Supply chain risk continues to exist, especially within international food supply chains.

Last week, the Taiwan High Court sentenced the owner of a food additive manufacturing firm to a jail term of 13 years for adding toxic plasticizers to clouding agents and selling these products to food and beverage producers.  His spouse was also sentenced on the same charges.  More disturbing, the incidents were reported to occur between August of 2005 to May 2011, a period of almost six years.  This incident is being described as the largest food contamination incident in Taiwan history.

Clouding agents are typically used in the products such as fruit jelly, yogurt powder, juices and other drinks.  This incident resulted in the recall of hundreds of products and was described by the Taipei Times as “bludgeoning the confidence of Taiwanese consumers and tarnishing the country’s reputation abroad.”

Sourcing and procurement teams need to insure that proper quality measures always exist up and down the supply chain. In this Taiwan incident, the existence of non-conforming product existed far too long without detection or investigation of consumer feedback. In the case of globally extended supply, producers, distributors and retailers must further have a keen eye to specific oversight and regulatory measures.

As Supply Chain Matters has often pointed out, brands can be destroyed with a single large-scale incident.

Bob Ferrari

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

Social and traditional media are abuzz today reflecting on a new twist to the potential category of most popular stolen goods.  Apparently thieves have been targeting Tide laundry detergent and police nationwide are trying to figure out why.

A posting on the Seattle Post Intelligencer blog, among others, features video and narrative reporting noting that thefts of Tide laundry detergent have become so rampart that some cities have special task forces established to thwart continued incidents.  Apparently Tide has become either a form of currency on neighborhood streets or has found other black market uses, possibly linked to the drug trade.

Who knew!

Of more interest are reports that a Minnesota resident has been accused of stealing $25,000 worth of Tide from a local Wal-Mart over the last 15 months without store inventory systems alerting to the loss.  If this turns out to be valid, it certainly raises red flags of concern among risk control and inventory management professionals.

This story comes on the heels of our previous Supply Chain Matters commentary related to reported supply shortages limiting the market introduction of the new Tide Pods product.  Perhaps P&G public relations has found a new silver bullet in explaining to consumers why Tide can be in short supply these days.

Oh yes- a memo to Wal-Mart inventory management: you may want to recheck physical store level informational and transactional integration to individual point-of-sale systems. Also to P&G Tide demand planning: product demand is better than your systems are reporting.

There is never a dull moment in today’s world of supply and inventory management.

Bob Ferrari

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.

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.