This is such an important and timely body of research. I strongly recommend picking up the report but only if you are seeking practical, action oriented advice. Stay safe!
Here we go again. A recent Bloomberg article once again cited the potential shortage of Heparin, a critical blood-thinning medication. Attached is the recent article, as well as a case study/excerpt from my book, “Single Point of Failure: The 10 Essential Laws of Supply Chain Risk Management”. Once again, the importance of collecting, monitoring and managing critical supply chain data by the products/value you produce comes front and center. Over the past decade, I’ve worked with more than 50 organizations to design, apply, improve, and deploy activity-based risk management. Contact me @ firstname.lastname@example.org if you’d like to learn more.
Deadly Pig Disease Sparks Fear of a Heart Drug ShortageBy
A case study demonstrates how a critical supply chain can be more vulnerable
than anyone thinks. The drug heparin is derived from animal liver cells and
is a vital anticoagulant (formula C12H19NO20S3). It prevents blood clots and is
used to treat acute coronary disease, a trial fibrillation, thrombosis, and pulmonary
embolism; clinical trials for the treatment of arthritis, asthma, cancer, and
even organ transplants are promising. It is also used in bypass and other heart
surgery operations. In other words, it is a vital drug. David Strunce, president
of Scientific Protein Laboratories, Baxter Lab’s main supplier of heparin, says
that the Yuan Intestine and Casing Factory is not in his company’s supply
chain. Scientific Protein can’t trace its supplies in China in as much detail as it
can in the United States. “We’re all dealing with the China collection system,”
Mr. Strunce reported.
China is the world’s largest heparin exporter, shipping more than $100 million
of the substance a year. China’s lack of consistent oversight of its heparin
industry highlights a regulatory gap that’s opening as drug makers increasingly
go shopping globally for ingredients. The raw heparin made by China’s myriad
small producers ends up in the hands of about 50 export companies, which sell
to customers overseas. In the first half of 2008, more than 85 percent of these
heparin exports went to the United States, Austria, France, Italy, and Germany,
according to an industry trade group.
An ideal system for tracing heparin back to the barnyard would involve
tagging individual pigs, then keeping files detailing each animal’s record of vaccination,
feed, and overall health. That record could follow the animal to the
slaughterhouse, providing a paper trail that a drug company or the FDA could
later tap into. Many heparin processors, including Changzhou Scientific Protein
Laboratories (SPL), the plant that supplies Baxter, are registered as chemical or
agricultural-byproducts companies and weren’t checked by health authorities.
Abraxis Pharmaceutical Products, or APP Pharmaceuticals, Baxter’s main rival,
says its Chinese supplier, Shenzhen Hepalink, is able to trace refi ned heparin
back to individual pigs. Shenzhen Hepalink also says it requires suppliers of raw
heparin to follow rules designed to minimize the chances of contamination.
The agency did, at most, 21 inspections of Chinese drug-making facilities
annually in fiscal years 2002 through 2007, according to the U.S. Government
Accountability Office (GAO). That represents a fraction of the 714 Chinese facilities
that, as of the end of fiscal 2007, the GAO says were involved in making
drugs or drug ingredients for the U.S. market. FDA Commissioner Andrew von
Eschenbach has said he would like to station inspectors in China.
Because heparin is derived from living tissue, companies that purify raw
heparin follow a range of steps—filtration, heat treatments, and other processing—
to reduce the risk that it may contain active viruses or bacterial toxins. Since
192 Single Point of Failure
mid-2006, China’s pig herds have suffered serious outbreaks of porcine reproductive
and respiratory syndrome, a viral illness commonly known as blue-ear
disease. Sick animals are supposed to be rejected by slaughterhouses, but
enforcement can be lax. Also, infected animals may be slaughtered before
symptoms are recognized.
Some drugmakers say it’s important to be able to trace back to the pigs that
served as raw materials. That way, if patients have adverse reactions to a drug,
the root problem can be discovered and other possibly tainted batches can
be pulled from the market. Many Chinese heparin manufacturers say this is a
very difficult standard to meet in China’s business and agriculture environment.
