Supply Chain Risk Management and Mitigation Techniques in Health and Personal Care

Aug. 11, 2009
Disruptions in HPC supply chains can have serious implications for personal and public health.

The Health and Personal Care Logistics Conference (HPCLC) is an 86-year-old organization of health and personal care companies dedicated to improving their logistics and supply chain performance. The organization conducts three meetings each year to focus on critical supply chain issues impacting the industry and discuss solutions. At a recent meeting held at Johnson & Johnson headquarters in New Brunswick, New Jersey, facilitators from Abbott Labs, Merck, Johnson & Johnson and JPMorgan Chase challenged attendees to focus on finding cutting-edge solutions to emerging supply chain vulnerabilities faced by health and personal care supply chain managers. The narrative below summarizes the discussions held that day as well as suggested solutions that emerged.

Risk management and mitigation techniques have emerged as central elements of successful supply chain management strategies. From fluctuations in fuel costs to the uncertain politics and economies of countries from which raw materials and component products are sourced, disruptions and delays of supply chain flows threaten the profitability of every firm competing in today's global business environment. These risks are particularly poignant in the health and personal care (HPC) industry, where a single container of product may be worth millions of dollars and require stringent temperature control across a broad spectrum of environmental conditions. Disruptions in HPC supply chains often impact more than just the economic bottom-line; inability to get products to the right place at the right time in the right condition often has serious implications for personal and public health. Among the most prominent areas of risk for HPC supply chain managers are temperature control, fuel cost, and product flow visibility.

Temperature control risk relates to the requirement to maintain the ambient temperature of many HPC products as they flow through the supply chain within very stringent windows; if temperatures venture outside of the specified range for even short periods of time, the product cannot be used. Technology and methods utilized on the manufacturing floor recently have been adopted throughout the supply chain to improve the reliability to manage the risk associated with temperature controls.

Managing such "cold chains" involves maintaining product quality and ensuring compliance with global regulations and industry standards for the storage, handling and distribution of temperature-sensitive products. The cold-chain management model includes consideration of product requirements, qualification/validation of equipment, facility and transportation temperatures, supply chain partner management, performance measurement and reporting, communication and education and continuous improvement. Qualification is one element of cold-chain management used to ascertain that the quality and efficacy of temperature-sensitive products are maintained. The understanding and improvement of cold-chain shipment conformance requires a structured problem-solving approach and implementation of processes and procedures to ensure sustainability. Shipment conformance should be part of the cold-chain management program, which in turn must support a firm's supply chain objectives in terms of compliance, customer service and costs.

Rising fuel costs combined with volatile fuel markets have caused firms to be subject to both fuel surcharges and rising base transportation rates. Although the costs and risk of rising fuel costs are not specific to firms in the HPC industry, HPC firms must manage somewhat differently because of the high value and sensitivity of the products they are transporting. HPC firms increasingly use external market intelligence on both crude and refined oil costs to gain market insights and pricing data. This information is used to generate forecasts and model the budget impact associated with fuel cost variations.

Managers at the recent meeting suggested other risk-mitigation strategies for managing fuel costs including partnering with suppliers to decouple fuel costs from cost of goods sold to enable better tracking and measurement; contractually eliminating fuel surcharges by blending volatility into base rates; establishing contractual caps on fuel charges to shift some of the risk to carriers; and searching for modal shifts and consolidation opportunities in transportation (to enable shifting from LTL to less-costly, full-truckload movements.)

Managers also revealed a number of operational techniques that they are attempting to use to minimize the risk associated with rising fuel costs. Some HPC firms are taking the opportunity to consolidate logistics decision and transportation freight flows not only across SBUs within their own organizations, but also across their supply chains by working with customers, suppliers, carriers and even competitors to align freight flows on both front and back haul lanes, thus optimizing the effectiveness of transportation assets and reducing fuel costs.

There are, however, considerable barriers that continue to make this a difficult area to manage. Differences in organizational culture, for example, preclude companies from collaborating across SBUs to consolidate delivering different product families to the same location on the same transportation asset. In addition, given the high value and sensitivity of inventory in HPC, ensuring sufficient supply and maintaining time and temperature controls is more critical than optimizing loads, forcing trade-offs to be made when managing fuel costs.

The risk of disruption to product flows is especially important in the HPC industry, where time is of the essence and shipments of overseas containers can contain millions of dollars of product. Because of the nature of the product, theft is an even greater risk with shipments of pharmaceutical products; product getting into the wrong hands could mean years of litigation and the risk of consumers' health and well-being. Improving the visibility of international supply chains is increasingly looked upon as being an important tool to help mitigate these risks in HPC. Improved supply chain visibility can translate to increased revenue growth through lower stock-outs, reduced inventory, and reduced transportation and distribution expenses through improved procurement activities, load utilization, transit times and reduced dependence on expedited shipments.

As a result, some HPC firms are moving to the next wave of information system implementation utilizing supply chain event management systems to capture and synchronize information from multiple sources across the global supply chain to provide close to real time access to shipment location, status, temperature, customs filing information, etc. The ability to track these data and receive prompt notification when something is amiss enables supply chain executives to manage potential risks and enable proactive responses. Key components of successful event management implementation include collaboration among partners and providers to establish standard metrics and reports, stringent care in partner selection and participation, and process coordination for reliable data flow across partners.

Each of the discussions highlighted above served to convince the audience that the requirement to carefully manage and/or mitigate supply chain risk will continue to be a hallmark of the supply chain profession. Managers at some of the leading pharmaceutical and health care firms are demonstrating that robust supply chain concepts may be brought to bear to grapple with the heightened sense of risk associated with today's increasingly turbulent environment.

Tried and true supply chain capabilities focused on capturing and tracking information far up the supply chain flow, deftly managing freight and transportation lanes, collaborating within and across companies, continually adapting performance measurement to meet new requirements, and innovatively using new information technology applications -- the very same capabilities that have yielded unprecedented improvements in customer service and operating cost and inventory reductions over the last 20 years -- are yielding impressive gains that are helping firms weather new challenges.

Monique Ueltschy is a Doctoral Student in Logistics. Ted Stank, Ph.D., is an Associate Dean and Dove Professor in Logistics and Transportation. John T. Mentzer, Ph.D., is Chancellor's Professor and Bruce Chair of Excellence, Department of Marketing and Logistics. All are with the University of Tennessee.

For over 30 years, University of Tennessee (UT) has played a major role in the areas of supply chain/logistics; supply chain certification; operations excellence (lean, process improvement); executive education; and leadership development -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks and creating benchmarks.

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