To follow-on with our previous posting, we provide another important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains. When legitimate essential drugs become scarce, unscrupulous activities unfortunately take advantage.

During these past few weeks, regulatory agencies have been alerting doctors and healthcare providers that in the light of severe shortages of hundreds of drugs, there are now clear signs that unauthorized or counterfeit versions of these drugs are infiltrating global supply chains. The U.S. FDA recently alerted to the appearance of “non-FDA approved injectable cancer medications.”  These include non-authorized versions of Faslodex, Hercetin, Neupogen and Rituxan.

The most visible headlines among traditional business media regarding the appearance of counterfeit versions involve the drug Avastin, prescribed to treat brain, colon, lung and kidney cancers.  Last week Swiss drug maker Roche, and its Genetech unit, the global producers of Avastin, indicated that counterfeit versions of its top-selling cancer drug, ones without any active ingredient, were being circulated in the U.S. Patients receiving this counterfeit version would thus not received required therapy. The FDA has further alerted 19 U.S. medical centers about purchases made from suspect distributors.

What is ever more concerning to supply chain management teams is the global based chain of custody now involved in these suspect drugs, adding many more points of vulnerability.  As shortages of life-saving drugs become more acute, healthcare providers are  turning to secondary channels in hopes of securing essential supply, sometimes not knowing the reliability product sourcing of such smaller wholesalers. In the specific case of Avastin, the counterfeit version flowed through wholesalers in Switzerland, Denmark and the United Kingdom before entry into the U.S.  According to an article published in the Financial Times, the Medicines and Healthcare products Regulatory Agency (MHRA) in the U.K. is further investigating whether the source of the counterfeit drug originated from a supplier in Egypt. It was also reported that some of these wholesalers never saw nor physically inspected the drug.  In essence, the existence of a counterfeit gets passed unnoticed all along the chain until it reaches the healthcare provider pharmacy. In its reporting, the Wall Street Journal included a graphic which indicates the multiple alternative wholesaler paths that were reported for distribution of the suspect Avastin.

Since there are currently no clear signs of improvement in overcoming critical shortages of life-saving injectable drugs, the emergence of increased distribution of unapproved or counterfeit drugs will only increase.

If there were ever a time for increased ‘track and trace’ or serial number control processes to assure legitimacy of supplies, it is clearly now.  While the industry has been generally dragging its feet on these initiatives, limiting such efforts to conform to specific U.S. state or national mandate schedules, current alarming events will only force legislative regulators to mandate increased controls for authentication., or possibly accelerate implementation timetables.  The problem is global in scope, meaning that tracking processes and standards must accommodate global supply chain distribution channels.

There is little question that pharmaceutical and drug supply chains have fallen down in insuring adequate and reliable supply of life-saving injectable drugs. Obviously, there are many ongoing problems to resolve, not the least of which is too much single sourcing and lack of adequate supplier monitoring of quality and consistency.  One big problem invariably leads to others, and now, an alarming trend for increased appearance of non-conforming or counterfeit versions leads to yet another problem, insuring authenticity and reliability of supply.

The bottom line, in our view, is that all members of pharmaceutical and drug supply chains, industry and regulators, need to bring serious attention and resources to bear on processes related to sourcing, supply planning, supplier monitoring and product authenticity.

We encourage comments from readers within the industry dealing with these problems.

Bob Ferrari

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

We provide a brief but important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains.

Yesterday the U.S. Food and Drug Administration (FDA) approved two additional suppliers for two life-saving cancer drugs that have experienced short supply because of the unplanned shutdown of contract producer Ben Venue Laboratories, a division of Germany based Boehringer Ingelheim GmBH.

To respond to the critical shortage of ovarian cancer treatment drug Doxil, distributed by Johnson and Johnson, the FDA has approved temporary importation of the replacement drug Lipodox as an alternative to Doxil.  The FDA has authorized a limited arrangement specific to Mumbai India based Sun Pharm. Global FZE and its authorized distributor, Caraco Pharmaceutical Laboratories Ltd., based in Detroit. In its press release, the FDA reinforces that temporary importation of unapproved foreign drugs is considered in rare cases when there is a shortage of an approved drug that is critical to patients and the shortage cannot be resolved in a timely fashion with FDA-approved drugs.

