Case Study: Johnson & Johnson’s Award-Winning Supply Chain Smart Factory
Johnson & Johnson successfully pilots a scalable smart factory strategy to modernize operations and transform how digital capabilities are incorporated
Company Fact File –
Company : Johnson & Johnson Sector : Health Care Products HQ location: New Brunswick, NJ Revenues : $10 billion+ annually Employees: 5,000+ Web url: www.jnj.com
Health care is a vital part of humanity, and Johnson & Johnson is committed to changing its trajectory by addressing patient, consumer, and customer needs. To accomplish this ambitious goal requires a high degree of visibility, flexibility and resiliency in the manufacturing operation.
Because the external environment has a dynamic impact on production, J&J developed a smart factory strategy that modernizes site operations by building digitally enabled capabilities to solve information, process, product, and human pain points. The smart factory is built upon a cohesive plan and foundation using data along with capabilities such as edge/high performance computing (HPC), process data mining/analytics, asset optimization, AR and VR mobility platforms, and modular systems that are threaded across the value chain – all designed to help optimize flow, improve reliability, resiliency and agility, while ensuring quality and safety.
The Journey to Smart
Many digitalization elements of J&J processes, digital stack, and standard data architecture and design supporting the smart factory began in 2017. Foundational programs like the development of a common data layer architecture, cloud environments, cybersecurity, ERP design, and a next generation manufacturing system platform are needed to ensure access to required data that will enable digital capabilities and solutions that will support processes, people and technologies.
“You can’t look at the individual technologies level,” says Bart Talloen, J&J’s Senior Vice President Supply Chain Strategy, Innovation and Deployment. “It’s all about the ultimate integrated capability for the business that you enable. The interoperability – system thinking – is fundamental because all the elements are interconnected.”
In the first quarter of 2021, the J&J Consumer business segment sites in Lititz, Penn. (USA) and Bangkok, Thailand began the internal diagnostic and review processes for key product value streams and how smart factory initiatives could improve business processes to support the customer. The smart factory process required engagement from all levels of the site’s organization to establish and link short- and long-term business objectives, vision and metrics.
The process included six phases: 1. Visioning 2. Diagnostics 3. Current to future state digital capability 4. Prioritization 5. Roadmap 6. Business planning
The smart factory requires good planning in how investments are made, sequencing, and people skill analysis to ensure optimal performance, agility, and resiliency objectives are met.
Since its inception, the smart factory rollout was extended to two additional J&J consumer sites in the third quarter of 2021 and then deployed across the entire global manufacturing network in the first two quarters of 2022.
“One of the smart factory objectives is for information to flow easily and in an interconnected way that provides insights for faster and more productive decision-making.”
“The right deployment strategy is critical. It’s always important to start small, nimble – what we call test and learn experiments to test something out,” says Talloen. “Then you take the learnings from those test and learns, and that informs you about deployments strategies.”
The Smart Factory Impact
The J&J Smart Factory transformed how the company identifies, tests, and incorporates digital capabilities to solve process constraints including lead times, equipment and labor efficiency, logistics , and planning processes. The first effort was to build a methodology, or playbook, that ensured a common language, definitions, and approach to understanding the transactional flow within a site, across sites and relationships with other supply chain systems areas (planning, procurement, delivery, customer, and product development).
“Systems can work perfectly, everything can be automated, but at the end it’s still people that are core in the execution. It’s critical to deveop these new technology standards that are clearly articulated for not only operators, but mechanics, engineers, quality people, and planning people to really prescribe in a detailed way those standard operating principles,” Talloen says.
Each smart factory capability was taken into consideration so both data and solutions interacted via a digital thread with interconnection to each system. Traditional problem identification and solving by means of process excellence or lean methodologies identified individual pain points and connections. The smart factory strategy allowed teams to understand and visualize the entire transactional process flow and interconnection of people, equipment, processes, and technology.
From there, the J&J Smart Factory strategy drove how the J&J Operating System (JJOS) – the company’s process excellence system – and teams understood the end-to-end information flows on a deeper level, which illuminated not just the sheer number of transactions within the end-to-end information flow, but the high incidence of duplication brought on by disparate systems. The JJOS includes process excellence methodologies, tools, metrics, and performance management principles. In addition, teams were able to identify additional flow breakers that would have not been visible without the need to understand the current digital landscape. The exercise was a critical input to building a smart factory roadmap because one of the smart factory objectives is for information to flow easily and in an interconnected way that provides insights for faster and more productive decision-making, so that operators, supervisor and managers can focus on making products.
“The smart factory strategy enabled J&J to identify common issues that impact business segments, operations, and needs globally.”
Ultimately, identification of common information flow breakers will populate an expanding digital solutions use-case library. Meanwhile, the capability and skilling process of J&J’s people will enable scaling and accelerate lead time reduction and agility around the globe.
Transforming the Way J&J Addresses Challenges
Beginning with the first Consumer pilot sites in Lititz, Penn., and Bangkok, Thailand, the smart factory program helped the locations address business challenges in new ways. In 2021, supply chain disruptions drove new business challenges throughout Lititz’s warehousing and logistics business units. These challenges led the team to use the JJOS tools to diagnose flow disruptions and leveraged the smart factory framework to identify and implement digital solutions.
- Implementation of J&J’s inbound yard management system, YardView, created detailed trailer visibility and yard jockey movement history. The warehouse team built capabilities for enhanced metric reporting and dashboards driving down detention and service costs.
- A digital twin of the production lines and material movements was created to model flow and material handling between the warehouse and manufacturing lines. The event models identified new product flows and 95% of the site’s total volume was converted to a direct-to-truck loading strategy, decreasing on-hand finished goods inventory by more than 50%. This change in shipping pattern, directly from palletizer to truck, removed 14 days of lead time (LT) from the site to distribution center network.
- Outbound container utilization load building, LoadMax, was implemented for the site, increasing container utilization by 4%, reducing costs by 15%, and lowering carbon footprint by 500,000 kg of CO2 emissions. Through the smart factory program, both Consumer sites can now address flow, productivity, and sustainability challenges in day-to-day business and during the pandemic.
- Scheduling tools were developed to replace manual scheduling and create the digital thread linkage between production’s real time output with logistic arrangement.
- Deliver Lighthouse provided goods-in-transit visibility to downstream markets, and best control on order, inventory, and customer services.
- The next gen manufacturing systems platform development and implementation unlocked the value of information about flow breaks in the manufacturing area to accelerate product release and prevent human error.
- Digital citizen development is aiming to help employees resolve real pain points by utilizing no-code/low code solutions (Power Apps, Alteryx, Azure Machine Learning).
- Workforce digital capability building is a systemic approach to all site employees, teaching how the future digital capability looks through a competency assessment and skills-based learning. The competency gap will be mitigated by multi-method, online learning, hands-on coaching, and project assignments.
As a result, J&J Thailand delivered 25% lead time reduction, 15% productivity improvement, and a 20% carbon footprint optimization.
Scaling for Success
The smart factory strategy provides the means to visualize, react, design, and implement digital capabilities and solutions from site, to region, to network at scale. Powered by clear identification of needs and pain points through information and process excellence, IT technology, and value stream mapping, J&J has identified, tested, developed, and scaled multiple technologies across the manufacturing network and sites within the consumer practice by direct development of tools or by leveraging digital capabilities and technologies from other business units.
J&J has continued deployment of the smart factory strategy across the entire J&J consumer network of twenty-one internal manufacturing sites.
“We’re getting into a phase going forward, where we’re integrating end-to-end supply chain and the smart factory-like capabilities all the way from the connection to the supplier to the connection to the customer,” Talloen says.
“The right deployment strategy is critical. It’s always important to start small, nimble – what we call test and learn experiments.”
Further expansion of the smart factory strategy into J&J medical technology and pharmaceutical business segments also began in 2022. The J&J Smart Factory strategy has enabled shared learnings, scalability of technologies, acceleration of the technology decision process and clear global investment strategies across the three business segments.
The smart factory process and strategy has enabled teams across all of J&J to not only identify local or regional issues, but to identify common issues that impact all business segments, operations, and needs globally. It has provided insights and focus to establish standard approaches that can be leveraged at scale to deploy across the regions and sites. Capabilities and technologies can be scaled more readily, people skills advanced more rapidly, and savings and competitiveness increased.
