As we transition into the final month of 2011, we are revisiting the Supply Chain Matters 2011 Annual Predictions for Global Supply Chains which were outlined a year ago.  Our annual process is to first re-visit past projections made for the current year, in this case 2011, and declare some projections for the upcoming 2012 year, which will come in a later series of postings before the end of the year. In this Part Four and final posting, we will revisit predictions eight through ten. Our earlier scorecards can be accessed by clicking on the following links:

Part One- Predictions One and Two

Part Two-Predictions Three and Four

Part Three- Predictions Five through Seven

Prediction Eight: Two industry sectors, B2C and healthcare, will be especially effected by significant supply chain process impacts in 2011.

Both the B2C retail and pharmaceutical and healthcare industries were significantly impacted by supply chain related process impacts in 2011, making our prediction right on the money.

In the brick-and-mortar and E-Commerce sectors, a more sophisticated consumer has absolutely altered the retail buying landscape. Throughout 2011, consumers are exercising their ability to significantly influence product selection choices, perform real-time price comparisons, and easily place orders via the Internet and smartphones. According to comScore Inc., U.S. online e-Commerce spending is expected to grow to $162 billion in 2011, up from $142 billion in 2010, an increase of 14 percent. This motivated brick-and-mortar, as well as online retailers, to significantly enhance their online shopping, multi-channel commerce and operational capabilities throughout 2011. An article featured in the Wall Street Journal in mid-November (paid subscription or metered free view) noted that the hottest thing on retailers Christmas lists this year are finding experienced directors of e-commerce. Those that are highly experienced with solid track records are commanding total compensation packages upwards of $1 million.

For the online channel, Amazon continues to set the bar for services and price aggressiveness, causing retailers in many sectors to heavily invest in augmenting online capabilities in order to protect market share. Two of the most visible aspects of online impacts were the announcement by Wal-Mart that its CEO of global E-Commerce would retire in July after disappointing results in the online channel. The retailer who continues to have aggressive expansion plans related to online presence promises to announce a replacement in early 2012.  Retailer Best Buy has experienced five consecutive quarters of declining sales growth as consumers visit that retailer’s brick-and-mortar stores to touch and view products but often order goods online from the most price advantaged sites.

Another highly visible impact was that of Target. The retailer had previously outsourced its online site to Amazon, but made a decision to roll out its own internally sourced online site Target.com in August, only to experience a five hour breakdown in September when premiering a highly marketed promotion of Missoni clothing. The after-effects of this incident have motivated that retailer to also seek a new director of online activity.

The massive shift to more online retail capabilities and services is forecasted to have noticeable impacts to retailer margins this year, particularly in the upcoming 2011 holiday buying season.  Most retailers are offering free shipping, and many have considerably expanded the availability of products available for online purchase.  The implications to retailer inventory management and added costs will be interesting to observe when the final year-end results are tallied.

Pharmaceutical and Healthcare

The second significantly impacted industry Supply Chain Matters predicted for 2011 was that of pharmaceutical and healthcare related value-chains. The reason was what we viewed as the cascading effects of the significant changes in strategic business models causing too much leaning toward reduction in supply chain costs, healthcare reform initiatives emanating from multiple countries and desires to grow sales in emerging markets.  We feared all of these forces would cause noticeable supply chain impacts.  What we did not anticipate was the severity, which turned out to be a complete breakdown in certain industry segments.

In July, we posted a Supply Chain Matters commentary, Why are Pharmaceutical and Drug Supply Chains Failing?, noting financial media headlines that a vast majority of U.S. hospitals were facing severe shortages of life-saving chemotherapy and intravenous drugs used in critical care.  We followed up with a commentary in August noting that the ongoing complexities of pharmaceutical global supply chains have become greater than these companies abilities to control them. Critical shortages of life-saving drugs spilled over to areas of pet care, and in September, we noted that 2011 was tracking to be a year with the largest number of severe, life-saving drug shortages causing hospitals and healthcare providers to resort to gray channels to secure supplies. While industry concerns were primarily focused on increased regulation and cost managing costs, value-chains in certain segments have broken down in 2011. Causation points to generic producers and contract manufacturing sources, but that may be symptomatic of other problems. Suffice it to state that this industry remains in supply chain related crisis and that the situation will continue into 2012.

Prediction Nine: The landscape for the global outsourcing of components and finished goods production will shift again in 2011.

