Supply Chain Matters provides another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains failing to deliver reliable and life-saving supplies to doctors, hospitals and patients. The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments. Readers can reference our previous updates at the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

The latest developments relate to the U.S. Food and Drug Administration (FDA) becoming very concerned about unscrupulous and grey market suppliers taking advantage of the ongoing critical drug shortages. The FDA is now directly warning clinics and healthcare providers to only procure drugs from approved sources both within and external to the U.S… The advisory warns that “In these cases, patients were unknowingly placed at risk when they received medications of uncertain purity, storage, handling, identity, and sourcing.” The FDA also warns that importing these medications from foreign sources is in violation of the Federal Food, Drug, and Cosmetic ACT.

According to a posting by Phil Taylor on Securing Pharma, the FDA has indicated that it is aware of promotions and sales of unapproved injectable cancer medications being distributed direct to U.S. clinics including unapproved sources of AstraZeneca’s Faslodex (fulvestrant), Amgen’s Neupogen (filgrastim) and Roche’s Rituxan (rituximab) and Herception (trastuzumab). The Secure Pharma posting also makes mention of a federal General Accounting Office (GAO) report that concluded that the FDA lacks proper authority to tackle this issue including a means to require drug manufacturers to report actual or potential shortages. The web link provided takes you to a GAO site that notes that the report is no longer available. We found that strange and interesting. Supply Chain Matters feels that the FDA does have some teeth in these matters, but perhaps not all that is required.

The important takeaway is that the prime U.S. regulatory agency has now publically acknowledged that unregulated and uncontrolled sources of these critical drugs have now entered drug and healthcare supply chains and buying authorities must be diligent to not utilize these sources, despite the enormous pressures to secure life-saving supplies of drugs.

We continue to find this state of affairs rather disturbing.  The FDA now has to warn healthcare professionals and their procurement teams to buy only from approved sources and to openly question whether a price sounds too good to be true, that deep discounts may equate to a product that is stolen, counterfeit or unapproved. Procurement teams should and are most certainly attune to this condition.

As this crisis continues into 2012, we believe that there is likely to be a call for pronounced industry efforts directed at traceability and pedigree of drug supplies and the pressure on drug companies to get more serious on supply chain identity and serialization efforts. While the industry may feel that traceability is an expensive or unacceptable alternative, the fact that healthcare providers cannot insure a reliable and safe supply of life-saving drugs could prove to be a far more expensive alternative.

What is your view?  We once again implore industry participants to weigh-in on this important issue.

Bob Ferrari

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

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.

We have yet another update to our Supply Chain Matters ongoing commentaries as to why are pharmaceutical and drug supply chains failing to deliver reliable and life-saving supplies to doctors, hospitals and patients. The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments. Readers are welcomed to scan our previous initial commentary, and Commentary Two to gain a perspective on the depth and severity of this ongoing problem.

The Economist magazine printed an article in the September 3^rd, 2011 edition, titled Coming up short.  It noted that in 2004, the U.S. had a shortage of 58 drugs. In 2010, there were 211 severe drug shortages, and thus far, 198 have been recoded.  The problem has spread and so has the panic. Once more, hospitals are now forced to consider navigating across ‘grey markets’ to secure some supply of life-saving drugs.

The Economist article notes that the causes of these drug shortages remain tangled and points to three potential causes. The first is manufacturing problems as firms trim costs and import cheaper active ingredients of variable quality. The second relates to ongoing mergers among generic drug makers, causing the supply of a given drug to be left to just one or two companies.  The third cause points to pricing, in that after a patented drug becomes open to generic alternatives, the price plunges as manufacturers fight for remaining market-share.  In all cases, market dysfunction then occurs opening the door to ‘grey market’ operators, hoarders and other such behaviors. While the FDA and firms are feverishly searching for root-cause solutions, U.S. Congressional leaders seen unable or unwilling to come-up with increased regulatory actions, especially in light of the current dysfunctional political environment.

Last week, we ran across a UPS press release announcing the release of the UPS 2011 Pain in the Supply Chain Survey specifically concerning healthcare manufacturers.  This survey outlined the top business and supply chain concerns of senior-level decision makers at nearly 250 pharmaceutical, biotech and medical device companies across the U.S., Europe and Asia. Surely, we would find some other pointers to this ongoing problem.

According to this survey, there are three key areas which these companies are focused:

1. Investment (in technology and global expansion)
2. Protection (in areas of intellectual property and product security)
3. Acceleration (in levels of concern around issues and changes in the supply chain)

If you review the findings, you will note that the first area is about concerns relative to ongoing healthcare reform along with changing and increasing customs laws for raw materials. Concerns for protection center on the usual areas of increased regulation, reform legislation and patent expiration. In terms of the area of acceleration, not much at all is stated.  Doesn’t that seem odd?

What was noted was that managing costs ranked as the second largest supply chain issue, cited by 64 percent of decision makers, and one of the top issues many companies reported being unsuccessful in achieving. In fact, in the complete series of these UPS surveys, managing costs was the number one supply chain issue for four consecutive years now.  This is in an industry with generally healthy product margins, with the possible exception of generics.

Scanning the list of other compelling concerns, there was no citing of increased quality and compliance initiatives, broader global supply chain visibility or collaboration. While a whopping 93 percent of U.S., 85 percent of European, and 82 percent of Asia based companies all plan to invest in new technologies in the next 3-5 years, one has to openly question whether priorities are being correctly assessed. More importantly, what is the strategy of the supply chain?  Is it not to deliver products on-time, with quality, consistency and reliability?