In addition to earning High Achiever status in the Enterprise Integration and Technology category at MLC’s 2022 Manufacturing Leadership Awards program, the J&J Smart Factory strategy and deliverables have been acknowledged in many forums and recognitions:
- World Economic Forum (WEF) Lighthouse Award – J&J Helsingborg Site – Q2 2021
- World Economic Forum (WEF) Lighthouse Award – J&J Thailand Manufacturing Site – Q1 2022
- Association for Supply Chain Management (ASCM) Annual Conference – Q3 2021 M
About the author:
J eff Puma is Content Director for the Manufacturing Leadership Council.
When Johnson & Johnson (J&J) got its start in 1886, there were just over one billion people in the world. Now, 131 years later, J&J serves just over one billion people per day worldwide. The company is responsible for many popular consumer brands, life-saving drugs, key service delivery components – a whole variety of products that are critical to the daily lives and business operations of many people. Maintaining the supply chain that ensures all of these varied products get where they need to go is more complex than ever before.
To meet the needs of J&J's growing customer base, the company transformed its supply chain into an engine that supports innovation throughout the organization. Given the scale and scope of J&J, this is no easy task. With more than 60,000 people and 350 distribution centers globally, J&J fills over 100,000 orders a day sending products and treatments to hospital operating rooms, retailers, pharmacies, and millions of homes around the world.
In order to stay in business for more than one hundred years while also making it into nearly every home in the world, an organization has to be consistently relevant and deliver high quality products that customers use for their whole lives. With an evolving marketplace, changing customer preferences, new technologies, and a shift to pay for outcomes models, creating significant disruptions in healthcare, J&J has had to develop effective strategies to evolve. The company has been able to adapt by constantly turning over its portfolio of brands and future-proofing the business. In her presentation, during the 2017 Next Generation Operations Summit: Creating a Customer-Centric Supply Chain, Meri Stevens, Vice President of Strategy and Deployment for Johnson & Johnson, explained that internally J&J changes a significant percent of the company through divestments, mergers, and acquisitions. That keeps the product mix viable but it also means that the supply chain has to constantly adapt to meet new requirements and deliver new products.
"At Johnson & Johnson, it's about who we partner with, who we benchmark, where we go for answers."
Understanding changing customer preferences.
In addition to product turnover, J&J’s supply chain team partners with commercial and R&D teams to understand how customers will buy and use products in the future. "The disruptions are quite large," Stevens says. "Think about Alexa. When you want to order something you just say 'Alexa, order me paper towels.' It doesn't ask you what brand. It doesn't ask you how much. It's dependent on what you bought last. So if it's Bounty, it's always going to be Bounty. The cost to change that pattern and get the consumer to buy something else is going to be enormous." In order to win the future, J&J's supply chain team is working closely with the sales team to ensure that the products customers casually order through Alexa or a Dash Button or something else are always J&J products and that those products are always available.
Outside of the US, J&J’s Supply Chain must also understand and react to the growing middle class in major emerging markets like China or India. The tax structure, product regulation, and purchasing process are different in these countries, making it harder to create a standardized process for order fulfillment throughout the organization. In order to manage so many variables, J&J has to rely on a strong network. "At Johnson & Johnson, it's about who we partner with, who we benchmark, where we go for answers," Stevens explains.
To focus and prioritize our transformation J&J’s Supply Chain team developed three North Stars and seven foundational pillars. The North Stars create the ability to digest trends and disruptions in an organized way and the foundational pillars assure constant improving our performance to meet rising expectations in value creation. Stevens centered her discussion on the North Stars.
Manufacturing for the Future
In addition to working on new products and services, J&J is also experimenting with how to manufacture for the future by incorporating new technologies and capitalizing on real-time data and analytics. Previously, J&J would have information on demand cycles, purchasing preferences and so on, but it was hard to predict potential disruptions or understand why customers were making certain decisions. To prepare for the future, J&J used this emerging capability to react to the recent terrorist attack at the Brussels airport. Belgium is the distribution hub for many products in Europe, data analytics allowed J&J to divert product to meet patients’ needs.
J&J is also using new technology to improve packaging and anticipate customer needs. J&J provides prescription treatments for a variety of conditions. With SmartPak technology, the supply chain team can track delivery of medications but also have the package automatically send a message that the package has been opened, giving suppliers and healthcare providers insights about refill needs or if different treatment options need to be developed because patients routinely forget to take medications.
In collaboration with J&J colleagues throughout the Supply Chain, Stevens and her team are also busy learning from other industries that have mastered rapid release manufacturing. Given J&J's focus on healthcare, it is important for each product to be backed by rigorous quality testing. Historically, that's made for a slow manufacturing process. However, other industries like semiconductor makers that also rely on rigorous quality testing have been able to speed up the pace to market, while providing microchips that have consistently better performance. J&J has made it a strategic imperative to learn from industries like semiconductor manufacturing to understand how to handle the rapid release of complex products.
Shaping the Portfolio
Finding answers to questions of the future can be difficult. In order to stay on top, Stevens and her team are helping the J&J Supply Chain evolve its way of working to innovate rapidly, but breakthrough innovation doesn't happen overnight. Ideas require testing and an understanding of how they will benefit the organization and the customer.
J&J’s supply chain team regularly meets with J&J's partner network to understand pain points, to explore new areas of demand and to solicit ideas. Once those ideas are paired down to a few key threads that align with J&J's business, the supply chain team gets to work. Ideas are studied, then developed and finally tested. Testing happens in agile sprints over a 3-6 month cycle in a target area to see how well a given idea will work out. "We go out and test small and rapidly learn," Stevens says. "For the ones that work, we scale like crazy and the adoption is incredible because everyone is aware of the pilots we're working - the engagement is right there."
One of the small tests currently underway in Jacksonville, Florida involves QR codes. In an effort to streamline maintenance, Stevens’ team partnered with a QR code provider to add the codes to each one of their product lines. Now when a maintenance person goes to update a given line, they scan the code with a smartphone and get all the steps required to make an update. If they run into trouble, they can put on Google Glasses and work with a technician remotely. The process removes any wait time associated with finding the right information or right person to make a change if something is out of the ordinary.
Finding partners that help improve capability is the pathway J&J is taking through the next hundred years. As consumerism and health care become more and more personalized it will be critical for companies like J&J to understand their customer base at an almost individual level. Maintaining a supply chain that is adaptive enough to be able to service billions of individuals each day is the new normal. By sticking to their Strategic North Stars, bringing in new technology partners, and experimenting with new ideas rapidly, J&J’s supply chain team are helping J&J design a new way of working – and innovating - for a digital world.
“You have to dedicate time to be able to go fast. Going fast actually requires you to do research and take a step back, not just plow ahead, and that's tough. You have to spend a lot of time testing and learning.”
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Here's How Johnson & Johnson Is Creating an Intelligent Supply Chain
The act of facilitating supply and demand is no mean feat. Things used to be slightly easier back in the day as companies would tend to favor geographically proximate suppliers from which to source goods and services.
Today, however, we live in a global marketplace, and while ordering a product and having it delivered may seem like a simple thing, it is a massive endeavor involving multiple stakeholders and thousands of miles. Each part of the supply chain needs to be carefully managed in such a way so it can produce predictable and measurable outcomes, which is essential for providing a consistent service.
It probably won't surprise you to hear that digital technology is helping big brands such as Johnson & Johnson to create more intelligent and dependable supply chains throughout its business network.
Johnson & Johnson
The responsibility for this transformation falls to the advanced planning team at Johnson & Johnson, which has been tasked with developing the complete end-to-end infrastructure of the supply chain and improve the brand's customer experience by using digital technology to create new efficiencies.
"I work in advanced planning," said Senior Director of Global Supply Chain Advanced Planning at Johnson & Johnson, Neil Ackerman . "It's part of the global supply chain. I focus on delivering an improved customer experience and creating a competitive advantage by levering advanced capabilities within the supply chain. What makes up the J&J supply chain? How do we think about it? We have some big, strategic ideas about supply chain. We want to fast track our innovation. We want to be an agile solution provider for customers. We want to have an end-to-end value, and we want to inspire our employees and people."
How, then, does customer experience fit into this idea of an intelligent supply chain? The expectations of customers have changed a lot when it comes to ordering products - regardless of whether they're B2B or B2C clients. If a company can't meet those expectations, those customers will have little problem seeking out one of its competitors.
Personalization and automation are two such ways Johnson & Johnson is working digital technology into its supply chain operations. Customers these days expect a certain amount of self-service. They don't want to have to sit on hold waiting to speak to someone. Instead, they want to be able to solve queries via chatbots or instant messaging services. Of course, sometimes a query is too complex to deal with via virtual assistants. However, allowing simpler issues to be dealt with this way frees up more human staff to deal with those tougher problems - improving the customer experience no matter the contact method.
