We provide a brief but important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains.

Yesterday the U.S. Food and Drug Administration (FDA) approved two additional suppliers for two life-saving cancer drugs that have experienced short supply because of the unplanned shutdown of contract producer Ben Venue Laboratories, a division of Germany based Boehringer Ingelheim GmBH.

To respond to the critical shortage of ovarian cancer treatment drug Doxil, distributed by Johnson and Johnson, the FDA has approved temporary importation of the replacement drug Lipodox as an alternative to Doxil.  The FDA has authorized a limited arrangement specific to Mumbai India based Sun Pharm. Global FZE and its authorized distributor, Caraco Pharmaceutical Laboratories Ltd., based in Detroit. In its press release, the FDA reinforces that temporary importation of unapproved foreign drugs is considered in rare cases when there is a shortage of an approved drug that is critical to patients and the shortage cannot be resolved in a timely fashion with FDA-approved drugs.

Another drug that is in critical short supply in the U.S. drug supply chain is the drug methotrexate, prescribed to treat many forms of cancer and chronic disease. Their have been recent media reports indicating that only two weeks of supply of the drug remained to fulfill patient demand. The FDA has additionally approved a preservative-free generic equivalent manufactured by Illinois based APP Pharmaceuticals, a division of Fresenius Kabi AG based in Germany. Drug maker Hospira additionally expedited release of additional 31,000 vials of methotrexate, described as the equivalent of one month’s demand for this drug. The FDA is also working with other drug producers to free-up additional supplies.

The FDA also issued additional guidance to drug manufacturers regarding more detailed requirements for both mandatory and voluntary notifications to the FDA regarding future drug shortages or potential drug shortages.

Supply Chain Matters applauds these latest actions coming from both the FDA and the industry.  The fact remains however that the potential for stockouts of any critical life-saving drug remains unacceptable, and the industry continues to find itself in a situation of too much sourcing risk, without contingency plans for augmenting supply.  We also strongly suspect that the new FDA directives regarding notification of short supply will only increase the visibility to other drugs in short supply, adding more embarrassment, patient and healthcare provider mistrust concerning the U.S. drug supply chain.  We fear that this will only add to the growing problem of counterfeit and grey market supplies of critical drugs.  We hope that we are proven wrong.

Bob Ferrari

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.

On Friday, McNeil Consumer Healthcare division of Johnson and Johnson announced the voluntary recallof the entire U.S. supply of infants grape-flavored Tylenol which amounted to over 570,000 bottles. The product had just returned to retail outlets in November. This latest recall comes after a long series of past recalls involving Tylenol and other J&J branded medicines including Benadryl, Motrin and Zyrtec that date back to 2009 and have been attributed to previous cutbacks.  The reason for the latest voluntary recall was described as a design flaw involving the bottle cap and dose dispensing syringe.  The new cap was introduced last year in an effort to re-capture lost sales. J&J took the action after receiving a “small number of complaints” from consumers but stresses that to the company’s knowledge, no infants have been harmed, and that “the risk for a serious adverse medical event is remote”.

This recall could not have come at a worst time as J&J was struggling to rebuild consumer credibility in its OTC medicine brands, and must now face yet another challenge to rebuild consumer confidence.  Even though the recall involved a specific product area (one ounce oral suspension infant Tylenol) we speculate that the decision to take this action was not taken lightly and had to involve discussions at the senior most levels of the company.

According to a report published in the Wall Street Journal, total revenues for the McNeill division are down 55 percent from a peak year in 2008. The Tylenol brand itself has slipped from second in sales of over the counter pain medicines in 2009, to now rank eight.  In a released statement on Friday, J&J CEO William Weldon stated that this latest recall was “clearly disappointing after all the progress that McNeil has been making to ensure its products meet the highest level of quality and consumer satisfaction”. Readers may recall that it was only a couple weeks ago that J&J announced a re-shuffle of senior management concerning the McNeil unit which perhaps adds even more perspective to this latest development.

