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2012

This time of year, it isn’t unusual to see brownouts or blackouts that stem from abnormally high power demands that stress grids. What is unusual, however, is the scope of the recent back-to-back power failures in India.

The world’s largest blackout ever crippled roughly half of India for a second consecutive day today. The massive power failure spread across 22 of the country’s 28 states, an area whose population is nearly 700 million, almost 10 percent of the world’s population. Consider, for perspective, that the grid failure was larger than both the August 2003 blackout on the U.S. East Coast and the March 1999 blackout in southern Brazil.

Surprisingly, the grid failure was met with some ambivalence. That’s because an estimated 300 million Indians do not have routine access to electricity, and localized failures are commonplace. Furthermore, because local outages are so prevalent, many businesses already have and use backup generators—so for them, business continued.

Nonetheless, a government investigation of the situation has begun. A number of factors contribute to the situation.

More than half of India’s power generation is coal-driven, but Coal India struggles to keep up with growing demand as it faces delays in clearance from the government to begin mining in environmentally protected areas. Secondly, as a Businessweek article notes, India depends on the summer monsoon for much of its annual rainfall but so far, this year’s rains have been disappointing. The less-than-normal rainfall has put strains on India’s hydroelectric power supply, which accounts for 19 percent of the country’s 205-gigawatt generation capacity but has dropped nearly 20 percent in the first six months of the financial year due to the delayed monsoon rains.

More problematic is a widespread theft of electricity. The Businessweek article explains that between 30 percent to 50 percent of the electricity produced by India’s power plants gets siphoned off by people who don’t pay for it. Making matters worse, local politicians don’t necessarily want to crack down on the practice because many of their voters depend on getting electricity without having to pay for it.

There will, most likely, be consequences for manufacturing and the supply chain. India is home to a growing number of manufacturing companies—including a substantial number of well-known companies in the pharmaceutical and biotech industries.

Indeed, in a BBC News article today,  Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce & Industry (FICCI), said that a shortage in power supply has resulted in industries across the country being asked to slow down their manufacturing or even shut factories for a certain number of days in a month.

It’s a serious crisis and it seems to be worsening, says Kumar.

As has been noted, the prevalence of routine power outages has forced many businesses to install their own power generation or power back-up units. That not only increases their capital costs, but also adds to their operational expenses because back-up units generate electricity using diesel fuel, which is more expensive than power generated from coal.

This has a bearing on any sector, be it manufacturing or services, says Amit Kapoor, honorary chairman of the Institute for Competitiveness, in the BBC News article.

To be sure, foreign companies and investors will be watching developments in India. If nothing else, the widespread power failure illustrates just how fragile India’s infrastructure is. It would seem that the outages will have an impact on some companies’ strategic business decisions. At the very least, it forces some thought and consideration to be given to backup power supplies and other risk mitigation tactics.

The number of counterfeit medicines seized in the EU rose an astonishing amount in 2011, according to a Securing Pharma article. Last year EU customs officials seized more than 27 million fake medicinal products in 2,500 cases of anti-counterfeiting enforcement. The dramatic rise compared to 2010, when 3.2 million fake medicines were found, coincides with the emergence of China as the primary source of fake drugs, the article explains. Indeed, China accounted for two-thirds of counterfeit medicines seized by the EU last year compared to less than five percent in 2010.

That article reminds me of news last February, when Roche warned doctors and patients alike about counterfeit vials of its best-selling intravenous cancer drug, Avastin. Roche’s Genentech unit said the fake products do not contain the key ingredient in Avastin, which is used to treat cancers of the colon, lung, kidney, and brain.

The Food and Drug Administration (FDA) began an investigation, and sent letters to 19 medical practices that the agency said had bought medicines from the suppliers of the counterfeit Avastin. The FDA’s letters warned the practices, based mostly in California--but also a few in Texas and Illinois—to not dispense the drug. The agency identified the counterfeit drugs’ suppliers as Quality Specialty Products (QSP), an overseas supplier that is also believed to operate as Montana Health Care Solutions. The letter said that QSP’s products are distributed by Volunteer Distribution, in Gainesboro, Tenn. According to Genentech, neither of those companies is authorized to distribute Avastin.

In an update, a recent Wall Street Journal article reports that the investigation continues to develop, as the FDA now disclosed it had warned another wave of doctors who bought drugs from Montana Healthcare and related distributors--bringing the total to 76 doctors in 22 states. The FDA said investigators uncovered new information identifying the doctors and distributors.

