On early Sunday morning an earthquake struck Northern Italy. The initial 6.0 magnitude tremor struck 36 kilometers (21 miles) north of the city of Bologna invoking wide scale damage. The quake occurred at shallow depth, estimated to be 5 kilometers, which adds to the magnitude of the destruction.  The quake was felt throughout Northern Italy. The region has suffered various damaging aftershocks including two on Sunday and another this morning. The area itself has had rare occurrences of major seismic activities, the last earthquake of similar magnitude being recorded in the 14^th century.

Thus far, five persons have been reported killed with thousands displaced.  Our hearts and prayers extend to all of the victims of this tragedy.

The impacted Finale Emilia region is an area known as an industrial heartland as well as the production of Parmesan and Grana Padano aged cheese. There is already one report indicating over $320 million in cheese inventory destroyed by the quake. Reports also indicate damaged factories and warehouses including the death of two workers at a ceramics factory.  A statement from Titan Europe indicates that work at its agricultural wheel factory located in Sermide and Finale Emilia has been suspended pending assessment of damage, but the plant appears repairable. According to the Titan web site, the company claims to be the leading manufacturer of high speed wheels for agricultural tractors. Production is in the process of being shifted to other facilities in France and Turkey.

Supply chains teams with value-chains extending to Northern Italy should already be assessing potential impacts to supply and supplier facilities. Insure that your suppliers are doing the same, since it many of the 2011 incidents of disaster, smaller suppliers took additional time to sense the magnitude of supply disruption. Industries impacted could range from food, industrial, aerospace, as well as retail businesses.

Supply Chain Matters will continue to monitor and feature additional commentary when other assessment information becomes available.

Bob Ferrari

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The following commentary also appears on the Supply Chain Expert Community web site.

About a month ago,we penned a Supply Chain Expert Community commentary reflecting on how any sort of news, positive or negative, emulating from Apple’s supply chain, can directly impact a company’s stock valuation.  That applies not only to Apple itself, but also its suppliers. The sheer scope and volume of Apple’s value-chain should cause any supplier to covet Apple’s business and volume scale.  Where the phenomenon of a negative market valuation drop was once attributed to a major supply chain disruption or snafu, when it comes to Apple, it can be any negative news deemed significant by equity markets.  Our readers are probably aware that both Apple and Samsung provide a rather unique industry relationship. While they each compete in the same markets for consumer electronics devices, Samsung has been a long-term key supplier of various supply components for Apple.

Thus, in yesterday’s financial media, are reports of the near $10 billion drop in the market valuation of Samsung, after a Taiwan based publication reported that Apple placed a rather large contract order for 12 inch DRAM chips with Japan based Elpida. As was noted in our late April commentary, Elpida, a DRAM chip competitor with Samsung and Hynix Semiconductor, among others, previously filed for bankruptcy protection, and has become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech”, because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.

A Reuter’s article reporting on the Samsung impact quotes an Asia based equity analyst indicating that the shift in supply contract implies that Apple does not want Samsung or Hynix to dominate this market segment.  Reuters also reports that U.S. based Micron Technology Corp. are in talks to acquire Elpida, and the prize has just become more valuable.

In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base. In a March Expert Community commentary, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.

Here’s another evidence point. Financial media is today reporting that Apple is sourcing a bigger screen for the upcoming new release of the iPhone. This 4 inch diagonal screen (contrasted with the current 3.5 inch screen) is reported to be sourced at suppliers LG Display Co., Sharp Corp. and Japan Display Inc. Consider that in March, Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn, invested $800 million to take a 46.5 percent stake in Sharp’s LCD production facility in Sakai, western Japan. Japan Display was previously formed from the merged LCD production entities of Sony, Toshiba and Hitachi, that each decided to consolidate as one to garner more volume scale. If sourcing reports turn out to be accurate, Apple would, in essence, be balancing geographic related risk (Korea and Japan sourcing), and supplier and scale risk in having LCD supply alternatives beyond Samsung.

Being the goliath in terms of volume and scale of the consumer electronics value-chain comes with tremendous influence for long-term revenue and capacity planning.  At the same time, such influence must include a balance of risk and influence.  We should all take notice of Apple since it continues as a benchmark in these practices.

