Last April, Apple sued rival electronics maker Samsung, accusing the company of creating devices that copy the look and feel of hardware and software found on the Apple iPhone and iPod. Samsung executives replied by filing a complaint accusing Apple of violating patents related to mobile devices.

 

Yesterday, Samsung continued that strategy by asking the U.S. International Trade Commission (ITC) to ban the import and sale of devices including Apple’s iPhone and iPad. As The Wall Street Journal reports, the suit appears to be part of a broad strategy by Samsung to fight Apple’s lawsuit over the design of its smartphones and tablet computers with a barrage of litigation around the world. So while Apple is moving toward seeking a preliminary injunction in the initial case—filed in April in a federal court in San Jose, Calif.—that might limit Samsung’s ability to sell its smartphones and tablet PCs in the U.S., Samsung has countersuits pending in a number of countries along with its filing with the ITC.

 

What’s interesting here—other than the two strategies, of course—is that although Apple and Samsung are smartphone and tablet computer competitors, they also have a customer-supplier relationship. Indeed, Apple is Samsung’s largest customer, and is expected to purchase nearly $8 billion in components from Samsung this year.

 

Naturally, then, news of the lawsuits and counter suits prompts some observers to speculate that Apple might try to end its supplier relationship with Samsung. However, as The Journal article explains, such a move would be costly to Samsung’s chip business. It would also be challenging for Apple to find other suppliers able to deliver sufficient parts at Samsung’s volume and price.

 

Nevertheless, rumors abound. For example, there is speculation that Apple plans to move away from Samsung for supplies for its custom-built ARM processors. According to an AppleInsider item, the shift could begin starting with the “A6” chip in 2012, when Apple may transition production of its custom ARM chips to a new chipmaker. Apple executives have said that they expect the relationship with Samsung to continue, and Samsung executives decline requests to comment on the situation.

 

In the end, there are two interesting dynamics at work here. The first, is what can potentially happen when rivals also have customer-supplier relationships. This is nothing new, however, as we’ve also watched similar stories develop in both the cellphone and A&E markets.

 

I’m most interested in the approaches used by Apple and Samsung. So on the one hand, Apple has focused on its ability to design distinctive—and, ultimately, extremely sought-after—products. Customers are excited about new designs and line up around the block to purchase these new products as soon as they are available. Taking that approach has allowed Apple to charge premium prices and reap larger profit margins. On the other hand, Samsung has focused on technology patents rather than design, and consequently has concentrated on developing components, related technologies and manufacturing capabilities.

 

It seems that, so far, Apple’s strategy has paid off. After all, the company has been able to boost both its profit margins and its sales in recent years. And while Apple clearly has its rivals, it also dominates the market.

I recently wrote about numerous initiatives launched by the U.S. government to help ensure workers in the U.S. have the training and skills necessary for today’s manufacturing processes. I believe it’s also worth pointing out that it isn’t just companies in the U.S. that are having difficulty recruiting, training and retaining talented workers.

 

Recent studies have shown that other countries are similarly plagued by a shortage of skilled workers. The situation is even more problematic for Western companies conducting business in China. For one thing, rising wages certainly limit their profitability. Perhaps more significantly, according to another study, Western multinationals must now re-evealuate their recruiting strategies if they are to maintain market position in China.

 

That’s because, as a news item from the Corporate Executive Board that ran on PRNewswire earlier this spring, points out, China’s continued economic growth as well as more compelling career opportunities, make it more appealing for highly skilled Chinese workers and managers to join domestic companies rather than work for Western multinationals. Essentially then, it’s becoming more challenging to find highly skilled workers and managers in China.

 

In the past, working for Western companies was more alluring. Now, however, Chinese companies are essentially viewed as equal to multinationals when it comes to employment preference.  While Western companies were trimming fat, pulling back on recruiting efforts and, in many cases, laying off employees, Chinese companies continued to hire and also began providing many of the advantages multinationals had become known for—development opportunities within a fast-growing company and quick promotions—from the comfort of home, says Conrad Schmidt, executive director of CEB’s Corporate Leadership Council. In fact, many executives at Western multinationals now say their Chinese talent is being aggressively recruited and employees get calls daily, he says.