"The world of the customer and what their expectations are has changed a lot," said Ackerman. "I remember years ago when you had to wait on a phone call and customer service took a long time. Now, it's not the same. A lot of things are self-service, if you think about what's happened. The customer has greater expectations. Why is that? It's because their whole lives around them have also become more efficient; effective, you could argue. As a result of that, in their whole lives they want that same efficiency."
At the core of Johnson & Johnson's goal for a more intelligent supply chain is data. Thanks to Johnson & Johnson's powerful IT capabilities, it can send data crawlers out into the supply chain to gather and index vast amounts of data based on pre-set parameters.
It's then able to create an analytics layer which can be used to create different types of data tools, which can then be used to create a number - such as a forecast - depending on the insight the advanced planning wants to achieve. For example, the data could be used to calculate the average times it takes a certain product to complete its supply chain journey, and then use that information to reliably inform customers how long they can expect it to take for their order to arrive.
Alternatively, it could inform teams if there are any points in the supply chain which are consistently failing to meet expectations. Once identified, these inefficiencies can be addressed and then continually reassessed to make sure the necessary improvements have been achieved.
"Let's take something simple - well, relatively simple," said Ackerman. "You order something. You want to know or the person listening wants to know when they're going to get it. Very simple, right? Except, actually, really hard. What happens is, they'll say, 'Over the past six months, when someone has ordered widget A, when has widget A arrived?' When we told them it was going to be this date, were we actually accurate with that date? Actually, you'll find that most of the time people are not."
Creating an intelligent supply chain using automation and data is a great way to boost both the performance of your brand and the customer experience simultaneously, and it's great to see massive brands such as Johnson & Johnson leading the way in this regard.
You can hear Johnson & Johnson's Senior Director of Supply Chain Customer Solutions, Ruben Taborda , speak at Supply Chain Next 2019 , taking place in November at the Westin Chicago River North, IL.
Download the agenda today for more information and insights.
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Home » Business Analysis » Case Study: Johnson & Johnson Company Analysis
Case Study: Johnson & Johnson Company Analysis
Founded in 1866 as a family business, Johnson & Johnson now has over 130,000 employees in 60 countries worldwide. What started off as a small, three-person business, the company has now expanded across the globe and was named a “2017 Fortune’s Most Admired Company”. One may wonder, how did brothers Robert, James, and Edward Johnson set the foundation for the next 130 years to come? This success can be attributed to Johnson & Johnson’s Strategic Framework, which is at the root of all decision-making. The company’s Strategic Framework is comprised of three main components: The Foundation, Strategic Principles, and Growth Drivers. All three sections of the Strategic Framework include insight into Johnson & Johnson’s Management Approach, which guides the company’s philosophy for continuous success.
The Foundation includes the Credo, which establishes the values incorporated into the decision-making process . The Credo can be seen in every single office and corner of Johnson & Johnson facilities . The Credo is a reminder of the standards that are upheld in correspondence with the company’s aspirations. The Strategic Principles include the company’s organizational approach, which is a decentralized structure in management for the long term. Lastly, the Growth Drivers are the areas of focus for growth and innovation, which include the Leadership Imperatives of Connect, Shape, Lead, and Deliver. These four Leadership Imperatives are considered the “4 Pillars” of Johnson & Johnson and are the main attributes the company looks for when seeking employment. The company is leadership-driven and needs leaders of employees to act as such. These three components support why Johnson & Johnson’s Strategic Framework is at the core of the business’ continued success for the past 130 years.
Mission and Vision
The mission of Johnson & Johnson is to, “Make diversity & inclusion how we work every day”. The purpose of a mission statement is to outline the foundation of the company’s goals and objectives. This mission is supported by the company’s vision of, “Be yourself, change the world”. Johnson & Johnson’s vision is a broader representation of where the firm plans to go in the future. These two statements validate why the company is listed as #16 of “The Happiest Companies to Work For in 2017”. Johnson & Johnson aspires to bring in natural-born leaders who are comfortable being themselves across a multitude of diverse backgrounds. Being comprised of 130,000 employees, the company wants to advance its unique culture to “spark solutions that create a better, healthier, world”. According to Forbes Patrick Hull, there are 4 essential questions that need to be answered in a mission statement. These four questions include the what, how, whom, and value brought. Johnson & Johnson’s mission is lacking half of these qualities because of how short and simple its statement is. The statement includes the what- diversity, and the value- inclusion; however, the statement does not go into the how or whom it addresses. Yet, one can imply the “how “by working across a range of diverse nations and the “whom” by those included in The Credo (patients, employees, communities, and shareholders). The statement is clear and concise but requires more implications than other traditional missions.
Johnson & Johnson is a company that is constantly pursuing its mission. This can be seen in its “Health for Humanity 2020 Goals”. The company’s “Health for Humanity 2020 Goals” are 15 goals that should be completed in a 5-year term to make “the places we live and work in healthier” across the world. These objectives are already being completed as seen in making and donating more than 160 million doses of medicine to children in underprivileged communities. These actions support the company’s mission by providing medicine to various societies and prioritizing physical well-being. The company’s mission, vision, and goals for 2020 align with The Foundation of the Strategic Framework, by always putting the people first.
Form of Organization
Johnson & Johnson converted from a private to a public corporation in 1944. Converting to a public corporation gave its shareholders and the public more visibility to the operations of the firm. Johnson & Johnson’s information can now be viewed on sources such as the NYSE. According to Zacks Investment Research, “being publicly traded is a two-edged sword”. This statement is due to the visibility that can put the company at a higher risk of failure exposure . If operations are not going as well as planned, this could reflect negatively in the company’s annual report and be used to a competitors’ advantage. Disclosing information that private firms are not required to do can have its perks as well as its downfalls. Shareholders appreciate the creditability as it allows them to access their day-to-day return, but this can also be put into a negative perspective if their return happens to plummet. Fortunately, Johnson & Johnson has had a consistent dividend growth for 55 years, which helps ensure its 2,419 shareholders (valued at $236 billion) that the company is in constant growth.
Besides being publicly traded, there are also advantages and disadvantages to being a corporation. The top three advantages of a corporation include limited liability, the ability to raise more money for investment, and size. Johnson & Johnson optimizes its limited liability and size capacity. Having limited liability is crucial for a large corporation like Johnson & Johnson. Since the company is in the consumer, pharmaceutical, and medical devices markets, it is vital for its owners to have limited losses in the company. This extra protection for its owners is extremely necessary right now with the issuance of lawsuit claims against the company for as much as $417 million. If the owners were liable for all the losses exceeding their investment, the owners may be entirely wiped out by now. Not only could this include the owners’ investment in the company, but it could also include their houses, cars, retirement funds, etc. Johnson & Johnson also leverages its size against competitors in its markets. Since the firm is so massive, it can accumulate enough profit and power every year to invest, acquire, and grow assets in the company.
On the other hand, the top three disadvantages of a corporation include extensive paperwork, double taxation, and difficulty of termination. Johnson & Johnson’s most evident disadvantages are double taxation and difficulty of termination. Since the company is a corporation, it is required to pay taxes twice: first, before it can distribute its income as dividends, and second, once the shareholders receive the dividends. Double taxation decreases the original net income that the firm annually earns. However, Johnson & Johnson acquires enough income to steadily grow every year, even with being taxed twice. It is almost impossible for the company to terminate now that it has expanded worldwide. The main downfall of impossible termination is if the company goes into large sums of debt, and ends up abandoning its employees as a result. The closing of the company would devastatingly leave over 130,000 people unemployed. Therefore, the firm needs to ensure profitable growth every year. Luckily, bankruptcy should not be a problem for Johnson & Johnson anytime soon, as it is currently one of the two AAA-rated companies in the United States for exceptional credit. Understanding the advantages and overcoming the disadvantages of being a corporation is why Johnson & Johnson has been so successful the past 130 years. The execution of its organizational form corresponds with the Strategic Principles in the Strategic Framework by managing for the long term.
Organization Size and Scope
The most recent data of 2017 Second-Quarter Results details Johnson & Johnson to currently have approximately 132,500 employees. These 132,500 employees are distributed among 250 different operating units with over a dozen research facilities in North America, Europe, Asia, and the Middle East, to touch the lives of over a billion people every day, throughout the world. The company operates on a multi-divisional organizational structure , which is the most common organizational structure of large companies with multiple business units. The 250 operating units are restructured to incorporate leadership designed for each facility. A multi-divisional structure is the best way for Johnson & Johnson to maximize return and results, as the appropriate leadership can focus its expertise on its specific segments and business lines within the company.