Bob Ferrari

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This week, SAP conducted its annual Sapphire customer conference in conjunction with its Americas Users Group (ASUG) among thousands of customers, partners and analyst wanabees.  There are the usual spiffy, industrial strength executive presentations that portend compelling trends in business and technology with customers responding to fluff questions or singing the praises of technology in return for healthy discounts.  However, beneath the glitz is reality, the reality of a technology company that has bold vision but is spread out in too many directions, with confusing messages for its customers.

In their keynote talks, both Co-CEO spoke to mega-trends of business and technology.  Co-CEO Bill McDermott stated that the world will consume everything through mobile devices. Co-CEO Jim Hagemann Snabe spoke to the world of 2052, and outlined his view of the three fundamental paradigm shifts in computing:

1. The rush to mobile computing and mobile access to data. In five years, everything is mobile.
2. Cloud computing adoption is underway, and, in less than 5 years, everything is cloud.
3. In-memory computing, with applications that recognize patterns and predict the future.

These are all compelling trends, those that a Geoffrey Moore, MIT’s Charles Fine, or HBR’s Clayton Christensen can certainly expand upon.  To no surprise, these three same compelling trends also conveniently match up with SAP’s business plans for revenue growth. We expect to hear about these trends from visionaries.  We should expect technology CEO’s to speak to solving customer’s current business problems, both in short and longer-term dimensions. There were some attempts to get to these concepts in the keynotes but SAP missed the mark in not providing a hard-hitting panel facilitator. SAP at its core is an ERP and enterprise technology provider, but those terms seem to become blurred which each Sapphire.

Most businesses and supply chains deal with today’s demanding business challenges of this quarter, next quarter, and the remaining fiscal year. Supply chains are challenged with the complex simultaneous problems of supporting top-line revenue growth, agility, efficiency and managing significant risk. A fundamental shift in the influence of technology decisions is well underway, a shift that favors business and functional teams.  Yet SAP messaging still tends to dwell on mega IT trends.

Supply Chain Matters would surmise that business and global supply chain teams utilizing SAP have their success pegged to near-term information, decision support and software application performance realities. For example:

Mobile Computing and Security- how do we protect and insure that sensitive data residing on mobile devices does not fall in the wrong hands. After all, it is a mobile device.  In his blog posting in preparation for Sapphire, Ray Wang summarizes user questions related to mobility, specifically: Why does it cost more to use SAP’s mobility solutions and why as an SAP customer, I pay twice, and in some cases three times for mobile licenses to access the same system information? In his blog commentary, ZD Net and SAP Influencer blogger Dennis Howlett noted developer consensus that SAP has shot itself in the foot, missing mobile opportunities that are obvious to everyone but SAP. He also points to considerable internal friction among internal SAP teams.

Cloud is certainly gaining interest but business and functional teams need to be provided with a coherent and scalable strategy that can be positioned with senior executive teams. Some have noted that SAP currently has multiple cloud platform offerings including some of the new HANA based applications. SAP’s newly appointed senior executive charged with Cloud strategy, Lars Dalgaard did not help to provide such clarity other than SuccessFactors is the model.

SAP also straddles private vs. public cloud deployment strategies, trying to both satisfy huge enterprise customers along with mid-market businesses.  The current customer adoption among SAP Business by Design and SAP Business One is not exactly stellar at this point, and Business One has just been re-written on the HANA platform. SAP is also just beginning to talk seriously about integration with non-SAP cloud platforms.

In-Memory: Then we have the game changing potential of HANA, which seems to change messaging which each passing Sapphire. Analytics means entirely different needs for different business challenges, and as pointed out by SAP, can span both OLTP (on-line transactional processing) and OLAP (on-line analytical processing) needs.  HANA seems to be evolving to not only solve each challenge, but to serve as the ERP transactional and substitute database platform strategy.  A bold vision indeed, but customers need specifics related to roadmap and impacts to existing upgrade strategies in applications and newer IT hardware.  What about pricing of HANA?  That seems to be something that is reserved for deal negotiations vs. overall planning.

SAP and Oracle are also engaged in public warfare over who has the better collection of technology that can support operational reporting, relational query, OLTP and information discovery needs. Each of these analytical needs requires different technical capabilities and both vendors claim the high ground.  Some credit goes to SAP for trying to take the high ground. Both vendors however, provide important arguments and IT teams need to assess the bottom line implications. The resolution of the debate will ultimately be determined in actual delivery of all of this functionality in a customer-timely, cost-affordable manner. The other reality remains that the majority of SAP existing deployments include SAP Business Warehouse, most likely wrapped with some SAP Business Object s Explorer tools. What’s the roadmap or recommended strategy for this infrastructure?