Another drug that is in critical short supply in the U.S. drug supply chain is the drug methotrexate, prescribed to treat many forms of cancer and chronic disease. Their have been recent media reports indicating that only two weeks of supply of the drug remained to fulfill patient demand. The FDA has additionally approved a preservative-free generic equivalent manufactured by Illinois based APP Pharmaceuticals, a division of Fresenius Kabi AG based in Germany. Drug maker Hospira additionally expedited release of additional 31,000 vials of methotrexate, described as the equivalent of one month’s demand for this drug. The FDA is also working with other drug producers to free-up additional supplies.

The FDA also issued additional guidance to drug manufacturers regarding more detailed requirements for both mandatory and voluntary notifications to the FDA regarding future drug shortages or potential drug shortages.

Supply Chain Matters applauds these latest actions coming from both the FDA and the industry.  The fact remains however that the potential for stockouts of any critical life-saving drug remains unacceptable, and the industry continues to find itself in a situation of too much sourcing risk, without contingency plans for augmenting supply.  We also strongly suspect that the new FDA directives regarding notification of short supply will only increase the visibility to other drugs in short supply, adding more embarrassment, patient and healthcare provider mistrust concerning the U.S. drug supply chain.  We fear that this will only add to the growing problem of counterfeit and grey market supplies of critical drugs.  We hope that we are proven wrong.

Bob Ferrari

On Friday, McNeil Consumer Healthcare division of Johnson and Johnson announced the voluntary recallof the entire U.S. supply of infants grape-flavored Tylenol which amounted to over 570,000 bottles. The product had just returned to retail outlets in November. This latest recall comes after a long series of past recalls involving Tylenol and other J&J branded medicines including Benadryl, Motrin and Zyrtec that date back to 2009 and have been attributed to previous cutbacks.  The reason for the latest voluntary recall was described as a design flaw involving the bottle cap and dose dispensing syringe.  The new cap was introduced last year in an effort to re-capture lost sales. J&J took the action after receiving a “small number of complaints” from consumers but stresses that to the company’s knowledge, no infants have been harmed, and that “the risk for a serious adverse medical event is remote”.

This recall could not have come at a worst time as J&J was struggling to rebuild consumer credibility in its OTC medicine brands, and must now face yet another challenge to rebuild consumer confidence.  Even though the recall involved a specific product area (one ounce oral suspension infant Tylenol) we speculate that the decision to take this action was not taken lightly and had to involve discussions at the senior most levels of the company.

According to a report published in the Wall Street Journal, total revenues for the McNeill division are down 55 percent from a peak year in 2008. The Tylenol brand itself has slipped from second in sales of over the counter pain medicines in 2009, to now rank eight.  In a released statement on Friday, J&J CEO William Weldon stated that this latest recall was “clearly disappointing after all the progress that McNeil has been making to ensure its products meet the highest level of quality and consumer satisfaction”. Readers may recall that it was only a couple weeks ago that J&J announced a re-shuffle of senior management concerning the McNeil unit which perhaps adds even more perspective to this latest development.

When an organization discovers significant systemic breakdowns in quality and accountability there is always a tendency for existing players to exhibit a rather cautious mentality, or perhaps a “bunker” mentality.  This often times requires senior management to set very clear direction, motivation and an emphasis for what needs to change vs. what tenets need to remain.  There is often a need for articulating an overall integrative framework of required transformation including what areas of operating practices, business metrics and people-related training skills must be changed.  Management must lead by example and be visibly active and participative in key transformation decision-making.

Sometimes however, change is only defined in a singular context, for instance a need to revamp a single production facility or change a few specific processes, without context and alignment to an overall end-state framework.  Sometimes, a particular function such as sales and marketing can still have a final say. In the case of McNeil and J&J only they and their management teams can readily conclude whether this has occurred.

Setting integrative goals is so very important.  In this latest situation involving infant Tylenol, we have to speculate why was a new packaging design introduced on an infant product area without extensive consumer involvement and testing, especially in light of the need for restoring consumer confidence? What about adequately addressing and testing the quality control measures of the packaging process?

Fundamental questions but yet, another challenge for J&J and its McNeil unit to once again overcome.

Bob Ferrari

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.