HPCLC Fall 2010 Conference Notes
Session 1 – Washington Update:
 Current gridlock may get worse with a change in Congressional control from
democratic to republican.
 Many controversial bills are dead for now
 Leaders of both parties foresee an improved performance by Congress in the next
year
 One of the casualties of the gridlock may be transportation infrastructure
investment…last highway bill expired 9-30-09…and only stopgap funding since
then.
 Likely no support for infrastructure investment in the near future (other than
stopgap)…maybe till 2013
 Call for constituents (i.e. carriers, shippers, business and labor) to press for action
regarding infrastructure development
 The result is more waste…JIT to JIC (case) supply chains…more inventory, more
carrier equipment and personnel
 New acts (shipping act of 2010 and railroad antitrust enforcement act) will
eliminate antitrust immunity for ocean shipping, railroads, etc.
 Safety advocates pushing for increased HOS regulations.
Session 2 – Economic Trends
 Consumer spending and Real Estate related areas are underperforming compared to
average recovery rates, whereas business (mfg exports and core capital) is
seemingly strongly outperforming compared to average recovery rates (recovering
from recession).
 Inventories are lean, especially at retail. Record lows - Will likely be one of the
better holiday seasons in recent years
 Corporate USA is making huge profit and sitting on record amounts of cash – before
long will begin investing in growth
 Residential investment is running under 2.5% of GDP…lowest ever - Uptake should
occur around 2011-2012, need to resolve some areas of uncertainty – mostly gov’t
and regulatory - Improvement will tax transportation capacity tremendously!!
 Emerging markets are driving the global economy. Significant growth rates
compared to developed countries - World trade is approaching it’s prior peak of
about 2008
 Transport modes linked to global trade are seeing strong growth (international air
and maritime)…also likely a function of leaning in inventories, especially with air.
Not likely to see significant modal shifts to air, though.
 Pretty big gap in supply and demand of petroleum. Shouldn’t see big uptake in oil
prices for next 3 years unless traders decide to buy futures – price of oil based on
futures market demand now.
Session 3 – Vested Outsourcing
Based on game theory by John Nash
 Says that competition is all about making decisions to either command or cooperate
in transactions
 Nash says that the key to success is for each party to make decisions that are best
for themselves AND the group
 Contracts between shippers and service providers usually prevent those kinds of
decisions – they are directive about the scope of work and how to complete it, and
don’t allow service providers to be innovative to solve problems in a way that best
benefits both parties. Rather providers are just directed to do what they are told to
meet static performance metrics
Rules of the Game:
1. Outcome-based vs. Transaction-based business model – pay for the end result not
for the individual transaction – performance partnership that optimizes for mutual
desired outcomes
2. Focus the contract on the “what” not the “how” – allow service provider (the
expert!) to determine how best to deploy assets to achieve the “what”
3. Clearly defined and measurable outcomes – not tasks, but end goals – John
Kennedy – we will put a man on the moon by the end of the decade
4. Pricing model/incentives for cost/service tradeups – gain/risk sharing to
incentivize maximizing the outcome; only 13% of value creation comes from assets
and physical labor – 87% comes from technical change improvements driven by
improvements in business process or product improvements – yet most contracts
revolve around assets and physical labor
5. Insight vs. Oversight governance structure – create metrics that are diagnostic
oriented so that both parties can use them to improve the process
4 parts of Vested Outsourcing process – 1) lay the foundation, 2) understand the business,
3) align interests, 4) establish the contract – then manage the relationship. Big problem
with most current outsourcing relationships – skip steps 1-3 and jump right to the contract.
Session 4 – Safety and Security:
 $5-10B/year in cargo theft
 Pharmaceuticals one of the targeted products for cargo theft
 Average cargo theft nets over $200K, whereas average bank robbery nets roughly
$9,500.00
 There has been no clear way to define and quantify cargo thefts
 Worst place for cargo theft is Brazil (Sao Paolo). Mexico is a close second.
 Pharma supply chain vulnerabilities are rising in large part due to outsourced
arrangements and “virtual” pharmaceutical companies.
 Pharma vulnerabilities are unique because of the perishable nature of the product
and the risk of product integrity compromise if stolen and recovered.
 The “last mile” of delivery is where vulnerabilities are particularly high.
 Successful supply chain security MUST be a cooperative effort involving the
regulatory affairs, corporate security, manufacturing, sales/marketing, logistics, risk
management, insurer.
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Though the pharma cargo theft is a small slice of the “cargo theft” pie from an
incident perspective, it represents the highest dollar amount.