In his keynote, Hasso Plattner was willing to speak candidly about the HANA roadmap.  Thank goodness for his candor. He spoke of the opportunity to move new SAP applications to the HANA platform, the ability to help customers perform more timely planning as well as simulation, and, as he mentioned last year, the ability to significantly accelerate the performance of SAP APO, SAP’s advanced supply chain planning application. He further noted that IT teams will have to reconfigure their physical systems and applications landscape to be able to leverage these capabilities. But all of this will again take additional time.

Some SAP observers note that the key to HANA adoption is the few killer application use cases that can convince the broader SAP community of the true game-changing power of HANA. For supply chain business process, that opportunity was presented in the recently released SAP Sales and Operations Planning Powered by HANA application. Our Supply Chain Matters first impression was that this was an opportunity to truly demonstrate HANA in a mission-critical supply chain application.  But, an initial evaluation noted incomplete features and limited functionality, along with a small select group of pilot customer ramp-up projects. Bottom line, another opportunity squandered.

As another Sapphire moves into the archives, SAP continues to leave gaps among vision, strategy, confusing internal structure and product execution roadmaps. In the mission critical areas of supply chain, manufacturing, product lifecycle management and procurement business process support, another year passes without transferring the power of potentially game-changing technology to multiple applications in planning, predictive analytics, collaboration and decision-support vs. just a singular application.  What about supply chain applications availability in the cloud, other than SRM?

There remains a need for clear positioning and articulated value for various supply chain business problems, and providing solutions based on customer timetables as opposed to SAP’s timetables and internal business priorities. That keeps the door ajar for systems integrators, best-of-breed technology and other providers to fill the gaps and turn confusion into opportunity.

Bob Ferrari

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

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In October of last year, Supply Chain Matters advised senior supply chain executives to initiate scenario plans and contingencies in three potential areas of global supply chain impact. One of these areas directly involved emerging developments reflected in the Eurozone financial crisis with the potential impact on financing of inventory and working capital.  Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain would experience difficulty in acquiring affordable access to credit and loans.  Our belief was that a worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies.

This week, the Wall Street Journal reported (paid subscription or free metered view) a significant reminder to this impact, one that is impacting multiple aircraft manufacturers.  Spanish based manufacturer Alestis Aerospace SL, an airframe supplier to Airbus, Boeing and Embraer, has been forced to slow production because of a lack of access to working capital. This Seville based manufacturer was placed under court administration, the Spanish equivalent of bankruptcy protection, earlier this month.  Alestis was formed in 2009 from the merger of several smaller aeronautic manufacturers within Spain. The company produces composite aircraft ribs, panels and skins for the Airbus A320 and A380 aircraft, among other supply contracts. The WSJ also notes that the company has gained valuable capabilities in the building of parts from composite carbon materials, supporting today’s new wave of lighter, more fuel efficient aircraft models. Alestis has gained at least one long-term supply contract from Airbus.

The financial crisis impacting Alestis was ultimately prompted last week, when the government of Spain ordered all banks to raise provisions against potential losses tied to real estate loans. That dried up available capital to companies such as Alestis. The other twist to this situation is that the company resides in an economic area that is primarily driven by credit requirements stemming from tourism, services and real estate vs. high-tech manufacturing. Because aerospace projects tend to have longer time windows, the local banks, struggling to survive themselves, can no longer afford or unable to finance loans tied up for multiple years.

Global aircraft manufacturers have accumulated customer orders that have provided years of capacity and production backlog for this industry.  Supplier failure, especially related to competency in new technologies is not something that the industry needs right now.  The WSJ reports that Airbus procurement teams are paying special attention to prompt payment and are monitoring Alestis’s key supplier network as well. Supply Chain Matters is of the point of view that alternative financing solutions will also have to explored, including the option of acquisition.

This is yet another reminder that in this era of global value-chains, an economic crisis in one geography will often spillover to other regions. We once again advise senior supply chain executives to insure that risk contingency planning is actively practiced, especially concerning ongoing developments in Europe.

Bob Ferrari

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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

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As patents on proprietary medicines increasingly continue to expire, the pressure on pharmaceutical supply chains continues to rise to meet business expectations and outcomes.

