JimFulcher

Are your suppliers honest?

Posted by JimFulcher Aug 31, 2010

I like to learn how supply chains evolve and how those changes affect complexity. One example is that as the number of suppliers continues to grow, it becomes more challenging to manage them—especially those that may be located in other countries.

At this time of year, some of you may be wondering—or might even be anxious—about just what, exactly, those college students are doing all day, because what they do and how they act is largely beyond your control. Those same concerns apply to some suppliers.

Considering how numerous and far-flung various suppliers may be, it can be difficult to really know how they operate. The impact of discovering that not all suppliers follow processes correctly—whether, for instance, it’s that they use lead in paint that’s on promotional drinking glasses or that they spray chemicals on the wooden pallets used to transport cartons of over-the-counter pain relievers—can be quite costly. There are other risks as well.

According to a recent article I read in the WallStreetJournal, the very nature of increasingly complex supply chains makes it difficult to guard against suppliers acting in their own interest. Such opportunism often leads suppliers to take advantage of poorly written agreements, or to simply break those agreements outright if the risk or cost of getting caught is low. And the deeper they are in the process—that is, the further from the end customer they are—the less responsibility they are likely to show in the absence of effective controls.

On his TV show AC360, Anderson Cooper has a segment I like called Keeping Them Honest, and I’m reminded of that when I think about some suppliers. Companies need to investigate the details of their supply systems to understand the risks, and then work to prevent problems—in other words, keep their suppliers honest.

The article I read offers several ways to help check supply chains not just for integrity, but also for on-going stability. Those points are:

1. Constantly monitor potential risks in the market. While it’s impossible to eliminate opportunism, manufacturers can be vigilant about monitoring suppliers and how they meet their obligations. Sometimes managers let their devotion to efficiency prevent them from taking steps to avoid problems, even when new risks are apparent.

2. Make suppliers and intermediaries responsible and accountable. The most common weakness in a supply chain is what is referred to as moral hazard. For example, if a supply chain has intermediaries whose compensation is based solely on the volume of orders passing through, there is little incentive for them to root out opportunism beneath them in the chain.

3. Change the ways you test and measure. There are many ways for suppliers to cheat the system. Some may substitute ingredients, fool tests and sanitize a plant just before inspection. Some opportunistic suppliers will even test a company’s limits to find the minimum acceptable standard.

4. Understand and accept the role of regulation. Regulation adds to costs and runs counter to the goal of ever-increasing efficiency. But if the costs mitigate or dramatically reduce the risks of failure, then regulation is the most efficient way to curb opportunism and decrease costs in the long run.

I don’t want to imply that all suppliers are opportunistic and act solely in their own best interest. In fact, I’d like to believe that is rare. But the risk is there nonetheless, and I think we’ve all heard stories about opportunistic suppliers, so it’s certainly a valid concern.

Let me know what you think. Are you keeping them honest? If so, how do you do it?

How responsive is your supply chain?

I ask that because I’m intrigued by some recent comments from Michelle Meyer, director of supply chain solutions at Hitachi Consulting. In an article that ran in SupplyChainSolutions, Meyer wrote that most companies understand the need to become more responsive to shorter product lifecycles, fluctuating inventory levels and changing costs, but few actually recognize the impact that becoming more responsive will have on their supply chain. What’s more, they underestimate the fundamental shifts necessary to move from being simply efficient to becoming truly responsive.

Hitachi Consulting and AMR Research, now part of Gartner, recently surveyed 164 manufacturers to better understand the way those companies detect change, how they respond to change and what they perceive as the biggest obstacles to becoming more responsive.

It’s always beneficial to learn how best-in-class companies perform, and that’s certainly the case here. Meyer analyzed the survey results to determine how successful companies make their supply chains more responsive and customer-centric while also keeping costs down.

