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2014

 

Complex regulations, increasing risks and continuing cost pressures are among the key factors that prevent healthcare executives from moving quickly to seize untapped industry opportunities, according to the results of a new survey. Globally, healthcare executives are planning for strategic partnerships and technology investment to mitigate risks and capitalize on growth opportunities.

 

The most significant factors contributing to uncertainty in the healthcare supply chain are more stringent regulations and increased product protection challenges, say the respondents in the seventh annual UPS “Pain in the (Supply) Chain” survey. For the third consecutive year, regulatory compliance is the top supply chain pain point, cited by 60 percent of respondents. That comes as no surprise since senior logistics executives polled at the ninth annual UPS Healthcare Forum last June reported an extremely low rate of success in addressing the challenge of regulatory compliance. Only 12 percent of those respondents reported they were satisfied with their companies’ performance in this area.

 

Secondly, concern about in-transit protection grows as products become more complex, often requiring temperature-sensitive transportation. As products travel further to new markets, the number of hand-offs increases, and supply chain visibility becomes even more important. With those concerns in mind, it’s no wonder product protection is seen as a key challenge. Indeed, 46 percent of the respondents cited product security as a top challenge, and 40 percent of the executives cited product damage and spoilage as a top concern.

 

I was interested to see that when it comes to growth and expansion, entering new markets is seen as a key strategy by the healthcare executives participating in the survey. For example, during the past 18 months, 65 percent of the respondents say their companies have entered new global markets to expand their customer base as a means to drive new revenue growth. Looking ahead, 78 percent of the respondents say their companies will expand to enter new global markets over the next three to five years. Interestingly, these responses closely match 2011 survey data, when 81 percent of executives reported they plan to expand to new global markets over the next few years.

 

Despite progress in addressing numerous industry challenges, there also are still a number of untapped opportunities for healthcare companies. One of these areas is to leverage new distribution channels and models to meet changing customer demands as e-commerce, urbanization and home healthcare grow. Over the past two years, 70 percent or more of those companies surveyed both years have indicated that they plan to increase their usage of new distribution channels, yet over this same time period, their channel mix remains nearly identical. This demonstrates that while the intention to take advantage of untapped opportunities is apparent, actual change is slow, the UPS report notes.

 

Finally, it will be interesting to see how the rise of home healthcare will have an impact on the industry. Globally, 21 percent of the survey respondents cite the shift to home healthcare as a key trend driving business and supply chain changes. Respondents report that 30 percent of their companies’ products will support the home healthcare channel in the next seven to 10 years.

 

In some respects, forming key partnerships, investing in new technology and entering new global markets are key strategies in any industry. What are your thoughts on the particular challenges in the healthcare industry?

 

 

Anyone who spends much time driving likely thinks their local roads, bridges and other infrastructure is aging and in need of repair. Add in traffic congestion, and the cost of using those roads has a direct bottom-line impact on drivers.

 

Take California, for example. Its worn-out and highly congested roads and bridges cost drivers $44 billion a year, according to a new report. Higher vehicle operating costs, congestion-related delays and traffic accidents cost $2,458 per driver in Los Angeles, according to the report released by The Road Information Program or TRIP, a national highway advocacy group. In San Francisco, the figure is $2,206 per driver, while in San Jose, it’s $1,723 per driver, according to the report.

 

Such costs are rising in all states. Investment levels in highways, roads and bridges are particularly vulnerable to inflation and the increasing cost of construction materials, and as a result, prices rose almost 10 percent per year from 2003 to 2008, according to “Catching Up: Greater Focus Needed to Achieve A More Competitive Infrastructure,” a study from the National Association of Manufacturers (NAM). States have been hesitant to make those investments, and the association’s research shows investment in highways, roads and bridges has fallen 3.5 percent each year from 2003 to 2012.

 

One of the consequences of states’ lack of investment in roads and bridges is that companies are forced to make changes to their supply chains to compensate so they can continue just-in-time deliveries. One common strategy is to lease additional warehouses with guarded parking lots on the edges of big cities where traffic congestion is an increasing problem.