Wang Shengfu, manager of another raw-heparin maker in China’s Shandong
province, Linyi Meiyuan Seasoning Co., notes that unscrupulous business people
and middlemen can easily “provide buyers with fake records.”14
By 2010, China is expected to produce nearly 25 percent of the world’s
pharmaceutical ingredients, according to a recent study by the investment firm
Credit Suisse. “If you haven’t been in a plant for the last two or three years,
you don’t have any clue what’s going on in those places,” said a congressional
source familiar with investigative work into the FDA by the House Commerce
Committee’s subcommittee. “They could be running monster truck rallies on
the plant floor, and we wouldn’t know about it.”
“The computer infrastructure is outdated, it’s not stable, there is insufficient security and capability,” said Dale Nordenberg, a Science Board member
who specialized in the computer systems. “The FDA is still relying on
an amalgamation of paper-based records and poorly integrated electronic
platforms.” The two main FDA databases cannot agree on how many foreign
companies are subject to FDA inspection. One claims the number is 3,000,
the other 6,800. Compounding the confusion, the FDA uses corporate
names, rather than identification numbers, to track production plants and
registration information. For an agency monitoring the operations of companies
in dozens of countries worldwide, this creates confusion. Indeed,
Scientific Protein’s China operation slipped through the FDA’s inspection
regimen primarily because of confusion over the company’s name. But
Nordenberg is hardly encouraged by the agency’s admission this was at the
root of the FDA’s failure to inspect the plant. “That’s just another heparin
timeline,” he said.15
One expert says as much as 70 percent of China’s crude heparin—for
domestic use and for export—comes from small factories in poor villages. One of
the biggest areas for these workshops is in coastal Jiangsu Province, north
of Shanghai, where entire villages have become heparin production centers.
In a village called Xinwangzhuang, nearly every house along with a narrow
street double as a tiny heparin operation, where teams of four to eight
women wearing aprons and white boots wash, splice, separate, and process pig
Law #6: Managing Production Risk Is a Dirty Job 193
intestines into sausage casings and crude heparin. The floors had large puddles
and drainage channels; the workshops were dilapidated and unheated;
and steam from the production process fogged up the windows and soaked the
walls. There were large ovens to cook ingredients and halls lined with barrels
to store enzymes, resins, intestines, and wastewater. “This is our family-style
the workshop,” said Zhu Jinlan, the owner of one heparin operation, who stopped
sorting pig intestines and invited visitors to a back room, where she lives with
her husband and child. “We’ve been doing this for about ten years.”
Experts say the small, unregulated factories could pose dangers because
they do not have the same controls and rules as large slaughterhouses, which
also produce crude heparin. “If you don’t control the incoming source, it’s very
hard to get rid of the contaminants,” says Liu Jian, a heparin expert at the
The University of North Carolina. Mr. Strunce of SPL says his company never buys
directly from the crude-heparin producers, only through its wholesalers, which
he called “consolidators”—Changzhou Techpool, its Chinese joint venture
partner, and Ruihua. His company, he said, has records documenting all the
transactions. But in Rugao, producers of crude heparin tell a different story.
A sales manager for a major supplier, Nantong Koulong, said he sells directly
to SPL without going through either of the two wholesalers. “We provided crude
heparin to Changzhou SPL,” said the sales manager, Chen Jianjun. Some of
Koulong’s stock comes from the unregulated workshops, he said. The owner
of one such workshop, Ms. Zhu in Xinwangzhuang, said she sold to SPL two
years ago. She also sells to Koulong. “We are really a traditional family-style
plant,” she said. “We have no certificate.”