One of the avenues for counterfeit drugs to enter the supply chain can be seen by looking at Canada Drugs Group. As The Wall Street Journal article reports, the company became a vital link for American consumers stung by high drug prices. When Canada Drugs was founded in 2001, it sold medicines exclusively from Canadian suppliers, say former employees of the company. These drugs were less expensive than U.S. versions due to Canadian price controls.

But as the company grew into a larger enterprise spanning three continents, the risks of counterfeit drugs grew as well. In the final months of 2011, companies controlled by Canada Drugs Group sold two batches of fake Avastin, to U.S. doctors, according to company documents reviewed by The Wall Street Journal, interviews with former employees and business associates, and people familiar with a federal probe examining the company's dealings.

The Avastin case was a watershed moment for law enforcement to recognize that this is not a problem that can be restricted to one part of the world, says Ronald Noble, secretary-general of the international police organization Interpol in The Wall Street Journal. It let the U.S. know it’s not immune to counterfeit drugs, he says.

The FDA says it has always considered businesses such as Canada Drugs illegal because they sell medicines to American customers that aren’t made for U.S. sale at FDA-inspected facilities. A bigger worry, though, is that fake or tainted medicines could slip into U.S. supply and potentially harm patients. The fake Avastin, for instance, does not contain the active ingredient to fight cancer, but instead contained cornstarch, acetone and other chemicals.

The recent counterfeit incidents highlight vulnerabilities in the drug-supply chain and the possible health risk to patients if medical practices are choosing to buy unapproved drugs from a foreign supplier, FDA spokeswoman Sarah Clark-Lynn said in an email to The Wall Street Journal.

Given the significant amount of money at stake, the likelihood of counterfeit medicines entering the supply chain seems high. In the U.S., a 400-milligram vial of Avastin costs about $2,400, but Montana Healthcare, allegedly sold it to doctors for $1995. What I’d like to know is what you think of the flow of counterfeit drugs, and if it can actually be stopped?

I was surprised at a recall announced today by Ford. Not because it was an automotive recall because, frankly, those seem common today. It was instead, the wording Ford used in announcing the recall of its newest Ford Escape sport utility vehicles that caught my attention. That is, the company warned drivers to stop driving the Escapes immediately.

Ford announced the voluntary safety recall of 2013 model year Ford Escape vehicles equipped with the 1.6-liter engine built through July 11, 2012. Ford estimates that there have been approximately 11,500 of these vehicles produced and distributed for sale in North America, with most in the U.S. market.

The company further explained it is voluntarily recalling the vehicles to replace an engine compartment fuel line, which could split and leak fuel—potentially resulting in an underhood fire. Also of importance, the condition does not present itself in vehicles when the engine is not running, a Ford statement explains.  

But what really stood out for me, is that Ford said, “As an additional safety precaution, customers who already own 2013 Escape vehicles with the 1.6-liter engine are being advised to stop driving their vehicles and to immediately contact their dealers.”

What’s interesting is that it’s so rare for an automaker to warn drivers to not drive at all. In fact, giving an idea of just how serious the issue may be, Ford also announced that dealers will deliver a loaner vehicle to these customers and will transport their 2013 Escape to the dealership for the necessary repairs. Furthermore, the company also said it is working to make parts available as quickly as possible, and customers will keep the loaner vehicle at no charge until the repairs on their vehicle are completed.

The good news is that no injuries have been reported as a result of the defect so far. Further good news is that the repairs are straightforward and should take dealers less than an hour to complete, pending parts availability, Ford announced. If affected customers quickly take action and contact their dealers as advised, all vehicles can be remedied in less than two weeks, according to the statement.

I’m reminded by all this that despite the cost involved and possible ramifications, every recall also offers an opportunity for manufacturers. How they conduct themselves in announcing the recall and then carrying it out can—in the long run—generate more business and strengthen existing customer loyalty.

Those are the findings of a survey completed in 2010 by Relational Capital Group. It asked respondents questions regarding their beliefs about the handling of recalls, as well as their purchase intent and loyalty for each recalled brand relative to its key competitors. What I found interesting is that 91 percent of those surveyed agreed that “despite modern technology and honorable intentions, even the best-run companies and brands can make mistakes that lead to product recalls.” Furthermore, 87 percent of the respondents agreed that they are more willing to purchase from, and remain loyal to, a company that handles its product recall in an honest and responsible way.