 

Whirlpool, for instance, has set up a network of secure drop lots outside Chicago, Milwaukee and Minneapolis, reports James B. Kelleher in a Reuters story. Today, a washing machine that—in the past would—ship from regional distribution center through a local distribution center and on to the customer in one day now sits overnight in a parking lot.

 

“That adds an extra day of lead time, which means extra inventory,” says Whirlpool Corp. Logistics Chief Michelle VanderMeer in the article.

 

What’s more, there also is the cost of the facility, parking lots and security guards, all of which adds up quickly.

 

“We’d rather be investing our money elsewhere,” VanderMeer says.

 

Whirlpool isn’t alone in investing in additional facilities. Commercial real estate advisers report a proliferation of “just-in-case” warehouses popping up in heavily congested urban areas. For example, outside Chicago, Panasonic Corp, Ingram Micro and Owens & Minor have all leased spaces in recent years to help take congestion-related variability out of their supply chains, according to real estate advisor CoStar, the Reuters article reports.

 

Obviously, there is an impact from such operations. An item which passes through two warehouses requires about 50 percent more inventory than an item which passes through one warehouse, says Rene Circ, CoStar’s director of industrial research, in the article.

 

“It either costs the companies in the form of lower margins and profits, or it costs customers in the form of higher prices,” Circ says.

 

Manufacturers are lobbying Congress to approve new repair funds next year. However, they have low expectations for change. For one thing, the Highway Trust Fund, which finances road and bridge repairs, narrowly avoided insolvency this past summer. Secondly, lawmakers fear a backlash from constituents if they were to vote on raising the gas tax to bring in the $170 billion the Federal Highway Administration estimates is needed annually to improve roads. So it would appear little will change.

 

What are your thoughts on road conditions and rising traffic congestion? Has it added cost to your supply chain?

 

A bug discovered Tuesday evening in Linux and Unix operating systems could—potentially—allow hackers to wreak havoc on the Internet of Things (IoT).

 

The bug, named Shellshock but also called the Bash Bug, was discovered in Bash, short for a command prompt in Unix known as Bourne-Again Shell. Unix is used in corporate computer networks and is the basis of other operating systems, like Linux and Apple’s Macintosh operating system, so the threat could be widespread. However, it isn’t clear yet how this may affect Macs.

 

The flaw could ultimately prove to be more of a threat than the Heartbleed bug of earlier this year because Shellshock may be used by hackers to write code that could take over a machine, or run their own programs in the background. The National Institute of Standards and Technology states that the vulnerability is a 10 out of 10, in terms of its severity, impact and exploitability, but low in terms of its complexity so it could be easily used by hackers. The Department of Homeland Security’s United States Computer Emergency Readiness Team, or US-CERT, also issued a security warning about the vulnerability.

 

The problem is that the bug is used in the software of the Apache web servers that run—by some estimates—at least half of the world’s websites. It’s also used in the software that connects many “smart” home devices to the Internet, including household security systems and even lighting systems.

 

According to open source software company Red Hat, the bug affects any device that uses the Linux operating system, which means everything from calculators to cars, a CNN Money article reports. But in addition to Apple Macs, the bug also affects some Microsoft Windows and IBM machines. Google, however, says no Android machines are susceptible.

 

Red Hat researchers went so far as to classify the severity of the bug as “catastrophic,” the CNN Money article notes.

 

“The real scale of the problem isn’t clear yet, although it’s almost certain that hackers and security researchers are testing web services and Linux software and the results of these tests will probably be published in the coming days,” says David Jacoby, a security researcher at Kaspersky Lab, in a USA Today article. “The good news is that vendors of some of the most popular products affected by the vulnerability have already prepared patches that could at least partially eliminate the problem. Now it’s up to administrators managing vulnerable systems to determine how quickly they react and update vulnerable software.”