After an outbreak of blue-ear pig, the disease swept through 25 of China’s 31
provinces and regions in 2008, prices soared and many drug suppliers had to
look to the small workshops. The epidemic said Cui Huifei, a heparin expert at
the Shandong University School of Medicine, “made those biotech companies
inevitably purchase from the family-style plants, for cheaper prices.”16
Another Apple Trifecta? If recent reports of Apple being engaged in discussions with cobalt suppliers are true (and I bet they are) then we are about to witness another lesson in how to gain competitive advantage as Apple simultaneously executes competitive strategy, uncertainty navigation and supply chain risk management.
CEOs and strategists often define competitive strategy as a point-of-view about the future in which they execute against. To do so requires focus, unique value and achieving superior returns on capital investment. One of Michael Porter’s key principles to competitive strategy is that one must thoroughly understand the industry value chain and the value creating and cost generating activities associated with it. Note: competitive advantage is achieved at the activity level or in this example, the supply chain resources, technology and processes.
Apple’s leadership has achieved competitive advantage over the past decade by consistently and thoroughly understanding the industry value chain as well as their own product supply chains and related sourcing activities. As a result, uncertainty surrounding these activities has been greatly reduced thus allowing faster and bolder investment decisions. The sourcing activity has clearly provided Apple with unique and sustainable value. Decision making about the future of essential materials, such as Cobalt, are viewed simultaneously through a market and operational lens, then linked to financial performance.
For example, in 2011, Tim Cook revealed that he had entered into long term component supply contracts worth $3.9 billion over the next two years. Apple had locked up 60 percent of the world’s touch panel capacity, creating an industry-wide shortage and making it hard, if not impossible, for competition to release new products or keep the shelves filled. Not the first time, or the last, Apple leveraged its deep insight into the market, strategic suppliers and “timing” opportunities throughout its materials-to-customer supply chain to separate themselves from the competition. They exercised similar prowess with batteries, NAND flash memory, LCDs glass for iPad retina display, memory chips, image sensors, and the special resins that are used to hold chipsets together. Events like these delay competitors from coming to market or keeping inventory on the shelves. (excerpt From: Gary S. Lynch. “Uncertainty Advantage.” iBooks. https://itunes.apple.com/us/book/uncertainty-advantage/id1196773501?mt=11).
Navigating Uncertainty and Managing Risk in the Supply Chain
As EVs (Electric Vehicles) and energy storage become more widely adopted the lithium ion cathode battery demand and use of cobalt will shift from mobile devices to mega-industry equipment for transportation and energy. Cobalt is an essential material in the production of the lithium ion cathode and Apple’s leadership certainly understands the potential risk. More importantly, their view is not limited to their primary industry value chain but also competing and adjacent value chain (another Porter principle, competing for profits and understanding the five forces).
Apple once again is aggressively navigating uncertainty, clearing the obstacles ahead as the proceed down the highway. To do so not only requires a willingness to take risk but also a commitment to gain deep insight into the broader industry value chains, the activities that differentiate their products and the competitiveness for key commodities and capacities.
Now the elephant in the room, do organizations in the healthcare, food and other industries exercise similar rigor? Are they prepared for a potential large-scale shift in capacity or cost? Will organizations in these industries be able to compete for supply with the mega-energy and automotive industries? A shortage of radio-isotopes in 2009 should have been a wakeup call to the industry and strategic planners that a broader view of industry value chains that support their products and services would be needed. It that case it was the failure of a major producer. Now these industries are faced with a similar threat because cobalt is used in many products including: external beam radiotherapy, sterilization of medical supplies and medical waste, and radiation treatment of foods for sterilization (cold pasteurization) – (Wilkinson, V. M; Gould, G (1998). Food irradiation: a reference guide. p. 53. ISBN 978-1-85573-359-6)
Bottom line: Apple continues to demonstrate the opportunity to leverage uncertainty for competitive advantage. To do so requires relentless pursuit of the data and details while simultaneously understanding the competitive landscape both within and outside your industry.
Interesting article from CNBC that reflects how risk is being considered as part of the design and innovation activity.
