What's in YOUR supply chain, Baxter?

Well, we wouldn't exactly call it "scooping" a major newspaper, but we here at SupplyScope are basking a bit in the glory of having highlighted the complexities and lack of transparency in Baxter's supply chain for its popular blood thinner nearly a full week before The Wall Street Journal's Gordon Fairclough and Thomas Burton brought the issue of China supply-chain transparency to Page 1.

Fairclough, ever the intrepid overseas reporter for the Journal, tromped right into a backwater sub-tier supplier in Baxter's heparin supply chain in rural China, interviewed the owner, snapped a few photos and shot a video of the Yuan Intestine & Casing Factory pig intestine-processing operations. (You may want to view the photos and video on an empty stomach.) What we learn from this article should be enough to make us think hard not only about what's in the drugs we consume, but in the food we consume as well. Baxter denies that the "factory" shown in the pictures snapped by Fairclough is part of Baxter's supply-chain for heparin. Our question to Baxter's supply-chain management team is: "Can you be so sure?"

For those in the field of supply-chain management - no matter what type of finished goods our companies sell - the evidence that continues to emerge from the Baxter heparin fiasco should remind us that establishing an off-shore, distributed supply-chain in places like China requires more than relying on on-shore first-tier suppliers or selecting a known or supposedly reputable first-tier off-shore supplier. It requires constant monitoring of and current knowledge about what's going on in the lower links in the chain. And doing a good job at this requires that sourcing organizations have the tools and invest in the resources that can keep their companies stay out of trouble and avoid negative publicity.

Right now Robert Parkinson, Baxter's CEO, and his team continue to remain mute about the company's blood thinner supply-chain traceability woes (not exactly a wise PR move, guys). In the end, this supply-chain problem is going to cost Baxter a lot of money. It sure would have have cost a lot less in the end to invest in supply-chain mapping and supplier-reputation research services. This is going to be one expensive "lesson learned" for Baxter.

Pigs and Lessons About Off-Shore Supply Chains

What do pigs in China have to do with supply-base intelligence and having the right tools in place to monitor your off-shore supply chain? Actually, quite a bit.

Yesterday news broke that a popular blood thinner sold by major U.S. pharmaceutical company Baxter International could be at fault in at least four deaths and hundreds of illnesses among users of the drug. This put the issue of off-shore supply-chain management back in the spotlight. There is no evidence yet that the deaths or illnesses are directly linked to any element of Baxter's highly leveraged supply-chain. But chances are that such a link will soon emerge.

Baxter purchases the active ingredient for its blood thinner Heparin from a Milwaukee-based supplier called Scientific Protein Laboratories (SPL). SPL relies on a factory in China that it majority-owns through a joint-venture with a Chinese pharmaceutical company.

It is worth noting that the financial and ownership structure of the U.S.-Chinese joint venture makes it nearly impossible to determine which, if any party, could ultimately be held to account for these deaths and injuries if it is determined that tainted heparin was the cause. SPL's joint-venture partner is owned by multiple, related Chinese pharmaceutical entities. And the SPL joint-venture actually supplies key drug ingredients back to the multiple entities that own its local joint venture partner. Still with us? If not, that's OK.

Suffice it to say that this is one huge reason why any company that relies on off-shore suppliers needs to know exactly what is going on within its supply chain. And we're not just talking about knowing the level of incoming and outgoing quality for you suppliers' factories or the levels of compliance with worker-safety and environmental standards (all important pieces of information certainly). We're talking about knowing who you can turn to overseas to get answers, action and remediation when things get muddied up within your supply chain.

Consider the Baxter supply chain for heparin ingredients. Which executive among the seven Chinese firms that have an operating interest in its Chinese joint venture do you think SPL can pin down to get answers, support and resolution? How many will try to hide behind the corporate “veils” that the complex financial structure of the joint-venture affords? Baxter and SPL will soon find out.

OK, so how do pigs fit into all this? Here's how. The key active ingredient in question is derived from the lining of pig intestines. Big deal, you're thinking, this ingredient is widely available – even online through our good friends at Alibaba!