Johnson & Johnson accumulated $18.8 billion in sales for Q2 which is up 1.9% versus a year ago. The $18.8 billion sales were broken down by $3.5 billion in consumer, $8.6 billion in pharmaceutical, and $6.7 billion in medical devices. The annual sales revenue of Johnson & Johnson in 2016 was $71.94 billion, and the company is projected to surpass this revenue at $76.1 billion by the end of 2017. The company utilizes its size and scope capacity to extend its services to the rest of the world, which resembles the Connect and Lead of the Growth Drivers in Johnson & Johnson’s Strategic Framework by being a leading provider in the consumer health, pharmaceutical, and medical devices industries.
One crucial element to a successful business is executing proper operational activities. Johnson & Johnson has recently extended its company base to include Supply Chain Management . For example, less than one year ago the Supply Chain Team in Buffalo Grove for major retailer Walgreens Co. started out as a two-person team. Within one year, the team now has over ten members and plans to grow by the year. Supply Chain now makes up 45% of employees working for Johnson & Johnson. Supply Chain has become crucially important to Johnson & Johnson’s Strategic Framework in the Foundation of the Credo. It is essential for the firm to not only allocate its resources efficiently but also environmentally friendly. Given a highly competitive atmosphere, Johnson & Johnson wants to advance its company with eco-friendly sustainability, which provides aid to the community aspect of the Credo.
For Johnson & Johnson to provide eco-friendly resource measures, the company must sustain proper inventory management . One tactic the company uses to handle its inventory is the FIFO valuation method. Johnson & Johnson implements a “first-in, first-out” inventory management approach to ensure proper product chain allocation. This means that the first goods purchased are the first ones sold. The advantage of this method is it reduces the risk of items becoming obsolete or outdated. Since Johnson & Johnson manufactures thousands of products with expiration dates, it is important for the company to use this resource measure when managing its inventory .
When the company produces its primary products, it also tries to implement end-to-end supply chain optimization. The end-to-end tool is used to eliminate as many “middle layers” as possible to increase efficiency and costs. The company is partnered with approximately 80,000 suppliers, broken down into 30 categories and grouped into 5 families. Johnson & Johnson has enrolled in the “Sustainable Procurement Program” to focus on supplier efficiency with regulatory system assessments. The hope for the company is to become as efficient, effective, and eco-friendly as possible. In 2016, 58% of packaging, 46% of marketing materials, and 61% of furniture were derived from forest materials.
Johnson & Johnson’s resource process begins with obtaining the raw materials and components needed for product configuration by outsourcing from one of its 80,000 suppliers. Once the materials are received, the product is created by one of its manufacturing plants worldwide. The product is sorted in a case, that is then put with others onto a pallet. The pallet is then shipped by truck, boat, or airplane to one of the major 14 distribution centers. From the distribution center, the product’s case is pulled from the pallet and then shipped to the customer warehouse distribution center. The customer distribution center then receives the products and ships them to the appropriate store locations, which finally sells the product to the end consumer.
As an example, Johnson & Johnson sources its raw materials for its 8 Hour Tylenol 24 count pack from its supplier, produces the pack at its manufacturing plant in Puerto Rico, then ships by boat or airfreight to its three major US consumer distribution centers located in Tobyhanna PA, Mooresville IN, and Fontana CA. The distribution center then sends the product to Walgreens’ two distribution centers located in Woodland CA and Marino Valley CA. Walgreens’ warehouse distribution centers further ship the product by truck to its brick and mortar store locations nationwide. The distribution center the product ships from is dependent on its proximity to the retail store. Once receiving the product from the closest geographical warehouse distribution center, the store places the product on the shelf, for a Walgreens customer to purchase.
Since the company has vastly widened geographically to 250 different operating units, it makes sense for Johnson & Johnson to delegate more freedom to its managers and employees in each unit. Johnson & Johnson’s facilities incorporate a decentralized structure with more empowerment for its workers in various levels of management . Implementing a decentralized structure allows each operating unit to adapt to the needs of the people in each differing location. In a decentralized structure, authority is delegated down the organizational chain. Since Johnson & Johnson is so massive with over 130,000 employees, the pyramidal structure is also quite tall. Having a tall organizational structure means that there are various levels of management and reporting relationships. Generally tall, decentralized structures are inefficient because of the lack of communication across multiple segments and levels. However, Johnson & Johnson is one of the few large companies that has used this structure to its advantage by adapting to the local needs in proximity to each operating unit. The company’s diversified organizational structure is affiliated with the Strategic Principles of Johnson & Johnson’s Strategic Framework of a long-term decentralized organizational approach.
The two main advantages of a decentralized structure include higher morale and faster decision-making. Imagine if a low-level manager had to ask its boss’ boss’ boss’ boss for approval on a decision. Increasing empowerment in its various levels of employees improves time management and provides employees with higher levels of satisfaction. The two main disadvantages of a decentralized structure include less top-management control and a weakened corporate image. However, these two disadvantages are in fact advantages for Johnson & Johnson as the company leverages its decentralized structure for a happier working environment which increases its corporate image to the public. It can also be assumed that Alex Gorsky, CEO of Johnson & Johnson, does not want nor has the time capacity to oversee 130,000 employees on his own. Instead, the decentralized structure includes multiple operating units that have different functional and divisional groups within.
For example, the Customer Focused Team in Buffalo Grove IL, is divided between Health & Wellness and Beauty & Personal Care. Within each division, there are different functions and responsibilities for each employee. Both divisions have Customer Development Managers that oversee specific brand lines, as well as Supply Chain Representatives that have the task of managing inventory allocation for specific brand lines.
Johnson & Johnson is labeled as one of, “The 10 Most Profitable American Companies in the Fortune 500”. For a company to be profitable, it must sustain substantial cash flow. One of the most relevant indicators of wealth in financial statements is the statement of cash flows . Johnson & Johnson’s statement of cash flows provides crucial insight into the success of the company’s profitability . The statement of cash flows is segmented by operating, investing, and financing activities. Currently for Q2 2017, Johnson & Johnson has $5.77 billion, -$12.25 billion, and -$1.92 billion in operating, investing, and financing activities, respectively. These numbers in Q2 2016, were $4.99 billion, $1.32 billion, and -$1.46 billion in operating, investing, and financing activities, respectively. When comparing the differing activities, the operating and financing segments seem relatively similar to the prior year. However, there is a huge difference between Q2 2017 investing activities (-$12.25 billion) versus prior Q2 2016 investing activities ($1.32 billion). This can be explained by Johnson & Johnson’s quarterly report. In Q2 2017, Johnson & Johnson finalized the acquisition of Actelion Ltd. for $30 billion in cash. The acquisition of a leading biopharmaceutical company such as Actelion Ltd. is substantial compared to the prior-year acquisition of Vogue International LLC for $3.3 billion in cash.
Both purchases appear in the investing activities section under the statement of cash flows. The range of purchases is the main reason behind the difference in investing activities versus the prior year. Nevertheless, this is not a bad sign to be negative in investing activities. In fact, it is a positive sign to see a negative in the investing portion of the statement of cash flows because growing companies spend increased amounts of money on new assets. In this case, Johnson & Johnson bought out Actelion, which is an immense contribution to the company’s assets. For a company to grow substantially, it must acquire more power and ownership in the market. In this case, Johnson & Johnson acquired a much larger company this quarter versus the prior year which will propel growth and profit in the future.
In regard to the other two sections of the statement of cash flows with operating and financing activities, there is not a significant difference between the two quarters. Both sections indicate positive, stable growth for the company. The operating activities increased by $.78 billion versus the prior year. It is always a good sign for the company to attain positive operating activities. This data showcases that Johnson & Johnson is making money off its goods and services. The increase can be explained by new technology and the entrants of new products. In Q2 2017, new products DARZALEX® (daratumumab) and IMBRUVICA® experienced rapid growth, resulting in the increase of operating activities for the quarter. On the other hand, financing activities can fluctuate on positivity versus negativity. The company’s financing activities of Q2 2017 are similar to Q2 2016 in the respect of both requiring the payment of cash dividends and the repurchase of common and preferred stock. This payment and repurchase allow Johnson & Johnson to diminish its debt and advance capital. Having sustainable flows of cash corresponds to Deliver of the Growth Drivers in the Strategic Framework by delivering the best results and maintaining a stable statement of cash flows.