Toyota is navigating uncertainty and managing risk by design. As a result, Toyota may be able to minimize customer/dealer delivery disruptions of it EVs (electric vehicles) arising from changing trade policies, higher sourcing cost, and/ or geo- socio-political- events (e.g. tariffs, taxes, political posturing, war).
Bottom Line: I don’t believe this is an isolated case but rather it reflects the early stages of an emerging trend. Personally, I’ve recently received a number of calls from Supply Chain and Operations Executives who are seeking greater insight and risk related data. As the discussion evolves, it is clear that their intent is to gather this data for competitive differentiation rather than defensive investment.
I’ve included several examples in my recent publication, “Uncertainty Advantage: Leadership Lessons for Turning Risk Outside-In” including an excellent example of how Rockwell Automation incrementally improved their risk and resilience investments from defensive to offensive weapons (Chapter 7, pages 242 – 244).
CNBC recently reported that up to 900 KFC branches in the UK faced a chicken shortage due to issues related to switching to a new delivery partner, DHL.
Organizations mitigate supply chain inventory disruptions through a variety of strategies including:
- Stock redundancy (safety stock)
- Stock diversification
- Direct ship
- Alternate sourcing
- Inventory substitution or repurpose
- Increase inventory investment within a channel
- Segmentation and prioritization (allocation)
- Salvage or repackage
However, these strategies in combination with the organization’s risk and resilience programs are typically limited to operational activities. Business continuity, crisis management, and supply chain risk programs seldom link to market intelligence and the financial rigor needed to exploit uncertainty at the onset of a disruptive event.
No chicken, no customers? Should that be the organization’s assumption when the core product or organization’s unique value evaporates? Or does this single point of failure actually represent a single point of opportunity? For example, from a market or industry perspective does the disruption represent an opportunity to accelerate the acquisition of a competitor or alternative product that will eventually lead to a broader, more appealing menu? Is this disruption an excuse to exit an unprofitable business in favor of a more promising opportunity? Or in the case of KFC, does a brief shortage represent an opportunity to promote a different set of products on their menu at a deep discount (or for free)? What did KFCs competitors do to exploit the opportunity, did their playbook include a strategy for exploiting this type of market disruption (i.e. the failure of a competitor)? The following case is provided to illustrate how GM outflanked Toyota when presented a significant recall.
Bottom line: organizational risk management fails as a strategic weapon because it ignores the most pivotal facts of the business landscape – the market and financial objectives. Markets move fast, organizations do not. Supply chain resilience programs are the starting point, however, these programs must be linked with broader contingency/opportunity strategy that includes the market and financial performance.
NEWS AFTER THE ORIGINAL POST
A case in point is a comparison between GM and Toyota in 2014. GM recalled 29 million cars worldwide in 2014, following thirteen deaths and fifty-four crashes due to a faulty ignition switch. Chevrolet Cobalt models were the culprits. The way GM handled this is instructive in comparison to the Toyota response in 2009– 2010 when acceleration problems led to recalls. In the case of Toyota, an attempt to diffuse the situation through public relations— including a denial that the problem even existed— nearly destroyed the company. The Toyota error was instructive to GM, and it reacted in a very different way. The GM focus was not on the profits impact but on markets.
As a result, sales and profits rose after the recalls, when you would naturally expect them to fall. Why? Jessica Caldwell, a senior analyst with Edmunds, explained, “You’d think it would damage their brand, but it’s actually helping to drive purchases at the dealerships.” Recalls brought people into the dealerships, of course. But GM saw this as an opportunity and focused its energies there. In July 2014, GM posted its best monthly sales in seven years despite the massive round of recalls. They sold over 256,000 cars that month alone, a 9 percent uptick from one year before. The consumer visits to the dealership as part of the recall sparked more trade-in activity that would have occurred without the recall. GM offered attractive low-cost financing coupled with employee-level pricing, a 34 percent discount from retail price.
SOURCE: Gary S. Lynch. Uncertainty Advantage: Leadership Lessons for Turning Risk Outside-In (Kindle Locations 1703-1709). Archway Publishing. Kindle Edition