 

According to the results from CEB surveys, 40 percent of the Chinese employees at multinational companies surveyed indicated that desirable senior-level positions within those companies are, and will continue to be, held by Western expatriates. This supports a perception held by many Chinese workers that a “glass ceiling” exists at Western multinational companies, where the preference is for expatriates to hold leadership roles.  These concerns, combined with the spirit of national pride Chinese employees feel when they work for a domestic employer, put Western companies trying to compete for talent in a precarious position, Schmidt says.

 

CEB has identified five best-practice strategies that leading Western multinationals use to maintain a competitive edge in recruiting efforts of Chinese nationals. Some strategies that stand out are: rethinking relocation policies so Chinese workers can stay in China while advancing their careers; articulating career pathing to demonstrate the benefits of a career within the organization; and, of course, establishing strong relationships with local suppliers, partners and community organizations.

 

Will that be sufficient? That’s a tough question to answer. It certainly seems that companies vying for talent—whether they are Chinese companies or Western multinationals—should be prepared to invest more and fight harder to acquire and retain senior managers. And if there is a perception that a glass ceiling exists limiting Chinese managers’ career paths, then Western companies should be working to dispel the myth to improve their attractiveness and employee retention levels.

 

What do you see? Have you noticed this evolution in the labor market in China as well?

Last month, President Obama said that America’s economy is always going to rely on outstanding manufacturing, “where we make stuff.” America isn’t just buying stuff overseas, but is making stuff here and selling it to somebody else, he said. Then, earlier this month, President Obama endorsed the creation of a national manufacturing skills certification system, which, ultimately, should help manufacturers across all industries. The system is a plan by the National Association of Manufacturers’ Manufacturing Institute to train and certify some 500,000 community college students with skills considered critical for manufacturing operations.

 

In a story widely reported today, which I happened to see on IndustryWeek, President Obama today pledged $500 million to the Advanced Manufacturing Partnership Initiative. The initiative—known as AMP—was launched to create public-private partnerships among universities, industry and governmental agencies to streamline innovation and bring products more quickly to market.

 

In making the announcement, the President said America needs to reinvigorate its manufacturing sector to lead the world. He went on to add, “We need to do it now. Not sometime in the future. Now.”

 

The universities initially involved in the program are the Massachusetts Institute of Technology, Carnegie Mellon University, Georgia Institute of Technology, Stanford University, the University of California-Berkeley and the University of Michigan. The program’s industrial partners include Allegheny Technologies, Caterpillar, Corning, Dow Chemical, Ford, Honeywell, Intel, Johnson and Johnson, Northrop Grumman, Procter and Gamble, and Stryker.

 

What’s interesting is that the President’s Council on Science and Technology (PCAST) recommended launching AMP and made recommendations about how the Federal government could be involved. Those recommendations include:

 

  • Investing in shared infrastructure such as Federal and university laboratories;
  • Supporting the development of advanced manufacturing processes;
  • Participating in partnerships with industry and academia that identify and invest in broadly-applicable, pre-competitive emerging technologies.

 

Perhaps more interesting is that in addition to AMP, PCAST calls for changes in tax and business policies, including a permanent extension of the R&D tax credit; continued strong support for basic research in addition to the new emphasis on public-private partnerships to support pre-competitive applied research; and enhanced support for training and educational activities to create a more highly skilled workforce. PCAST also favors a national “innovation policy” rather than creating a national manufacturing policy.

 

I think the president is taking the right steps. Common concerns, across many industries, are that schoolchildren in the U.S. are falling further behind their peers in other countries, it is increasingly difficult to find talented workers with the skills necessary for today’s manufacturing processes, and that cost of innovation is becoming cost prohibitive. The programs and initiatives Obama has launched over the past few months address these concerns. As always, the question is, Will they be enough?

 

The answer, for each initiative, obviously remains to be seen. However, by identifying the challenges, creating programs to address them, and delivering funds to the programs so they can be carried out, President Obama and his council are taking steps in the right direction. It certainly will take time to see how well it all plays out, but I for one, am encouraged.

 

What about you?

As business expands, and companies see additional growth opportunity, they increasingly use global and outsourcing strategies to seize that opportunity. That in turn, leads to an increased use of outsourced ingredients and components.