In the end, though, time will pass and people will forget about the threat. However, Norweigian cybersecurity consultant Per Thorsheim explains in the CNN Money article that even when the bug becomes old news, people will still be vulnerable.

 

“In a few days everything will be forgotten, and the hackers will feast on [this] for years to come,” Thorsheim says.

 

In the meantime, about all that can be done is to update devices as patches become available. Nonetheless, it’s difficult for the average person to figure out if, for instance, their home security camera is vulnerable. What’s more, it’s highly unlikely that companies and public institutions will go so far as to update every single computer.

 

What are your thoughts on Shellshock, or cyber-security threats in general? Does your company actively work to take necessary responses?

As at least some manufacturing returns to, or is planned to begin in, the U.S., one interesting discussion is the process of determining where to locate operations. As states vie for business, companies should evaluate a number of economic factors, as well as potential risk.

 

For example, as has been noted before, southern states have routinely been selected as the location for call centers and warehouses, but as a recent BusinessWeek article notes, industries such as autos and aerospace are also shifting production to southern states. The article notes that, according to Southern Business & Development (SB&D) magazine, which tracks commercial projects in the south valued at more than $30 million, manufacturing made up 68 percent of investments announced last year. The number of projects totaled 410, which is the most in 20 years.

 

The South “has become the cheapest place to make things inside the largest economy in the world,” says Michael Randle, publisher of SB&D. Due to low taxes, cheap electricity and a mostly nonunion workforce, states such as South Carolina, Alabama and Tennessee are now among the least expensive production sites in the industrialized world.

 

The flip side of the coin, unfortunately, is that the labor force in those states may not meet companies’ requirements. For instance, according to U.S. Census figures, 83.1 percent of Tennessee’s 25-year-olds have no more than a high school degree—which ranks it 41st among U.S. states, the BusinessWeek article reports.

 

Dexter Muller, senior vice president for community development for the Memphis chamber of commerce, says that means it isn’t necessarily easy to find candidates with the right skills. When a large brewer took out ads three years ago to hire 200 workers in the area, it had to review thousands of applications to find candidates with the right skills, he says in the article.

 

“The quality of applicant wasn’t there,” Muller says.

 

Another factor to consider when determining where to locate operations is risk exposure due to natural hazards. Florida, for example, has been ranked as the U.S. state with the highest level of comprehensive risk exposure to multiple natural hazards by CoreLogic, a global property information, analytics and data-enabled services provider. That ranking is the result of analysis by the company’s Hazard Risk Score (HRS) analytics tool, which gathers data on multiple natural hazard risks and combines them into a single score.


Florida was found to be at regular risk from hurricane winds, storm surge, flooding, sinkholes and wildfires. Rhode Island, Louisiana, California, and Massachusetts round out the top five states with the most risk. Kansas, Connecticut, Oklahoma, South Carolina and Delaware round out the top 10 states at the most risk for natural hazards. At the other end of the scale, Vermont, North Dakota, New York, West Virginia and Michigan are among the states with the lowest risk of natural disasters.

 

“Florida’s high level of risk is driven by the potential for hurricane winds and storm surge damage along its extensive Atlantic and Gulf coastline, as well as the added potential for sinkholes, flooding and wildfires,” Dr. Howard Botts, vice president and chief scientist for CoreLogic Spatial Solutions. “Michigan alternatively ranks low for most natural hazard risks, other than flooding.”

 

Tax and other economic incentives can certainly be appealing. However, that appeal must also be balanced against other factors, such as an available labor force, availability of skilled labor, and even the threat of earthquakes, floods or wildfires. Whether it’s the decision to locate operations in a foreign country or in the U.S., companies must create a well thought-out business strategy to thoroughly study the costs—both business and personal—of manufacturing.

 

If your company is locating—or potentially locating—operations in the U.S., what are some of the factors that are considered when evaluating various states?