With a highly competitive industry, Johnson & Johnson is focused on the segment that contributes the most to the overall success of the company . Johnson & Johnson’s pharmaceutical industry has reported continued growth for Q2 2017 and amounted to roughly 46% of the company’s total revenue. Pharmaceuticals has continued to account for the largest segment of revenue within the company for the past three years. In the pharmaceutical industry, Johnson & Johnson’s three main competitors include Pfizer, Novartis, and Eli Lilly & Co. Considering the pharmaceutical business includes more than two major competitors owning a significant market share, Johnson & Johnson is considered an oligopoly. An important characteristic of oligopolies is the strategic interdependence between competitors. This statement means that any change in one influences the other- especially when it comes to products or prices. Johnson & Johnson, Pfizer, Novartis, and Eli Lilly & Co create similar medicines designed to cure and treat specific diseases. Therefore, price reliance is not as much of a focus as the differentiation of advantages and benefits associated with its products. Each company heavily relies on innovation within its own laboratories to outdo rival firms. Introducing new products to the pharmaceutical market can heavily impact competitor profits. One way these four oligopolies expand their market share in the industry is by using their size capacity to facilitate large research and development budgets to create new drugs and medicines.
Over the course of the past ten years, Johnson & Johnson has increased its research and development budget, giving them a competitive advantage over the other three firms. This supports Johnson & Johnson’s Credo to support its doctors and patients in the Foundation section of its Strategic Framework. According to Endpoints News, Johnson & Johnson is #2 on the list of “The 15 Top R&D Spenders in the Global Biopharma Business” in 2016. The company’s research and development budget has increased significantly over the years, where their budget originally was lacking behind competitors at $6.4 billion in 2005. Ever since Johnson & Johnson has made it a priority to improve innovation by increasing the budget. As of 2016, the company’s budget spend was $9.1 billion, followed by #3 Novartis at $8.4 billion, #4 Pfizer at $7.8 billion, and lastly #9 Eli Lilly at $5.4 billion. Allocating more money on research and development provides Johnson & Johnson with a competitive advantage by enabling the company to create more product differentiation with the entrance of new products.
The competitive advantage of an increased research and development budget is shown in Johnson & Johnson’s announcement to introduce at least ten new products by 2019 that each have the potential to generate over $1 billion in sales. The new products also include more than 40 line extensions of existing and new medicines. Another competitive advantage Johnson & Johnson has over competitors Pfizer, Novartis, and Eli Lilly & Co, is the protection of its diversified product portfolio . While the company’s competition has other various pharmaceutical products, Johnson & Johnson has much more intellectual property on its inventions. In “Top 300 Organizations Granted U.S. Patents in 2016”, Johnson & Johnson had 932 patents, whereas Pfizer had 152, Novartis had 247, and Eli Lily did not even make the list at less than 110 patents. The competitive advantage Johnson & Johnson gains from obtaining the most patents for the recent year is its exclusivity to create, use, and sell its products for up to twenty years. There is a direct relationship between its research and development budget with its intellectual property. By prioritizing a larger emphasis on research and development, Johnson & Johnson can produce more innovative processes and patent them, giving the company a step ahead of its competition in the marketplace.
One promise Johnson & Johnson makes time after time is quality assurance. The company strives to achieve the most efficient yet effective products as displayed in Deliver of the Growth Drivers in the Strategic Framework. One way the company executes this is by segmenting its market. It creates products for all ages, genders, and races. It targets each segment by providing a solution to a particular need. For example, teenagers are prone to have more acne- so Johnson & Johnson create products specifically designed for acne treatment and launches “solvemyacne” on its Neutrogena website. “Solvemyacne” includes a personalized questionnaire for a teenager to fill out that ultimately recommends a suitable regimen. This segmentation can be seen across multiple markets, but one market the company is continuously trying to capture and deliver to is its mothers.
Johnson & Johnson assumes that mothers are willing to go the extra mile to provide the best care for their children as stated in their Johnson’s® Baby mission: “We’re helping moms and dads like you safely care for your babies. We know you don’t want to take any risks”. Therefore, Johnson & Johnson, owner of Johnson’s® Baby, creates products of premium quality for those mothers that want the best for their child. The company manufactures all the necessary products a mother may want to be created with the gentlest ingredients. This is supported by “Johnson’s® 5-Step Safety Assurance Process” which constantly tests and evaluates its formula ingredients. The company’s product line contains baby shampoos, oils, body washes, wipes, powders, lotions, etc. Johnson & Johnson knows mothers will pay for the premium product, and therefore designs its products to include the purest, eco-friendly, non-chemical ingredients, that are proven to be the safest and least harmful to children.
Since Johnson & Johnson labels its products to maintain the “highest standards”, its prices reflect this as well. Johnson’s® Baby products are set at a premium yet affordable price, usually higher than private-label or other generic brands. The company utilizes its scientific development and research to provide the safest products while still sustaining an affordable price. Known as cost-based pricing, Johnson’s® Baby products require higher retail prices due to increased material costs associated with better quality. An example of this can be seen with Johnson’s® Baby Head-to-Toe Wash Original Formula 15 oz priced at $5.49 on Walgreens.com, versus Walgreens private-label brand Well Beginnings Baby Wash 15 oz priced at $3.99. The difference in pricing between the private-label brand and the name brand is evident, but not extensive. The company also captures the mother market by using psychological pricing, which sets its product at price points of .49 or .99. This deceives the mother into thinking she is getting the item for $5 when $5.49 versus $5.50 is essentially the same price. However, if the pricing was $5.50 instead, the orders would not be sufficient as the mother then perceives the price as more expensive at $6.
Johnson & Johnson guarantees product placement with its Johnson’s® Baby products to further incentivize mothers to purchase its items. First, the company confirms its products are readily available in the baby section of every large major retail store. These stores include nationwide locations of Walgreens, CVS, Rite-Aid, Kroger, Target, and Walmart. The company ensures its products are an option for the mother. To begin with, the company pushes for product purchasing by implementing on-shelf availability. The company negotiates thousands of dollars to place its baby care products at eye level and within reach on the shelf, for both the mother and the child. This product placement is essential to its marketing technique. By placing the product at eye level for the mother, it is the first baby brand the mother looks at when debating a purchase. Secondly, by placing the product at eye level for the child, the child is then able to grab the product and ask his/her mom to buy it. Allocating on-shelf availability in an accessible manner motivates the mother to purchase the product, whether that be by the decision herself or the pressure from her child.
Although Johnson & Johnson’s pricing is at a reasonable premium level, it allows for the expense of discounts and bundles. The markup on pricing gives the company wiggle room to promote its products at lower prices. Promotions include BOGOs (buy one get one), coupons, or FSIs (free-standing insert). All three promotions lessen the purchasing prices of the items. If vendors expense a promotional spend, the price can be less than the generic brand. This can be seen with the same Johnson’s® Baby Head-to-Toe Wash Original Formula 15 oz priced at $5.49 that currently has a $2 off coupon. This coupon brings the retail price down to $3.49, which is less than the generic Walgreens Well Beginnings Baby Wash 15 oz priced at $3.99. In this case, Johnson’s® Baby is utilizing a high-low pricing strategy, where it is cheaper to buy the name brand than to buy the generic brand when on promotion. Promoting discounts and deals builds a relationship that returns mothers back to the Johnson’s® Baby brand and stimulates growth in the company.
Summary and Conclusion
As shown, Johnson & Johnson continues to outpace the market by delivering maximum benefit across the globe. From the organization’s mission to its size and structure, Johnson & Johnson has proven to be one of the leading healthcare providers in the consumer, pharmaceutical, and medical devices industries. Back in 1866, brothers Robert, James, and Edward Johnson set the foundation of what was at the time small family business. Today, this business has expanded worldwide and makes an impact on more than a billion lives every day. This advancement of Johnson & Johnson for the past 130 years can be attributed to its core Strategic Framework of the Foundation, Strategic Principles, and Growth Drivers for ultimate success.
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Case study: How Johnson & Johnson promotes environmental and social responsibility throughout its supply chain
As the world’s largest and most diversified healthcare company, with 134,000 employees in 60 countries, Johnson & Johnson works with over 70,500 suppliers across its three business segments Tweet This! : Consumer, Medical Devices and Pharmaceutical. Building a socially and environmentally responsible supply chain is, thus, a key priority.
This case study is based on the 2017 Health for Humanity Report b y Johnson & Johnson published on the Global Reporting Initiative Sustainability Disclosure Database that can be found at this link . Through all case studies we aim to demonstrate what CSR/ sustainability reporting done responsibly means. Essentially, it means: a) identifying a company’s most important impacts on the environment, economy and society, and b) measuring, managing and changing.