Considering the fast pace of innovation and product development cycles today, true differentiation from competitors and durable customer loyalty is difficult to achieve, says Chris Malone, the article’s author and chief advisory officer of the Relational Capital Group. When a company transparently and courageously admits a significant mistake to protect its customers’ interests, it leaves a powerful and lasting impression on customers because that isn’t something they see very often, he says.

In other words, customers can forgive mistakes if they believe they are treated honestly and fairly. If, on the other hand, they believe the company isn’t being honest, or if they think the company isn’t treating customers fairly, they’ll take their business elsewhere.

I’ll be watching the Ford recall to see how events play out. In the meantime, what do you think about either the Escape recall or the opportunities presented in general by a recall?

It’s summer, and I’ve got traveling on my mind. Not for vacation, but instead, for transporting goods.

An article that ran on Businessweek notes that according to the American Road & Transportation Builders Association, more than 16.4 million tons of goods and materials-- valued at more than $14.4 trillion--moved on U.S. roads and highways last year.

All that driving, however, results in more wear and tear on roads and bridges. Anyone who does much driving knows many roads and highways need significant improvement. The article further points out that, according to a report released last August by the American Society of Civil Engineers, deficiencies in America’s roads, bridges, and transit systems cost the U.S. economy roughly $130 billion in 2010.

Traffic congestion also results in the loss of billions of dollars each year. The Businessweek article also cites a 2009 study of 437 U.S. urban areas by the Texas Transportation Institute, which estimated that bad roads and traffic congestion drained some $87.2 billion per year from the economy in lost time, wasted motor fuel, additional pollution, and vehicle wear and tear.

Road and highway deficiencies, construction—it is summer, after all—and congestion aren’t the only trucking issues. In fact, trucking companies are now struggling to recruit and retain enough drivers. Older drivers are retiring and younger drivers aren’t entering the field. That’s because, in part, the lure of being away from home for days on end doesn’t sound so appealing. Another factor is that since truck drivers must be at least 21 years old, many 18-year-old high school graduates who might consider trucking choose instead to pursue other trades. Finally, despite the current unemployment rate, many unemployed construction and factory workers simply can’t afford the $4,000 to $6,000 cost of a six-week driver-training course.

With all that in mind, it’s no wonder railways are gaining favor. Indeed, a recent IndustryWeek article explains that over the past year, rail-freight transportation rose by 15.3 percent, which is noteworthy given that it also rose by 21.8 percent in 2010.

The railroads are in very good shape from an infrastructure, equipment, and personnel basis, says Rosalyn Wilson, senior business analyst with consulting firm Delcan. Compared with other major transportation modes, railroads have gained market share, especially in intermodal, which combines rail with another mode, usually trucking. Last year, more medium-sized trucking companies began to use intermodal for the first time to combat driver shortages and the high cost of adding to their fleet, Wilson explains.

That number will likely rise. Especially because considering the challenges trucking firms face—which in addition to a talent shortage and rising salaries, include rising fuel prices and capital equipment costs—it isn’t a given that trucking firms will always have sufficient capacity to carry freight. Wilson contends that companies should now begin making contingency plans for the day they cannot hire a truck to carry their freight. Railroads, Wilson notes, have the capacity to take up the slack.

According to the Association of American Railroads (AAR), the nation’s major freight railroads are projected to invest a record $13 billion in capital expenditures in 2012 to expand, upgrade, and enhance the nation’s freight rail network. The freight railroads also expect to hire more than 15,000 employees this year, replacing retiring workers and adding new positions nationwide.

Unlike trucks, barges or airlines, America’s freight railroads operate on infrastructure they own, build, and maintain themselves so taxpayers don’t have to, says Edward R. Hamberger, AAR president and CEO. And this year they are investing at a record rate to meet the demands of the recovering economy. Those investments help businesses get their goods to market more efficiently and affordably, so they too can innovate, invest, and hire, he says.

Given the challenges the trucking industry faces, the railroads’ on-going commitment to capital expenditures comes as good news. What I would like to know, is if your company or partners are planning to increase the use of railroads.

 

The commercial aircraft business has seen some interesting news with supply chain implications over the past week or so.

To begin with, Airbus SAS put an end to on-going industry speculation by announcing that, yes, the company will be opening its first U.S. assembly facility in Mobile, AL. The deal will bring 1,000 jobs and a $16 million Airbus final assembly facility to the Brookley Aeroplex industrial complex and airport.

The biggest benefit of the new facility will be the added production capacity. Airbus is sold out of its staple single-aisle jets—the Airbus A320 family—through the end of the decade. Airbus expects the Mobile facility to have an initial capacity of four planes per month, with the potential to ramp up to eight planes per month.

