Statistical soothsaying

Statistical soothsaying

Supply chain forecasting is essential to uphold the balancing act between companies’ supply chains and logistics … JACO DE KLERK got the latest lowdown on this paramount business activity at the Sapics Regional Conference in the Western Cape.

Supply chain forecasting is crucial in the world of logistics as it ensures that companies don’t run out of stock or have too much stock on hand, both of which can have serious repercussions. However, determining this golden mean is a tricky balancing act – especially in the pharmaceutical arena, where medication runs the risk of expiring and the end users have to get the products …

At the sixth Annual Sapics Regional Conference in the Western Cape (see
page 49), held at the Erinvale Estate in Somerset West, Cipla Medpro South Africa (one of the fastest growing local pharmaceutical companies) and ToolsGroup South Africa (a software provider offering key demand analytics and supply chain planning solutions) presented a case study on the importance and benefits of implementing a supply chain “crystal ball”.

Painting the supply chain picture

Founded in 1993, Cipla Medpro is South Africa’s third largest pharmaceutical company by value. Shané de Wet, the company’s master planner, says: “In the generics market, Cipla is the third largest pharmaceutical company by volume.”

She explains that Cipla International is based in India and was founded in 1935. “The organisation is present in 170 countries worldwide and manufactures about 2 000 products in over 65 therapeutic categories, with 40 different dosage films.”

The local company accesses the supply chain in Cape Town. “We’re a Cape Town based company, with our distribution centre also based in this city,” De Wet points out. “We receive about 65 containers of stock every month at an average of 700 open purchase orders, across 26 international suppliers – from Shanghai to India and Europe.”

She adds that Cipla Medpro distributed 68 million units throughout South Africa last year. “During 2012 we completed more than 106 000 sales orders, on which we only picked up 72 errors.” This is even more impressive if you consider that 80 percent of all the orders are picked within three hours, the bulk of which are also packed and ready to be shipped by close of business on that day.

However, the company’s efficiency isn’t only due to ample hard work but some statistical soothsaying as well – which the ToolsGroup provides in the form of supply chain forecasting software solutions.

The crystal ball

De Wet explains: “We wanted to move away from manual forecasting, which is a difficult process to develop, especially at the rate at which we are growing.” She adds that the company wanted something that can automatically generate, in typical terms, what it needs to order. “And that is why we met up with the ToolsGroup in 2011.”

Statistical soothsaying De Wet points out that, after three months of operation, the company had an accurate view of what its stock holding would be over the next 24-month period. “And that is on a rolling basis, so we are able to see two years in advance what our stock hold will look like.”

But the benefits didn’t end there, as the software includes the integration of Cipla’s supply chain forecasting with its overall planning. “Forecasting shouldn’t be done as a standalone activity,” explains Hein Dill, MD of ToolsGroup SA. “It should be integrated with your inventory, supply chain, transport and distribution planning – and must include all your business processes.”

He adds that Cipla has different product managers. “So they provide the information and the system generates a statistical forecast,” Dill explains. “This is used to decide the way forward, for example, if the company has to sell more or less of a certain product according to the projected conditions in the market.”

However, the forecasting solution can also be changed manually. “Management can make changes based on the knowledge they have about their competitors and about the market conditions,” says Dill.

This integration of information and the ability to amend the system, along with its accuracy, enabled Cipla to swoop in on a massive opportunity during April. De Wet explains: “Two of our competitors went out of stock on a specific item during this time. However, giving our suppliers a forecast well in advance, they were able to procure their raw material ahead of time.” So when Cipla’s competitors went out of stock, the company was able to supply the products, using the forward cover of raw material from its suppliers.

“For three months we supplied just over 300 percent of our normal forecast per month,” notes De Wet. “And we were able to react quickly enough when our competitors came back into stock, carrying on with our normal forecast. So we didn’t lose anything, we just gained for three months.”

Besides providing forecasting for Cipla, the software solution is also able to supply forecasting at multiple levels. “We are able to provide customers with a full forecast of their business with us,” De Wet points out. “We’ve learned what their shortages and challenges are, and have integrated this information into our forecasting system.”

The system also has sufficient algorithms to deal with both fast and slow moving goods. Dill explains: “A lot of forecasting algorithms are very good for fast movers, but they’re not as good with slow movers as they don’t have stable demand patterns.”

These slow movers sit in the “tail” of the supply chain, but for Cipla these products represent a significant portion of its revenue. “We found that 25 percent of Cipla’s items are in the tail,” notes Dill. “And that 25 percent represents 40 percent of the company’s revenue.”

But the system is dealing with this and is providing exceptional results. De Wet points out: “The order performance from our suppliers has increased by 17 percent, because we are able to give them a more accurate forecast for the time period they require.”

Furthermore, Cipla estimates that its profit margin increases by two percent if it increases the accuracy of its forecasting by three percent. “We also have better customer retention because we’ve got the stock to supply them,” says De Wet. “In about eight months we were able to reduce our out-of-stock items from just over five percent to just below one percent of inventory.”

So with Cipla’s supply chain forecasting crystal ball polished, it has found the golden mean of keeping stock on hand. “Cipla now has visibility across its entire supply chain, enabling it to focus more on its core functions and less on gathering data for supply chain forecasting,” concludes Dill.

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