The essence of this 2011 prediction was that two fundamental business forces, ongoing fierce competitiveness forces directed at lowest product cost and continued needs for access to booming emerging markets, would compel manufacturers and retailers to pay much more attention to outsourcing strategies and to analyzing all the pertinent factors motivating these strategies.  We anticipated further shifts in component and finished goods product sourcing, particularly in low margin or highly sensitive IP product areas.

This prediction also turned out to be generally correct but the most compelling motivation for re-examining sourcing in 2011 relates to vulnerabilities to natural disaster when product production is too concentrated in a single geographic region.

Significant inflationary pressures brought about by explosive increases in labor costs, along with raw material and commodity costs, forced many manufacturers to revisit their sourcing strategies for China and other emerging economies. The building clouds of currency risk ebbed and subsided in various points in 2011, only to surface again late in the year with the ongoing Eurozone sovereign debt crisis and threats to the Euro. Manufacturers of lower costs and lower margin products continued to shift sourcing strategies away from China in favor of other countries.

Of more lasting impact, one that will continue in 2012 was the reminders that the northern Japan earthquake and severe monsoon floods in Thailand brought in 2011.  The motivations for low cost sourcing may have exposed significant vulnerabilities to strategic capacity and risk.  Having upwards of 30 percent of global hard disk drive manufacturing sourced within one country, along with the hundreds of bill-of-material related component related suppliers is cause for concern.

In the area of market access, intellectual property protection and increased concerns among senior executives regarding increased barriers for doing continued business within China have cast a less aggressive perspective for sourcing within China, and those companies that are compelled to stay the course, are constantly revising or modifying sourcing and value-chain strategies.

We believe that the landscape for global outsourcing of components and finished goods shifted in 2011, and will spillover again into 2012, perhaps at a much more aggressive rate.

Prediction Ten: Supply chain related green and sustainability programs will continue in 2011 and beyond, but at a slower pace.

Entering 2011, supply chain wide green and sustainability initiatives had been primarily directed at achieving reductions in resource use as well as in saving costs. Saving energy, water consumption or packaging resources all related to the bottom line and at the same time, provided customers and consumers a positive persona of a green and sustainable brand and company.

While a positive sustainability profile often makes good business sense, we had predicted a slowdown in green and sustainability program momentum during 2011. Our prediction was predicated on the continued effects of global recession and that consumer buying decisions would not in the end, favor a green or sustainable product over a lower-cost product.

That did not turn out to be the fact since consumers continued believe that companies can provide green and sustainable products at competitive prices. Rather than a slower pace, many companies, especially those with a B2C presence, increased their investments in green initiatives. The efforts and initiatives of multi-industry supply chain dominants such as Wal-Mart, Procter & Gamble, Kraft Foods, Nike and others no doubt kept momentum moving and expectations high. In one example, Wal-Mart is deploying its Supplier Energy Efficiency Program (SEEP) to improve the energy efficiency of its suppliers by passing along learning the global retailer has gained from its own internal initiatives.

The standards for green and sustainable supply chain are high, and we are pleased that our 2011 prediction in this area turned out to be more positive.

This concludes our complete series of scorecard updates related to the Supply Chain Matters 2011 Predictions for Global Supply Chains published at the beginning of this year.

Of the original ten predictions, by our count, five were on the money, three came about partially, and two were a miss.  We rate our 2011 predictions good, but readers are certainly welcomed to chime in and share their observations of global supply chain events in 2011.

Predictions aside, 2011 was a significantly challenging year for global supply chain teams and it does not get any easier in 2012. In December, we will declare and publish our 2012 Predictions for global supply chains so keep your browser favorites pointed toward Supply Chain Matters.

Bob Ferrari

©2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

An article appearing in the July 22^nd edition of the Wall Street Journal (paid subscription or metered free view required) cites an internal investigation led by Johnson & Johnson’s independent directors which points to a direct connection from certain headcount reductions, along with  “periodic headcount freezes’ as contributing factors related to product quality breakdowns at the company’s McNeill Consumer Healthcare unit.  Millions of bottles the unit’s popular medicines such as Tylenol and Motrin have been recalled since 2009 for various quality defects. While these defects did not pose serious health risks, J&J’s financial results and brand reputation have suffered significantly. Sales of alternative products such as Bayer‘s aspirin products and Novartis’s Excedrin product have been on the rise and consumers make their own decisions on pain relievers.