When an organization discovers significant systemic breakdowns in quality and accountability there is always a tendency for existing players to exhibit a rather cautious mentality, or perhaps a “bunker” mentality.  This often times requires senior management to set very clear direction, motivation and an emphasis for what needs to change vs. what tenets need to remain.  There is often a need for articulating an overall integrative framework of required transformation including what areas of operating practices, business metrics and people-related training skills must be changed.  Management must lead by example and be visibly active and participative in key transformation decision-making.

Sometimes however, change is only defined in a singular context, for instance a need to revamp a single production facility or change a few specific processes, without context and alignment to an overall end-state framework.  Sometimes, a particular function such as sales and marketing can still have a final say. In the case of McNeil and J&J only they and their management teams can readily conclude whether this has occurred.

Setting integrative goals is so very important.  In this latest situation involving infant Tylenol, we have to speculate why was a new packaging design introduced on an infant product area without extensive consumer involvement and testing, especially in light of the need for restoring consumer confidence? What about adequately addressing and testing the quality control measures of the packaging process?

Fundamental questions but yet, another challenge for J&J and its McNeil unit to once again overcome.

Bob Ferrari

Last April, Procter and Gamble announced its intent to merge its Pringles® business into Diamond Foods. At the time, Supply Chain Matters believed that this deal had significant supply chain implications.  That was then. Like many business stories of late, unplanned and troubling events concerning Diamond have led P&G to opt for another suitor. The deal was undone by revelations that Diamond senior management has wrongly accounted for payments to walnut growers, and both Diamond’s CEO and CFO have been sacked.

This week, the new acquirer for Pringles® is cereal maker Kellogg Co., who as Diamond had before, has the opportunity to become a top player in the global savory snacks business.  This new all-cash deal has a total value of $2.7 billion and is expected to close by the summer, pending regulatory approvals. When the news broke, Kellogg’s stock price rose almost 5 percent, optimistic news that Kellogg has sought for some time. This new business adds an additional $1.5 billion in annual sales on a global scale along with many upside potentials, but Kellogg also takes on an incremental $2 billion in new debt.

The Wall Street Journal in its reporting noted that P&G heard from other interested parties in acquiring Pringles® but CEO Bob McDonald declined naming any of these.  We speculate that most all of the current top market players in global snacks were knocking on P&G’s door. The WSJ further noted that because of legal restrictions related to the previous deal with Diamond, the deal with Kellogg was consummated in all night sessions over the last four or five days. Kellogg’s last major acquisition was a $3.8 billion deal to acquire Keebler in 2000.

As we noted in last year’s commentary, Pringles dominant presence lies among mass merchandising (48 percent), grocery (25 percent) and convenience (12 percent). Kellogg on the other hand has a current high presence in grocery with some mass merchandising, but lacks any substantial global presence. Pringles should immediately add such presence, bringing along a world class manufacturing and supply chain capabilities, including production presence in the U.S. Europe and Asia, and a distribution presence among 140 countries. Pringles joins Kellogg’s other savory snack brands such as Cheez-It, Keebler, Nutri-Grain, Special-K Cracker Chips.  The addition of Pringles almost triples the size of the existing snacks business, and when completed Kellogg’s cereal and snacks business will be of similar size.  The initial estimate of combined synergies are $10 million in 2012 and between $50 million and $75 million after 2013.

Kellogg also has its own unique supply chain challenges having been involved in some visible product recall incidents involving Eggo® Waffles in 2009, and later a cereal recall. In January 2011 Kellogg’s CEO publically noted that the company would put additional time and effort into restoring investor confidence in its supply chain. Kellogg senior management has since taken some considerable heat from Wall Street analysts for admissions that it cut too much in supply chain resources and needed to invest in additional resources to insure consistent product processes which Supply Chain Matters praised.

The new challenge will of course be overall integration.  With Pringles, Kellogg inherits significant presence in emerging markets such as Latin America, China, Russia and other countries.  But as supply chain distribution professionals know, distribution channels and logistics to serve these markets are far different.  In our view it would be very wise for Kellogg’s SCM team to allow the Pringle’s SCM team to lead in driving global distribution needs. Kellogg’s for the most part has been emphasizing a direct-to-store distribution model which does not lend itself well in emerging markets.