For Johnson & Johnson, creating a sustainable supply chain reduces sourcing risks, protects brand reputation and, most importantly, has comprehensive positive impacts on both society and the environment. In order to promote environmental and social responsibility throughout its supply chain Johnson & Johnson took action to:
- monitor compliance with the Responsibility Standards for Suppliers
- carry out Environment, Health & Safety (EHS) audits
- conduct social audits
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With this case study you will see:
- Which are the most important impacts (material issues) Johnson & Johnson has identified;
- How Johnson & Johnson proceeded with stakeholder engagement , and
- What actions were taken by Johnson & Johnson to promote environmental and social responsibility throughout its supply chain
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What are the material issues the company has identified?
In its 2017 Health for Humanity Report Johnson & Johnson identified a range of material issues, such as product quality, safety and reliability, ethics and compliance, innovation, global public health, workplace safety. Among these, promoting environmental and social responsibility throughout its supply chain stands out as a key material issue for Johnson & Johnson.
Stakeholder engagement in accordance with the GRI Standards
The Global Reporting Initiative (GRI) defines the Principle of Stakeholder Inclusiveness when identifying material issues (or a company’s most important impacts) as follows:
“The organization should identify its stakeholders, and explain how it has responded to their reasonable expectations.”
Stakeholders must be consulted in the process s of identifying a company’s most important impacts and their reasonable expectations and interests must be taken into account. This is an important cornerstone for CSR / sustainability reporting done responsibly.
Key stakeholder groups Johnson & Johnson engages with:
How stakeholder engagement was made to identify material issues
To identify and prioritise material topics, Johnson & Johnson invited more than 1,500 stakeholders to respond to a survey. Stakeholders were asked to rank topics by importance to them and by their potential for social, environmental and economic impact.
What actions were taken by Johnson & Johnson to promote environmental and social responsibility throughout its supply chain ?
In its 2017 Health for Humanity Report Johnson & Johnson reports that it took the following actions for promoting environmental and social responsibility throughout its supply chain:
- Monitoring compliance with the Responsibility Standards for Suppliers
- Johnson & Johnson confirms and monitors suppliers’ compliance with its Responsibility Standards for Suppliers by means of a formal assessment and audit program. Assessments are conducted through EcoVadis – a third-party program. EcoVadis assessments involve an initial screening of supplier performance. Subsequently, the results (a score) play an important role in deciding which suppliers may require an on-site audit.
- Carrying out Environment, Health & Safety (EHS) audits
- follow-up technical visits which include expert training and best practice sharing
- business reviews with direct coaching and guidance
- information provided in the Sustainability Toolkit for Suppliers
- supplier relationship management engagement at category level
- participation in supplier capability-building conferences, webinars and other resources that are available through Johnson & Johnson’s membership in the PSCI
- In 2017, Johnson & Johnson carried out 189 EHS audits and technical visits.
- Conducting social audits
- In 2017, to establish an enterprise-wide framework for addressing human rights in its supply chain, Johnson & Johnson expanded the human rights requirements in its updated Responsibility Standards for Suppliers. In addition, a cross-functional Human Rights Working Group met regularly, guiding and informing the development of Johnson & Johnson’s human rights risk assessment approach and audit program. Johnson & Johnson’s supplier social audit program is scheduled to be fully implemented in 2018. Supplier selection and prioritisation criteria will include results for EcoVadis scores regarding Labour and Business Ethics, location in a country considered high risk for violation of human rights and the supplier category.
Which GRI Standards and corresponding Sustainable Development Goals (SDGs) have been addressed?
The GRI Standards addressed in this case are:
1) Disclosure 308-1 New suppliers that were screened using environmental criteria
2) Disclosure 414-1 New suppliers that were screened using social criteria
Disclosure 308-1 New suppliers that were screened using environmental criteria does not correspond to any SDG.
Disclosure 414-1 New suppliers that were screened using social criteria corresponds to:
- Sustainable Development Goal (SDG) 5 : Achieve gender equality and empower all women and girls
- Business theme: Workplace violence and harassment
- Sustainable Development Goal (SDG) 8 : Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
- Business theme: Labor practices in the supply chain
- Sustainable Development Goal (SDG) 16 : Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
78% of the world’s 250 largest companies report in accordance with the GRI Standards
SustainCase was primarily created to demonstrate, through case studies, the importance of dealing with a company’s most important impacts in a structured way, with use of the GRI Standards. To show how today’s best-run companies are achieving economic, social and environmental success – and how you can too.
Research by well-recognised institutions is clearly proving that responsible companies can look to the future with optimism .
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1) This case study is based on published information by Johnson & Johnson, located at the link below. For the sake of readability, we did not use brackets or ellipses. However, we made sure that the extra or missing words did not change the report’s meaning. If you would like to quote these written sources from the original, please revert to the original on the Global Reporting Initiative’s Sustainability Disclosure Database at the link:
Note to Johnson & Johnson: With each case study we send out an email requesting a comment on this case study. If you have not received such an email please contact us .
Johnson & Johnson COVID-19 vaccine contamination could have been avoided with traceability, monitoring of supply chain risk from procurement
04/06/2021 By Sally Ehrmann
- Supplier Information Management
- Master Data Management
- Supplier Discovery
- Supplier Diversity
- Supplier Performance Management
- Supplier Quality Management
- Supplier Relationship Management (SRM)
- Supplier Risk and Compliance Management
- Supplier Sustainability Management
- Supply Chain Execution
- Supply Chain Risk Management
Mix-ups in supply chain and procurement happen. But when it’s a high-profile issue, like the recent Johnson & Johnson (J&J) Covid-19 vaccine mishap , it can make the general public distrustful and leave procurement professionals wanting to lend their expertise.
Although the mass vaccination effort is more of a focus for supply chain teams, it’s actually a great opportunity for procurement to step up and provide a way forward.
How do you find the right procurement technology and vendor for your company? Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide” can help — with how-to documents, checklist templates and other tips.
Pharmaceutical procurement teams especially shook their heads at the handling of the J&J vaccine contamination when two recipes were accidentally combined. They know that these mistakes are fairly avoidable with a robust, digital-first solution.
TraceLink is one such solution. In a recent interview with Spend Matters, John Bermudez, the Vice President of Product Marketing at TraceLink, acknowledged that errors happen. But that’s where procurement can be a helpful arm to any organization focusing on pharmaceutical production.
“Mistakes are always possible, but the rigorous onboarding process typical in the pharmaceutical industry is designed to avoid the sloppy mistakes that were made in this case,” Bermudez said.
Last week, news circulated that a factory mix-up in a Baltimore plant led to up to 15 million doses of the Johnson & Johnson coronavirus vaccine to be contaminated. The plant was led by Emergent BioSolutions, a manufacturing partner for the J&J and AstraZeneca vaccines. Workers accidentally swapped ingredients for the two vaccines, affecting the shipment timeline of up to 24 million doses of the vaccine.
The J&J and AstraZeneca vaccines use the same technology (called a vector) that employs a version of the virus to help stimulate the immune system in people. But the two vaccines use a biologically different vector, meaning they can’t be interchanged. In February, one or more Emergent workers confused the two. This raised questions about Emergent’s hiring process and training, after it employed hundreds of new workers to help mass produce vaccines.
“The best practice is to track supplier compliance to all aspects of the production and quality processes,” Bermudez said. “This not only includes the expected quality checks of the vaccine, but also compliance with all good manufacturing practices, manufacturing processes specified for this vaccine, quality assurance processes, etc. By tracking supplier incidents at all levels, supplier management can identify poor performing suppliers and work with them to improve processes before something catastrophic happens — as it did with the J&J vaccine.”
But as the world awaits the vaccine rollout while fearing a fourth surge of Covid, any hiccup feels like a massive setback. The general public may raise an eyebrow and ask, “What happened there?” — but procurement experts are likely to think to themselves, “How can we make this process better?”
That answer lies in digitalization, clean and clear supplier onboarding, and having oversight into supply chains and traceability.
“Procurement teams are generally responsible for selecting and onboarding suppliers,” Bermudez said. “This is a rigorous process that can take up to one year for a CMO (contract manufacturing organization) like Emergent to produce a new drug. During this process called ‘tech transfer,’ every aspect of the supplier’s process and facilities are scrutinized. The usual scrutiny period was greatly reduced, and the Food and Drug Administration approved this facility for J&J and AstraZeneca use. This mistake likely could have been avoided with normal review processes in place to onboard a new supplier.”
When needing to act fast, it’s important that an organization look to as many areas as possible to help monitor risk. This is where procurement can step up to help organizations in supply-chain risk monitoring.
