reported as acknowledging that his company may have inadvertently shipped fake vials of the cancer treatment drug Avastin to U.S. healthcare providers. The byline of the WSJ article points to the flourishing of grey market distributors because of the large price differential among U.S. channels as contrasted to lower-cost, foreign based Internet channels. These drugs enter the U.S. presumably after they have been shipped across many other foreign jurisdictions with different regulatory controls.  In the specific example of fake Avastin, which turned out to contain starch and cleaning solvents, there is some belief that the supply route originated in China and made its way through Turkey, Egypt the UK and Canada before its entry into the U.S. supply chain.

However, it is important to keep a historic perspective to industry tensions. The WSJ points out that for the past several years, there has been a history of drug manufacturers pressuring Canadian based wholesalers to stop supplying lower-cost drugs because in effect, it undermined the ability of drug companies to charge far higher U.S. prices than exist in Canada or other countries. Drug companies seek proprietary supply and pricing control, but as the current supply shortage crisis continues to unwind, events compound themselves.

In the point of view of Supply Chain Matters, there remains three significantly different challenges at-play and industry participants and government regulators need to align toward common stakeholder interests to resolve the current shortage crisis.

Pharmaceutical and life sciences companies should strive to provide the most innovative and cost affordable drugs to combat diseases and ailments.  Their supply chains should be focused on insuring safe and adequate supply, with contingency for unexpected supply interruption or unforeseen quality breakdowns.  Industry supply chain teams have always marched to the mission of zero stockouts and never failing to provide needed drugs when patients are in need.  That mandate extended itself into far too much excess inventories, or having on-hand supplies that exceeded expiration dates.  Today, the counter reaction has perhaps been too much emphasis on cost reduction without corresponding controls and process investments, resulting in a complete breakdown in insuring adequate supply.

Healthcare providers strive to provide their patients with safe and speedy choices in the treatment of chronic diseases such as cancer. Any patient faced with a chronic condition should demand the best available outcome without having to endure financial peril. Patients and their providers expect drug manufacturers to collaborate on cost affordable choices, particularly in the new era of needed healthcare reform.  This goal should not equate to drug manufacturers cutting back on quality, demanding proper adherence to good manufacturing practices (GMP) or placing additional single source production supply risk on any critical life-saving drug’s supply plan.

When broader political and industry agendas are brought to bear on an existing chronic problem, the issues become ever so compounded and patients suffer even more.  In our view, the current chronic supply shortages should not be the fodder in efforts to curb competition or derail the efforts of generic drug producers to introduce more cost affordable sources of supply. Just this week, India’s patent office granted an India based producer of the generic equivalent to Bayer’s kidney and liver cancer treating drug Nexavar, the right to distribute its drug to patients within India.  The government felt compelled to act because the cost differential was substantial, $5600 per month for the proprietary drug compared to $175 per month for the generic equivalent.

As this situation continues, it benefits all of us to differentiate within the current media reporting to identify the existence of competing stakeholder interests and urge industry stakeholders to align and solve one problem at a time. Now is not the time for the industry to be seeking protections, but rather a speedy response to current patient needs.

Bob Ferrari

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

During the heights of the global recession, Supply Chain Matters issued a number of commentaries that addressed the need for governmental policies to not just focus on strategic industry or company survival, but rather the broader aspects of protecting strategic industry supply chain capabilities. The motivation was the crisis that occurred within the U.S. automotive industry, with at least two of the big three automotive OEM’s at risk of going bankrupt.

At that time there was much political discourse around the merits of the U.S. government’s investing of billions of dollars to “bailout” Chrysler and General Motors.  That discourse remains a point of debate among Republican candidates within the current U.S. Presidential election cycle.