Most cargo theft is truck-related, with truck stops, carrier facilities, and parking lots
representing the top three locations of such theft activity.
Most cargo theft occurs on weekends, particularly holiday weekends where delivery
is delayed. Very strong in the 4th quarter.
Facility locations, from a risk assessment perspective, is a vulnerability
Takeaways from recent burglaries: 1. Very clear and detailed instructions when
alarm systems are triggered. 2. Locations of existing alarm and surveillance
equipment must be very secure. 3. Motion alarms should not only be positioned at
floor levels, but also high enough to detect attempts to enter facilities through roof
openings. 4. All alarms, false or otherwise, need to be personally investigated. 5.
Encourage local law enforcement to include site perimeters in their routine patrols.
6. Secure all cargo equipment
Prosecution of offenders has proven very difficult. South Florida cargo theft “gangs”
are prevalent. Cargo thieves operate in teams. A “stealing” team and a “driving”
team. Transfer of teams (from driving to stealing) usually occurs at state borders.
Drivers are frequently unaware of security requirements, which also increases
vulnerability
Majority of thefts occur within 200 miles of originating destination….chances of
theft are pretty slim beyond this “red zone”
Things that raise risk in Pharma: 1. Single drivers as opposed to teams (no “escort”
of product). 2. Using refrigerated trailers (reefers signal higher value product). 3.
Using “white” trailers (hard for law enforcement recognition). 4. Not being aware
that shipment subcontracting to another carrier may happen. 5. Shipping late in
week. 6. Packing highest value commodities closest to trailer door (as opposed to
the more protective nose of the trailer). 7. Not exchanging info with the driver so
that two-way communication is possible in emergencies. 8. Drivers unaware of
specific security requirements. 9. Being dependent on carriers gps. 10. Stopping at
obscure places. 11. Not using “layered” security
“Table Top Exercise” – simulation of incident scenarios to play out procedures for
dealing with theft.
Use of escorts has also proven effective, perhaps even using police.
Asset tracking technology (GPS) is also important. Encouraging manufacturers to
use their own and not rely solely on carrier technology.
Devices are becoming so small that they can be placed inside pill bottles.
The PCSC website will provide information on cargo theft.
Cargo theft is significantly down this year…recovery is significantly up
ROI of supply chain security is significant.
Firms should have a risk assessment of each product it manufactures to expedite
processing and issues with the FDA if cargo/warehouse theft occur
Session 5 – Supplier Diversification:
1. Estee Lauder – will be rationalizing supply base of over 3000 suppliers
 Balanced approach to supply base mgt
o Quality – robust and consistent
o Service – reliable and responsive
o Cost – total and asset mgt
o Best practices – systems, practices, and training
 Move from emotional based selection to fact-based, data driven model
 Challenges – cautious economic environment, dynamic geopolitical,
overleveraged consumer
 Procurement priorities and focus – procurement interacts cross-functionally
within the company and across partners
o direct material sourcing (brands, buying categories and R&D),
o third party manufacturing –key product suppliers, service providers and
specialty providers (consulting, etc.)
o indirect procurement – reduce cost
o organizational development and investment
2. J&J/Vistakon
 Need to move beyond quality, service and cost to innovation and diversity –
diversity has become a huge initiative with Fortune 100 and Fortune 500
companies
 Billion dollar roundtable is group of firms that do at least $1BB in business with
diverse suppliers (women and/or minorities)
 Each of the major J&J businesses (in consumer, medical products,
pharmaceuticals) has a diversity lead to help diversify supply base
 Market demands supplier diversity – need to buy from small firms and create
supply base that resembles consumer and patient base – will help increase
market share with diverse consumer base; also need to increase buying power of
diverse consumer market
 80% of purchasing decisions in home are made by women – supplier diversity
programs influence buying decisions of women
 Supplier diversity program is a requirement of government contracts
 What can suppliers do to make themselves good partners for supplier diversity
programs?
o Partner with diverse suppliers, mentor other diverse partners as part of
solution for customers (share this data with big customers) – do things
like work to establish lean/6 sigma – e.g., a service provider that utilizes a
diverse pallet supplier
3. Merck – case studies in leveraging supplier diversity
 Reasons for pursing supplier diversity mirror those of J&J above
 Global strategies do not necessarily equate to one global supplier – diverse
suppliers can partner as Tier II for the optimum solution – 2nd tier drives
supplier diversity throughout the supply chain
 Merck collaborates with diverse supplier to manage temporary labor
requirements through web-enabled management system. In addition to diverse
Tier 1 supplier, this supplier uses several diverse Tier II suppliers
 Merck teams with a large corporation on driving significant diverse supplier
opportunities across integrated facilities management portfolio – IFM supplier
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utilizes diverse Tier II suppliers in landscaping, janitorial, mail room services
and other site maintenance activities – shows that building aggressive diverse
supplier requirements in outsourcing can yield major results
Merck partners with a lead transportation management services providers to
drive diverse supplier opportunities in trucking – diverse suppliers ID’d by both
supplier and Merck. Supplier must make reasonable effort to spend a % of total
annual Merck spend with US based diverse subcontractors. Shows how
aggressive targeting can drive results in a category (logistics) traditionally
challenged to contribute to company diversity goals.
