If you are looking for another example of the importance of procurement and its impact on revenue and profits, just pick up today’s business section of your newspaper do a net search for “Tylenol Recall.”
What you will find is that Johnson & Johnson just ordered the recall of one product lot of its Tylenol 8-hour caplets due to a musty odor that seeped into the product containers from the wooden pallets upon which they were stored.
This news is on the heels of a series of voluntary recalls of consumer (and other) products earlier this year (One announcement can be found here – there have been other product recalls this year). Coincidentally, J&J held its earnings call today (transcript) where it blamed the earlier recalls for:
- an increase to its cost of goods sold (130 basis points higher) in the quarter ended 9/30/10
- the shutdown of one plant
- a large negative impact on sales
According to J&J CFO, Dominic Caruso, “The third quarter results reflect an approximately $240 million negative impact to sales and an approximately $0.05 per share negative impact to EPS from the McNeil consumer healthcare recalls and shutdown of the Fort Washington, Pennsylvania facility.”
This week’s recall was apparently caused by the presence of trace amounts of a chemical called 2,4,6-tribromoanisole (“TBA”) which is a residue created when a fungicide used to treat wooden pallets and shipping packages gets wet (our simplified explanation). TBA is a strong enough compound to penetrate the product packaging of some of the items housed on the pallets and create problems. This is nothing new for J&J which had recalls earlier this year and in 2009 related to the same issue. This is nothing new for professionals and scientists who read The Journal of Agriculture and Food Chemistry who published a study called “2,4,6-Tribromoanisole: a Potential Cause of Mustiness in Packaged Food” in 1997.
I raise the issue, not to highlight some specific issue at J&J but to remind us that chief procurement officers and their departments must remain vigilant and keep supply risk on their agendas. J&J will get through these issues. It may be painful/costly in the short term or even the medium-term; but, they have mastered crisis management in the past (The J&J Tylenol recall story from the 80’s is a classic business school case study and one that continues to be referenced today) and there’s no reason to think they won’t do so this time too. Although J&J’s problems extend beyond procurement, they are not alone with the supply risk linked to the TBA pallets – earlier this month, Pfizer recalled certain batches of Lipitor due to complaints about a musty odor coming from the drug’s containers.
Supply risk is very real and while it can be very straightforward, more often than not, it is complex or highly complex. Two of the many challenges in dealing with supply risk are (1) figuring out the potential cost to the enterprise when something does go wrong (2) determining the right level of resources and investment to be made in supply risk prevention/mitigation/identification/etc. We’ve focused on supply risk in the past (here’s one example found here – worth a read if you joined the readership recently), but we’re only just getting started on the topic (at CPO Rising, but also as an industry).
Look at this specific wooden pallet issue – apparently the TBA was created when the fungicide, tribromophenol (“TBP”) was sprayed on wooden pallets and, after drying, got wet again. TBP is currently banned in the US, Canada, and the EU. So, for the TBA to appear, the pallet manufacturer must have sourced its wood from some other region or manufactured the pallets abroad. Does this mean that every food, agro, and pharma company must have full and complete visibility into the supply chain of its wooden pallet suppliers and those of its shipping and logistics service providers? What’s that gonna cost? At what point do you have to self-insure against that risk? What other products can TBA impact? Not straightforward; complex very complex.
Tagged in: Case Study, Supplier Performance Management, Suppliers, Supply Risk
