Vertical Integration at Johnson & Johnson
Johnson & Johnson: Planning Vertical Integration Team Synergy April 4, 2011 In a competitive market to which Johnson and Johnson operates, the smallest of errors can lead to consequences which can cut revenue. When large mistakes occur, millions of dollars are lost, and even worse, there is a loss of customer confidence. Johnson and Johnson has had numerous recalls in their consumer healthcare division recently, which rocked the organization’s once sound image, and diminished its profits. These recalls have hurt Johnson and Johnson’s stocks and cost the company about $900 million in sales last year (Rockoff, 2011).
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Opportunity For Johnson and Johnson to continue being an industry leader, change is needed. An overhaul of the company’s production management must be examined. Recalls like ones they have been experiencing are unacceptable in the medical field. Mr. Weldon acknowledged customers were smarting from the recalls, and vowed to regain their trust and confidence once the recalled medicines return to the market at the end of this quarter (Rockoff, 2010). These recalls have led to the closing of plants, and loss of profits.
Johnson and Johnson must reestablish itself as a premier, family oriented health care organization. Establishing consumer confidence once again and finding ways to regain its market share is the company’s primary strategic plan. An integration of the McNeil arm (which produces the products recalled) to the Johnson and Johnson production standards is needed. The recall problems have not been a one and done case. In the fiscal year of 2010 the FDA reported that Johnson and Johnson had to recall “approximately 288 million drug product units” (Perrone, 2011).
Johnson and Johnson needs to find a way to control this problem before this arm of their corporation ruins its image which has been built over years. An integration of product management must be implemented with proper oversight, and execution. The ultimate goal is to minimize any potential danger to its clients, and turn the McNeil arm into a profitable one, once again. Solutions The current vertical integration of Johnson & Johnson follows the backward integration ideology, with a focus on diversifying products closer to their production.
Johnson & Johnson is responsible for the manufacturing, marketing, and distribution of its products. Through backward integration Johnson & Johnson has more control over the beginning stages of production. Retailers that sell Johnson & Johnson products rely and trust that customers are receiving high quality products. After several product recalls, it is the primary objective of the Executive Team to create a new strategy to insure that the best quality products are being produced. Two specific solutions have been proposed to address the growing problems related to the vertical integration of Johnson & Johnson.
The key issue with product recalls is a lack of quality control throughout the various branches of management. The Executive Team should create a new position, Senior Director of Quality. This individual will report directly to the CEO and be responsible for the quality control initiatives being implemented. This Senior Director of Quality will head the corporate quality program, Signature of Quality (SOQ). This is a committee present in each J&J arm and is tasked with improving operations from the manufacturing process to product performance.
As an organization that relies heavily on suppliers for chemicals and raw materials, it is essential that the products meet J&J’s high standards for quality. Supplier evaluations are critical when receiving raw materials used in the manufacturing of J&J products. Incoming quality inspections must be administered, data recorded, and tracked. J&J has been successful in past by acquiring other businesses that are able to help the organization advance. Continued vertical integration through acquisitions will help the organization increase revenue and also help control product quality.
In the past J&J has acquired companies like HealthMedia, an online health management space aimed at employers to decrease health costs. The vertical integration of J&J into health services was a win-win for the company, employers targeted as customers, and employees (Sarasohn-Kahn, 2008). The expanded growth capability through acquiring companies in the downstream will continue to help the organization offer more products and services. The current problem is that with various product offerings the quality and safety guidelines may have been overlooked.
The product recalls have been a result of poor quality management and errors in the manufacturing process. The key benefits of backward vertical integration are: more control over the manufacturing of J&J products, advanced technology, and more trusted industry experience. If J&J has greater control over the upstream (selection of raw materials, production, manufacturing, marketing, and distribution) then greater stability and higher quality goods will be sent to retailers. Implementing Solutions
In order for Johnson & Johnson to achieve success in its vertical integration process, they need to create a new position under CEO, William Weldon to manage the Signature of Quality Committee members (SOQ) and to oversee the full supply chain processes. This role will be known as the Senior Director of Quality. Within the next 30 days, a Cross functional team made up of the CEO, the Vice President of HR, and Ajit Shetty (in charge of operations for J&J pharmaceuticals, medical device and consumer segments) will hire or appoint the Senior Director of Quality.