 

Consider, for example, a recent IndustryWeek article, which reports that—according to the FDA--a typical U.S. manufacturing company relies on more than 35 different contract manufacturers around the world. Furthermore, this trend will continue as Western economies “increase their productivity to compete with emerging markets and economies, leading to more imports and increased pressure to reinvent manufacturing processes,” says a new FDA report, “Pathway to Global Product Safety and Quality.”

 

Global production of FDA-regulated goods has grown significantly during the past ten years. In addition to an increase in imported finished products, manufacturers increasingly use imported materials and ingredients in their U.S. production facilities, making the distinction between domestic and imported products obsolete, says Commissioner of Food and Drugs Margaret A. Hamburg, M.D., in the report. She also adds that since there has been a perfect storm—more products, manufacturers, countries and access—a dramatic change in strategy must now be implemented.

 

For instance, as explained by Dr. Hamburg, imports of FDA-regulated products have quadrupled since 2000, and are growing at a 15 percent annual rate.

 

That’s why, in its “Pathway to Global Product Safety and Quality” report, FDA is announcing a new approach that depends on partnering and data-sharing. Key goals to the approach are:

 

1. The FDA will partner with its counterparts worldwide to create global coalitions of regulators focused on ensuring and improving global product safety and quality.
2. The coalitions of regulators will develop international data information systems and networks and increase the regular and proactive sharing of data and regulatory resources across world markets.
3. The FDA will build in additional information gathering and analysis capabilities with an increased focus on risk analytics and information technology.
4. The FDA increasingly will leverage the efforts of public and private third parties and industry and allocate FDA resources based on risk.

 

However, an interesting item on the Pharmaceutical Commerce webpage notes that whether or not the FDA can ramp up its overseas inspections of drug-manufacturing facilities at a pace commensurate with the growth of imports from them—or whether Congress understands the scope of the responsibility it keeps mounting on FDA’s shoulders—the reality is that the FDA inspection system has fallen far behind the current manufacturing and trading marketplace, for both food and drugs, as well as medical devices. For example, Congress imposed a duty of inspecting 19,200 more food-exporting facilities by 2016, through the FDA Food Safety Modernization Act, and requires FDA to double the number of foreign inspections each year. However, FDA says the task is “impossible” without a “substantial increase in resources of a complete overhaul in the way it operates.”

 

In the end, there clearly are some growing pains. While the FDA’s new strategy certainly sounds promising, there clearly are some obstacles to overcome. FDA itself says the strategy will unfold over several years, and, considering rapid annual growth of imports of FDA-regulated products, one must wonder how well the strategy will succeed.

 

In any event, it’s a story worth watching. What are your thoughts? How will FDA’s new strategy effect the life sciences supply chain? 

What do you consider a supply chain disruption? I ask that because I’ve been thinking about a recent article on Area Development On-line, in which the author, Tim Feemster, senior vice president and director of Global Logistics, Grubb & Ellis, notes that “supply chain disruption” implies a temporary, or even minor, condition. However, the impact of the earthquake and tsunami in Japan, for example, has been anything but brief for those in the auto, auto parts and electronics industries.

 

Indeed, the idea of planning for worst-case scenarios becomes more important as global supply chains become longer and more complex. That’s because, in turn, events ranging from earthquakes and volcanic eruptions to turmoil in the Middle East happen more often and have far more impact on the supply chain than events in the past. Consequently, today’s managers must develop flexible supply chains that include multi-sourcing raw materials, reviewing inventory strategies/JIT/lean programs that minimize inventory, and developing contingency plans and testing them.

 

The need to plan for these worst-case scenarios, rather than temporary disruptions, becomes more evident when examining the ramifications of events in Japan this past spring. For instance, as noted in the article, all three of Japan’s auto giants received negative ratings this month from Standard & Poor’s following steep declines in their March output. S&P said supply-chain disruptions are posing a greater challenge for Japanese automakers than it had initially anticipated and had forced virtually all Japanese automakers to significantly cut output in Japan. The agency expected that parts shortages would be largely resolved by July, but cautioned that “full production is unlikely to recover in the summer” due to power shortages and a time lag for parts to arrive at overseas plants.

