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.
Andrew, just a couple things to comment on. The supply risk impacts not only revenue but for a small organization it may mean the demise of the product or the company itself. A fair number of small entities I deal with have limited resources at product launch, feel the need to partner/contract/collaborate to manufacture, package and distribute and build market share as soon a possible. This usually leads to false risk assumptions which delays or even negates contingency planning. An event such as the TBA issue falls into the company regulatory cracks between a minor safety/moderate nuisance issue for a isolated event. The FDA has taken the stance that the issue is a GMP issue-adulterated product-hence the recall action. The TBA issue in the wine industry has been once you have it in you product and facility it is extremely hard to get rid of it.
Larger companies can survive the bump by quickly investigating the problem while concurrently moving to existing “clean” back-up providers to mitigate the impact. A smaller company without planning for the recall and delay of manufacturing of a single sourced product could find the future bleak. Not able to respond quickly or effectively forces the sales to stop, market share erosion, and partners relying on product for their bottom line will extract penalties for non-delivery. All of a sudden the few million to plan for a scenario such as this seem miniscule when compared to the cost and damages.
Regarding the wood pallet and the TBA issue, this has illuminated a huge gap in the supply chain. TBA is a substance that is detectable in minute quantities (ppb levels)by the human senses. Toxicity of the chemical is not known, exposure to TBA can make you ill (nausea, vomiting, diarrhea)but the effects are not long lasting. It is an aggressive volatile material that can contaminate wood, cork, cardboard, plastics, drywall, concrete and a variety of other materials. Removal of TBA is difficult. Currently manufacturers are accepting and transporting materials only on IPPS certified heat treated pallets to assure no chemical treatment of the palletts. But contamination can occur from direct or indirect contact with TBA or materials contaminated with TBA. This could be a nightmare in that if the supply chain from pallets to product containers to manufacturing facilities to shipping containers to distribution warehouses are contaminated at detectable levels. If you remember all of the recalled products are connected to Puerto Rico (contaminated bottles from PR manufacturers used at PR contract packagers)but in the latest recall from Pfizer it was indicated the the contamination was related to packaging materials and containers (purchased from a PR manufacturer) and there is indication in the latest JNJ recall that the recalled product was manufactured in the US. TBA may already be in the US supply chain… and what is the risk now to other commodities? This being a hot button issue with the FDA we will be hearing about more recalls from other than the current TBA victims.
Wow! Thanks for sharing this information. My head is spinning…. It does make me wonder if this is a larger issue than a few batches of tainted wood pallets. Very complex!