From a technology and systems perspective, Kellogg has been in the process of re-implementing SAP within its U.S. operations, and management indicates that the addition of Pringles business presents an added opportunity to integrate within the SAP environment. P&G itself has provided ongoing service arrangements to transition Pringles and is a very sophisticated user of SAP applications, often serving as a lighthouse customer.  Here again, Kellogg teams can gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.

As in the prior Diamond acquisition, on paper, the potentials of a Kellogg snack business with the addition of Pringles look rather promising but the devil always rest with the details.  For our part, Supply Chain Matters will keep a watchful eye on ongoing developments.

Bob Ferrari

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

Just when we presumed that international ocean container carriers were finally paying more attention to customer cost and service needs vs. their own gross overcapacity challenges, they once again, shoot themselves in the foot.

Bloomberg and other logistics media are reporting that on the heels of modest signs of increased economic activity in the U.S. this past quarter, carriers are now singularly targeting the U.S. inbound market to recoup lost revenues.  The cost to move loaded forty-foot container from China to the U.S. peaked in July 2010 at a cost of $2833, dropped to as low as $1418 in December of 2011, and is now being quoted at an average $1824 per container. While the Bloomberg headline indicates a 28 percent rate increase, as in most events related to freight rates, the reference depends on which context carriers elect in their communications to shippers.

Continued gross overcapacity has led to idled ships, slower steaming times to conserve fuel along with numerous measures directed at cutting costs.  The current Baltic Dry Index, a measure of overall shipping and supply chain activity has slumped 55 percent thus far in 2012, which does not indicate any huge resurgence in global trade. Container ship operators apparently see signs of optimism in the U.S. economy and now want to leverage more revenue.

It is no secret that the world’s ocean container carriers are facing significant needs for consolidation and restructuring.  Reduced shipping volumes exacerbated by global economic turbulence, too many ships in the global fleet, and higher bank borrowing costs brought about by the current Eurozone crisis have placed many of the top  carriers under the looking glass of investment analysts.  In December, top-tier carriers began to form mega-alliances for jointly aligning capacity under the guise of providing enhanced customer service directed at the most active shipping routes. One could speculate why governmental trade agencies and shipping authorities have not taken a closer look at the implications of these alliances.  Perhaps these latest rate increases are the first signs, namely enhanced pricing power in the market.

Recent ship accidents, including the grounding of the ocean container vessel Rena off the coast of New Zealand raise concerns about compromises in safety. While all of this occurs, reliability and on-time performance remains suspect and tracing a container shipment can be a dark hole.

Is it no wonder that the U.S. is currently experiencing a resurgence of insourcing of manufacturing, given the extreme variability of container shipping rates?

In December, we shared our observation that the industry would continue in the midst of a fight for profitability in a highly uncertain global economy. If carriers collectively idle too much capacity, shippers would again be back to the unpleasant situation of the novel set of economics that occurred during the previous severe economic downturn. Overall capacity will shrink, remaining active ships will run at lower speeds to save on operating costs and reserving container space will again become a larger challenge. We speculated on higher rates for time-sensitive or higher volume shipping routes and that seems to be the current pattern.

Our advice to shippers and transportation sourcing teams is the following.  Pay close attention to industry developments and further signs of consolidation.  Seek out longer-term rate assurances but do not lock-in freight rates until clearer signs are evident. Monitor the total number of idled ships globally, especially since the Lunar holiday and peak Asia export shipping season has ended and this is the time when carriers will cut-back on capacity and service levels.  Most of all, demand more reliability measures and penalty compensation for non-conformance to schedule and more visibility to in-transit containers.

Finally- a memo to strategic sourcing teams who oversee contract manufacturing and major component supply.  Time to re-double analysis of current tradeoffs of outsourcing vs. insourcing. The new variable is turbulence in ocean container shipping.

Bob Ferrari

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