 

As pointed out in previous posts, it isn’t just the automotive supply chain that was effected. Japanese companies may not be the leader in the consumer electronics industry or the semiconductor industry, but they still produce about one-fifth of the world’s semiconductors and 40 percent of the electronic components. Secondly, together, Japan’s Mitsubishi Gas Chemical and Hitachi Chemical produce almost all of the world’s BT Resin--a raw material used in chip packaging. Furthermore, Hitachi Chemical has a 70 percent market share for a type of chemical slurry used by semiconductor producers to polish chips.

 

What’s more, even the loss of seemingly inconsequential components from single-source vendors can have significant effects on the supply chain. As was noted previously, consider what happened when auto manufacturers were unable to get paint pigments from Japan. Toyota obviously suffered, but Ford and Chrysler were also forced to restrict orders of vehicles with some black and red paint because the pigments used in the paint are made in Japan—and production of that pigment had been halted.

 

What this means then, according to Feemster at Grubb & Ellis, is that a major lesson for managers is to build in resiliency and backup sourcing as part of the contingency planning process. This should include dual and long- or near-shore sources for manufacturing and distribution throughout the chain. In fact, he believes up to 90 percent of supply chain-contingency planning should comprise dual sourcing. In cases where the chain must rely on a single-source supplier, a different inventory strategy is needed. In an extreme case, such as presented by the disasters in Japan, this could mean an additional six months of storage.

 

I’m interested in your feedback. Has your company begun to implement comprehensive and resilient contingency and backup planning strategies along the supply chain? Or, is it still business as normal?

At the end of To Have and Have Not, Harry Morgan, Ernest Hemingway’s protagonist, says that a man alone hasn’t got a chance in this world. While Hemingway obviously wasn’t writing about manufacturing, I’m reminded of Morgan’s statement from time to time when thinking about the nature of manufacturing today. That is, no company actually goes it alone anymore, and is instead, critically dependent on suppliers and partners.

 

However, that’s certainly not to imply that those partnerships always work out for the best, and they clearly require dedicated work. In a recent IndustryWeek article, Sherry Gordon, author of Supplier Evaluation and Performance Excellence and president of management consulting firm Value Chain Group, says that suppliers are sometimes wary of some customers using the term “partnership” because customer firms may erroneously consider partnerships to be a way to demand more from the supplier—such as price concessions—without any mutual give and take.

 

Gordon prefers using the Institute for Supply Management’s definition of supplier partnership. That is: A commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship. These relationships require a clear understanding of expectations, open communication and information exchange, mutual trust and a common direction for the future. By that definition, Gordon says, few customer-supplier relationships actually qualify as partnerships.

 

It’s no small wonder that many partnerships fail to meet the level of adoption specified in that definition because there are so many challenges. The article goes on to list some good advice, but one piece that really stood out for me, is that the customer must also change. That’s because by its very nature, a partnership is not only about the supplier making changes on its side of the equation, Gordon says. Customers must learn to listen to suppliers rather than think that they are firms needing to be “managed,” she says.

 

Another key step for any relationship, but certainly for business partnerships, is to—as stated in the Institute for Supply Management’s definition--foster mutual access and communication between senior leadership. That, Gordon says, is really a signal at each firm that the relationship is valued, and it provides a means to quickly resolve challenges that may arise.

 

In the end though, what people look for in any partnership is mutual benefit. Or, more pragmatically, if it doesn’t seem like a win-win situation, it probably isn’t. To be a true partnership, both parties must benefit and share rewards. As Steve Peplin, CEO of Talan Products, says in the article, if a relationship is cannibalistic, some day dinner is going to run out. One company will eventually eat the other up, he says.

 

In the end, like most vital initiatives, creating a successful supplier partnership requires a great deal of dedication and hard work. It’s not easy, which is why companies struggle. I believe, however, that the benefits and improvements that are possible make those efforts worthwhile.

 

As an aside, Monique Rupert had a good post yesterday too, asking, “What makes a strategic relationship vs. a tactical relationship?” Rupert makes some good points about what constitutes a strategic vendor/customer relationship, and I recommend checking out the post.

As was widely reported this week, President Obama has endorsed the creation of a national manufacturing skills certification system, which, ultimately, should help manufacturers across all industries.

 

The system backed by Obama is a plan by the National Association of Manufacturers’ Manufacturing Institute to train and certify some 500,000 community college students with skills considered critical to manufacturing operations. The Manufacturing Institute will work with the president’s Skills for America’s Future program to implement the system, which will provide certification through competency-based education and training.