In late November, the very popular cholesterol-lowering drug Lipitor, which at its peak, generated over $12.9 billion in global revenues, became open for production by generic drug manufacturers. Generic drug producers Ranbaxy Laboratories, based in India and Watson Pharmaceuticals made plans to produce and distribute generic versions of Lipitor during 2012.  Drug maker Pfizer, the original patent owner came up with a novel idea to continue promoting the drug while piloting a direct distribution model to patients and their insurance carriers. To hold market share, the company made plans to sell Lipitor directly to patients at generic prices by partnering with Diplomat Specialty Pharmacy to mail the drug directly to patients via online prescription fulfillment.  A dual tier pricing model would be maintained, with generic pricing for Diplomat and higher pricing for existing Lipitor channels. The feeling at the time was that if Pfizer’s model was successful, it could become a model for other drug makers whose popular drugs came off patent. According to a recent Wall Street Journal article, after spending more than $87 million promoting Lipitor, Pfizer is quietly suspending its efforts to negotiate new contracts to sell this drug to health plans because these same health plans are signing up generic versions of Lipitor at far lower prices.

Another important area in proprietary drug development and production has been the area of cancer fighting drugs.  As we all know, these drugs have been extremely expensive, not only because of their rather large research and development investments but also the rather complex production and quality requirements involved in the drug’s supply chain. Many pharmaceutical manufacturers view the large populations and emerging economies of China and India as a new revenue growth opportunity for these drugs.  However, recent announcements from generic producers point to other challenges.

One of India’s largest generic drug makers, Cipla Ltd., recently announced that it would cut prices on its cancer medications by as much as 75 percent. According a Wall Street Journal report, the company indicated it would cut the price of its generic version of liver cancer medication Nexavar to $128 for a one month supply. Drug maker Bayer’s proprietary drug costs the equivalent of $5236 per month. Cipla also reduced the price of lung-cancer drug Iressa by as much as 60 percent, and the generic version of brain-cancer drug Temozolamide by 75 percent. Cipla’s chairmen attributed the cuts as a means to bring less costly cancer drugs to world populations, similar to what the company accomplished ten years ago for HIV medications. Cipla also indicated its plans to sell these generic versions in other developing countries where there are no intellectual property restrictions.

Supply Chain Matters recently called attention to an announcement from Samsung BioLogics, a division of South Korea based Samsung, that plans to produce generic versions of certain monoclonal anti body drugs by 2015. The company is targeting the opening of a new Korea based manufacturing plant by June, and seeks international regulatory approvals for the plant by the end of this year. A Samsung executive made note that while certain pharmaceutical companies excel in drug innovation and sales strategies, they may lack volume and process based manufacturing expertise. Governments among economically challenged populations are willing to support price disruptors in order to provide affordable healthcare for their citizens.

Many other medicines have drug patents expiring this year including Diovan, for the treatment of high blood pressure, Plavix, for the treatment of blood clots, Singular, for treating asthma, and Tricor, for treating high cholesterol.  Each has been a high revenue generator, generating large numbers of patients.  With current building global-wide pressures directed at health care cost control, each of these medicines can be lucrative for volume oriented generic producers.

To combat these trends, some pharmaceutical companies have turned toward a merger and acquisition strategy to replace or augment their proprietary drug pipelines.  Some manufacturers have called for a tiered pricing strategy, offering a drug at different pricing, depending on a country’s level of economic development.  That, however, provides an opportunity for an increase in grey market supplies, as drugs purchased in lower-priced countries are re-distributed to more lucrative higher priced countries.

Generic manufacturers are also shifting to meet increased scale value-chain efficiency challenges. Watson Pharmaceuticals recently announced a $4 billion acquisition deal with European based Actavis Group, with the potential to become the third largest global generics manufacturer.

In all cases, pharmaceutical and drug supply chains will have to rise to the challenges of an increasingly disruptive market place reflecting higher levels of global competition and innovation in supply chain production and distribution. In addition to M&A Supply Chain Matters advises the industry to also consider additional investments in global supply chain value-chain efficiencies, business intelligence and response management.

Manufacturers may gain by adding a new proprietary drug to their product portfolio, but will always need globally competitive supply chains to sustain industry competitiveness and agility.

Bob Ferrari

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

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