Many past accolades have been written and cited regarding Apple’s supply chain capabilities including recognition in most any industry analyst’s top supply chain ranking, including our own at Supply Chain Matters.

If you have not been keeping-up of late, Apple has entered, perhaps not to its liking, a fairly new phase of global-wide visibility to its supply chain capabilities. The current phase can best be described as a phase driven by public relations and perception, one that will once again challenge Apple’s internal supply chain management teams.

The watershed events leading to this current phase were triggered by two media events.  One was Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, and the other was a rather revealing and candid article published in the New York Times revealing Apple’s certain production and supply chain practices which was not complimentary.

Since that time, Apple’s senior executive and public relations team have been hard at work depicting two sides of Apple’s corporate culture.  The first is one that protects the Apple brand for innovation and corporate responsibility.  The second is the ability to exercise corporate name and power to influence whom in traditional and social media Apple deems to grant access and visibility.

A recent blog posting penned by Wall Street mogul Henry Blodget on the Business Insider blog speculates that instead of thanking the Times for focusing attention on why so many high tech and consumer electronics companies have no choice but to deal with the implications of supply chain sourced in Asia, Apple has been  retaliating by offering competing traditional media outlets like the Wall Street Journal, or blogger friendly outlets like John Gruber’s blog, increased access to Apple senior executives for interviews. The takeaway conclusion is noted as access journalism.

The newest chapter comes tonight in the U.S., when an ABC News’s Nightline broadcast will air what is hyped as an unprecedented glimpse inside the contract manufacturing facilities of Foxconn.  Reporter Bill Weir has penned a fairly revealing perspective of what will be aired on tonight’s program. Weir provides the context for the invite to ABC News as a direct invitation by Apple to actually observe Foxconn final assembly lines as the Fair Labor Association (FLA) conducts its first ever audit of Apple’s supplier responsibility practices. Weir questions the fact that ABC News is owned by Disney Corporation and Disney CEO Bob Iger serves as a member of Apple’s board of directors.

Readers will note Weir’s statement that Apple promised complete access to factories, but denied repeated requests for interviews with either Apple CEO Tim Cook or senior vice president of industrial design, Jony Ive.  The remaining commentary provides eye-popping admissions that reveal how past events have led to Apple having no choice but to increase its oversight of supply chain working conditions.

Sound bites that are sure to resonate from tonight’s airing include the statement that Foxconn’s production campus “employs 235,000 people, roughly the population of Orlando Florida. “  That should hit a sour chord with current U.S. unemployed high tech workers. He notes that during the recent wave of worker suicides that occurred on Foxconn’s campuses, Tim Cook rallied a team of psychiatric experts for advice for dealing with this situation.  Readers may recall that recently the Times expose noted that Tim Cook secretly traveled to Foxconn for first-hand meetings.  There are many more revelations, but , in our view, probably the most revealing are stated quotes from FLA audit inspector Ines Kaempfer.  In the context of Apple’s decision to join and engage FLA in what is reported to be a six figure cost, Kaempfer states: “We call it the ‘Nike moment’ in the industry.  There was a moment for Nike in the ‘90s, when they got a lot of publicity, negative publicity.  And they weren’t the worst.  It’s probably like Apple. They’re not necessarily the worst, it’s just that the publicity is starting to build up. And there was just this moment when they just started to do something about it. And I think that’s what happened for Apple.”

Weir concludes his preview by replaying the  video interview with a production worker as he pulls out his personal iPad and shows photos of his children in America. He asks that worker: “For all the people in America who buy one of these, what do you want them to know about you?”  The reply is impactful: “I want them to know we put a lot of effort in this product so when they use this please use it with care.”

Thus by this airing tonight and the observations and impressions made by viewers, Apple is indeed orchestrating a new and far more visible perspective on its global supply chain.  This is a perspective not as Supply Chain Matters has previously penned as managed by extraordinary supply chain business process, procurement strategy or advanced technology.  It is one that will come from global consumer perceptions of the labor and supplier social responsibility practices within Apple’s supply chain.

The open question for Apple’s supply chain management community is how to manage in a public relations vs. overall improvement framework context.  Tune in tonight and share your own perspectives and observations.

Bob Ferrari

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

Prediction Eight of our Supply Chain Matters 2012 Predictions for Global Supply Chains noted stepped-up efforts in 2012 to mitigate supply chain unscrupulous activities. Many industries will be impacted not the least of which has been the pharmaceutical industry which is currently reeling from a number of significant supply chain related supply and enforcement issues.

Today The Wall Street Journal featured a Marketplace headline article, Pharmacies Swept into Drug Wars. (paid subscription or free metered view)  The article reports a looming legal showdown as U.S. governmental regulators go after major drug distributors and larger corporations to fight rampart prescription drug abuse.  Recent 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) has taken 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 WSJ article notes: “Cardinal last year shipped enough oxycodone to Sanford (area pharmacies) to give 59 of the pills to every man, woman, and child there, the DEA says.” The DEA has also targeted CVS Caremark Corp. which operates two of the suspect pharmacies, and the WSJ notes that this has been the most aggressive DEA effort to date to combat all of the sources of prescription drug abuse. Both companies have denied any wrongdoing and have noted their individual efforts to target specific pharmacy abusers. Cardinal for its part, states that it wants clearer guidance from the DEA.