The answer is that the companies that have become more responsive started by designing their supply chains from the customer backwards, and then built-in appropriate performance metrics to ensure the organization is aligned with a customer-centric strategy. Meyer outlined the steps that some of these best-performing companies follow. These companies:

1. Measure total supply chain cost instead of sub-optimized parts. Many manufacturers use metrics that measure volume and unit values, and, consequently, focus on per-piece or per-transaction costs. Best-in-class companies, on the other hand, begin with high-level customer satisfaction metrics and measure total supply chain cost, not individual pieces. Then they measure their entire supply chain against the total customer experience.

2. Have very different supply chain organization structures. The most responsive supply chain organizations include traditional areas in the supply chain function, but they also include procurement, manufacturing and the customer experience organization, as well as distribution functions. Many of these successful companies also have finance, IT and business process improvement teams within their supply chain organization to deliver business process improvement and an elevated level of finance capabilities. But most importantly, in this environment, the supply chain organization takes on a role where the supply chain becomes the vehicle to create the customer experience.

3. Understand the value of connections. Best-in-class supply chain organizations work hard to make connections—to suppliers, third-party providers, outsourced manufacturers, third-party logistics companies and their customers. They invest in systems and processes that promote a unity of purpose across the value chain. As a result, their supply chain becomes the physical manifestation of how they interact internally and externally—and how connected they are willing to be to other parties.

4. Put technology in its place. While there definitely is a role for technology in support of a world-class supply chain, the most successful companies realize that people and process come first and that technology is simply an enabler.

Companies that fundamentally redesign their supply chains from the perspective of the customer experience are significantly different, Meyer says. They give their teams clear, customer-oriented and cross-functional objectives. They also develop comprehensive metrics and an organization structure that supports being customer-oriented. The result is that their supply chains become the engine that drives the customer experience.

I’d like to hear from you. Is your organization working to be more responsive and customer centric?

One of the concerns for many companies working to decrease their inventory levels is the impact that such a reduction will have on customer satisfaction. They worry that they won’t be able to meet a sudden surge in demand, and, consequently, customer satisfaction will decline.

However, a new report by Tompkins Supply Chain Consortium found that while more than half of the companies surveyed decreased inventory levels in 2009, customer satisfaction remained the same or even improved for nearly 80 percent of the participants.

In 2009, companies worked very hard to reduce inventory levels to improve cash flow and positively impact company financials, says Bruce Tompkins, the Consortium’s executive director and author of the report. The expectation was that order fill rates would be negatively impacted as shortages and stockouts became increasingly prevalent. However, the reality is just the opposite: Order fill rates actually improved, Tompkins says.

According to the Tompkins report, which is based on the results of the firm’s Finished Goods Inventory Management survey of leading manufacturing and retail companies, companies found ways to substantially reduce their finished goods inventory levels even as the economy slowed and sales consequently dropped. Chief among the top tactics cited for inventory improvement are smarter planning, improved focus from management, and better inventory mix.

Considering on-going fears about the economy as well as news from the Labor Department that new applications for unemployment benefits recently rose by 12,000 to 500,000—the highest level since November and the third straight increase—those lessons and tactics will continue to play a critical role for many companies and their supply chains. Demand is likely to remain quite volatile and it certainly makes sense to minimize inventory while focusing on improving customer satisfaction.

But, it isn’t just demand that’s volatile. Results from a recent survey from MFG.com, an on-line marketplace for manufacturers, point out some interesting statistics as well. Indeed, some 51 percent of large U.S. manufacturers reported “significant supply chain disruptions” in the second quarter, while 42 percent of small and medium-sized suppliers said they had received queries or work from larger companies in need of urgent assistance due to their supply chain problems, MFG.com.

What’s more, those shortages have effected a range of products. Leading suppliers of everything from earth-moving equipment and commercial aircraft to autos have felt the impact of suppliers not being able to deliver what’s needed on-time and in sufficient quality.

The impact can be substantial. Last April, Jeffrey Immelt, chief executive of General Electric told investors that anybody in the electronic supply chain has seen the tightness around certain components. Keith Sherin, GE’s chief financial officer, added that roughly $50 million worth of revenue might have been hung up at the end of the quarter in the supply chain.

