So often our discussions about supply chain center on arcane details and limited stakes. Production delayed? Get ready to pay more for expedited transportation. Lost a supplier? Might mean empty shelves at the supermarket. Life goes on.
Sometimes, though, the stakes are much higher. They can even be a matter of life and death. Just ask Hospira, the leading producer of generic injectable drugs. It is one of several big pharmaceutical companies at the center of a global prescription drug shortage.
Michael Moore, vice president of supply chain with Hospira, said the number of critical drugs found to be out of stock has increased fivefold since 2004. In 2011, it reached an all-time high of 251, according to the U.S. Food and Drug Administration, which maintains an ongoing list.
The consequences have been devastating. In the early stages of the crisis, Hospira was getting complaints from global purchasing organizations. After about six months, pharmacists began calling. Then came the patients themselves. Hospira's call centers were hearing from the parents of children with leukemia and other forms of cancer, who were in desperate need of drugs for treatment. Premature infants had to have Vitamin K, or they would go blind. "We had none in production," said Moore. Between 2010 and 2011, at least 15 deaths were blamed on the unavailability of vital drugs from multiple manufacturers.
How did things get so bad? Unsurprisingly, there is plenty of disagreement. Critics of FDA charge the agency with overly aggressive regulatory behavior, resulting in the shutdown of nearly a third of manufacturing capacity at four makers of injectable medicines. FDA has refuted the claim, blaming problems caused by manufacturers' quality issues, production delays, shortages of key raw materials, increased demand and the decision by producers to stop making some drugs because they weren't profitable enough.
It's a complex issue, and there is no sole cause. But you might be surprised to hear that the drug companies aren't absolving themselves of responsibility. Speaking at the Supply Chain Council's latest Executive Summit in Indian Wells, Calif., Moore suggested that at least part of the reason for the shortage was Hospira's inefficient, poorly communicating supply chain.
It began with a dysfunctional method of forecasting demand. Moore said those responsible for inventory and production planning had never sat down with operations leaders to discuss changes in the plan. The numbers that did emerge were often suspect. Marketing, for instance, was prone to developing forecasts that oddly synched up with sales targets. "There was not a whole lot of math, process or structure behind that," he said.
It's a common malady among companies of all types, the inability of various corporate functions to step outside their "silos" and reach consensus on forecasts and production plans. For Hospira, the answer lay in the application of a sales and operations planning (S&OP) process in more than just name.
What was needed was a brand new operations-review concept. A crucial element, said Moore, was inviting finance to the table for the first time. Business planning had to be conducted in a holistic manner, bringing "a strong dose of reality to the sales plan, as well as [to] excess and obsolete inventory," said Bill Nienburg, executive director of Integrated Business Planning Associates.
Nienburg's consultancy, which worked with Hospira to implement the new system, prefers the label of "integrated business planning" to S&OP. As the term suggests, IBP involves the creation of cross-functional teams and linking up the S&OP cycle with a well-established business-review process.
Whatever you choose to call it, the initiative has revamped the way in which Hospira forecasts demand and applies the number to production. Among the most notable features was creation of a new stage of review, dubbed "pre-S&OP," to let junior managers attack issues before they are passed up to the "executive S&OP" level. Planners therefore avoid the prospect of debating basics in front of the company president. "Only tough issues go up to ES&OP," said Moore.
This newfound push for consensus allows Hospira's demand planners to reset statistical forecasts when necessary, come up with the best alternative and launch an internal review to see if any unexpected issues pop up. The same goes for operations, where planners can access the revised supply plan and see exactly what's changed. In cases where the company can't meet supply targets, the operations leader has time to devise a strategy for avoiding, or at least minimizing, a product shortage.
Hospira divides its forecast into zones, tied to execution, tactical and strategic planning horizons. They address, respectively, commitments for the next three months, four to 12 months, and 12 to 18 months. In addition, the company maintains a rolling 18- to 24-month forecast for planning resources, capital outlay and financials. The whole apparatus is "hard-wired" to the company's "latest best estimate" of sales. The result is a system that does a much better job of predicting and shaping future demand, as well as addressing immediate needs.
It hasn't been an easy task to carry out. Hospira is a $4bn company with about 20 percent of its sales outside North America. It has to be constantly taking into account new markets and the complex integrations that arise from serving them. Some plants are the sole source of a critical drug for a particular region. But the operations group works by product category, making it tough to determine which parts of the world are in greatest need of a drug at any given time. On top of that, the FDA has begun mandating earlier notification of potential shortage situations.
It remains a work in progress. "We're continuing to improve every month," said Moore. "Integration with finance has been awesome. I've never seen all senior leaders agree to a single forecast so fast."
The crisis is far from over, although this year has seen fewer drug shortages than the last, partly because of internal efforts such as that of Hospira, and partly because FDA has been working more closely with drug manufacturers to head off problems. But additional challenges loom. Hospira and its pharmaceutical counterparts are under constant scrutiny by FDA for quality and compliance issues at their plants. Just this year, Hospira initiated a series of recalls triggered by product quality problems. It has responded to FDA warnings by upgrading plants in Texas and North Carolina. And it continues to pursue supply-chain efficiencies driven by implementation of the integrated business planning process.
How important is good supply-chain management? At Hospira, that's one question that nobody ever asks.
- Robert J. Bowman, SupplyChainBrain
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