Risk & Compliance

Is Your Supply Chain Safe?

Major disruptions are not the only risk facing extended supply chains. Safety takes a multifaceted approach.

January 4, 2013
Trans

Supply chain managers who focus on the most recent threat will be blind-sided by something else. That seems to be a rule of nature and, unfortunately, a tendency among managers.

“The prevailing notion is that dealing with major risks is episodic, based upon what’s happening at the time, rather than a balanced, consistent approach,” observes Brad Householder, principal at PwC. Companies have rotated through supply assurance, IP protection, counterfeiting, product safety, security, quality… “For large branded providers of consumer goods, their reputations depend on what happens two or three tiers into the supply chain.” At that level, what happens runs the gamut from suppliers who don’t understand the necessity for certain specifications, to problems in sourcing, product handling and transportation.

Development, manufacturing and sourcing aren’t limited to any single geography, even for a single product. “Therefore, the issues today are more challenging and global,” notes Mohan Ponnudurai, industry solution director at Sparta Systems. “The challenge is to manage suppliers, ensuring the right type of suppliers from a brand risk perspective while meeting your mission regarding safety, regulatory compliance, costs and a global presence.”

Because suppliers also may define a company’s competitive advantage, it’s paramount that manufacturing and business processes are standardized, and that mindsets are synchronized so brand value is maintained. As Ponnudurai emphasizes, “If something goes wrong, it’s not your supplier’s name that’s usually in the press. It’s yours.”

 

Prevention, Policing and Planning

PwC’s Householder summarizes supply chain safety management as a combination of “prevention, policing and planning.” He says, “Building active partnerships and collaborations, understanding the key risks and putting measures in place to avoid them helps prevent problems. Policing features monitoring and auditing performance. Planning prepares contingencies for fast responses. For example, three hours after the 2011 Japanese tsunami, one large electronics company had its contingency plan in motion, even though most of the world hadn’t yet heard about the disaster.”

Developing contingency plans isn’t a way to save money, but the plans can help increase efficiency and protect the supply chain during emergencies. “Managing supply chain risks costs money, but if you know how to think about risk and know how to react, you can minimize the effect upon customers and, thus, upon revenue,” Mike Giguere, PwC principal, emphasizes. Having relationships with alternative suppliers; knowing where to reroute transportation; identifying and prioritizing business-critical activities before a crisis strikes; all contribute to smooth operations during difficult times.

“Some aspects of protecting the supply chain should be collaborative,” Giguere says, while others must be driven by clients through monitoring, reporting and auditing systems that help ensure suppliers remain true to agreed upon goals. “One of the biggest mistakes a company can make is to base supplier relationships entirely on price.”

Basing purchasing decisions mainly upon price contributes to safety risks, like the use of lead paint in toys or the September 2012 scandal in which used cooking oil (so-called “gutter oil”) was used in place of soy oil in pharmaceuticals.

Often, safety breaches “are a by-product of overreliance on suppliers who haven’t been properly segmented or categorized according to risk,” Householder elaborates. That includes new and unestablished, as well as high-risk, suppliers. Until those suppliers prove they can consistently deliver products according to specification, their shipments should undergo inbound inspections at their expense. “The problems tend to occur where relationships weren’t properly configured,” he reemphasizes.

For Bell Helicopter, “The risks of non-conforming product coming from our supply chain include the costs of additional transactions, reworks, repairs, and scrap, as well as the potential for downstream quality escapes,” notes Michael Loeffler, lead strategic sourcing director.

“This highly regulated industry is very prescriptive about product quality and conformity,” Loeffler says, and “passing on non-conforming products to our customer is unacceptable. There is great focus and expense associated with avoiding these types of escapes.” Bell does this by extending its quality management system into its supply chain. According to Loeffler, “Bell’s suppliers are contractually bound to meet quality standards and their respective quality systems are evaluated, measured and subject to quality assurance audits.”

 

Developing Nations

China has a black eye in world opinion, with a reputation for poor quality products and poisonous goods. But the problems that it faces also confront most developing nations, according to consultant and expert witness Rosemary Coates, president of Blue Silk and author of “42 Rules for Sourcing and Manufacturing in China.”

As she explains, “The China price is the break-even point. After winning a contract, Chinese manufacturers find ways to cut corners, by using less expensive materials, making products slightly smaller or reducing thicknesses. The issue with lead paint on toys, for example, arose because lead paint dries faster than the alternative and helped them meet the Christmas production schedule.”