I’d like to know if you have noticed the same thing. Are both your supply and demand volatile, and, if so, how are you managing them?

In an acknowledgement that the development of medical countermeasures against bioterror threats and pandemic flu has failed to meet expectations, federal authorities yesterday announced plans for a $1.9 billion makeover of the system used to identify and manufacture drugs and vaccines for public health emergencies.

The makeover will focus on two key challenges. Part of the action calls for refining manufacturing with a goal of reducing the time it takes to produce pandemic flu vaccine by a matter of weeks. The overhaul also calls for implementing a series of steps aimed at more quickly spotting promising scientific discoveries and getting them to market.

In making the announcement, U.S. Department of Health and Human Services Secretary Kathleen Sebelius said our nation must have a system that is nimble and flexible enough to produce medical countermeasures quickly in the face of any attack or threat, whether it's a threat we know about or a new one. HealthandHumanServices She went on to say that by moving toward a 21st century countermeasures enterprise with a strong base of discovery, a clear regulatory pathway and agile manufacturing, the government will be able to respond faster and more effectively to public health threats.

Secretary Sebelius requested a comprehensive exam of the federal government’s system to produce medications, vaccines, equipment and supplies needed for a health emergency-- known as medical countermeasures—when the department encountered challenges with the 2009 H1N1 pandemic flu vaccine.

A story running in the Chicago Tribune today, ChicagoTribune, reports that money for the changes comes from funds initially allocated for the H1N1 flu pandemic. For instance, it includes $678 million to set up at least one private facility that would work under government contract with small companies to manufacture new products, develop new manufacturing processes and help produce vaccines during periods of peak demand.

The plan also calls for creating a $200 million fund to invest in small companies developing promising technologies. The fund would be set up as a non-profit business run by an independent board.

That comes as good news because the review found that some of the most promising research and development on countermeasures is done by small, emerging biotech companies that have little experience in large-scale manufacturing. Driven by that discovery, the Centers of Innovation for Advanced Development and Manufacturing will serve as a resource for those young companies, helping them bring products to market while also helping the U.S. government increase the number of new countermeasures available in an emergency.

This doesn’t come as a surprise, but the review also found that private companies have difficulty attracting investors in countermeasures where there is little or no market for the products other than that of creating government stockpiles. To help address the situation, the Department of Health and Human Services will explore ways to help small companies attract investors to develop promising countermeasures that have multi-use potential.

I’m interested in how all this will play out. It certainly sounds like good news for small, relatively young biotech companies and members of their supply chains. Only time will tell, however, how long it takes for the funds to reach these companies, as well as how they can improve manufacturing and supply chain performance.

Are you optimistic about both an economic recovery and how well-prepared your global operations are to meet increasing demand?

I’m curious because I’ve been thinking about the results I recently read of a survey conducted by consulting firm PRTM. The firm surveyed nearly 350 participants from Europe, the Americas and Asia, and the survey results are part of PRTM’s Global Supply Chain Trends 2010–2012 Survey—the largest annual survey of global supply chains conducted by the firm. PRTMSurvey

More than half of the respondents expect average gross margins to surpass 10 percent over the next three years, which is good news. However, according to the survey results, three-quarters of the survey participants cited demand and supply volatility, coupled with poor forecast accuracy, to be the biggest roadblocks they face in capturing profits from the economic upturn.

Many of the participants noted that their companies did not strengthen critical capabilities during the recession. Only a small percentage truly improved their supply chain flexibility to capture increased demand and to better manage volatility, says Reinhard Geissbauer, director, PRTM’s Global Supply Chain Innovation practice.

Making the situation more challenging is the realization that supply chain complexity obviously will continue growing. More than 85 percent of the participants expect supply chain complexity to grow significantly by 2012, due to the challenges of serving new global customers—which will be their primary source of revenue growth. That complexity will continue to increase as those companies strive to deliver products and services to new locations, and the growing number of product variations required to meet the expectations of these new customers will further add to supply chain complexity, Geissbauer says.