 

NASA ended its Space Shuttle program in 2011 after a review and during a shift in priorities to exploring deep space, including sending humans to Mars. Since then, NASA crewmembers have been catching rides to the International Space Station on Russian spacecraft—at a cost of $70 million per seat, according to NASA. The agency typically purchases six seats per year.

 

That process will be changing over the next few years, however. Earlier this week, NASA announced that under its Commercial Crew Program, it will award contacts to Boeing and SpaceX for spaceflight vehicles to transport U.S. astronauts to and from the International Space Station.

 

Of the $6.8 billion NASA plans to spend on its next two human spaceflight vehicles over the next five years, Boeing will receive $4.2 billion for its CST-100 capsule while SpaceX will receive $2.6 billion to finish developing and fly the crew version of its Dragon cargo vehicle, an article in Aviation Week reports. Losing out, was Sierra Nevada Corp., the third company that had received NASA seed money under the agency’s commercial crew-vehicle development program. In selecting Boeing and SpaceX, NASA chose traditional capsule designs over the reusable lifting-body approach Sierra Nevada advanced with its Dream Chaser vehicle.

 

What’s interesting is the difference in the two companies’ culture and approach. Boeing, of course, is a so-called “old space” company with decades of proven experience. SpaceX, on the other hand, is a newer company, founded by billionaire entrepreneur Elon Musk who has plans to disrupt the industry. Boeing’s CST-100 capsule uses the Atlas V rocket to deliver the capsule to space. SpaceX already uses its Dragon capsule to transport cargo to the space station, and is the first private company to do so.

 

Nevertheless, both companies face the same requirements, and both award amounts were based on what the companies said they would need to complete the work of getting their vehicles certified to fly four-member crews to the International Space Station, according to Kathy Lueders, NASA’s commercial crew program manager, in the Aviation Week article.

 

Under their contracts, Boeing and SpaceX each must meet five milestones, including having their crafts first undergo safety testing before manned flights take place. Then their craft must complete a demonstration flight to the International Space Station with at least one NASA astronaut on board. After that, each company will qualify for between two and six operational missions.

 

Something else which stands out is that NASA plans to use Boeing’s CST-100 and SpaceX’s Dragon to shuttle four astronauts to the space station on each mission. However, both capsules are configured to transport five passengers. Boeing will work with its partner, Space Adventures, to offer the additional seat to space tourists.

 

There also seems to be more advancement to come, as NASA authorities hinted at other ambitions. For example, NASA will conduct missions that will each set their own impressive roster of firsts, said NASA administrator Charles Bolden in an interview in CNN Money. Those firsts could include first crew to visit and take samples from an asteroid, first crew to fly beyond the orbit of the moon, and perhaps the first crew to grow their own food and eat it in space, he continued.

 

“All of which will set us up for humanity’s next giant leap: the first crew to touch down on and take steps on the surface of Mars,” Bolden says.

 

This is all exciting news, for those in the aerospace industry and as well as anyone who has followed space exploration efforts over the years.

 

What are your thoughts on NASA’s news, as well as the implications for the aerospace industry?

 

In a recent survey, 37 percent of the respondents reported economic crime in their organizations. Of particular note, the categories of bribery and corruption, and cybercrime both were cited more by respondents this year than in last year’s survey.

 

PwC’s 2014 Economic Crime Survey was completed by 5,128 respondents from 99 countries. According to the results, asset misappropriation was the most common economic crime, and was cited by 69 percent of the respondents, which probably comes as no surprise.

 

A new category was added to the survey by PwC this year: procurement fraud. The firm believes this category is primarily driven by more-competitive public tender processes from governments and state-owned businesses, and the increasing integration of supply chain into core business activities. Interestingly, procurement fraud received a significant response (29 percent), which made it the second most frequently reported type of fraud.

 

Bribery and corruption was the third most reported economic crime, and was cited by 27 percent of the respondents. I was more interested, however, to see cybercrime listed as the fourth most-reported crime. It was cited by 24 percent of the respondents. Additionally, more than 11 percent of those companies suffered financial losses of more than US$1 million.

