Recent concerns about safety issues with food and toys from China are causing businesses to reevaluate national and international supply chains. A lesson learned again is that a supply chain is no better than its weakest link. Almost all companies will try to shorten supply chains and improve internal controls, but few will move to vertically control the entire process because an individual company is usually not efficient at all segments of an industry and must choose only a few to focus on as core competencies.
AstraZeneca, Britain’s second largest pharmaceutical company with $26.5 billion in worldwide sales and 27 manufacturing plants in 19 countries, recently announced that over the next 10 years it will outsource all its drug manufacturing activities. The company’s 2006 Annual Report highlights its activities, “We discover, develop, manufacturer and market prescription pharmaceuticals…” In a Times of London story, David Smith, Executive Vice President of Operations said, “Manufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brand-building…There are lots of people and organizations that can manufacture better than we can.” Smith previously worked for Estee Lauder and Timberland clothing where outsourcing is common as it is in industries like electronics and automobiles.
“Core competencies” is a modern phrase for a fundamental concept in international trade called comparative advantage. People in some countries are better at certain economic activities than others and focus on those activities and trade internationally with producers of other items they need, but don’t produce. An international company like AstraZeneca has the same challenge of choosing a few core competencies and letting other companies focus on the rest. With 66,000 employees in over 100 countries, running everything top down in a vertically integrated chain is not as economically efficient as allowing the company to specialize in a few areas and trade with other companies that have expertise in other areas.
Mr. Smith noted that quality and safety would remain a core competency. That’s logical because the rest of the company has no value if quality and safety are not built into the supply chain. AstraZeneca is also not cutting staff in the research and development unit that has 12,000 people at 16 centers in eight countries. They spend $16 million each working day on discovering and developing new medicines.
In the U.S. the Grocery Manufacturers Association (GMA) is addressing concerns about the quality and safety of imported foods. They have developed a Four Pillars of Food Safety program to build food safety and quality into the supply chain. GMA President and CEO Cal Dooley stated, “Because we cannot simply inspect our way to a safer food supply, industry can apply its vast knowledge and practical experience along the entire supply chain to prevent problems before they arise.”
The first pillar of the plan is all importers would be required to adopt a foreign supplier quality assurance program and verify that imported products meet Food and Drug Administration (FDA) safety and quality requirements. The program would be based on industry best practices and FDA guidance and be enforced by FDA. The second pillar would allow companies/importers to qualify products as lower risk by sharing with FDA in a confidential manner test results, data and supply chain information. At the point of import these products would receive expedited service and free up FDA resources to focus more on higher risk imports. Companies would be assuming the task of guaranteeing that products meet the standards.
The third pillar is to more closely align the food safety standards of other governments with those of FDA by providing assistance to upgrade their safety standards (often referred to as capacity building). The last pillar is increased funding for FDA to meet its increased responsibilities.
The Four Pillars program is a “life-cycle” approach to food safety centered on prevention. Life-cycle is the latest buzz phrase that generally refers to looking at all parts of a system or supply chain rather than just one segment. Sixty years ago the preferred approach would have been a vertically integrated company on the mistaken notion that knowledge can be concentrated at the top of a system and managed downward. Companies have learned that knowledge is widely disbursed throughout a supply chain and no one at the top knows enough or has enough power to direct how knowledge is used throughout a supply chain. The same is true for government regulations; they only work when they meet specific needs at the individual supply chain level.
AstraZeneca is making its changes to prepare for a time of lower profits when patents expire on key medicines. The GMA has a more immediate problem of rebuilding confidence in imported products on their customers’ retail shelves. Other companies and trade groups will come up with programs that meet specific needs. Few of them are likely to reject the benefits of international trade as a way to resolve supply chain safety and quality issues. They will seek out ways to harness the disbursed knowledge needed to develop a life-cycle approach to safety and quality.
The ultimate success of these programs will be determined by how supplier countries respond to these efforts to strengthen safety and quality. The GMA proposal to help countries develop better safety systems is an encouraging sign that expertise will be available. The pharmaceutical industry has long operated under tight government regulations and may be better prepared to work with new country standards. These efforts will result in higher quality products without sharply higher costs and improved consumer safety.
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