INVENTORY MANAGEMENT FOR PHARMACEUTICAL INDUSTRY
Brazilâs pharmaceutical market, the second largest in the emerging world, is growing at a 28 percent compounded annual rate. In 2010, the value of the prescription drugs sold to Brazilâs middle class was $8 billion, mostly for unpatented medications. According to McKinsey report1, the middle class prefers to rely on public health services, whose physicians prescribe only generic drugs. Moreover, it reported that cost-conscious middle-class patients ask pharmacists to switch their medications to less expensive generics even when physicians prescribe branded drugs.
As a result, global pharmaceutical companies have concluded that they must focus on low-cost strategy for generics and branded generics. Nine of the largest local pharmaceutical films in Brazil (Ache, Biolab, Cristalia, Libbs, EMS, BioNovis, Hebron, Eurofarma and Orygen) have invested BRL538 million (USD174.3 million) during the first five months of 2015, focusing mainly on the production of biosimilars and generics2.
1 2
http://www.mckinsey.com/insights/health_systems_and_services/capturing_the_brazilian_pharma_opportunity https://www.ihs.com/country-industry-forecasting.html?ID=1065999088
Campinas is a city in State of Sao Paulo, Brazil. To the north are a series of coastal towns that are growing very quickly. In 1998, PharmaDist Co.-a pharmaceutical wholesaler serving nine largest local pharmaceutical producers) opened a distribution center in Campinas to supply pharmaceuticals and related products to retail pharmacies, hospitals, dispensing doctors and a few other outlets. In the past, deliveries of pharmaceuticals in this remote area had been made directly by manufacturers, but the growing population had encouraged wholesalers to open. Now there is a mature industry giving an efficient delivery service from centralized warehouses.
As more pharmaceutical wholesalers arrived the market has become increasingly competitive. PharmaDist is one of the main wholesaler companies in the area. It is now classified as a medium-sized private company which is run efficiently and gives a good service to customers. The three main activities of PharmaDist are:
â order taking and processing
â stock holding and control
â delivery to customers.
1 2
http://www.mckinsey.com/insights/health_systems_and_services/capturing_the_brazilian_pharma_opportunity https://www.ihs.com/country-industry-forecasting.html?ID=1065999088
To ensure his companyâs continuing success, Orlando Marcelo, the CEO is always looking for improved performance. A short while ago he was concerned that the cost of deliveries to customers was rising. The distribution system had been reviewed occasionally as the company grew, but it was essentially designed for a much smaller operation.
Orlando hired a management consultant to give advice on improving the transport operations. The consultant did some work which suggested areas for improvement, and his final report suggested that the company look at its stock holding policies. Orlando looked at the stock control system, which was based on standard software provided by SOFT seven years earlier. This had been updated and expanded twice, and still seemed to work quite well. Unfortunately, a close examination showed that stock levels had actually been drifting upwards for some time. The purchasing department explained that the company was successful because it had a reputation for reliability and service. A customer could e-mail, fax or telephone an order and delivery would be guaranteed during the next working day. Unfortunately PharmaDist had occasionally run out of stock and had let down customers (their own lead time from manufacturers averaged about a week). To ensure 97% service level, the purchasing department had adopted a policy of keeping two weeksâ demand in reserve stock, but for some reason this seemed to be drifting up to three weeksâ demand. The same ordering procedure was used for all items. This was based on the purchasing departmentâs view that the most important factor was average demand over the past five weeks. This value was used as a forecast of future demand. Then a reorder level was set as:
Reorder level = Forecast à (lead time + safety stock) à Factor
where Factor is a variable between 1 and 2 to give a subjective view of the itemâs importance and the supplierâs reliability. Order quantities are really set by the number of staff in the purchasing department. Three people work in the department, each processing up to sixty orders a day. In 200 working days a year they can process 36,000 orders. As there were 4000 items in stock, each item can have an average of 9 orders a year. To add another element of safety, each order was made big enough to last about eight weeks. The system was largely automated, and nobody really checked its performance. Items were usually in stock when they were needed, so managers did not look at the details of the operations. Unit costs varied between one dollar and several hundred dollars, and no one had calculated cost of stock holding or ordering.