The survey results illustrate just how vital S&OP is today. The problem with forecasting is that it essentially focuses on creating a statistical forecast based on past shipments. In a stable market with predictable demand—and when it’s possible to maintain finished goods inventories as a buffer against demand fluctuation—that approach works reasonably well.

The problem, of course, has been the increase in demand volatility over the past few years. While there certainly is value in analyzing historic demand patterns, S&OP must focus on the future even though market drivers are uncertain and little—if anything—is known about what your competitors are doing.

A few weeks ago, Trevor Miles posted here, TrevorMiles, that he can think of no better way of evaluating the effect demand uncertainty has on the supply chain than to leverage a robust what-if capability starting from range forecasting. Trevor’s advice, which I think is great, is to determine a best estimate, but then test upside and downside scenarios to evaluate and mitigate risks.

Trevor went on to write that testing those scenarios means determining: Which is worse, to be left with excess and obsolete components or to lose market share because demand is not satisfied? What if you sourced from a more expensive supplier but they provide shorter lead times and more flexibility on volumes? Would this offer you lower overall inventory liability? Those can be tough questions to answer but can you really afford to not use what-if capabilities to test various scenarios?

I’d like to know what you think. Is your supply chain ready to capture increasing demand and better manage volatility?

I’ve read and heard predictions that we are coming out of the economic downturn, and that better times are ahead. Of course, I’ve also read and heard predictions that the economy will get worse.

Either scenario is something that essentially is beyond your control. However, preparing for those scenarios is something else altogether. We all hope the economic forecast brightens, and then actually improves. But how many of you have a plan in case the global recession worsens?

The consequences of not preparing would, most likely, be quite significant. Or as a recent press release from Gartner, GartnerRelease, puts it, while most CIOs were forgiven in 2008 for being unprepared to deal with the global recession, no CIO will be forgiven for being unprepared a second time—especially if another recession unfolds in the next 12 to 18 months.

It’s no secret that investor doubts about the health of the global economy returned late last spring and early this summer. And Gartner says that while there are encouraging signs that 2010 and beyond will be a period of modest recovery and growth, there also are concerns about nations defaulting on repaying massive loans, high unemployment rates, depressed housing prices, limited access to consumer and business credit, and—among some--a growing belief that a sustained economic recovery may not be possible this year.

Since there is so much uncertainty about the sustainability of the current recovery, Gartner recommends CIOs now take clear and decisive action. In fact, they should bolster current near-term plans by preparing for a second recession.

Just the potential for a second business downturn should be sufficient to compel CIOs to plan for another business downturn, says Ken McGee, vice president and Gartner fellow. However, the reality is that if a second business downturn occurs, most CIOs will be caught without a response strategy.

There is a significant advantage for CIOs, and that is, for the first time in the history of the IT industry, more than 90 percent of CIOs possess recent and practical experience dealing with a recession, McGee says. That’s why Gartner strongly urges CIOs to leverage their recently acquired experiences by proactively preparing their entire enterprises for the possibility that another economic downturn may occur within the next 12 to 18 months.

While the advice from Gartner is tailored for CIOs and deals with IT projects, I believe it’s good advice for those in the supply chain as well. Following it begins with asking hard questions, such as: How has your supply chain weathered the recession? Are your suppliers prepared to meet your increasing demand as the economy continues to recover and grow? On the other hand, would they survive a second economic downturn? What would happen to your company if a key supplier went out of business?

Truthfully answering those questions is vital to preparing your plan. Then, as Gartner recommends, prepare a plan for a second recession, rehearse that plan, and then hope that you never have to use it. I like that approach, and would like to hear from you.

How many of you hope for the best but prepare for the worst?

I’ve been thinking about John Westerveld’s recent post, BlackSwan, and, specifically, a key point. John summarized one of the key tenets from Nassim Nicholas Taleb’s book, "The Black Swan: The Impact of the Highly Improbable," by saying the goal isn’t to try and predict a Black Swan event, but rather, instead, to build robustness against negative events and the ability to exploit positive events.