 

In a sign that organizations are taking this threat more seriously, the survey results indicate that the perception of the risk of cybercrime is increasing at a faster pace than that of reported actual occurrences, the PwC report explains. This year, 48 percent of the respondents said their perception of cybercrime risk at their organization increased, up from 39 percent in 2011.

 

Even so, companies continue to make their critical data available to management, employees, vendors and clients on a multitude of platforms—including high-risk platforms such as mobile devices and the cloud—because the economic and competitive benefits appear so compelling, the report notes. Ultimately though, cybercrime isn’t strictly a technology problem, and is instead, a strategy problem, a human problem and a process problem. After all, organizations aren’t being attacked by computers, but by people attempting to exploit human frailty as much as technical vulnerability, PwC observes.

 

Finally, regardless of the type of economic crime, organizations often don’t grasp the true financial impact of an economic crime until after it has happened—sometimes well after, PwC notes. As in previous years, the survey underscores that the cost of fraud, both in financial and non-financial terms, is significant. For example, nearly one in five organizations suffering fraud experienced a financial impact of between US$1 million and US$100 million. But economic loss isn’t the only consequence for companies. The PwC survey respondents also reported damage to employee morale, corporate and brand reputation, and business relations as some of the most severe non-financial impacts of economic crime.

 

When taking into account the secondary damage, the true cost of an incidence of economic crime can be long lasting. Consider, PwC notes, the long chain of adverse events which may follow a single, high-profile incident of economic crime: lost revenues as customers look for other business partners; delayed entry to new markets due to regulatory issues; lowered stock price; and declining productivity and morale.

 

Given those findings, I wonder what you think. What do you believe are the possible long-term ramifications of economic crime? Secondly, given that cybercrime increasingly relies on employee error—or bad judgment—rather than a system flaw, how is your company working to prevent this type of attack?

 

Executives at foreign companies in China increasingly believe the Chinese government targets their companies for unfair enforcement of anti-monopoly and other laws, according to the results of a new survey. The result, they say, is that if conditions fail to improve, they may cut investments.

 

In a survey conducted last month by the American Chamber of Commerce in China, 60 percent of the respondents said they feel foreign business is less welcome in the country than before. That percentage is up from 41 percent in a late-2013 survey. Furthermore, 49 percent said foreign companies are being singled out in recent pricing or anti-corruption campaigns.

 

American Chamber members say they have “growing perceptions that multinational companies are under selective and subjective enforcement by Chinese government agencies,” Greg Gilligan, the group’s chairman, wrote in a report, a recent Bloomberg article reports. Laws and rules “lack transparency and are at times only vaguely related to the particular case,” Gilligan continued.

 

Dozens of foreign companies—in industries such as pharmaceuticals, medical devices, high technology and autos—are being targeted, according to Les Ross, the American chamber’s vice chairman. For instance, Chinese regulators opened an anti-monopoly investigation into Microsoft Corp. in July.

 

Perhaps the example that gathered the most attention was that in July, China fined 10 Japanese auto parts firms more than $200 million in total for price-fixing, reportedly the biggest-ever such penalties. The auto parts companies were found to have implemented monopoly pricing agreements for more than 10 years, the National Development and Reform Commission (NDRC) regulator said in a statement. A number of those companies have since announced price cuts of vehicles or spare parts.

 

What’s puzzling though, is that the situation is a clear reversal for companies that welcomed plans unveiled by the ruling Communist Party in 2013 to open the state-dominated economy to more private competition. The ruling party under President Xi Jinping has promised to make China’s economy more productive by opening more industries to private and foreign competition. However, foreshadowing what may come to pass, China is also trying to create industry leaders in industries such as automotive, telecommunications and aerospace. That, some business leaders say, is what has prompted regulators to use a six year-old antimonopoly law and other regulations to shield domestic companies from competition.

 

Responding to the U.S. Chamber’s report in Bejing, Qin Gang, a Foreign Ministry spokesman, said China’s anti-monopoly measures are transparent, fair and done in accordance with the law, the Bloomberg article notes.