Logistics and direct manufacturing are challenging areas for supplier diversity –
working language supporting diversity into all service agreements
Options for moving forward for service providers – pursue joint ventures,
strategic alliances/partnerships, carve-out sub-categories of spend, seek diverse
Tier II’s.
How do you define a diverse supplier? Must be at least 51% women or minority
owned. Certified by National Minority Supplier Development Council
Session 7 – Trade Compliance
 Mutual trade security programs are emerging, where companies are working
together to ensure secure global trade
 Increase focus on revenue protection
 Increased focus on US export requirements and enforcement
 Countries are working on sharing information to prevent discrepancies
 More robust databases and data mining procedures are emerging
 High-risk areas that are the focus of customs trade: 1. Agriculture 2.
Antidumping and countervailing duties 3. Import safety. 4. Intellectual property
rights. 5. Penalties 6. Revenue 7. Textiles (you can add security and audits to this
list)
 Foreign customs trade issues: EU is focusing on protecting the financial interests
of its member states through taxes, focuses on unfair and illegal trade, security
and safety, environmental protection, and balancing of customs controls with
facilitating trade
 China is focusing on export promotion and protecting domestic markets through
controls on imports and exports
 Brazil is focusing on revenue significantly. Security and IP protection are a
lower priority than in the US
 Pharma IP protection has been a hot issue for the last several years, and will
likely continue
 CTPAT currently has about 10,000 members. The requirements are increasing,
and value proposition of CTPAT is being questioned. CTPAT is looking for
opportunities to expand the value proposition through enhanced and increased
benefits associated with the program.
 Importer Security Filing (ISF)…(formerly 10+2). Required for all ocean shipping.
Essentially providing more information earlier in the supply chain.
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TSA Certified Cargo Screening Program (CCSP). The way legislation is written is
that it’s the responsibility of the air carrier. TSA has proposed that shippers do
their own screening. TSA requirements must be met, however.
Automated Economic Operator (AEO). The EU’s version of CTPAT.
EU has pre-arrival and pre-departure declarations similar to ISF, but for all
modes, not just ocean
The data that the EU requires is very similar to the US data requirements, though
perhaps not as detailed. The EU has the goal of improved risk analysis.
China and Brazil have no such pre-arrival and pre-departure declaration
programs. Focus more on licensing and other forms of reporting that may not be
directly security focused
World Customs Organizations is working to define and develop security
reporting standards. Currently 17 standards have been adopted that balance
between security and trade facilitation.
The Lacey Act requires declaration of the genus, species, and other specific
details of certain imported products to the USDA.
PREDICT…FDA program that predicts whether something is high risk or not.
Currently only working in LA and NY
Importer Self Assessment (ISA) – customs assesses an organization’s processes
and determines that compliance is high, then provides certification that allows
organizations to self assess and report in the future
Joint Strategic Plan on IP Rights – several agencies working together to police IP
Free Trade Agreements – must ensure that items qualify for FTAs.
Focused Assessment/Quick Response Audits..Focused Assessment is what ISA
negates. Quick respone, which is more specific and focused on certain areas is
possible, even if a firm is ISA.
CTPAT vs ISA. CTPAT is less inspections. ISA is less audits. The two are not the
same.
EU AEO program (their version of CTPAT) includes a focus on financial solvency.
AEO self assessment is on the horizon..by end of 2010.
SASP (single authorization for simplified procedures) is a benefit of AEO.
Imports going into EU countries can centralize processes and gain more
simplified customs procedures
Administrative tariff suspensions are much more predictable and planned in the
EU. Regularly reviewed and reevaluated. Several are currently of interest to the
pharma industry
Excise taxes on imports in India have been cut from 14 to 16%, as part of
stimulus
Import Compliance challenges for Companies: 1. Valuation 2. Tariff classification
3. FTA (NAFTA audits are on the rise for pharma) 4. Express Carrier Shipments
5. Communication (particularly with finance, tax, manufacturing, and
marketing….need to engage with and share information) 6. Doing more with
less.