Demand for Item Week 1 2 3 4 5 6 7 8 9 1 53 284 252 27 145 1235 567 121 987 2 64 301 260 32 208 1098 664 87 777 3 82 251 189 23 177 987 548 223 743 4 41 333 221 22 195 1154 602 304 680 5 73 276 232 27 211 1559 530 76 634 6 18 259 195 30 179 1209 650 377 655 7 40 242 217 31 205 993 612 156 598 8 53 310 225 23 187 1313 608 198 603 9 52 311 186 28 156 1405 596 94 621 10 21 336 265 23 182 1009 637 355 564 11 67 258 245 25 171 985 555 187 559 12 50 277 212 28 169 1237 589 209 519 13 22 263 224 31 210 1119 601 304 485 14 37 277 233 28 182 1124 584 295 483 15 36 275 235 28 182 1117 580 315 463 16 34 273 236 29 182 1110 576 335 442 17 32 271 238 29 181 1103 572 354 422 18 31 269 240 29 181 1096 568 374 402 19 29 267 242 29 181 1089 564 394 381 20 22 272 243 30 184 1105 568 430 359 Mean 43 280 230 28 183 1152 588 259 569 Standard Deviation 18 25 22 3 17 144 34 112 154 Reorder level 302 1220 1050 160 1120 6100 2520 900 4400 Order quantity 450 2000 1500 245 1450 7900 4500 1950 6400 Unit cost (USD) 45.25 10.2 8.75 32.6 12.25 6.5 28.5 36 4.2
1. How well do you think the existing inventory control system works? What are the current annual total costs for the selected items?
2. What policy would you suggest to reduce the total costs? What is the anticipated gain?
3. Orlando Marcelo is keen to make progress in this area. What would you advise him to improve their inventory management system?
INVENTORY MANAGEMENT FOR PHARMACEUTICAL INDUSTRY
Brazilâs pharmaceutical market, the second largest in the emerging world, is growing at a 28 percent compounded annual rate. In 2010, the value of the prescription drugs sold to Brazilâs middle class was $8 billion, mostly for unpatented medications. According to McKinsey report1, the middle class prefers to rely on public health services, whose physicians prescribe only generic drugs. Moreover, it reported that cost-conscious middle-class patients ask pharmacists to switch their medications to less expensive generics even when physicians prescribe branded drugs.
As a result, global pharmaceutical companies have concluded that they must focus on low-cost strategy for generics and branded generics. Nine of the largest local pharmaceutical films in Brazil (Ache, Biolab, Cristalia, Libbs, EMS, BioNovis, Hebron, Eurofarma and Orygen) have invested BRL538 million (USD174.3 million) during the first five months of 2015, focusing mainly on the production of biosimilars and generics2.
1 2
http://www.mckinsey.com/insights/health_systems_and_services/capturing_the_brazilian_pharma_opportunity https://www.ihs.com/country-industry-forecasting.html?ID=1065999088
Campinas is a city in State of Sao Paulo, Brazil. To the north are a series of coastal towns that are growing very quickly. In 1998, PharmaDist Co.-a pharmaceutical wholesaler serving nine largest local pharmaceutical producers) opened a distribution center in Campinas to supply pharmaceuticals and related products to retail pharmacies, hospitals, dispensing doctors and a few other outlets. In the past, deliveries of pharmaceuticals in this remote area had been made directly by manufacturers, but the growing population had encouraged wholesalers to open. Now there is a mature industry giving an efficient delivery service from centralized warehouses.
As more pharmaceutical wholesalers arrived the market has become increasingly competitive. PharmaDist is one of the main wholesaler companies in the area. It is now classified as a medium-sized private company which is run efficiently and gives a good service to customers. The three main activities of PharmaDist are:
â order taking and processing
â stock holding and control
â delivery to customers.