One example of that ability to quickly recognize and then seize opportunity can be seen in the actions of companies responding to the numerous recalls of Tylenol and other over-the-counter adult and children’s medications produced by Johnson & Johnson subsidiary McNeil Consumer Healthcare.

A recent article in the Chicago Tribune points out that while J&J leads the over-the-counter medication category, recalls over the last 11 months have led to widespread shortages—and retailers have been quick to seize the chance to market their store brands as safe and effective substitutes. What’s more, consumer loyalty can be fleeting. So the longer shelves remain empty, the harder it may be for J&J to win back consumers.

McNeil’s Fort Washington, Pa., facility, where Tylenol products are made, has been shut since May. J&J is under federal investigation after a voluntary recall in April of 6 million bottles of more than 40 types of children’s and infants’ medications produced in Fort Washington after some medications were found to be super potent or to contain tiny particles. And, there have been five voluntary recalls since last November of medications that have a musty or moldy smell.

The recalls have led to shortages of Tylenol, Benadryl, Motrin and St. Joseph Aspirin as well as lawsuits and hundreds of health complaints that have been sent to the FDA for investigation. The other significant consequence is that as the fiscal second quarter ended July 4, the recalls were responsible for a 13.4 percent slip in J&J’s over-the-counter pharmaceutical and nutritional products segment, with sales falling to $1.14 billion, the Tribune reports.

What’s interesting is how other companies are responding.

For example, in the Tribune article, Target spokeswoman Erin Madsen said signs went up in June promoting Target’s Up & Up brand as an alternative to McNeil products. And at CVS, shelves reserved for adult and children’s Tylenol and Motrin products point consumers to store brand products. A sign reads: “Looking for Tylenol? Try CVS/Pharmacy brand for relief you can trust.”

The company has definitely increased the level of CVS/Pharmacy brand product in its stores, Mike DeAngelis, director of public relations for CVS, told the Tribune.

While that’s good news for those companies—as well as the manufacturers who produce products for them—the flip side of the coin for J&J is that customer loyalty can be fleeting.

Once consumers are forced to use other products, they may decide to not switch back to the other brand, Aparna Labroo, associate professor of marketing at the University of Chicago Booth School of Business, told the Tribune. For instance, if the effectiveness of the private label is not significantly different than the branded alternative, the consumer might stick with the cheaper alternative even when the branded product reappears on the store shelf, she said.

What about your company? Does your supply chain allow you to seize unexpected opportunities? Can you ramp up production quickly to meet sudden demand? What’s more, can you continue to meet that new level of demand?

Legislation that was introduced earlier this week is of particular interest to those companies in the life sciences industry. The bill, titled the Drug Safety and Accountability Act of 2010, DrugSafetyandAccountabilityAct, would give the FDA increased regulatory authority over drugs.

The proposed legislation is intended to boost consumer protection against adulterated drugs by establishing quality standards for the FDA, drug companies and their contractors--who are increasingly based overseas where safeguards may be lower than those of the U.S. The legislation also would improve the federal government’s tracking systems of manufacturing sites. If passed, it also would give the FDA the authority to require a company to recall drugs that have been found to be contaminated or unsafe.

Supporters of the bill cite the growing complexity of the drug supply chain as the chief problem. It is that complexity that makes it difficult to know where drugs or ingredients originated. That complexity, along with the rapidly rising number of high-profile incidents and general wariness of consumers regarding product safety, have prompted some lawmakers to wonder whether the FDA actually has enough power to adequately safeguard the nation’s drug supply.

For instance, in 2007 and 2008, there were approximately 100 deaths attributed to taking contaminated Heparin that was produced in China. Additionally, last year, there was a Yaz recall after the FDA determined that it was possible that Bayer shipped substandard birth control pills to the U.S. from a production plant in Germany.

It isn’t always the drugs themselves that are the source of the recall. Sometimes it’s the packaging materials that are potentially unsafe. Either way, it’s ultimately the manufacturer’s responsibility.