Supply Chain Matters views this latest development at J&J as extremely significant since the internal investigation by the J&J board points to a causation area that many in supply chain have long suspected, too many cutbacks in important control areas, and too many conflicting operational goals. It also, in our view, points to more evidence of the pitfalls in de-centralized organizational structure surrounding manufacturing and supply chain needs.

The WSJ article notes from the J&J investigation that in 2007, J&J cut its world-wide quality and compliance staff by 35 percent (15 people), and reduced its worldwide healthcare compliance staff by 25 percent (4 people). A direct WSJ quote- “At McNeil’s manufacturing plants, “there seemed to be a lack of attention to product quality” by certain non-quality control workers, such as engineering and operations, which produced tension between quality control and operations, the report said.” “Periodic head-count freezes and an emphasis on production volume may have contributed to this situation,” the report said.”

According to the WSJ and other news reports, J&J’s board has now adopted the recommendations made in this internal investigation and has created a regulatory and compliance committee of the board to oversee quality compliance.  The board also elected not to pursue litigation against the officers and directors that were previously accused by shareholders of breaching their fiduciary responsibilities.

Supply Chain Matters has long sounded an alarm that supply chain resources have been cut too thin in many industry sectors.  The revelation of this internal investigation is ever more significant in that these cutbacks occurred in a company well noted for its reputation for quality branded products, and existing in a highly regulated industry.  Saving the cost of 19 corporate quality and compliance people and perhaps hundreds of other distributed operations people is now translating to far more millions of dollars in lost sales, and an untold hit to consumer confidence in J&J brands.  We noted in a commentary just a month ago that the symptoms at J&J pointed to systemic quality breakdowns and cost control efforts that may have compromised quality, consistency and compliance.

With drug supply chains now extending ever further to include lower-cost regions, the risks of quality compliance are far higher. Life sciences manufacturers need to take heed of what has occurred at J&J and not repeat the same steps.

Bob Ferrari

Yesterday, I had the opportunity to attend the AMR Research / Gartner Healthcare Exchange 2010 event held in Boston.  The program brought together both AMR Research analysts and a select group of supply chain related executives in addressing current and future challenges within healthcare and life sciences related supply chains.  This event was also a staging point to announce AMR’s Healthcare Supply Chain Top 25 listing of companies, similar to AMR’s Top 25 Supply Chains Rankings.

For me, one of the most insightful portions of the program involved a lively panel discussion that included four industry executives representing Orlando Health, Dana Faber Cancer Institute, Cook Medical, and Broadline Group.  It was one of the better executive panel discussions I’ve observed this year. These executives each did a great job at providing both a customer and patient lens for the ongoing challenges involved in healthcare supply chains, as well as the key challenges needing to be addressed.  One clear takeaway from this and other exchanges is that the current path of healthcare-supported supply chain processes is unsustainable from both an overall cost and services perspective.  The audience, made-up of manufacturers, other health and technology providers, provided, in turn, more insightful Q&A interchange.

There is an acknowledged need for increased alignment in overcoming barriers of shared outcomes, increased efficiency and more cost effective service levels.  Hospitals are frustrated with manufacturers who market, sell and service directly with individual  physicians or clinicians, without some consideration to the need for inventory and service balancing.  Manufacturers, in turn, drive the perception that they prioritize the need for market share and demand creation over helping partners improve overall efficiencies along the supply chain.

In a previous Supply Chain Matters commentary, we noted that the challenge of reducing healthcare’s value chain costs and improving collaboration was bigger than any one player in the network.  Those messages were again delivered loud and clear by the panel participants in the AMR exchange, but there were signs that some progress is being made. Providers and suppliers are starting to better understand where they can align for mutual outcomes.   Clearly, one end goal on which all can agree is the need for the entire value-chain to align to benefit patient and provider needs.  Excess inventory and an overall tendency toward priority air as the prime mode of transportation service level are systemic challenges that need to get solved.