What this plant will do then, is open up production slots that otherwise just aren’t available, says aerospace analyst Scott Hamilton in a recent IndustryWeek article. Airbus plants in France or Germany have had to be the suppliers to fill the U.S. airline orders. But when Mobile goes online and fills the U.S. airline orders, it will free up an equivalent number of slots in France and Germany to fill orders elsewhere in the world, Hamilton says.

A steady stream of news has also come from the Farnborough Airshow this week. For instance, a Reuters report today explains Boeing will cap off the airshow with a $9 billion order from United Airlines for 100 aircraft. The aerospace industry’s biggest event was a chance for Boeing to pick up some orders for its fuel-efficient 737 Max narrow body, its answer to Airbus’ short-haul offering, the A320 Neo. As the article notes, including the United Airlines deal, Boeing racked up around $30 billion of firm orders and commitments at the show, with Airbus securing deals worth around $17 billion.

The airshow has been relatively subdued though, and marked by a lack of firm orders. What has been seen instead, are commitments to buy planes at a later date. Nevertheless, business is business.

What is perhaps most interesting, however, is that with order books already full and economies around the world remaining shaky, the question then becomes just how will companies be able to deliver a backlog of planes. Indeed, a story running on SupplyChainBrain notes that according to a study of the aerospace and defense industry released by global business advisory firm AlixPartners, the industry must increase production rates by 45 percent in volume by 2015 to meet demand. That, of course, presents significant challenges.

Eric Bernardini, managing director at AlixPartners and head of the firm’s global Aerospace & Defense Practice, says beneath the surface, every level of the aerospace and defense supply chain is scrambling to accelerate performance, on-time delivery, and service levels. The success of more fuel-efficient commercial aircraft by Airbus and Boeing will eventually drive increased financial performance, he says.

In the meantime, supply chain pressures may drive a period of further consolidation among Tier 2 and Tier 3 suppliers, especially in segments where fragmentation is still high, such as aerostructures components, Bernardini says. On the other hand, some “super-Tier 1” suppliers may have become so big that they represent a risk that OEMs will address by getting “under the hood” of all their suppliers, and their suppliers’ suppliers, he continues.


What do you think? Will we see more consolidation within the aerospace and defense supply chains? With a significant ramp-up on the horizon, will OEMs begin to prepare themselves by improving visibility to supply chain operations or becoming more demanding to prevent possible issues?

 

You may have already seen news that Apple asked EPEAT, the electronics standards setting group, to pull its products—including past versions of the MacBook Pro and MacBook Air--off EPEAT's list of green products. EPEAT, created through funding by the federal Environmental Protection Agency and manufacturers, awards products a seal to certify they are recyclable and designed to maximize energy efficiency and minimize environmental harm.

 

To meet the standards (created jointly by manufacturers, including Apple, advocacy groups, and government agencies), recyclers need to be able to easily disassemble products with common tools to separate toxic components, such as batteries. However, Apple’s new MacBook Pro with a high-resolution “Retina” display is said to be nearly impossible to fully disassemble. Reports indicate that its battery is glued to the case, and the glass display was glued to its back.

 

In an article that ran in the Silicon Valley MercuryNews, EPEAT’s CEO, Robert Frisbee, says there is an issue with the cementing in of batteries. If the toxics can’t be separated from recyclables, a product doesn’t qualify as a green product, he says.

 

Of course, if you can’t take products apart, then you can’t repair them. A user can’t make upgrades easily either. However that may well be another issue.

 

Barbara Kyle, national coordinator of the Electronics TakeBack Coalition, a group that promotes green design and recycling of electronics products, explains in the same article that the first thing a recycler does is to take apart a product to remove hazardous materials. They absolutely need to be able to open up products, she says. If they can’t even take the battery out, or if the manufacturer glued the battery in using industrial strength glue, that isn’t designing with recycling in mind, Kyle says.

 

While there probably won’t be much fallout in the consumer market, the story may be considerably different in the commercial market. Corporations such as Ford, HSBC, and Kaiser Permanente require CIOs to purchase computers from sources that are EPEAT certified. Furthermore, the U.S. government requires that 95 percent of the electronics it purchases be EPEAT certified. There also are cities, such as San Francisco, which can no longer buy Apple computers because their procurement rules specify EPEAT approval.

 

Indeed, a CIO Journal report today explains that San Francisco city officials now say they are moving to block purchases of Apple desktops and laptops by all municipal agencies because the products lack the green electronics certification. Officials with the San Francisco Department of Environment say they will send out letters over the next two weeks to inform all 50 of the city’s agencies that Apple laptops and desktops “will no longer qualify” for purchase with city funds.