In late 2009 and later in a January 2010 Supply Chain Matters commentary, this author ranted on the then current state of industry attention and urged Presidential advisors  to not view the task as one of saving individual companies but rather for sustaining and building competitive supply and value-chain networks.   By August of 2010, 13 months after the U.S. government stepped in to financially assist Chrysler and GM, auto industry employment had increased by 76,300 jobs, of which 44,000 were estimated to come from the supplier base. The White House blog noted in June 2011 that job growth was now at 115,000 jobs.  Today, in addition to continued job growth, billions of new dollars are being invested in new or expanded manufacturing capabilities. All of this activity was what many of us were able to see and read about.  Today however, we have an inside view of what was also occurring, one that again reinforces the strategic importance of any industry’s supply chain capabilities.

The Wall Street Journal printed an excerpt from a soon to be released book: American Icon: Alan Mulally and the Fight to Save Ford Motor Co. by Bryce G. Hoffman. (paid subscription or free metered view)  This excerpt stated: “By the fall of 2008, the Detroit three OEM’s weren’t the only ones struggling to stay in business.  Most of their suppliers were also on the brink of bankruptcy.” The book goes on to describe Ford’s intense efforts to prevent its supplier base from destroying the long-term viability of Ford as a producer of vehicles.  It describes efforts in 2008 by Tony Brown, Ford Vice President of Global Purchasing to establish “Project Quark”, a rather secret global cross-functional team tasked with simultaneously addressing three goals: to intensely monitor parts suppliers, prevent supply chain disruptions, and accelerate Ford’s needs to shrink its supply base into a network of strategic suppliers.

While our readers can review this WSJ excerpt or actually read this new book when it becomes available, we did want to highlight a very important aspect of what was noted as ultimately occurring.   “From the beginning Mr. Brown knew that Ford could not prop up the global automotive supply base on its own. He reached out to other manufacturers for help.” In the end, it was a collaboration of Ford, Toyota, Honda and later Nissan who collectively agreed to coordinate their efforts to support suppliers that were critical for each OEM. Also noted was that Ford, Toyota and Honda together sent a letter to the U.S. Treasury Department explaining the important interconnections among the automotive supply base while urging the federal government to take concrete steps to protect it.

This inter-industry player collaboration was an unthinkable event in the pre-recessionary industry competitive environment.

For our part, we can’t wait to get our hands on this book and read more details.

As with the conclusion of any major crisis, organizations move on with important insight and learning.  For government and industry players, the U.S. automotive industry crisis brought home that important learning. As the industry continues with its current renewal, past and current investments and joint collaboration will collectively improve industry capabilities for years to come.

Once again, we again circle back to why this blog was so named, for the reality that supply chains do indeed matter in any company’s business strategy.

Bob Ferrari

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

This coming Sunday will mark one year after the tragic disaster that impacted northern Japan and that provided such vivid images for all of us. There is little question that this incident, followed by the effects of the monsoon-driven floods that struck Thailand, have without doubt provided the wake-up call to the vulnerabilities of today’s global supply chains.

The Wall Street Journal’s Drivers Seat Blog penned a brief but rather insightful commentary related to the lessons being learned by major Japan based automotive manufacturers after the devastating earthquake and tsunami that impacted that country almost a year ago this week. We wanted to call attention to our Supply Chain Matters readers to this important evolving learning, but also add broader considerations for firms to  consider.

One year after the Japan disaster both Toyota and Nissan have taken initiatives to probe deeper into their respective supply chains to ascertain vulnerabilities.  Toyota itself has established a rather aggressive goal aimed at the ability to restore any of its manufacturing operations within Japan in just two weeks after the occurrence of a major disaster. The WSJ blog commentary goes on to note: “After the earthquake, Japan’s biggest car maker by volume asked about 500 suppliers to its domestic factories to disclose details of their supply chain. About half revealed sourcing network information, and Toyota found that some 300 production locations could be at risk.”

That statement alone is an important reflection of what occurred in the initial days after the disaster.  Supply Chain Matters has heard first-hand accounts from a number of senior supply chain executives indicating that while initial assessments may have given an indication of minimal or minor impact. It was the later assessments from lower tier suppliers that provided the real magnitude of potential disruption to supply.