Well, if you're a pig in China these days, you might be a bit concerned about catching a mysterious porcine virus that's spreading quickly throughout the country. And if you're a responsible global supply-chain manager, you'll want to know just about all you can about the key raw material ingredients for your end products.

Is there any connection between the outbreak among Chinese swine and possible tainted ingredients in Baxter's human blood-thinning drug? We can't say yet. But we can assure you that if one of our key products depended on a long, complex and geographically-distributed supply chain, we would want to have intelligence into every level of the supply chain, including:

• any leading information about events that could affect raw material quality (say, a porcine virus) so we could seek safe alternate sources of supply; and

• data about the ownership structure of our key off-shore partners so we would know exactly who to finger and coordinate with if something went wrong.

Operating off-shore supply-chains in high-risk geographies without such information is simply asking for trouble.

Why China Supply-Chain Intelligence Matters Even More Now

The Dollar is weakening, American consumers are feeling less flush these days in light of the housing crisis, the U.S. economy is headed for a recession, according to many analysts, and inflationary pressures in China are pushing up the prices of many goods we consume here, putting pressure on Chinese suppliers to raise prices, making imported goods more expensive, leading American consumers to ratchet back on their consumption....

With all these economic drivers, U.S. importers should expect to see a decline in the demand for Chinese-made goods in the coming months. But here's why U.S. companies will need to hone their China-supplier due diligence activities and increase their oversight of their suppliers in China in the coming months.

A decline in demand from U.S. buyers will likely reveal some fragility in the Chinese supply base. Rising raw-material prices in China will put pressure on Chinese manufacturers to act in ways that could negatively impact their U.S. customers. And a stronger Euro and Yen will lead Chinese suppliers to turn their attention to European and Japanese customers at the expense of their U.S. ones.

If your current China suppliers react to these economic conditions adversely, then you will want to learn immediately about new or more resilient suppliers that could make more stable and reputable supply-chain partners.

Decline in demand for China-made products is bound to produce a shakeout in the Chinese supply base of many industries. Such a shakeout is long overdue. Even Chinese officials are aware of this. Among China's estimated 5+ million export-focused firms, many have suffered the consequences of over-investment (thanks to generous regional or local government incentive plans and favorable domestic tax programs), poor management, lax process control and predicted export demand that may never have fully materialized. The Chinese government has acknowledged that some local “enterprises seek to reduce export costs by exceeding pollution limits” and worker-safety rules. Last October, the Chinese government went so far as to threaten to ban domestic firms from exporting if they flaunt environmental laws. Rising wages and a reduction or elimination of certain subsidies and rebates for firms in China, combined with an erosion in demand from U.S. buyers will only accelerate the shakeout. As a result, in the coming months, for a variety of reasons, many Chinese suppliers will cease operations. Will yours be one of them? What leading or current indicators of supplier performance and reputation will you be watching to know for sure?

Saddled with higher energy and food prices, Chinese manufacturers will attempt to pass through those cost increases to their overseas customers. But not all buyers will be willing to accept the pass-through. Faced with the possibility of losing key customers, Chinese firms will naturally look for ways to reduce their cost structures to compensate for these rising costs. We shouldn't be surprised to see suppliers reducing investment in quality-assurance programs, customer service, IT and other infrastructure as well as environmental, health and safety programs.

And the strength of other global currencies relative to the Dollar (since China loosened exchange-rate restrictions on its currency in 2005, the Dollar has weakened more than 10% against the Renminbi) will drive Chinese exporters to turn their attention to buyers paying with Euros or Yen. Any purchasing professional who has to contend with “mindshare” issues at a supplier will tell you that unless you control a significant portion of a supplier's revenue stream, you will find yourself fighting for manufacturing resources.

The bottom line: for U.S. buyers to successfully manage through these challenging economic conditions, they will need to do two things well: increase their vigilance about the evolving reputation and performance of their current partners, and remain constantly aware of new, alternative sources of supply in China that will allow them to remain competitive and ultimately avoid catastrophic supply-chain disruptions.

Buyers with access to the right set of tools and services to do these things well will continue to enjoy success with their off-shore supply chains. Those who don't invest in these tools and resources are in for a rough spell.