In mid-February, Supply Chain Matters provided commentary regarding a looming legal showdown as U.S. governmental regulators began a crackdown on major drug distributors and larger corporations to fight rampart prescription drug abuse in the U.S..  Specific incidents involving 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 has failed to follow agreed-to procedures to monitor misuse of controlled substances such as oxycodone. The DEA also targeted retail chains CVS Caremark Corp. and later Walgreens in this effort.

This morning, the Wall Street Journal is reporting (paid subscription or free metered view) that Cardinal has agreed to a settlement with the DEA that involves a two-year suspension of its DEA license to ship controlled substances from its Lakeland Florida distribution center, along with efforts to improve this distributor’s anti-drug-diversion procedures. The WSJ also reports that this new settlement could also affect DEA’s ongoing litigation with CVS , which alleges that the drug retailer’s  two retail facilities in Florida sold suspiciously large volumes of pain pills received from the Cardinal Lakeland distribution facility.

While further details will follow, this report would indicate that the DEA and U.S. regulatory agencies are placing serious teeth to the ongoing efforts of flagging and enforcing obvious illicit drug distribution through available U.S. retail channels.  It is an obvious sign that distributors and retailers had better invest in analytical tools that can flag unusual or excessive patterns of controlled substance retail sales, coupled with actionable regulatory reporting and mitigation control.

Bob Ferrari

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

The automotive industry continues to encounter some significant learning regarding major supply chain disruption and mitigating global supply chain risk.  In 2011, the effects of the massive earthquake and tsunami that impacted northern Japan, followed by the massive flooding in Thailand brought about by an unusually strong monsoon event led to a new awareness of supply risk that extended to critical components at the lowest tiers of the value-chain. In March of this year, Supply Chain Matters provided updated commentary regarding this learning, along with efforts being taken by major Japan based Automotive OEM’s to mitigate such risks in the future.

Last week, major automotive manufacturers in Japan reported results from their March ending fiscal year closings, collectively forecasting record production volumes and increased profits for the coming fiscal year.  Toyota and Honda, both severely impacted by supply disruption, reported optimistic forecasts for the upcoming 2013 fiscal year, but not without the need for aggressive sales campaigns. The Financial Times reported that Toyota produced 2.5 million vehicles in its March ending fiscal year, surpassing both Volkswagen and General Motors annual output. The company however incurred a 2.2 percent decrease in annual revenues and a 24 percent decrease in operating income. According to its annual reporting, Honda produced slightly under one million units (988 thousand), noting increased output for the North America market but decreased output in Asia due to the ongoing effects of the Thailand floods. Honda had both of its Thailand car assembly plants totally underwater directly after the floods. Honda’s profitability levels within its automotive group have recovered to just under FY10 levels.

The most significant headline, however, is that of Nissan, which reported robust 7 percent increase in operating income, exceeding the results of its larger Japanese rivals. Both the Financial Times and the Wall Street Journal noted that Nissan was the quickest of Japan’s big three auto makers to recover. With this headline comes the reminder of the two sides of major supply chain disruption, turning disaster into an industry opportunity because of more agile and responsive supply chain capabilities. Two weeks after the quake struck Japan, Nissan indicated that it had assessed all of its suppliers and production facilities and determined that the situation was not as dire as some had originally predicted. Nissan resumed partial production on March 24, 2011 utilizing inventory of components and parts, supplemented by parts from overseas factories. The majority of Nissan’s global production capacity was external to Japan and Thailand. In early April of 2011, Nissan took bold actions in shipping V6 engines from its U.S. based Tennessee engine factory directly to Japan to keep its assembly plants operating. The same agility occurred after the Thai floods struck. In February, Nissan’s COO asked all of its suppliers to disclose details of their component supply network.

After these incidents, Honda has since announced its intention to shift a major portion of its production capacity into North America over the next few years, as a hedge to future major supply disruptions.  Toyota remains committed to a significant manufacturing presence within Japan and has embarked on an aggressive goal aimed to restore any of its manufacturing operations in just two weeks after the occurrence of a major disaster.  Preliminary analysis uncovered that some 300 production and/or supplier locations could be at risk.

One year after the original Japan quake, the financial and operational impacts to supply chains, to the bottom line, and to stock price remain. As noted in our March commentary, we as a supply chain community need to continue to have a more risk aware perspective to the profile of the global value-chain, along with an assessment of what sourcing, analytical assessment and risk response areas need to be shored-up for mitigating such events in the future.

The evolving lessons from the automotive industry continue as an ongoing reminder of the importance of identifying and mitigating risk.

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.

Troubling issues concerning aviation and aerospace supply chains are not just confined to Boeing.  Rival Airbus has also been dealing with its own challenges, and this week presented yet another concern related to its massive A380 jetliner shown in our pictorial.

In past weeks, after the appearance of cracks appearing in parts of the wing of the A380, European air safety officials ordered an inspection of the entire fleet.  It has since been reported that these minor cracks were found in almost all of the fleet.  Airbus claims it will take considerable time to resolve the problem.

Readers might also recall the potentially devastating blowout of Rolls Royce Trent 900 engine in September 2010 involving a Qantas Airways A380, forcing an emergency landing in Singapore, and subsequently the grounding of the entire fleet for weeks. A result of that incident was a confidential settlement between Qantas and Rolls Royce involving a reported $100 million. Other reports indicated the cumulative costs to Rolls for having to fund the inspection, repair and airline damages of all engines throughout the supply chain to be roughly $190 million.

Last July, an A380 flying from Singapore to Hong Kong was forced to return after an engine shutdown.

This week provided yet another incident.  A Singapore Airways A380, this time traveling from Singapore to Frankfurt, with 430 passengers on board, was involved in an engine incident forcing the aircraft to return to Singapore after about three hours of flight.  Fortunately for the plane’s many passengers, the aircraft returned without further incident and passengers were transferred to another aircraft. Reports indicate that an engine surge in the number three engine, which was also a Trent 900 Series, was the probable cause.  Singapore Airways issued a statement indicating it was working with both aviation authorities and Rolls Royce to determine cause and probable actions.

Airbus’s new composite materials A350 passenger jet development program, a response to the existing Boeing 787 Dreamliner has also suffered a series of recent setbacks. The company made the decision to delay the plane’s introduction from late 2013, to the first half of 2014 by concluding that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

In the world of aerospace, and its associated supply chains, risks incur both in the product development, production and after-market phases of the aircraft’s product lifetime.  As manufacturers continue to drive more advanced engineering and innovative, but complex components, the risks get higher and implications to highly stressed supply chains magnify even further. It seems that no manufacturer nor supplier is immune and the stakes continue to get higher. Now more than ever, broad visibility and supply chain agility are the competencies for meeting business needs.

Bob Ferrari