1 2
http://www.mckinsey.com/insights/health_systems_and_services/capturing_the_brazilian_pharma_opportunity https://www.ihs.com/country-industry-forecasting.html?ID=1065999088
To ensure his companyâs continuing success, Orlando Marcelo, the CEO is always looking for improved performance. A short while ago he was concerned that the cost of deliveries to customers was rising. The distribution system had been reviewed occasionally as the company grew, but it was essentially designed for a much smaller operation.
Orlando hired a management consultant to give advice on improving the transport operations. The consultant did some work which suggested areas for improvement, and his final report suggested that the company look at its stock holding policies. Orlando looked at the stock control system, which was based on standard software provided by SOFT seven years earlier. This had been updated and expanded twice, and still seemed to work quite well. Unfortunately, a close examination showed that stock levels had actually been drifting upwards for some time. The purchasing department explained that the company was successful because it had a reputation for reliability and service. A customer could e-mail, fax or telephone an order and delivery would be guaranteed during the next working day. Unfortunately PharmaDist had occasionally run out of stock and had let down customers (their own lead time from manufacturers averaged about a week). To ensure 97% service level, the purchasing department had adopted a policy of keeping two weeksâ demand in reserve stock, but for some reason this seemed to be drifting up to three weeksâ demand. The same ordering procedure was used for all items. This was based on the purchasing departmentâs view that the most important factor was average demand over the past five weeks. This value was used as a forecast of future demand. Then a reorder level was set as:
Reorder level = Forecast à (lead time + safety stock) à Factor
where Factor is a variable between 1 and 2 to give a subjective view of the itemâs importance and the supplierâs reliability. Order quantities are really set by the number of staff in the purchasing department. Three people work in the department, each processing up to sixty orders a day. In 200 working days a year they can process 36,000 orders. As there were 4000 items in stock, each item can have an average of 9 orders a year. To add another element of safety, each order was made big enough to last about eight weeks. The system was largely automated, and nobody really checked its performance. Items were usually in stock when they were needed, so managers did not look at the details of the operations. Unit costs varied between one dollar and several hundred dollars, and no one had calculated cost of stock holding or ordering.
Demand for Item Week 1 2 3 4 5 6 7 8 9 1 53 284 252 27 145 1235 567 121 987 2 64 301 260 32 208 1098 664 87 777 3 82 251 189 23 177 987 548 223 743 4 41 333 221 22 195 1154 602 304 680 5 73 276 232 27 211 1559 530 76 634 6 18 259 195 30 179 1209 650 377 655 7 40 242 217 31 205 993 612 156 598 8 53 310 225 23 187 1313 608 198 603 9 52 311 186 28 156 1405 596 94 621 10 21 336 265 23 182 1009 637 355 564 11 67 258 245 25 171 985 555 187 559 12 50 277 212 28 169 1237 589 209 519 13 22 263 224 31 210 1119 601 304 485 14 37 277 233 28 182 1124 584 295 483 15 36 275 235 28 182 1117 580 315 463 16 34 273 236 29 182 1110 576 335 442 17 32 271 238 29 181 1103 572 354 422 18 31 269 240 29 181 1096 568 374 402 19 29 267 242 29 181 1089 564 394 381 20 22 272 243 30 184 1105 568 430 359 Mean 43 280 230 28 183 1152 588 259 569 Standard Deviation 18 25 22 3 17 144 34 112 154 Reorder level 302 1220 1050 160 1120 6100 2520 900 4400 Order quantity 450 2000 1500 245 1450 7900 4500 1950 6400 Unit cost (USD) 45.25 10.2 8.75 32.6 12.25 6.5 28.5 36 4.2
1. How well do you think the existing inventory control system works? What are the current annual total costs for the selected items?
2. What policy would you suggest to reduce the total costs? What is the anticipated gain?
3. Orlando Marcelo is keen to make progress in this area. What would you advise him to improve their inventory management system?