 

As an article in IndustryWeek reported, the president pointed out that many manufacturers have skilled positions going unfilled. The mystery to me is how this continues to occur while U.S. joblessness remains high. The president himself describes the situation as “a mismatch we can close.” So, the expanded initiatives are aimed at resolving that mismatch and helping workers gain skills that will “make America more competitive in the global economy,” Obama says.

 

This comes as good news, I believe, since it’s widely documented that manufacturers have difficulty filling those skill-critical positions. For example, ManpowerGroup last month released the results of its sixth annual Talent Shortage Survey. Those results show that one in three employers globally report difficulty filling jobs due to lack of available talent. That’s the highest percentage since before the recession in 2007.

 

It’s worth noting that the U.S. isn’t the only country experiencing these problems. Indeed, numerous countries suffer the same setback. Here in the U.S., however, the number of employers struggling to fill roles has jumped 38 percentage points to the largest percentage in the history of the survey—52 percent of the companies surveyed. According to ManpowerGroup’s survey, which included almost 40,000 employers across 39 countries and territories, the hardest jobs to fill are technicians, sales representatives, engineers and skilled-trade workers.

 

Companies’ inability to fill mission-critical roles because of a lack of skills and experience should serve as a wake-up call for businesses, education, governments and individuals, says Jeffrey A. Joerres, ManpowerGroup Chairman and CEO. It’s imperative that employers collaborate with these parties to address the supply-and-demand conundrum in the labor market and create long-term solutions to developing the talent they need, he says.

 

Joerres’ mention of businesses, education and governments reminds me of a Fortune article earlier this spring reporting that the shortage of skilled American workers has drawn concern from leaders in the public and private sectors--with the result that a group of executives from major companies appealed directly to state governors, urging them to set higher standards for student proficiency in science and mathematics. The group of executives, called Change the Equation, (citing figures from national educational assessments) notes that only one fifth of today’s 8th graders are proficient or advanced in math.

 

The CEO-driven initiative was launched last fall as part of the Obama administration’s “Educate to Innovate” campaign in response to forecasts that the U.S. will be short as many as 3 million high-skills workers by 2018, according to a Georgetown University report issued last year. Two thirds of those jobs will require at least some post-secondary education, says Anthony Carnevale, director of Georgetown’s Center on Education and the Workforce, in the Fortune article.

 

Considering many states’ on-going budget crises that results in slashed spending on education and continued teacher layoffs, I have to wonder if any states will take action. Even so, it’s encouraging that the situation is recognized by so many, and that action is being taken on several fronts.

When people read that thieves made off with more than $10 million in stolen cargo, it gets their attention. And if they learn that’s $10 million worth of pharmaceutical products, that really makes people take notice.

 

You may remember from the news—and, if not, you may have seen a Business Week article—about a driver whose cargo ($10 million of pharmaceuticals) was stolen while he was in a truck stop. As the BusinessWeek article explains, the truck contained 18 pallets with 21 different medicines. The drugs were owned by the U.S. division of Tokyo-based Astellas Pharma, and while the company’s directors were concerned about the release of all the medicines, an immunosuppressant was particularly problematic. That’s because the drug, which prevents patients from rejecting transplanted organs, is sensitive to temperature and humidity. If left in an uncooled trailer or warehouse, the drug could fail when taken, and, potentially, result in major complications for a transplant recipient.

 

Ultimately, Astellas withdrew all the drugs on the marketplace from the same lots as those on the stolen load. That meant pills—even legitimate ones—in drugstores and hospitals nationwide had to be destroyed. Consequently, the $10 million theft grew into a $47 million loss that wiped out 10 percent of the company’s North American sales for the quarter.

 

A recent Fortune article also calls attention to another theft. This time, Pfizer experienced a theft when a trailer was stolen from a trucklot in Memphis; the value of the shipment is estimated at $66,000.

 

This type of theft happens across all industries but pharmaceutical thefts seem to garner more media attention partly, I believe, due to the monetary scope of the theft, and partly due to the potential impact on the marketplace. Even so, one must wonder just how often this type of theft occurs. There’s actually good news and bad news in this regard. The bad news is that FreightWatch International, an organization that collects incident data and does trends analysis, issued a five-year report in April showing that thefts of pharmaceutical products rose by 283 percent from 2006 to 2008.