That same cross functional team will also appoint the SOQ committee members within 30 days. These members will be diverse in their backgrounds but all possess experience in supply chain management. Once the Senior Director of Quality and SOQ committee members are on board for 30 days, they will begin to create and implement new strategies to improve operations throughout the supply chain. This includes introducing strategies or responsibilities to create more vertical integration throughout the organization.
Such examples include monthly supplier evaluations, daily incoming quality inspections, and the introduction of a new quality management software program. All of these new processes should be in place within a month after the first meeting. The team will continue to monitor the success of the implemented strategies on a monthly basis. Finally, a cross functional team including Ajit Shetty, the SOQ team, and the Senior Director of Quality will invest in an outside organization to recommend best practices & monitor the quality management process. An external organization will be able to look at he strategies in place and make recommendations to improve on supply chain cohesiveness. An external party should be hired within 30 days of the completion and implementation of the new supply chain strategies. The company will also be asked to come back and provide evaluations to the cross functional team on a monthly basis. Metrics for Success Measuring firm performance as survival, Bigelow and Argyres found companies that make vertical-integration decisions consistent with the logic of transaction-cost economics survive longer than those that do not (Bigelow, 2010).
The transaction with suppliers or decisions to acquire more organizations will depend on whether the transactions will decrease costs in the long-term. Success will be measured by determining income to sales and inventory to sales. The longer the production line and more successive processes are operated by one firm, the higher the ratio (Adelman, 1955). Data collection regarding potential acquisitions will be obtained and those that support the organizational goals, increase quality, add more to product pipeline, and improve revenue will be added.
Potential candidates include: * Crucell – vaccines J&J already has major stock in * Regeneron – array of biologics for rare diseases * Exelixis – oncology * Human Genome Sciences – lupus * Intermune – therapeutic areas of infectious & rare diseases * Celgene – hematological (blood related cancer market) * Elan – Alzheimer’s The Senior Director of Quality will be evaluated on his/her ability to meet goals determined by the Executive Team. The first review will begin after 90 days in the position to determine if adequate progress has been made.
Adequate progress includes: * Zero findings during laboratory audits and inspections. * Decrease in product error/recalls. * Successful integration of new manufacturing firms and suppliers. * Improved communication within manufacturing, compliance, research & development, and regulatory affairs. * Enforce measurable quality systems in compliance with FDA regulatory standards. * Oversee the SOQ committee. * Performance will be measured by their ability to engineer changes, improve design and development producibility, quality, reporting and data collection, and materials/logistics (Haase, 2002).
The goals of both the Senior Director of Quality and SOQ members are to inform Executive Management of the status of the various elements of the production system through a set of high-level metrics. This team will introduce new quality management software MetricStream QMS that provides real-time data about the quality, corrective actions, training, costs of quality, product tracking, unresolved corrective actions, and supplier performance parameters (MetricStream 2011). Conclusion Johnson and Johnson has experienced great difficulties in its vertical integration process over the past few years.
With numerous recalls, customer confidence has slid and profits have fallen. However, with the solutions laid out, Johnson and Johnson has the ability to fix these problems and improve on their vertical integration process. With maximized control over the upstream process, Johnson and Johnson will gain greater stability and produce higher quality goods. However, if they are unable to implement the improvements and enhanced control over its supply chain processes, it will be difficult for them to resolve the holes in their processes.
References Adelman, M. A. (1955). Concept and Statistical Measurement of Vertical Integration. Retrieved April 3, 2011 from http://www. nber. org/chapters/c0965. Bigelow, L. (2010). Outsourcing May Lead to Failure in Tough Times and Even in Good. Retrieved April 3, 2011 from http://www. business. utah. edu/node/1198. Haase, S. (2002). Supply Chain Redesign: Advanced Sterilization Products (ASP). Retrieved April 3, 2011 from http://www. lda-us. com/Articles/AME_SupplyChainRedesign. pdf. MetricStream. 2011). Enhance Quality Tracking and Process Efficiency Optimization in Pharmaceutical Manufacturing. Retrieved April 3. 2011 from http://www. metricstream. com/whitepapers/html/pharma. htm. Perrone, M. (2011, March 29). Yahoo Finance. Retrieved April 2, 2011, from www. finance. yahoo. com. Rockoff, J. D. (2011, March). J Recall Watch: More Musty-smelling Tylenol Caplets. Retrieved April 2, 2011, from WSJ: www. wsj. com. Rockoff, J. D. (2010, August 19). WSJ. Retrieved April 3, 2011, from www. wsj. com.