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(BMGT44530)
MEMO 1: GLOBAL PHARMA,
MANAGING UNCERTAINITY
STUDENT NAME: SHAILESH
PANIGRAHY
STUDENT NUMBER: 14200021
SUBMITTED ON 01 MARCH 2015
INTRODUCTION
Global Pharma, manufacturer of Active Pharmaceutical Ingredients (APIs),
generics and pharmaceutical services is headquartered in Hyderabad the
pharmaceutical hub of India (Felker, Greg; Chaudhuri, Shekhar; Gyrgy, Katalin
(1997))1. The $2 million company exports its products manufactured in 20
Distribution
Similar to other markets the distribution of medicines in the Indian
Pharmaceutical Industry is carried out by importers, clearing and forwarding
agents(CFAs) who are responsible for packing, storage, customs clearance
and transportation of the medicines. The wholesalers also play a role in
distribution and form a bridge between the manufacturers and the end
customers. They share vital information required for the continuous supply of
medicine. With the current data available there are close to 1,500 CFAs and
60,000 wholesales present in the Indian Pharma supply chain.
Determinants of distributor margin
Distributors/CFAs are traditionally paid on the basis of the stock they carry
throughout the year, the margin is fixed and regulated as a percentage on
the basis of the price of the medicine. To lower the costs the companies use
regressive margin, wherein a lower percentage is applied for the more
expensive drugs. The distributors receive incentives on the basis of the
amount of medicines they sell to the wholesalers. To increase stock rotation
and sales, they often tend to give out discounts. In cases where the
wholesaler cam influence the manufacturers product the percentage of
discount provided is higher.
END OF CHAIN
The wholesalers/stockists purchase products from different CFAs. They have
the option of holding stocks from different companies (generally five to six).
The stockists then sell the drugs to the various retailers and from then to the
end customer. (IMS health, 2004)3
supplier who provided the integral API. The lead time for the API to reach
Global Pharma was quite high as well. The cost parameters affecting Global
Pharma currently was due to inadequate data availability to make proper
demand forecasts.
COMPANY PLANS
The new director after having analyzed the data available in the ERP system
realized that more time was required to come up with an accurate forecast.
He discussed with the API supplier on postponing his order, to be able to
provide him with a perfect order quantity. However, the lead time given to
the supplier was not supposed to change the desired service level had to be
maintained.
If we look at this decision from the perspective of Global Pharma, it gives
them more time to place more accurate orders. This eventually helps in
reducing the risk of running into a stock out and benefits them on reducing
the loss in revenue due to stock out and excess holding cost. Whereas, on
the supplier end postponement would result in increasing his production
temporarily to maintain desired service levels and to expedite the
distribution and logistics involved. Both of which would incur huge additional
cost, the supplier has to implement both these measures only on a
temporary basis hence the cost benefit achieved on a long term basis cannot
be availed here.
The increase in cost due to logistics and expedited production will be directly
passed on to Global Pharma, this will result in the cost of the final drug going
higher. Global Pharma is currently following the fixed time period model for
placing orders. Wherein, the inventory levels are measured with the sales
and demand data at a fixed time frame (weekly, quarterly, monthly, etc) and
so is the order placed in a particular/fixed time frame and the new director
wants to postpone the date of placing the next order.
POSSIBLE SOLUTIONS
2.
In the Fixed order quantity policies. The order quantity is always the same
but the time between the orders will vary depending on demand and the
current inventory levels. Inventory levels are continuously monitored and an
order is placed whenever the inventory level drops below a pre specified
reorder point. This is regarded as the Continuous review policy of the
company.
In the Fixed time period policies the companies place orders at fixed time
periods, though there is no fixed quantity involved. The quantity ordered
each time changes with demand and the current inventories available with
the company. Inventory is reviewed periodically in fixed time intervals, such
as a week or month. Then on the basis of the inventory available an order
size is determined to increase the inventory level up-to the forecasted level.
(Gel, Esma Keskinocak,Pinar. (2007))4.
the
year
so
that
the
Constraints:
1. Each order is received in a single delivery. Hence, partial orders cannot
be obtained which might result in production being halted if there is
shortage of even 1 unit. The production can resume only after the
whole lot arrives.
2. There is no quantity discount. Generally, the holding cost is minimized
with a discount that suppliers provide on bulk discounts. Since no bulk
7 Brown, B. A. T., Sellen, A. J., & O'Hara, K. P. (2000). A diary study of information
capture in working life. Proceedings of CHI 2000, 438-445. New York, NY: ACM.
Postponement of the order time with reduced lead time will lead to an
increase of Rs.0.15/day/unit. This would affect the total annual inventory cost
of Global Pharma. Following are the possible EOQ solutions depending on the
lead time.
Solution 1:
No. of days of postponement: 23 days
Increase in price per unit: Rs.3.45/unit
Hence, new purchasing cost of critical API: Rs.23.45
EOQ= SQRT ((2DS)/hC))
EOQ= SQRT ((2*73000*100)/(0.5*23.45))= 1115.86
Ordering cost= (D/Q) * S = (73000/1116)*100= Rs.6541
Carrying cost= (Q/2)*hC= (1116/2)*0.5*23.45= Rs.6543
Total cost= Purchase Cost+ Ordering Cost+ Carrying Cost= Rs.17,24,934
Solution 2:
No. of days of postponement: 18 days
Increase in price per unit: Rs.2.7/unit
Hence, new purchasing cost of critical API: Rs.22.70
EOQ: 1134
Ordering Cost: Rs.6437.69
Carrying Cost: Rs.6,435.45
Total Cost = Rs.16,69,972
Solution 3:
No. of days of postponement: 13 days
Safety stock can be calculated using normal approximation and exact value
methods, the normal approximation gives a better solution when service
levels are in the value of 50% to 70%. Exact vale method is used with higher
service levels like the way explained above. Further, the value of the service
level and fill rate can affect the reorder point of the commodity. With exact
demand available during the lead time instead of the normal approximation
we infer the following:
1. With cycle service levels above 50% but less than a threshold, reducing
lead time variability increases the reorder point and safety stock.
2. For cycle service levels above 50% but below a threshold, reducing the
lead time decreases the reorder point and safety stock. (Chopra,Sunil et
al.,2004)8
RECOMMENDATION AND CONCLUSION
On the basis of the EOQ model developed and the various possible solutions
tested, a postponement of 15 days is considered optimal, the total ordering
cost in this case would be close to Rs.16,15,008.40. Postponement by 13
days should give the director sufficient time to analyze the data from the ERP
system.
stock per order to avoid last minute stock out and maintain the 98% service
level.