“Not all supply chain risk is a procurement responsibility — downstream risk generally falls on the Supply Chain Operations group. Procurement is responsible for vetting suppliers even when they are selected by other groups like Science and Technology,” Bermudez said. “This includes reviewing potential upstream risk at and beyond immediate suppliers to determine financial risk, geo-political risks, environmental risks and social responsibility risk. Supplier management not only needs to vet suppliers during the onboarding process but monitor their performance to spot potential risks that might be on the horizon. Building stronger relationships with suppliers can help mitigate risk by encouraging suppliers to report potential risks.”
Another key issue in J&J’s mishap was that Emergent’s mistake went uncovered for days before a J&J quality control check discovered it. Traceability, especially in pharmaceutical production, is another area where a procurement department can help an organization.
“Procurement is generally the point of contact for all supplier relationships and serialization (the beginning of traceability) is performed by the CMO that manufactures the product,” Bermudez said. “Actual follow up will be a cross-functional effort on both sides of the supplier relationship. Improved visibility and digital collaboration capabilities (like TraceLink Agile Process Teams) can greatly reduce the time to resolve a traceability issue.”
Digitalization may not be the be-all and end-all. People will still need to monitor things. But, the case study of the J&J vaccine contamination is more evidence that digitizing procurement operations can help speed up processes and allow for better products to get out the door. Not every mistake is dire, but when it comes to things like a mass vaccination effort, procurement really can mean life or death for thousands of consumers.
“Digitalization improves visibility, agility and joint decision making with suppliers,” Bermudez said. “With digital processes as those supported by TraceLink APT, both parties have visibility to ongoing processes like change requests, incident follow-up and exchange of updated standard operating procedures. Missing a change request or a change to a standard operating procedure could lead to a defective production lot or worse, such as a defective medicine that reaches patients.”
Check out Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide” — and get a shortlist fast.
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The pandemic has brought supply chain to focus, and organizations recognize dynamic supply assurance as a critical capability for their business. Chief Supply Chain Officers (CSCO) and other executives seek to optimize their supply chain by infusing AI, modernizing their technology and addressing sustainability goals.
Over the next decade, CSCOs will need to solve key industry challenges: supply chain disruptions due to climate events; regional conflicts such as Ukraine or Middle East; the desire for convenience and personalization; awareness of the environmental impact of consumption; meeting delivery expectations; fears about trade disruptions and fluctuations in cost. All of these challenges can be solved with more connected, agile and sustainable supply chains.
Organizations that proactively address these industry challenges can see some typical outcomes related to stock, including a 4-8% improvement of lost sales from stock outages, increased stock turnover, improved management of product risk, perishability and age, as well as increased management of lead time (a leading indicator of stock overage) and a reduction of days on hand. In addition, there can be financial benefits, such as a solution cost savings of 10%, reduced holding costs and improved gross margin return on investment. Finally, they may also see customer-facing benefits, including a reduced return rate, the ability to manage unusual supply chain interruption events including weather or natural disaster, and an overall improvement in customer satisfaction.
To help organizations address these industry challenges, IBM and Red Hat teams developed this whitepaper and supporting assets through an IBM Academy of Technology Industry Affiliate Initiative.
Download the whitepaper to learn more
This whitepaper provides an executive summary, business challenges and overall solution followed by specific business scenarios. For each business scenario, we will discuss the business challenges, business value, and business outcomes and then provide automation and modernization actionable steps organizations can take to drive innovation and move toward a digital supply chain. Actionable steps will be developed through the lens of use cases on how the main risk factors can be transformed into opportunities.
The specific business scenarios covered in this whitepaper are demand risk, loss and waste management, product timeliness, perfect order, last mile delivery, sustainable supply chain, supply chain returns and disaster readiness. For each business scenario, we present the business scenarios, solution overview and architectures.
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How Machine Learning Will Transform Supply Chain Management
- Narendra Agrawal,
- Morris A. Cohen,
- Rohan Deshpande,
- Vinayak Deshpande
Businesses need better planning to make their supply chains more agile and resilient. After explaining the shortcomings of traditional planning systems, the authors describe their new approach, optimal machine learning (OML), which has proved effective in a range of industries. A central feature is its decision-support engine that can process a vast amount of historical and current supply-and-demand data, take into account a company’s priorities, and rapidly produce recommendations for ideal production quantities, shipping arrangements, and so on. The authors explain the underpinnings of OML and provide concrete examples of how two large companies implemented it and improved their supply chains’ performance.
It does a better job of using data and forecasts to make decisions.
Idea in Brief
Flawed planning methods make it extremely difficult for companies to protect themselves against supply chain disruptions.
A new approach, called optimal machine learning (OML), can enable better decisions, without the mystery surrounding the planning recommendations produced by current machine-learning models.
OML relies on a decision-support engine that connects input data directly to supply chain decisions and takes into account a firm’s performance priorities. Other features are a “digital twin” representation of the entire supply chain and a data storage system that integrates information throughout the supply chain and allows for quick data access and updating.
The Covid-19 pandemic, the Russia-Ukraine conflict, trade wars, and other events in recent years have disrupted supply chains and highlighted the critical need for businesses to improve planning in order to be more agile and resilient. Yet companies struggle with this challenge. One major cause is flawed forecasting, which results in delivery delays, inventory levels that are woefully out of sync with demand, and disappointing financial performance. Those consequences are hardly surprising. After all, how can inventory and production decisions be made effectively when demand forecasts are widely off?
- Narendra Agrawal is the Benjamin and Mae Swig Professor of Information Systems and Analytics at Santa Clara University’s Leavey School of Business.
- Morris A. Cohen is the Panasonic Professor Emeritus of Manufacturing & Logistics at the University of Pennsylvania’s Wharton School. He is also the founder of AD3 Analytics, a start-up that developed the OML methodology for supply chain management.
- Rohan Deshpande is a machine learning scientist at Cerebras Systems and a former chief technology officer at AD3 Analytics.
- Vinayak Deshpande is the Mann Family Distinguished Professor of Operations at the University of North Carolina’s Kenan-Flagler Business School.
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Supply chains: when the chips are down
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In the latest in a series of business school-style teaching case studies, Professor Usha Haley considers the supply problems faced by technology and electronics companies because of growing restrictions on US-China trade. Readers are invited to read the article and linked stories and consider the questions raised at the end.
China and the US are intense rivals in national security and economic output. Yet the world’s two largest economies — which represent 40 per cent of GDP — remain integral partners in many ways.
So, in these circumstances, what should companies do to manage global supply chains and geopolitical risks , and how does uncertainty affect the green economy and economic stability?
CIA Director William Burns has argued that, for the US, the answer is “not to decouple from an economy like China’s, which would be foolish, but to sensibly de-risk and diversify by securing resilient supply chains, protecting our technological edge and investing in industrial capacity”. The August 2022 US Creating Helpful Incentives to Produce Semiconductors (Chips) and Science Act reflected that view, with implications for supply chains, nanotechnology, clean energy, quantum computing and artificial intelligence.
In December 2022, China announced a $143bn retaliatory package and, in May 2023, banned Chinese companies from buying from US chipmaker Micron Technology , reducing its sales by $3bn. Then, in July, it restricted exports of two key metals essential to the semiconductor, telecommunications and electric vehicle industries.
In October, an updated Chips act limited US sales of high-performance semiconductors and access to technology that “could fuel breakthroughs in artificial intelligence and sophisticated computers”. That affected Nvidia (which receives a quarter of its chip revenues from China), Intel and AMD.
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China has been a major player in global supply chains, dominating the technology and electronics industries. In 2020, its chip sales totalled nearly $40bn, or 9 per cent of the world market, and they are projected to reach $116bn this year. But that is changing. Kearney’s 2023 Reshoring Index indicated that 96 per cent of US chief executives may reshore or already have, including Dell, Google, Microsoft, Intel, Apple, Amazon and Walmart. In 2023, China accounted for the smallest share of US imports in 20 years. And, as global supply chains restructured, US foreign direct investment in China fell to an 18-year low of $8.2bn in 2022.
For US and European companies, strategies for resilient supply chains now include the following:
Friendshoring & reshoring
Foxconn and the other leading Taiwanese manufacturers of electronics responded to customers’ demands by moving production from China to elsewhere in Asia, Mexico and beyond. Companies have hedged bets using a “China plus one” strategy to maintain existing domestic operations while directing new investments elsewhere.
Many businesses “ friendshored ” or moved supply chains to political or economic allies such as India, Thailand and Vietnam . In 2022, Dell said it would move one-fifth of its laptop production to Vietnam. Apple also said it was shifting 18 per cent of global iPhone production to India. US companies “near-shored” to Mexico and Canada to benefit from the United States-Mexico-Canada Agreement on free trade, and reshored production to the US.