In essence, the U.S. government is now arguing that besides individual doctors and patients, major players in the drug supply chain have responsibility to monitor signs of major abuse or unusual consumption. If the current DEA allegations hold up in legal proceedings, it would indicate that major drug supply chain players can no longer turn a blind eye to what is happening at the point of consumption. The WSJ rightfully notes that besides Cardinal, McKesson Corp and AmerisourceBergen Corp. who together control most all U.S. distribution could feel the effects of increased enforcement of suspected abuse. While lawyers for all the players involved will no doubt thrash out the implications of these latest enforcement efforts, a couple of observations are worth consideration by readers.

The DEA states that three million pills of controlled substances were shipped to just two CVS pharmacies in Sanford Florida, 50 times the normal volume of the average Florida pharmacy, and further alleges that obvious ‘red flags” are being ignored. In our view, any of today’s available demand planning and forecasting software applications would surely flag extraordinary or peak product demand coming from a single geographic distribution center. Florida is also a well-known hotbed for sources of prescription drug abuse which is a piece of unstructured information that is easily inserted into an explanation of unusually high demand from a single distribution point.

We and other supply chain influencers have been monitoring overall industry efforts to postpone legislative directives directed at prescription drug item level tagging and control initiatives directed to flag areas of suspected fraudulent or grey market drugs. These efforts, in essence, were initiated to protect both patients from unsafe drug supplies, and drug companies from fraudulent players in the supply chain. This new twist involves an enhanced effort to stop the unscrupulous prescription dispensers and drug abusers who game the system while supply chain players turn a blind eye.

Now more than ever is the time for all healthcare industry players to align on common stakeholder interests. No longer can the problem of overt drug abuse, fraudulent or grey market supply penetration be passed along to the next level of the supply chain. In the end, patients end-up feeling all of the effects of an unaligned industry.

What is your view? Is the collective pharmaceutical and healthcare supply chain aligned to common interests?  Are there other measures needed?

Bob Ferrari

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

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.

Over this weekend, international media has been reporting on New Zealand’s worst maritime disaster, the story of the stricken cargo ship Rena which is breaking-up on a highly ecological barrier reef.  The vessel  struck the Astrolabe Reef enroute to the port of Tauranga in early October and has remained aground all of this time.  The ship is registered in Liberia, owned and crewed by the Greek shipping company Costamare Inc., and was under charter to Mediterranean Shipping Group (MSC).  Reports indicate that the ship has been servicing routes involving Australia, China, New Zealand and Singapore.

This incident has many twists and turns. The actual grounding incident occurred on October 5th when the cargo ship ran head-on to the reef steaming at 17 knots. The reef itself has been documented on sea charts for over 200 years. At the time of the incident, the ship itself was some distance off course and outside recognized shipping lanes.  Both the captain and second officer, who were in command at the time, were previously arrested by New Zealand maritime authorities and await a formal investigation and hearing.

The ship containers and fuel were initially spilled into adjacent waters. Since October crews were somehow attempting various salvage operations, but continued high seas in the area have finally taken a dangerous toll as the ship is now breaking-up and threatens to do more ecological and other physical damage.

A BBC video and news report this morning notes that heavy seas have snapped off the stern section of the vessel and up to 300 containers have been washed overboard.  Some containers contained milk powder but there are concerns for some potentially dangerous cargos.  Salvage crews, however, had managed to attach tracking devices to suspect containers.  As can be viewed in the video and news account, two parts of the ship are now 20-30 meters apart and the hull has been breached by waves. The BBC reports that container recovery company Braemar Howells noting that 200-300 containers out of 800 still aboard had additionally washed overboard when the ship split. Salvage crews, however, had managed to remove 1100 tonnes of fuel oil from the vessel up to this point, but 385 tonnes remain on board, which to some small extent limits the potential for a far more severe ecological disaster.

This is yet another visible incident of the increasing potential for physical and environmental harm focused in ocean container shipping.  Readers may recall our coverage of the August 2010 incident involving two ships that collided near the port of Mumbai which also provided international news media with many visuals related to the dangers of these incidents.

This incident, however, has far more issues at play. A report published by the New Zealand Herald in late December notes that this vessel had at least 17 documented safety problems identified through ongoing safety inspections conducted in China, Australia and New Zealand prior to the actual grounding incident.  The violations included the metal pins securing cargo container . Authorities in Australia impounded the vessel, noting that containers might not remain secure in rough weather, but released it the next day after Liberian maritime authorities intervened and declared the ship safe to sail. In late September, just prior to the incident, inspectors in the New Zealand port of Bluff documented 19 problems, but allowed the vessel to continue.   The NZ Herald article features one excerpt of mention that should capture the attention of ocean container shippers:

“Whether or not the problems found in July contributed to the navigational error in October or the subsequent loss of cargo, experts say the Australian records paint a picture of an aging ship in poor repair and highlight a dangerous cost-cutting culture under the so-called flag-of-convenience system.”

The whole issue of “flag of convenience” registration, which now accounts for more than half of merchant cargo vessels, is used as a means to avoid safe operating procedures. It is an issue that is sure to come under additional scrutiny in the coming months.

Supply Chain Matters and other industry media have already noted the ongoing excess capacity and financial challenges now impacting the ocean container industry. Too many ships, declining cargo volumes and hemorrhaging balance sheets are evident.  The industry must now come to grips with a potential byproduct, namely issues of overall safety, crew competency and sea readiness of vessels.

Bob Ferrari