Many developing nations — China included — have been manufacturing for export for a relatively short time. Therefore, global manufacturers often must introduce concepts that are considered basic among industrialized nations, but in which manufacturers in developing regions have little or no experience. “For example,” Coates says, “I toured a machine shop on the outskirts of Beijing recently. The general manager was called away and we wandered through the shop unescorted, and without eye or hearing protection. That wouldn’t have happened in an industrialized nation.”

Organizations contracting with such firms bear some of the responsibility for ensuring standards are met. “You have to specify how things are produced and take responsibility for all the processes — you can’t just throw it over the wall,” Coates stresses. “The German firms operating in China are great at this. They provide a lot of detail and are very exacting regarding their specifications. Consequently, German companies probably get better quality from China than any other contingent operating there,” she concludes.

 

Operational and Statistical Risk

A large part of ensuring a safe supply chain involves supply chain network optimization, according to Aaron Baker, senior director of supply chain development logistics provider Damco, part of the A.P. Møller - Mærsk Group. He recommends looking at the supply chain from end to end with an eye to both operational and statistical risks.

“Operational risks can be approached from a qualitative perspective,” Baker says. For example, a subjective sourcing map may be created that assesses low-cost geographies against such risks as poor infrastructure or political instability. One bad situation — a washed-out road, perhaps — could eliminate the advantage of a low-cost labor force.

Therefore, Baker advises organizations to evaluate their network design, considering such details as ports of entry, the best locations for distribution centers, staging of buffer stock, etc. “Ultimately, you need to determine whether extra inventory really is needed at each node or whether it can be deployed more effectively without sacrificing safety.”

Statistical risks can be quantified based upon the probability of various supply chain risk disruptions occurring and the time to recover from them. For example, Baker says, “A risk analysis of a potential port strike can be quantified using a model to determine how and where goods enter the market and — in the United States — the percentage of goods entering either coast.” Then contingencies and costs are factored in and a cost is ascribed to each potential disruption to determine the value at risk. This enables risks to be ranked so planning can concentrate on risks most likely and most disruptive to business.

 

Track and Trace

Track and trace capabilities are becoming increasingly important as governments insist that faults be traceable throughout the supply chain. Processes used by manufactures to track lots or pallets to the offending material are being applied to the food and pharmaceutical industries, making it possible to trace harmful ingredients further back in the supply chain and thereby significantly reducing the size of any recalls that do occur.

“The Food Modernization Act requires track and trace,” says Kevin Payne, senior director of marketing at Intelleflex. Using RFID tags to trace every handoff helps the food industry to reduce waste and increase revenue, thus minimizing the risk of recall.

For example, Payne notes, the FDA collected data on Indiana cantaloupe contaminated with salmonella between August 14 and 16 and announced the name of the grower August 28. “The cantaloupe was still on shelves throughout that time because of a paper-based track and trace system, which takes time. When you can document product electronically, it’s much easier to identify the source of problem and initiate a recall.”

For pharmaceuticals, the one-year phase-in of serialization is expected to begin Jan. 1, 2015 in California, effectively mandating track and trace requirements for the entire U.S. pharmaceutical supply chain. Detailed product information must be on each label, down to the individual unit level, as the product moves throughout the distribution chain. This will enable faster, more economical recalls and is expected to reduce the problems of product counterfeiting and diversion.

Exactly how the information will be collected and managed is still being debated as some pharmaceutical manufacturers begin pilot programs. Importantly, a recent study by the University of South Florida, the Blood Center of Wisconsin, Abbott, Georgia Institute of Technology and the Madison RFID Lab at the University of Wisconsin found that radio frequency emissions from RFID technology have no impact on biologics, thus removing the major pharmaceutical industry concern. Intelleflex champions Class 3 RFID tags because they have a reading range of more than 300 feet and respond to a radio signal even through packaging and can be placed inside pallets and containers.

Intelleflex’s combination of RFID and temperature monitors enables shippers to know the location and condition of their products when the tags are scanned at each handoff point. As Payne points out, “It provides actionable data so, for example, if pharmaceuticals are sitting on a tarmac and the plane is delayed, the shipper can monitor the actual temperature inside the package, know that it’s climbing and send the cargo back to refrigeration.”

 

Temperature Controls

Temperature-controlled shipping is becoming increasingly important for both food and pharmaceuticals. The Panalpina Group reports that 20 percent of its cargo is temperature-controlled and C.H. Robinson Europe recently opened an office in Rotterdam specifically for temperature-controlled shipments. Growth is driven by the increasing realization that food’s shelf life depends upon temperature as well as time, and the increasing sensitivity of new medications and vaccines to temperature. “Many in the food industry were unaware of the impact of temperature from the moment food is harvested,” Payne says.

