Improve Your Supply Chain Forecasting

Oct. 26, 2012
A great benefit of a strong planning system is that previously forecasts could only be done at the product level, today we can forecast right down to the customer level, anytime at the press of a button.  

With the benefit of clear hindsight, I wanted to share my experiences of transforming a single process in our supply chain -- forecasting -- which has brought many profitable and some unexpected outcomes to bear for my company, and most importantly, to our customers.

Cipla Medpro is South Africa's fastest growing pharmaceutical company and currently the third largest by value in a highly competitive market. We strive to provide South Africans and the neighboring Southern countries of Namibia, Botswana, the Swaziland and Lesotho with superior-quality, but affordable medicines.

In order to do this, we seek to eliminate as much waste and inefficiency from our supply chain as possible while meeting our compliance obligations. This last bit is more easily said than done and not a uniquely South African problem.

The pharmaceutical sector is highly regulated all around the world. We must comply with, among others, World Health Organization standards, the South African Medicines Control Council, our own local pharmaceutical and manufacturing standards. 

On top of all the various forms of regulation, pharmaceutical supply chain logistics are relatively complicated and unpredictable and contribute significantly to the price of medicine. When it comes to transporting medicine, there are strict requirements for each product with regards to temperature control and the type of vehicles in which each can be transported. Routes need to be mapped carefully in advance, taking variables like adverse weather and road quality into account.

These factors and others make achieving economies of scale very difficult when compared to most other industries, which can more easily aggregate their cargos. Although my story isn’t about logistics as such, I point to these factors because when your forecasting is inaccurate, you add unnecessary transportation costs and complexity.

Why Prioritize Forecasting?

Every link in the supply chain is dependent upon the forecast, so getting it right is vital to the health of the business. Obviously some circumstances, especially in transportation, will always be beyond control. But it is a tricky job. Although we don’t carry too many SKUs, we have very high turnover on each one. Also, there are no clear, predictable seasonal patterns to our demand.

The cardinal sin in our business is running out of stock and not being able to fulfill an order. You only need to have this happen once before you are swiftly replaced by another supplier. Most suppliers ‘insure’ against this by holding excessive levels of safety stocks, but this inevitably leads to waste and obsolescence and ultimately, higher costs. So striking the optimal balance is a difficult process but one that can make a huge difference on the price and availability of medicines. This is why I decided to make forecasting our top priority.

A Leap of Faith

By 2011 Cipla Medpro had been growing at a rapid pace for nine years, and it became increasingly difficult to maintain forecasting accuracy as we scaled up. When we started out, we only supplied a handful of products and had to manage a relatively small number of orders, which we could forecast well enough using common sense and Excel spreadsheets. Last year it was clear that we had outgrown this. Nevertheless, I was initially very apprehensive about investing in new planning software due to the ‘grief cycle’ I experienced in the past with IT projects that came with long, expensive implementations and unmet expectations. 

After looking at four companies that supplied supply chain planning software, we selected ToolsGroup. Not only did their software meet our functional requirements but SaaS ‘rental’ option lowered the risk factor. If it didn’t work it out, at least we wouldn’t have shelled out lots of money up front.

Mercifully, all my apprehensions were laid to rest. The software implementation was extremely easy and within 30 days we were fully operational, with all of our data sets integrated. That was extremely valuable to us and a huge surprise. A business like ours can’t afford to grind to a halt while the IT department spends six months to a year trying to get meaningful data out of the system. Having them physically near us was also a major boon. Many U.S. software companies service South Africa from offices somewhere far afield in mainland Europe, which isn’t much good to us.

In Forecasts We Trust!

Due to the highly competitive nature of our business, I can’t disclose how much the new forecasting process has improved the bottom line in hard currency terms but I can tell you that it’s very significant -- not only in improved operational efficiency, but in inventory costs and customer retention. 

Crucially, before we started with ToolsGroup, we were out of stock with just above three percent of our inventory at any given time. Stock-outs lead to revenue losses that can never be recovered, which is especially severe when high-value items come into the equation. Today stock-outs are less than one percent of our total inventory and this is purely due to situations beyond our control. That’s probably the most important benefit that the new planning system contributes to our operations.

Another benefit of the new system is that where before we could only forecast at the product level, today we can forecast right down to the customer level, anytime at the press of a button. That really opened a whole new world to us because now we forecast demand from our most important customers by product, which is not possible using standard ERP products.   

The new system also helped us to cut down on stock that was obsolete or about to expire, which was an unexpected benefit.  When our data was analyzed we learned that we were doing incorrectly, which can be very risky as a supplier. (We tend to have ‘long feet’ and it’s easy to step on our toes!) With regard to our batch sizes in relation to sales, some batch sizes were not viable given the time period that we had to sell products before they expired. Armed with this information, we went back to our suppliers and explained that we had to change the batch sizes or run the risk of carrying obsolete stock. It may seem like we should have noticed this before, but this type of information can lie very far beneath the surface. This has really changed our planning process and costs for the better.

Another unexpected benefit was the ability to instantly do a long-range cash flow projection. We had attempted this in the past but it was very time consuming. Now with the press of a button, we can see cash flow projections based on anticipated orders for the next five years. This means we can build ‘what-if’ scenarios, taking anticipated growth into consideration.

Last, but not least, we are finally starting to trust our forecasts.  In the Excel days we weren’t as confident with our forecasting, always double-checking our calculations to make sure we were going to be able to fulfill our customer orders. The new system removes all that doubt and gives us a final figure that we can trust, eliminating a lot of planning and worry. Today my team and I spend time more usefully, on placing orders and managing them into the warehouse.  

The biggest lesson I learned is that the benefits of implementing a new planning system can far outweigh the costs and if I had the chance do it all over again, I would have started much sooner. Our investment paid for itself within the first six months and that’s only factoring in the efficiency savings. When you add in inventory costs and customer retention, the payback gets much faster. I hope this persuades some readers to take my advice and fix their forecasting process today for the long-term health of their businesses.

Joseph Ludorf is managing director of Cipla Medpro Distribution Centre PTY (LTD)

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