Supply Chain Matters urges all drug companies, especially those producing generic injectable or intravenous drugs to take a close look in the mirror. If your one concern is increased regulation and managing costs, and your supply chain is failing miserably to deliver on-time supply, are you not in a self-fulfilling loop of denial?

Increased regulation comes when patients place pressure on government to reign-in unacceptable practices from drug providers, such as drug shortages causing unnecessary delays in critical treatment or even causing patients to die. The recent American Hospital Association survey noted that more than 90 percent of hospitals reported shortages of surgery, anesthesia or emergency care drugs, while two-thirds reported shortages of chemotherapy drugs. Managing costs can lead to cutting corners with supply, production and oversight, which are further symptomatic of the current problem and of a failed supply chain.

This situation continues to gain visibility and yet, the industry remains silent.  This is not a healthy situation for any party.

Bob Ferrari

There is a very concerning supply shortage occurring among pharmaceutical drug supply chains, and the question is- what is the problem? The problem is acute and needs broadened visibility, since lives are at stake.

A recent Wall Street Journal article with the headline- Most Hospitals Face Drug Shortages, (paid subscription or metered viewing required) notes that the vast majority of U.S. hospitals have been forced to restrict the use of life-saving chemotherapy and critical-care drugs for the past six months.  Hospital emergency rooms and intensive care units are also impacted.

More than 80 percent of hospitals surveyed by the American Hospital Association report that they have delayed treatment, and 70 percent indicated that patients received less effective substitute drugs. The most staggering statistic- 99.5 percent of hospitals reported experiencing one or more drug shortages in the prior six months.  Nearly half reported 21 or more drug shortages. Other disturbing statistics noted are that pharmacists spend about 17 hours a week dealing with drug shortages. Hospitals report that they rarely or never receive advance notice of shortages or not informed of the expected duration of the shortage. The survey is so disturbing that Supply Chain Matters urges all readers to take the time to download and review the results. The U.S. Food and Drug (FDA) regulatory agency also confirms growing drug shortages but cannot provide public statistics.

Needless to state, this is a rather disturbing trend concerning a supply chain that has always professed to the notion of overcompensated safety stock inventories, because of the life or death consequences. From a customer satisfaction perspective- drug supply chains deserve an ‘F’.

The fundamental question is- what is causing this supply problem?  Hospitals and health care providers deserve definitive answers.

Reports are that the majority of drugs in question are generic, but not highly profitable, but some proprietary drugs are involved.  Multiple drug producers are involved. many are generic drug manufacturers like Teva Pharmaceutical Industries, Hospira and Sandoz, among others. Some point to a shortage in active pharmaceutical ingredients (API).  The WSJ points to industry consolidation and manufacturing problems.

A report in this morning’s WSJ notes yet another new shortage announcement. Johnson & Johnson is warning doctors not to start patients on its ovarian and myeloma cancer drug Doxil due to a supply shortage. J&J indicates that a contract manufacturer is experiencing production delays and J&J hopes to begin replenishing supplies by late August.

Supply Chain Matters, by this commentary, is calling attention to the obvious.  Drug related supply chains are failing, and lives are at stake.  We trust that our fellow supply chain bloggers will also sound the mantra and raise this awareness to this problem.  The symptoms obviously point to systemic causes, and the situation needs to be resolved quickly.

We urge our readers, especially those residing in hospital and drug manufacturing supply chains to provide first-hand observations.

What is going on and why are these drug shortages so acute?

How did the industry get to this point?

You can share your observations either by providing your own observations directly appended to this posting, or share them confidentially.  Send us an email to: info <at> supply-chain-matters <dot> com.  Supply Chain Matters will also attempt to reach out directly to drug companies for comment, and trust that companies will help provide plausible explanations related to the current conditions.

Once we gather our research, Supply Chain Matters will publish a future commentary.

Bob Ferrari

There is yet another product recall from Johnson and Johnson, with very similar characteristics and public relations script to previous product recalls.

Yesterday, J&J’s Janssen Pharmaceutical unit  recalled 11,700 bottles of the HIV/AIDS drug Prezista ©of products sold in Austria, Canada,  Germany,  Ireland and the UK.  The cause was attributed to trace amounts of the chemical TBA, believed to be leaching from wooden pallets. J&J noted it received four consumer complaints of musty or moldy odors.

Our most recent  Supply Chain Matters commentary for J&J involved a recall of select TOPAMAX© product produced by Ortho-McNeil Neurologics Division of Ortho-McNeil Pharmaceuticals, Inc., another J&J division. The press release had very similar characteristics of smell and odor caused by TBA leaching.

The affected products in this week’s recall were produced at a J&J plant in Puerto Rico, similar to the multiple recalls involving the McNeill.  The J&J statement again notes that in January 2010, a number of actions to reduce the potential of TBA contamination, including requiring suppliers to verify that they do not use pallets made from chemically-treated wood.

Sounds very familiar and again raises the question of why after 17 months of investigation, incidents of TBA leaching still occur, and what other products sold to consumers still have this lingering  problem.

More importantly, as pointed out in the Bloomberg BusinessWeek April cover story dedicated to the current challenges of J&J, its CEO continues to believe that quality issues involving just a few plants have overshadowed activities involving over 120 plants, and fully expects that J&J will regain the trust of consumers and patients.

While there may be a belief that consumers have short memories, constant product recalls, even if motivated on the side of caution and safety, make regaining trust a bigger challenge.  The time is long overdue for J&J senior management to become very visible on communicating efforts to address systemic supply chain quality remediation.

Bob Ferrari