For example, “Producers accept that 2 to 4 percent is lost, but we found it’s at least twice that. One case study showed 30 percent of product at risk of spoilage.” Blackberries, for example, have a 16-day shelf life and age one day for every hour they are kept at 70°F. Therefore, cooling blackberries immediately after picking can extend their shelf life several days. Conversely, subjecting those blackberries to high temperatures reduces the shelf life. Both shipments of blackberries may look the same when they arrive, but the shipment exposed to higher temperatures will result in greater spoilage.

Immediate cooling also helps control pathogens, which proliferate as temperatures increase. The problem is getting mainstream attention. In August, The Today Show highlighted the problem in a report showing Indiana police checking the temperature of refrigerated trucks. Investigators found many drivers had turned off the refrigeration to save fuel, and turned it on again before reaching their destinations, thus compromising their cargo. That was not the first time the Indiana video had aired publically. It has been used by both sides of the debate about food transportation safety regulation — to demonstrate the breadth of the problem and to show the negative image that can be projected by a minority who are willing to put cost over safety.

According to the 2011 Bio/Pharma Cold Chain Sourcebook, in 2016, 8 of the top 10, and 27 of the top 50 best-selling drugs, will be cold chain products. Although the 2°-8°C range is the most common cool temperature requirement, the industry is beginning to monitor the temperatures of ambient temperature products — typically 20°-25°C — to ensure appropriate temperatures are maintained.

In response, the Panalpina Group recently added two new “Cool Planes.” These airplanes are designed to hold cargo at two different temperature ranges — the 2°-8 °C range and 20°-25°C, for example. Panalpina has partnered with Antares Solutions to deploy the SmartView RFID temperature monitoring system for cargo trucked from a Swiss pharmaceutical manufacturer to Luxemburg and then air freighted to Huntsville, Alabama. Other pharmaceutical companies are piloting that solution now.

In the cold chain, “The most common mistake shippers make is trying to engineer a solution to every problem,” Payne says. “The problem is that you can never eliminate all the variables.”

 

Audits

Audits remain a useful way for manufacturers to emphasize the elements that are important to themselves and to the rest of the world, such as safety and environmental standards and labor laws. The downside, particularly for small suppliers, is that frequent audits take resources away from the work itself. To reduce the burden, auditors use a risk-based approach. After an initial audit, future audits can focus on the highest risk areas, ensuring that corrective actions have been taken.

“Some specialized consortia exist for the pharmaceutical and food and beverage industries, so their members can do common audits and share the results. It’s a good way to streamline operations.” Sparta Systems’ Ponnudurai says.

The transportation industry did this too, PwC’s Householder adds. “There are a lot of equipment compliance and regulatory compliance requirements, so companies work collaboratively with suppliers with respect to component and sub-assembly specifications, and have varying levels of audits in place to confirm that equipment is properly calibrated and is within acceptable tolerances,” he says. “Today, depending on the sector, many companies and their suppliers are developing technology and specifications jointly.”

Governmental entities also are improving the situation, Coates adds. “China, for example, put together a green initiative that rewards companies that succeed in their environmental efforts.” The World Trade Organization also exerts leverage that triggers improvements.

Automation supports standardized audits so the criteria remain stable regardless of auditor, thus lessening ambiguity. Automation supports the formation of a centralized data repository that tracks issues through their remediation and back to the business processes that may be the root of the problem. Consequently, manufacturers can concentrate on the value-added portion of their work.

“The benefits include reduced cycle time, effort and costs, because the time between spotting and resolving an anomaly is faster,” Ponnudurai explains. “And, because everything is running on a central system, there is full visibility, which enhances analytic capabilities.”

Audits have their place, but, as Loeffler emphasizes, “Audits are clearly not the panacea… the answer is having the kind of supplier relationships and processes in place that drive quality into the product, rather than hoping to inspect defects out.” To that end Bell Helicopter involves its suppliers in the technical definition and design of new products. That involvement includes multiple technical considerations, including manufacturability. “This type of collaborative approach ensures that Bell is designing products that can be efficiently and repeatedly produced.”

With suppliers located throughout the world, manufacturers must expect and plan for evolutionary changes and setbacks. Prevention, policing and planning are each integral elements in ensuring supply chain safety and become increasingly important as the supply chain lengthens. wt

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