 

Michael Gartenberg, an analyst at Gartner, says in that article that while there is some significance to Apple’s rejection of the standard, it probably isn’t of major significance. “Given the relatively small percentage [of organizations] that require 100 percent EPEAT-compliance, it’s not going to make a whole lot of difference to Apple,” he says.

 

It should be noted, as the article points out, that the move by San Francisco city officials is largely symbolic. Only around 500-700, or one percent to two percent, of municipal computers are Macs. In fact, 2010, the last year for which the city has complete reports, San Francisco spent $45,579 on Apple desktops, laptops, and iPads. That’s compared to a total of $3.8 million spent overall on desktops and laptops, in 2010.

 

There’s also speculation that Apple’s moves are simply the result of recognizing the consequence of efforts to make products smaller and have batteries last longer. So, rather than intentionally trying to make it difficult to open a case, Apple is working to use space as effectively as possible as a design decision. If that is the case, it may well be a foreshadowing of future design decisions.

 

Either way, it will be interesting to see what—if any—effect those decisions have on municipal, corporate, and consumer buyers.

What is your company’s highest supply chain priority? I ask that to see if you agree with the results of a new survey, in which 80 percent of the respondents named “reducing overall supply chain costs” as the top supply chain priority for the coming year. That was followed by “improving supply chain agility,” cited by 55 percent of the respondents. “Improving product quality and safety” followed closely as the third top concern.

The survey, which is the basis for a new report titled, “Business Strategy: 2012 Supply Chain Survey-Manufacturing Priorities and New Technology Adoption,” was conducted earlier this year by IDC Manufacturing Insights. The firm surveyed more than 350 U.S.-based manufacturers, and the majority of the respondents were from organizations with more than 10,000 employees, while the rest were from companies with no fewer than 1,000 employees. The typical role of the respondents is in manufacturing operations but the survey did reach across the organization to areas such as IT, supply chain planning, logistics/distribution, and supply chain executives.

In an article that ran in IndustryWeek, Simon Ellis, practice director, Supply Chain Strategies, at IDC Manufacturing Insights, wrote that an overwhelming majority of the responses citingreduce overall supply chain costs at the top supply chain priority suggests that the focus for supply chain organizations remains efficiency and elimination of waste. He also asks if there is an inconsistency between the strategic aspiration in the supply chain (what we say we want to be) and the tactical/operational realities (what we do)? To a degree, the answer is yes, although one can make the argument that product, cost, and service are not mutually exclusive, but in fact, all are necessary to varying degrees as “table stakes” for the successful manufacturer, Ellis writes. Reinforcing this notion is that “improve product quality/safety and “improve overall customer service,” while picked less often than reducing costs, were still selected by 50 percent or more of respondent companies as one of their top three priorities.

However, when asking for specific activities that will drive overall cost savings, the focus is on procurement, broader deployment of lean, and transportation, the survey results show. So, for example, regarding sourcing, 45 percent of U.S. manufacturers are looking at increasing global/low cost country sourcing to serve North American demand, versus 38 percent that are looking to increase domestic (U.S. and Canada) production. Technology-oriented manufacturers remain the segment most likely to be increasing global/low cost country sourcing, reflecting the inherently higher relative importance of labor costs. Engineering-oriented manufacturers are most likely to be increasing domestic sourcing as a consequence of higher shipping and logistics cost.

I was also interested to see that IDC found that survey respondents consider IT-based solutions for demand planning and forecasting and production scheduling as key to business performance over the next year. This, the firm believes, could signal a genuine shift to a more holistic approach to truly integrated business planning, inclusive of fulfillment excellence.

Secondly, according to survey participants, big data and mobility are the most important new technologies for supply chains. IDC Manufacturing Insights believes there is substantial value to how manufacturers can use these to improve agility and customer service.

“According to our findings, the key supply chain challenge facing all manufacturers today is the juxtaposing of complex and extended supply networks with increasingly fast and volatile demand networks—and the increasingly ineffective role for inventory as a way to buffer cadence mismatches,” says Ellis. “While there is anecdotal evidence to suggest that 2012 may indeed represent the most challenging time in the history of the manufacturing supply chain, there also are significant opportunities. For example, consumer-facing manufacturers have an opportunity to redefine their core relationship with the consumer through mobile and social media tools; or the ability to apply next-generation analytics to massive new sources of both structured and unstructured data.”