‘In China, for China’
Chips subsidy recipients are not allowed to make semiconductors in “countries of concern” (including China) for 10 years. So some companies are now producing goods made in China for domestic Chinese consumption only , although government-affiliated organisations must buy Chinese brands. Investing in China has exposed foreign manufacturers to IP theft and skewed competition from Chinese subsidised industries that obtain cheap or free land, capital, electricity, raw materials and access to technology. Companies have also faced politically motivated harassment. In October 2023, Foxconn underwent tax probes in four provinces.
Chinese investment in the US
Chinese investments face a high risk of coming under regulatory scrutiny, over national security and competition concerns. For example, a China-linked company’s Wyoming facility came under investigation by the Committee on Foreign Investment in the United States, after a report suggested its proximity to a Microsoft data centre and a US airbase might enable intelligence gathering. Some 33 US states have now prohibited the Chinese government, citizens or businesses from buying agricultural land or property near military bases, and the trend will probably continue. Meanwhile, Chinese investments in US shale gas have been found to skew energy technology development, reduce US patents, increase Chinese patents but offer few benefits to local communities, in research funded by the National Science Foundation.
Replacing China in supply chains will take time. It is the largest producer of key components in electric vehicle battery production. Over the next two years, manufacturing incentives in the $430bn US Inflation Reduction Act (IRA) offset one-tenth of an EV’s cost while shutting out battery-content and critical materials from “foreign entities of concern”, including China. But China has begun circumventing the restrictions through joint ventures with US free-trade partners South Korea and Morocco. The US and China remain mutually dependent, even as they balance economic interests with geopolitics.
How are US-China relations affecting global supply chains worldwide?
Which companies and countries gain from the current US-China tensions — and which lose?
What strategies can companies follow, including staying out of the Chinese market or leaving? What are the upsides and downsides?
What risks for companies are associated with leaving or staying in China, and how can these risks be managed?
What immediate, medium- and long-term threats exist for global supply chains? And what are the threats to the green economy from changed supply chains?
What further problems do reshoring and friendshoring raise for US and European manufacturers? Is the solution worse than the problem?
How do you predict US-China tensions will play out in five years and in a decade? Which factors are most important in your scenarios?
Usha Haley is W Frank Barton Distinguished Chair in International Business & Kansas Faculty of Distinction, Barton School of Business, Wichita State University
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Canal delays and the impact on global supply chains
February 6, 2024 “Can’t our supply chain just have a normal year?”
The wish is understandable. While 2023 seemed to mark a degree of post-COVID-19 normality, 2024 has started with a sharp reminder about the importance of supply chain resilience. Reduced cost and inventory levels alone don’t make the Panama Canal any fuller or the Red Sea any more navigable.
Long-term questions haven’t gone away either. A recent report by the McKinsey Global Institute (MGI) looks at shifting global trade flows , considering potential reconfigurations based on developing economies and geopolitical distance. It flags that businesses will need to plan for disruptions, and two ongoing examples in shipping show just how great the need is.
Our colleagues in McKinsey’s Travel, Logistics, and Infrastructure practice have commented on the cost and delay implications of low water levels in the Panama Canal , which normally carries around 8 percent of global container volume. 1 Extreme drought has reduced maximum ship crossings, resulting in prolonged waiting times. Consequently, several carriers have already announced new fees for Panama transits. 2 In addition to costs incurred by shipping companies and their clients, costs for the Panama Canal itself are estimated to rise to between $500 million and $700 million in 2024, 3 compared with previous estimates of $200 million.
At the same time, conflict in the Red Sea and reduced access to the Suez Canal are leading companies to reroute shipping around the Cape of Good Hope, adding about two weeks to shipping time while raising costs for resources such as fuel for the vessel and food for the crew. While this delay is relatively short if a supply chain is prepared accordingly, there have been reports of automotive companies implementing line stoppages in response to material shortages. The direct impact on business revenue illustrates the need to invest in resilient supply chains. 4
These disruptions are different from the challenges posed by the COVID-19 pandemic. At that time, the demand for goods significantly increased, whereas now a supply shortage has the potential to lead to stockouts. Still, both cases call for measures to increase supply chain resilience. In the current situation, the main impact is on cargo traveling from Asia to Europe, but because of delays causing an imbalance of container availability, the impact is also being felt in routes from Asia to the west coast of North America. As with most challenges, the situation will normalize; we expect it to take around two months for global supply chains to absorb the two weeks (the time added by shipping detours) of inventory.
Waiting for that normalization to happen is not an attractive option. Instead, company leaders can take actions to build further resilience and ready themselves for additional disruptions, should they occur. Most likely, they will; previous research has predicted disruptions of one month or more every 3.7 years .
The expectation of more frequent disruptions suggests a need to prepare for the future. Supply chain leaders can prepare by developing an understanding of their operations and the world in which they are operating. They should establish an insights edge for competitive advantage, with a granular view of their company, peers and other elements of the value chain, and the broader global context.
Second, it is important that supply chain leaders understand their tier-n connections in detail. Indeed, MGI research shows that only 2 percent of companies have visibility below tier two . And finally, it is becoming increasingly important for leaders to monitor the world for tremors that may signal challenges to their operations; looking solely at their own value chains will no longer be sufficient.
With this in-depth understanding of their supply chains in place, companies can pursue a set of strategic actions to mitigate future risks. Establishing options to shift supply chains, production locations, or operating markets can provide alternatives when disruption hits, as can explorations of new technologies , partnerships, and alternative materials.
A final thought: there is no room for complacency in supply chain management and the pursuit of resilience, and the case for supply chain leaders having the ear of— and indeed being part of —the executive board remains as strong as ever.
1 “A freightful time for container ships,” Financial Times , January 4, 2024. 2 “Panama Canal to be a maritime pinch point well into 2024,” Riviera News , December 4, 2023. 3 “Panama Canal toll revenue shrinking this fiscal year due to drought,” Reuters, January 17, 2024 4 Victoria Waldersee, Anna Ringstrom, and Marie Mannes, “Tesla, Volvo Car pause output as Red Sea shipping crisis deepens,” January 12, 2024.
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BMW Group Supply Chain: an ESG Case Study
The BMW Group is a world-leading manufacturer of premium cars – including Rolls-Royce models – and motorcycles. Its 30 production sites helped fuel sales in 2022 of 2.4mn vehicles across 140 markets. It employs 149,500 people.
Ensuring compliance with ESG standards across its vast supplier network is “one of our declared aims”, the BMW Group says. “This specifically includes respect for human rights and responsible extraction of raw materials,” it adds.
Creating transparency around far-reaching, dynamic supply chains – and making goods flows traceable – are two of the most important requirements for meeting ESG targets.
This, says the company “is why we are constantly expanding our close cooperation with our partners in the supplier network”.
BMW explains that it sources components, materials and other services from a variety of production and delivery locations worldwide, and adds its ESG due diligence obligations associated with this “are set out for our suppliers in contractually binding sustainability standards”.
It continues: “When we identify risks at our direct suppliers we respond to these with preventive and corrective measures, as well as enabling activities.”
It explains that a multi-stage due diligence process “anchors our responsibility for the supplier network in all relevant areas of the BMW".
It adds that this process incorporates requirements relating to ESG issues as these affect “component development and product group strategies”, and that due diligence informs both the tendering process and supplier development strategies.
The company says it does the same for its indirect suppliers on “an ad-hoc basis”, adding that “these measures have been systematically anchored in our processes”.
BMW Group cutting use of raw materials
Naturally, automotive manufacturing involves a massive amount of raw materials, and BMW Group says it is “working on reducing our consumption of raw materials and increasing the use of secondary materials”.
(Secondary materials are materials that have been used, recycled and sold for use in manufacturing.)
“As part of our materials strategy, we constantly analyse and pay special attention to raw materials that could be linked to potential breaches of environmental and social standards,” the company adds.
It goes on to explains that the potential risks are highest “during the extraction and processing of 37 raw materials and raw material groups of relevance to the automotive industry”.
It says the biggest challenge here is “ensuring transparency and traceability within the ever-changing supplier network”.
To improve visibility the company leverages the Catena-X Alliance, an open data ecosystem for the automotive industry, designed to create data chains to enhance value chains.
“We are also working to reduce or eliminate our use of critical raw materials and have established raw material-specific sustainability standards for the relevant components,” it adds.
This, it says, “has already enabled us to gradually reduce the share of cobalt in battery cells to just under 10% at present”.
In addition, BMW Group adds it has sworn off using cobalt, nickel and manganese that are extracted via deep sea mining.
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