A couple of other observations come to mind.  First, there was a lot of emphasis placed throughout the day on the need for increased collaboration among healthcare supply chain participants.  What I did not sense was more emphasis of segmentation of value-chains, namely understanding supply chain models that can support commodity or replenishment-oriented items vs. models that deal with innovative, time-sensitive, or highly specialized clinical or pharmaceutical supplies.  Some of the panelists indicated that A-B-C inventory classification planning methodologies were being practiced but these methods do not totally address the broader classification and deployment of different value-chain management processes.  Each requires a different perspective on collaboration models and activities, especially around physician-specific supply needs. I came away with a sense that a lot more value-chain segmentation, blocking and tackling concerning process improvements, and a higher sense of urgency among healthcare value-chain participants are the prescriptions for meaningful transformations.

Finally, a comment on the designated AMR / Gartner Top 25 healthcare supply chain rankings.  First, as with the broader Top 25 Supply Chain rankings, too much weighting seems to be placed on subjective and qualitative vs. financial and performance oriented weightings.  This writer just about fell off the chair when Johnson and Johnson (J&J)  was announced as the #2 ranking, ahead of manufacturers such as Novartis, Becton Dickinson, Glaxo Smith Kline and others.  This is the same J&J that experienced a severe breakdown on manufacturing quality that involved multiple over-the-counter brand name product recalls this year, the closing of an entire manufacturing facility, and the acknowledgement from the CEO that the company stumbled. That was a shocker, not so much that J&J would be included in a top 25 ranking, but that it would be ranked that high.  Then again, 2010 is turning out to be the year of ranking extremes.

Bob Ferrari

With all of the focus on the current ongoing legislative debates for passing a comprehensive healthcare reform system within the U.S., I thought it would be appropriate to initiate some ongoing commentary related to current challenges concerning healthcare supply chains. I’m planning to provide commentary from a number of various perspectives- providers, customers, or suppliers, and encourage Supply Chain Matters readers to add in this commentary, either through exchange of comments or authorship of guest postings.

One of the most informative articles on this topic that I have read of late, Is Supply Chain the Cure for Rising Healthcare Costs?, was published in the September 2009 edition of Supply Chain Management Review (paid subscription is required).  The article was written by Mike Duffy, Executive Vice President of Operations at healthcare distributor Cardinal Health. Duffy is no stranger to our community, and came to the healthcare industry from his previous supply chain management roles in the consumer product goods (CPG) sector. In his article, he draws many parallels to the similar challenges that were ultimately overcome within CPG focused supply chains.

Duffy describes the healthcare supply chain system as an extremely complex “adsorption model” that moves products downstream with limited visibility into product demand at the point of use.  The outcome of the current model results in products that can be out-of-stock as much as 15 percent of the time.  He notes that there is some sentiment that transformation to performance standards currently experienced in the CPG and other industries is not possible.  Widespread information sharing and trust obstacles among trading parties and effective knowledge management are all lacking.  Many hospitals still rely on the bulk stockroom as the hub of their supply chain, often without any automation in inventory tracking and management.  Critical products are either unavailable when hospitals and physicians need them, or products have far too much excess inventories. Interesting enough, my own conservations with healthcare supply chain professionals further indicate that certain pharmaceutical suppliers often have large excess finished goods inventories which are also the result of a system of conflicting and fractured information relative to balancing demand with supply.

In the remainder of the article, Duffy contrasts three fundamental differences between healthcare and CPG supply chain principles.  They boil down to the following:

• A very fragmented and regionalized healthcare delivery system with no single player (think Wal-Mart) capable of influencing breakthrough changes in practices.
• Pricing and stakeholder interest models do not currently align, nor provide incentives to drive cost efficiency.
• A general lack of technical sophistication in supply chain management systems that is often found in other industry supply chains.  Duffy very perceptively points out that technology alone should not be viewed as the panacea for the healthcare supply chain.  Like all other successful transformation initiatives, getting business process, information, and reward system aligned precedes automation. 

The bottom line expressed by this industry insider is that transformation is not easy and will take some time.  Some innovators such as Lahey Clinic and Nebraska Medical Center have emerged, and the industry needs to continue to build on best practices knowledge.  Duffy’s final message is that the job of reducing healthcare’s value chain costs is bigger than any one player in the network.  Siloed thinking and old paradigms must be challenged, and the effort cannot wait much longer.

My goal in future posts is to provide viewpoints and commentary that address the current structural and operational challenges faced in healthcare supply chains.  You are welcomed to provide your own observations regarding these challenges in the comments area related to this posting, or provide references to others who have taken on these challenges.  If you would like to contact me directly regarding information sources, please email me at: bferrari at blog1 dot com.

Bob Ferrari