 

“China will always welcome foreign companies and enterprises to develop cooperation in all fields and build a good market economy,” Qin said. “At the same time, we request foreign companies observe Chinese laws while in China.”

 

In perhaps the most cut and dried statement, Kim Woodard, a former vice chairman of the American Chamber, said foreign companies used to have a “sense of cooperation” with Chinese regulators but believe that has changed over the past two years, according to an article in The Seattle Times.

 

“Now, what’s happening is you have aggressive enforcement actions against selected companies,” said Woodard. “That starts to look like another barrier to market access.”

 

It’s challenging enough to conduct business in foreign countries. But if it seems the deck is stacked against them by a government trying at the same time to create a favorable environment for national companies, it certainly makes business more challenging. If the situation doesn’t change—and it looks like it won’t be changing anytime soon—one must wonder if those U.S. companies will follow through on cutting future investments.

 

What are your thoughts? What else can those companies do?

 

 

The hack of Apple accounts that led to nude photos of celebrities and athletes being posted on Internet forums by unknown hackers is just another example of the need for vigilance when it comes to cybersecurity.

 

Some cybersecurity experts blame the hacking of celebrity photos on inadequacies in Apple’s cloud and mobile security, while others point out—more generally—that the situation simply demonstrates security is lacking in some degree in cloud-services security. Apple denies that its iCloud or Find My iPhone systems were hacked. In the meantime, the FBI has begun an investigation, and, interestingly, Apple stock sank 4.2 percent yesterday.

 

This week also brings news of another large attack on a major retailer. On his Krebs on Security website, cybersecurity blogger Brian Krebs reports that multiple banks say they see evidence that Home Depot stores have been hacked and the stolen data is the source of a massive new batch of stolen credit and debit cards now for sale in the cybercrime underground. Home Depot says it’s working with banks and law enforcement agencies to investigate reports of suspicious activity. There are signs that the perpetrators of this apparent breach may be the same group of Russian and Ukrainian hackers responsible for the data breaches at Target last year.

 

Both of these events remind me of a recent BusinessWeek article in which Karen E. Klein notes that the National Small Business Association reports that in a survey of members last year, almost half of the respondents had experienced security breaches—and nearly 60 percent of those incidents resulted in business interruption. Furthermore, although more than 90 percent of those surveyed said they were very or somewhat concerned about cybersecurity, one in four reported knowing little to nothing about cybersecurity issues.

 

Because there now is such a significant threat of hackers gaining access to systems and obtaining confidential information, there has been a corresponding rise in claims for so-called cyber-liability insurance, says Harris Tsangaris, senior vice president at insurance broker NFP, in the BusinessWeek article. This insurance covers both electronic hacking incidents and confidentiality breaches that result if a company isn’t properly disposing of paper files that contain financial information, he says.

 

The insurance typically includes liability coverage in case lawsuits are filed over the security breach, Tsangaris says in the article. It usually pays for the cost of notifying all individuals who have been affected, as well as providing credit monitoring services for them after their confidential information has been compromised. Another cost that should be included in a cyber-liability policy is any regulatory fines or penalties that could be levied against the company as a result of the breach, Tsangaris says.

 

As companies continue to rely on facilities around the world to supply products, any disruption in supply or distribution chains—caused, for example, by natural disasters such as earthquake, tsunami or river flood—may lead to significant interruption and loss to a business. Consequently, companies increasingly rely on contingent business interruption insurance to protect themselves from business interruption losses when a logistics system fails due to a covered cause of loss. Fortunately, a company may be protected from such losses even if the company itself has not suffered any damage to its own property because there has been a disruption in its supply or distribution chain.

 

I wonder if there will likewise be steadily growing demand for cyber-liability policies to protect against security breaches. What are your thoughts on these policies? Is this just the cost of doing business these days?

 

The other issue is what seem to be inadequacies in cloud-services security. Is this a concern where you work, or should it be?