Operational Strategies for Managing Supply Chain Disruption Risk1 Brian Tomlin Tuck School of Business at Dartmouth, Hanover, NH 03755 Yimin Wang W.P. Carey School of Business, Arizona State University, Tempe, AZ 85287 1. Introduction On June 16 2009, Genzyme Corporation announced that it had discovered the virus Vesivirus 2117 in one of the bioreactors at its plant in Allston, Massachusetts.2 While the virus strain is not thought to be harmful to humans, it does interfere with production efficiency. Genzyme made the decision to shut down production of the three drugs ‐ Cerezyme, Fabrazyme and Myozyme ‐ produced in the plant. In FY2008, Cerezyme and Fabrazyme (used for the treatment of Gaucher and Fabry diseases) accounted for $1.7 billion of the company’s $4.6 billion in revenue. Genzyme anticipated that the Allston plant would be back up and running by the end of July. However, because of the long processing lead time associated with biopharmaceuticals, production launched in August would not yield product until later in the year. At the time of the disruption, Genzyme was in the late stages of constructing a second facility in Framingham, Massachusetts for the production of Cerezyme and Fabrazyme. While the Framingham plant would provide an added layer of protection against any future interruptions in the production of Cerezyme and Fabrazyme, Genzyme’s only protection in June 2009 was its existing inventories of these two drugs. Unfortunately, the company’s stockpile was not large enough to fully absorb the production loss. Genzyme’s July 22 press release stated that: “Cerezyme and Fabrazyme inventories are not sufficient to avoid shortages during the period of suspended production and recovery. Genzyme is working closely with treating physicians, other health care providers, patient communities and regulatory officials worldwide to support patients with Gaucher and Fabry disease during the temporary period of supply constraint.” The press release estimated that the revenue loss associated with the disruption would be in the range of $250‐$600 million depending on whether the pre‐disruption work‐in‐process inventory would be usable. Presumably the revenue loss would have been much greater if Genzyme did not have an inventory stockpile but would have been less if the Framingham plant had already come online. Fortunately for Genzyme (though not for the patients), there were no other existing Food and Drug Administration (FDA) approved drugs for the treatment of the Gaucher and Fabry diseases, and so the strategic risk of sustained market‐share loss was not a preeminent concern in this instance. Genzyme did not anticipate shortages of Myozyme, the other drug produced in the Allston plant, in part because it This work is intended as a chapter for the “Handbook of Integrated Risk Management in Global Supply Chains” co‐edited by Panos Kouvelis, Onur Boyabatli, Lingxiu Dong, and Rong Li, to be published by John Wiley & Sons, Inc. 2 All references to Genzyme in this chapter are based on information contained in press releases, communications and financial statements issued by the company. ~ 1 ~ 1
had recently received approval from the European Commission for production of Myozyme at its facility in Geel Belgium. We can learn two important lessons from Genzyme’s experience. The first lesson is that supply chain disruptions can and do have very large financial and strategic consequences. The second lesson is that operational strategies, if correctly designed and implemented, can effectively mitigate the financial and strategic risk associated with supply ...
References: Alizamir, S., A. Alptekinoglu and A. Sapra. 2007. Demand Management Using Responsive Pricing and Product Variety in the Presence of Supply Chain Disruptions. Working Paper. SMU Cox School of Business. Chopra, S., G Reinhardt, and U. Mohan. 2007. The importance of decoupling recurrent and disruption risks in a supply chain. Naval Research Logistics 54 (5) 544‐555 Dada, M., N.C. Petruzzi, and L.B. Schwarz. 2007. A newsvendor’s procurement problem when suppliers are unreliable. Manufacturing and Service Operations Management 9 (1), 9–32. Griffy‐Brown, C. 2003. Just‐in‐time to just‐in‐case. Graziadio Business Report 6. Pepperdine University. Krause, D.R. 1997. Supplier development: Current practices and outcomes. Journal of Supply Chain Management 33(2) 12‐19. Krause, D.R., R.B. Handfield, B.B. Tyler. 2007. The relationships between supplier development, commitment, social capital accumulation and performance improvement. Journal of Operations Management 25(2) 528‐ 545. Latour, A. 2001. Trial by fire: A blaze in Albuquerque sets off major crisis for cell‐phone giants. Wall Street Journal (January 29). Sheffi, Y. 2005.The Resilient Enterprise. The MIT Press, Cambridge, MA. Song, J.‐S. and P.H. Zipkin. 1996. Inventory control with information about supply conditions. Management Science 42 (10) 1409–1419. Tomlin, B. 2006. On the value of mitigation and contingency strategies for managing supply‐chain disruption risks. Management Science 52 (5) 639–657. Tomlin, B. 2009a. The impact of supply learning when suppliers are unreliable. Manufacturing and Service Operations Management 11 (2) 192‐209 Tomlin, B. 2009b. Disruption‐management strategies for short life‐cycle products. Naval Research Logistics 56 (4) 318‐347 Tomlin, B. and L. Snyder. 2007. On the value of a threat advisory system for managing supply chain disruptions. Working Paper. Tomlin, B. and Y. Wang. 2005. On the value of mix flexibility and dual sourcing in unreliable newsvendor networks. Manufacturing and Service Operations Management 7 (1) 37–57. Wang, Y., W. Gilland and B. Tomlin. 2008. Mitigating supply risk: dual sourcing or process improvement? Forthcoming, Manufacturing and Service Operations Management.
~ 19 ~
Please join StudyMode to read the full document