The WSJ commentary also notes that Nissan’s COO recently asked its suppliers to take similar steps in disclosing details of the component supply network.  Supply Chain Matters readers of both our ongoing blog and newsletter commentaries will recall that in the case of Nissan, it was far more equipped to respond to the crisis and bounced back the earliest.  The latest financial performance results from all of the Japan based auto manufacturers now indicate how Nissan has been able to buffer any major sales decline and actually exhibit sales growth due of the flexibilities of its supply chain capabilities.

Over and above supplier assessments, there is a need to have singular organizational focus and accountability for risk identification and mitigation.  There are two fundamental components to risk namely, identification or mitigation as well as adequate response when major disruption occurs.  In our view, both must also fall under the same organizational umbrella.

Over on the Spend Matters blog, fellow blogger Jason Busch offers a recommendation that this accountability should reside in either finance, procurement or both.  Our view is that it should have even broader supply chain accountability, including a direct relationship to the company’s senior supply chain or operations executive. Notice that in the case of both Toyota and Nissan, the spokespersons are senior operational executives.

Like many other of today’s more demanding capabilities there is an all-important skills aspect to the identification and management of risk and firms need to assess the required skill levels to support these needed competencies.

Risk identification and mitigation requires advanced analytical and business intelligence capabilities as noted not only in the scope of Toyota’s effort, but in current benchmarks from companies such as Cisco, Procter & Gamble, FedEx and others.  There are needs to to quantify which components, regardless of individual cost, have the most risk to end-product revenue support needs.  Risks themselves need to be categorized as to frequency of occurrence. It also requires the existence of supplier early warning capabilities as well as the broadest visibility of what may be occurring throughout all layers of the supply chain at any given time.   Much of these capabilities require some investment in advanced technology, and we believe this will lead to broader perspectives for investments in a new class of supply chain control tower like applications.

Organizations cannot adequately address nor implement any technology investment without first gaining alignment in formulating a comprehensive organizational plan for addressing supply chain risk management. Such a plan has people, process, technology and change management components.

Technology providers in turn need to educate firms in understanding the building blocks or roadmaps for building adequate skills, organizational capabilities and safeguards in order to leverage these technologies.

One year after the tragic events impacting Japan, we as a supply chain community need to take a broader and more aware perspective towards existing risk to industry supply chains including the need to educate the highest levels of senior management as to the required building blocks and investments.

Has your organization gained a new awareness and sensitivity to supply chain risk?

Bob Ferrari

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

Supply Chain Matters provides our February update commentary regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand in the fall of 2011. Our last early 2012 update in January reflected on the initial quantifiable impacts across industry supply chains. As the period of end of year earnings announcements concludes, we are getting a far more quantifiable picture of the cascading global supply chain impacts as a result of the floods.

We begin with the overall financial impacts.  According to a recent Insurance Journal posting, noted rating agency AM Best indicates that the insurance losses resulting from the floods in Thailand could be considered one of the five costliest insured loss events in the past 31 years.  Thai authorities now estimate that flood damage costs could be up to $15 billion, involving more than 400 manufacturers and households. A study from Aeon Benfield indicates that the amount of structural damage is actually “four times greater than what resulted from Japan’s earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption.”  The implication is that many smaller suppliers or manufacturers may have self-insured.  The more sobering news for sourcing and procurement professionals to be concerned about is an indication by Best that the Thai commercial insurance industry “will likely face sharply contracted (coverage) capacity, higher pricing and tighter terms for coverage with the Sian and Japanese reinsurance renewals in April.” The takeaway, in our point-of-view, is that existing suppliers in these regions will probably face significant higher insurance or liability costs by virtue of their location in a disaster-prone region.

From an economic standpoint, the financial impact to the overall economy of Thailand was far larger than expected. That economy contracted at the annual rate of 9 percent in the final quarter of 2011 which is quite significant. According to the National Economic and Social Development Board of Thailand, the manufacturing sector alone declined 23 percent while net exports fell at an annual rate of 6.1 percent compared to a 17.3 growth rate in the previous quarter.  Beyond Thailand, the economy of Japan contracted a worse than expected 2.3 percent in the final quarter of 2011 and government authorities pointed to a strong yen, falling overseas demand and the impacts from the Thailand floods as hampering production and exports.