A couple of weeks ago, I wrote about McNeil Consumer Healthcare’s recall of 21 lots of over-the-counter drugs sold in the U.S., Puerto Rico, Fiji, Guatemala, the Dominican Republic, Trinidad and Tobago, and Jamaica, FulcherblogRecalls. Those drugs include Benadryl, Children's Tylenol, Motrin IB, Tylenol Extra Strength, Tylenol Day & Night and Tylenol PM.

That recall actually is a follow-up to a large recall of those drugs earlier this year that was initiated following consumer complaints of a musty or moldy odor. The odor has been linked to the breakdown of a chemical applied to the wooden pallets used to transport and store the products’ packaging materials--and has been traced to a facility in Puerto Rico. The newly recalled lots apparently used packaging materials that had been shipped and stored on the same type of wooden pallet.

As for the latest proposed legislation, it’s important to note that the push to increase FDA power doesn’t just come from lawmakers. Indeed, the American College of Physicians, the AARP, the Consumers Union and the Society of Chemical Manufacturers and Affiliates submitted a jointly written letter to congress backing the bill. jointlettertoFDA.

Lobbyists for drug manufacturers are preparing to oppose the bill. They are sure to argue that first of all, the FDA already has sufficient power. They’ll also point out that the U.S. has the most stringent drug regulations in the world.

In any event, I’m interested in how all this plays out. What are your thoughts on the bill, the FDA’s current capabilities, and the impact a product recall has on your business?

This might not come as a surprise to some of you, but the results of a survey conducted by Tompkins Supply Chain Consortium TompkinsSurvey indicate that companies are now more likely to have an executive level supply chain leader.

The survey’s executive briefing, titled The Structure of Today’s Supply Chain Organizations, notes that throughout the past five years, the organizational level of the most senior supply chain executive has gradually moved higher. Nearly half of the retail and manufacturing companies surveyed have a supply chain leader at or above the executive vice president level.

As supply chains become more dynamic and agile, organizations must be able to keep pace, says Bruce Tompkins, executive director of the consortium and author of the brief. Additionally, these companies have begun to realize the significance of having a high-level supply chain executive influence their business strategies, he says.

The functions reporting through the more senior supply chain executives are growing as they become consolidated under one organization and one leader. Transportation, distribution center operations, network design and planning functions are now commonly the responsibility of a senior executive, Tompkins says.

However, there still is significant opportunity for better communication and integration of supply chain functions, according to Tompkins. But as companies discover these opportunities for improvement, they increasingly share resources across divisions and business units.

The need for executive presence certainly makes sense, because as Kevin O’Marah recently posted on his Gartner blog KevinO’Marah’sblog, while the supply chain was a servant of production in the 1980s, it became much more rather quickly.

Indeed, by 1990, the supply chain was beginning to gain importance as directors of materials management started to influence engineering with smart ideas about better sourcing, and operations research personnel started to effect asset utilization in plants and distribution networks with advanced math, O’Marah says. Today, the head of supply chain, in most major manufacturers and retailers, is influencing margins, time to market and customer retention with strategic capabilities that matter to investors.

This isn’t really surprising when you consider the scope of supply chain operations or its budget.

For example, according to Gartner research, IT budgets typically represent anywhere between 2 percent and five percent of revenue--depending on industry. Meanwhile, supply chain management—encompassing direct materials sourcing, manufacturing operations, packaging, handling and transport—is likely to account for as much as 20 percent of revenue including not only technology such as order management systems or planning algorithms, but also machinery, buildings, freight contracts and more. What’s more, big money is increasingly spent each year on bets that merge industrial technology such as conveyor belts and forklifts with information age technology such as sensors, inventory tracking systems and web order forms, O’Marah says.

What about your company? Does it have a chief supply chain officer? What about supply chain vice presidents? Do they, as O’Marah suggests, have hard-line authority over only a portion of the process and consequently must influence the traditional owners of manufacturing or forecasting via dotted lines?

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