Session 8 – Sustainability: Regulatory and Compliance
 US, Germany, Saudi Arabia, Canada…really high on per capita CO2 emissions
 Transport sector is about 20% of total global GHG emissions (half of which is
likely freight related)
 In the EU, transport accounts for about the same percentage of CO2 emissions
 Most industrialized countries have targets for GHG emissions mitigation.
Targets may not be tangible.
 Key drivers toward green logistics….consumer market, resource markets, capital
market, competition
 87% of high level logistics executives suggested that environmental issues were
either important (52%) or VERY important (35%) to their business strategy
 Reporting schemes in the transport sector
o GHG emissions – CO2, SF6, CH4, N2O, HFCs, PFCs – CO2 makes up roughly
80-85%
o Direct impact on these emissions are vehicles (own fleet) and fuel
combustion (SCOPE 1)
o Indirect (SCOPE 3) is employee business travel, waste disposal, contactor
owned vehicles, outsourced activities, product use, production of
purchased materials
o Indirect (SCOPE 2) is energy for company use
 Air is 50-80 times as an impact on carbon footprint than ocean. About 40 times
that of ground.
 A global emission calculation tool is being developed to enable emission
calculations based on kinds of goods, modes of transport, kinds of fuel, etc.
Focuses on “well to wheel” emissions chain to calculate.
Session 9 – CSA 2010
 Recent Regulatory issues – EOBR (electronic on-board recorder) rule.
Potentially mandating EOBR for all carriers. Perhaps in the next 5 years. Has
significant HOS implications
 HOS will likely be reduced from 11 to 10. Potentially 40-48 hour restart and
mandated rest break.
 Overall tightening of enforcement on carriers and associated reduction in
capacity.
 Increase in driver training (120 hours)
 Highway Reauthorization…bills will likely include other regulatory issues
 Safestat…the existing measurement system used by FMCSA. Only focuses on
out-of-service and moving violations, whereas the new system will use ALL data
to assess carrier safety. Currently assessing drivers also
 In the CSA2010..unsafe drivers and fatigue are referred to as “stand alone basics”
which automatically lead to intervention with carriers
 With CSA2010, carrier ratings can change constantly….so the need for constant
monitoring is important
 SMS Basics: 1. Unsafe driving (all moving violations…scored for severity). 2.
Fatigued (HOS). 3. Driver fitness (proper CDL, etc.). 4. Controlled
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Substances/Alcohol (doesn’t involve random drug screening…only if drugs and
alcohol are present at point of inspection). 5. Vehicle Maintenance. 6. Cargorelated (big for flat-bed). 7. Crash indicator (will not be visible to the public)
Threshold for each BASIC is different depending on the type of carrier….general,
hazmat, passenger (passenger more strict than hazmat, which is more strict than
general)
The #1 risk for intervention is fatigue…changes in HOS and mandated EOBRs
will like exacerbate this issue
Correlation between carriers that are good on compliance and those that are
great on service
Tort law says that you have a duty to hire safe carriers. CSA doesn’t mandate
hiring safe carriers…but tort law holds you liable if you don’t.
Vicarious liability…carrier’s liability becomes shipper’s liability
Negligence…shippers are held liable to do due diligence and selecting competent
and safe carriers (and monitor carriers to ensure carrier REMAINS competent
and safe). Non-delegable…meaning the duty to do this CAN’T be delegated to
others (i.e. 3pls)
CSA should lead to a defined process that shippers consistently follow…tools to
gather, analyze and USE carrier data to have a paper trail of due-diligence
Cold Chain
 Major regulatory changes, standards and guidance is forthcoming in 2011 that
will heighten the emphasis on distribution and supply chains for temperature
sensitive product. (US Pharmacopoeia, World Health Organization, Health
Canada). Suggests that drug manufacturers are ultimately responsible for the
safety of the distribution of temperature-controlled pharmaceutical products
 Main drivers of increased attention…1. Many patent expirations on biological
drugs are forthcoming, opening the door for “biosimilars”. 2. Surge in biologics.
3. Lots of NPD. 4. Global expansion (particularly BRIC). 5. Evolving
manufacturing practices.
 Biotech is the fast growing market in healthcare, mainly all of which travels by
air
 Significant capacity constraints in airfreight capacity, with slow growth in
capacity.
 Since 2006, significant increase in global airlines that are offering pharma ‘cold
chain’ cargo service offerings
 Air cargo represents the greatest area of cold chain risk (not just flying…but
handling and all cargo activity).
 New label to identify temperature controlled product.
 Technology is being used more…as opposed to dry ice as a coolant.