The financial impact among individual companies has also come to light.  Western Digital, initially the most impacted manufacturer with 60 percent of its global hard disk drive (HDD) manufacturing sourced in Thailand, indicated that in its fiscal second-quarter, earnings fell 36 percent while overall HDD shipments dropped a substantial 45 percent. That volume drop equates to a shipping shortfall of over 52 million hard drives from the year earlier quarter.  Overall revenues were down 20 percent from the previous quarter. The news from Western Digital was generally well received by Wall Street given the dour initial news immediately after the floods. Company officials noted that while manufacturing levels are on the increase, manufacturing capacity levels will not reach pre-flood levels until at least the September quarter, and that supply chain pipeline inventories are not expected to reach normal levels until the first-half of calendar year 2013.  Meanwhile, rival Seagate Technologies Inc. who had far more limited production presence in Thailand reported better than expected earnings, margins and shipments for the quarter ending in December.  Seagate shipped almost twice the volume of Western Digital, 47 million HDD’s in comparison to the 28.5 million for Western. Seagate’s gross margins increased nearly 12 percentage points from a year earlier as limited overall supply chain supply led to higher prices. According to IHS iSuppli, the average selling price for HDD’s increased on average 28 percent in Q4 of 2011 and will only decline slightly in the current quarter. In our January update, we noted reports of pricing spiking as much as 50 to 100 percent at the retail level in Asia.

Moving up the supply chain, computer providers Dell and Hewlett Packard has released each of their latest quarterly earnings with noted admissions to the financial impact from interruption of HDD supply.  Dell’s fourth quarter 2011 results indicated that while revenues rose 2 percent, earnings fell 18 percent. Dell CFO Brian Glidden acknowledged that the flooding in Thailand financially hurt the company during the quarter.  Not only were available hard drives expensive, Dell could not fulfill its desired needs for higher capacity drives. HP announced that for the quarter ending in January, PC related profits were down 31 percent, and server related profits declined 32 percent.  Overall profits declined 31 percent, and HP’s CFO in-turn acknowledged that the HDD shortage hurt both PC and server sales, and that the impact would continue through the first half of this year.  Readers should recall that both of these companies previously downplayed any significant disruption in supply or pricing.  This again brings credence to the concept of whether in times of significant supply chain disruption, it may be better to bring forward the worst and best case impacts, setting appropriate expectations, rather than waiting for the actual results to occur.  In the case of Western Digital, prior announcements of significant impact, followed by better than expected performance, was well received by Wall Street, in spite of not so positive financial news. Apple on the other hand, most likely from its huge influence in volume buying agreements, has publically indicated little supply impact and had stellar financial results in its latest quarter.  Interesting enough, both Western Digital and Seagate are listed suppliers on Apple’s supplier responsibility report.

Moving down the supply chain, a Forbes hosted article penned by semiconductor industry analyst Jim Handy noted the effects of the HDD supply disruption on the other components of global PC and server supply chains.  Handy notes that  about 40 percent of the total semiconductor market is made up of data processing applications, and because limited supplies of HDD restricted PC build schedules, other components such as LCD screens and DRAMS went into oversupply.  He predicts that other PC components will enter oversupply this quarter which will have a negative impact on semiconductor component prices both in the current quarter and perhaps the remainder of the year.  Supply Chain Matters would add that this may also reflect a situation where longer-term volume buying contracts could not be adjusted or that supply chain planners were challenged with maintaining current build plans while hoping for the best in HDD supply.

As more quantitative and other data attributed to this one significant major supply chain disruption becomes ever more visible, the consequences for re-examined strategic sourcing, supply chain risk mitigation and other planning become more obvious in the months to come.

We can all collectively hope for a less disruptive remaining 2012, but that may be wishful thinking.

Bob Ferrari

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