 

Now for the good news: According to the organization’s research, since 2008, the rate of growth for pharmaceutical trailer thefts has been almost flat. As the report notes, this is most likely due to efforts by the pharmaceutical industry to harden the supply chain.

 

A recent opinion that ran on Pharmaceutical Commerce takes the position that there are two succinct takeaways concerning the theft of trailers containing pharmaceuticals. The first, is that it’s critical to listen to pharma security and supply chain managers when they identify security gaps in product distribution—and that furthermore includes transportation managers at distributors as well as receiving personnel at retail and hospital end points. Secondly, while the industry overall appears to be dealing with the problem effectively, it’s never going to go away entirely. Stolen or diverted product will continue to show up, whether or not it travels through the so-called normal distribution channel. That means product serialization, effective track-and-trace systems, and usable authentication methods must be used, the piece concludes.

 

I think it’s worth adding that proper system integration will be vital to implementing a cost effective and efficient tracking system. To do that, the supply chain will need to bring all these disparate data points together, and create a common language used by different systems and suppliers. However, that will require a concerted effort across the supply chain.

The introduction of counterfeit products into the supply chain poses challenges for companies in any industry. Their impact, however, is clearly more profound in some industries than others.

 

For example, a blog post I ran across on Spend Matters prompted me to think about the impact of counterfeit products in the A&D industry. In his post, titled, “Counterfeit and Unapproved Parts Go Beyond A&D: Where We Know the Problem is All Too Real,” Jason Busch referenced another post, and noted that the problem of counterfeit and unapproved parts in the A&D supply chain is, in all probability, likely just as large as the problem in other industries. As Busch—and, in the other post, Paul Teague—point out, given the critical nature of products produced by A&D companies and the extremely high cost of a failure, one would presume that particular care would be taken to prevent counterfeit and unapproved products from entering the A&D supply chain.

 

That’s why it’s surprising to see a recent Aerospace Industries Association (AIA) press release noting that the volume of counterfeit parts in the A&D supply chain is increasing. In fact, while the prevalence of counterfeit parts in the supply chain is difficult to quantify, in fiscal 2009, the Customs and Border Protection Service seized nearly $4 million in counterfeit critical technology components, including networking equipment and semiconductor devices that the aerospace industry uses. Considering that the use of counterfeit parts in the aerospace industry may have life or death consequences, what’s required to reduce their proliferation and potentially harmful effects is for industry and government to increase diligence and take active control measures, says AIA President and CEO Marion C. Blakey.

 

A&D, of course, isn’t the only industry beset by the rise of counterfeit goods. Indeed, a Pharmaceutical Commerce report this spring noted that the FDA’s caseload reinforces concerns regarding illegal trade and distribution of pharmaceuticals. During a presentation at a meeting, Deputy Administrator Dr. Ilisa Bernstein noted that 72 cases had been opened by FDA’s Office of Criminal Investigations in FY 2010. That number is an 11 percent increase over 2009, which also had grown noticeably over the prior year. As Allan Coukell, a Pew Prescription Project director, observed at the meeting, “Counterfeiting is like water pressure; It will find a way in.”

 

The correlation here, is that just as is the case in A&D, use of counterfeit products in the pharmaceutical industry could—potentially—have disastrous consequences depending on the products and substances involved.

 

And so, with that in mind, the question then becomes: What can be done? The AIA report includes more than 20 recommendations geared toward most effectively reducing counterfeit parts in the supply chain. The recommendations, which were prepared by AIA’s Counterfeit Parts-Integrated Project Team, include:

 

·       Scrutinize the purchasing process to limit the use of automated systems, which is known to increase the risk of counterfeit products,

·       Develop an Approved Suppliers list,

·       Conduct training for employees in procurement, detection, reporting and disposition of counterfeit parts, and

·       Create standards for mechanical parts and materials.

      

I believe those recommendations are useful for all companies—regardless of their industry. However, I also think that perhaps the single most important tool for preventing counterfeit and unapproved products from entering the supply chain is supplier relationship management. By that, I mean having a good relationship with reputable suppliers and partners—and understanding who their downstream suppliers and partners are—as well as having visibility into their operations.

 

What do you think? How critical of an issue is counterfeit products for your company?

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