CHAPTER 1: INTRODUCTION
Company Background
For more than 65 years, OPV has established itself as a leader in Vietnam's pharmaceutical industry, specializing in the production and marketing of OPV brands The company also develops products for third-party distributors and offers contract-manufacturing services to multinational corporations With a WHO-GMP certified factory, OPV adheres to the highest international quality standards in its operations.
The OPV factory is equipped to manufacture a diverse range of products, including drugs, liquids, solids, creams, and ointments Its production facilities and equipment are designed to meet the high-quality standards expected by OPV's multinational partners.
OPV is the preferred partner for leading global pharmaceutical companies such as MSD, GSK, Johnson & Johnson, and Otsuka Our success is driven by a skilled professional team with extensive industry knowledge and strong ethical standards We pride ourselves on having some of the best talent in Vietnam, which is essential to our achievements As a result, OPV boasts the largest portfolio of registered pharmaceutical products in Vietnam, encompassing both OTC and prescription formulations across key therapeutic categories.
OPV is committed to enhancing its operations to align with international quality standards while delivering dependable professional services to both local and multinational clients The organization is also dedicated to improving access to affordable medicines, helping patients "Stay healthy by integrating global technologies with Vietnam's traditions."
Organization Charts
Source: OPV Annual Report 2018 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
OPV company have the six primary divisions which presents for the important aspects in the pharmaceutical company that are
The Regulatory Affairs Division is responsible for the licensing and maintenance of OPV pharmaceutical products, ensuring compliance with the Drug Associate Vietnam (DAV) policies across all OPV activities and the product portfolio.
The Commercial Division is responsible for driving sales performance of OPV, actively engaging core customers in company activities, and fostering strong relationships to enhance the company's image both in the industry and among clients.
The Supply Chain Division oversees all aspects of supply chain operations, including supply and demand planning, inventory management, import forecasting, warehousing, expiry management, distribution, and invoicing Its primary goal is to generate net value and establish a competitive infrastructure by optimizing logistics and aligning supply with demand This approach aims to enhance customer satisfaction through minimized stock levels, reduced lead times, and fewer expiries, while also measuring performance against established KPIs.
The Quality Division ensures that all production activities meet the OPV quality standards and adhere to relevant regulatory requirements, the OPV Quality Management System, established policies, written procedures, and industry best practices.
- Production Division focuses on ensuring that all OPV products are produced to the highest standards of quality, safety and efficacy and are available when needed
Production Division is accountable in maintaining and handling advanced pharmaceutical manufacturing equipment, and software that controls manufacturing equipment following GMP documentation and other formalized, rigorous procedures
The Support & Operation Division serves as the essential management hub of OPV, overseeing the coordination of personnel, equipment, technology, information, and all resources necessary for the efficient production of goods and services.
OPV is dedicated to upholding the highest standards of corporate governance, with well-defined systems and processes that minimize time and cost wastage Our governance structure is essential for executing the company strategy, aimed at generating long-term value for both shareholders and stakeholders Additionally, 'Efficiency' has been incorporated as a core value of OPV.
This thesis explores the structure of the Planning Department, which is responsible for organizing production in alignment with demand and quality standards It ensures that materials and equipment are available when needed, facilitating smooth operations throughout the production process.
Figure 2: Planning Department Organization Chart
The total headcount of Planning department is four employees that include one manager and three staffs with the specification and responsibility below:
Planning Managers are responsible for developing strategies to enhance production efficiency and output They create improved workflows that utilize company resources more effectively while overseeing all aspects of the production process and recommending necessary changes Additionally, they communicate future production changes to other managers and collaborate closely with various departments to ensure a seamless shipping process.
The Planning Staff plays a crucial role in ensuring the accuracy and timeliness of the production process by meticulously maintaining inventory records and adhering to company and industry standards Their responsibilities emphasize the management of materials and goods necessary for production, ensuring that all working requirements are met to achieve optimal performance.
The planning department is crucial for the success of OPV organizations, directly influencing manufacturing and production outcomes It is essential for this department to ensure that OPV goods are produced on time and distributed profitably Ultimately, the primary goal of the planning department is to facilitate a smooth and cost-effective flow of OPV production operations.
The Planning department is essential for ensuring the timely availability of materials and equipment, facilitating smooth operations Its responsibilities include determining what to produce, when to produce it, and the quantity required, among other critical tasks.
The OPV business in Vietnam, employing around 300 staff, is dedicated to delivering prescription medicines and healthcare products to Vietnamese patients and consumers through three key distribution channels.
- Retail Channel: OPV sales teams direct sell and distribute the products under OPV brands to pharmcy stores (for OTC products) and to hospitals (for ETC products)
The OPV factory manufactures products under the OPV brand in response to dealer sales orders, allowing dealers to establish their own sales policies based on their unique business strategies and available resources.
- Contract Manufacturing: The partners such as MSD, GSK, J&J will provide material for OPV factory produces the products under partner brands based on contract terms between OPV and partners
This thesis focuses on evaluating the performance of the dealers channel in 2018 by analyzing sales data, integrating theoretical insights, and conducting interviews with department heads to identify issues and propose solutions for enhancing performance.
Tydol provides temporary relief from common cold symptoms and effectively treats mild to moderate pain, including toothaches, osteoarthritis pain, headaches, sore throats, discomfort from colds and flu, dysmenorrhea, migraines, and pain following vaccinations or tooth extractions.
CHAPTER 2: PROBLEM IDENTIFICATION
Problem Context
In 2018, OPV experienced significant growth, particularly due to the exceptional performance of the contract manufacturing team However, total sales revenue reached only 312.1 billion VND, which is approximately 96.5% of the 2018 sales target of 325.7 billion VND, resulting in a shortfall in meeting the Board of Directors' sales expectations for the year.
Unit: VND’ Billion All OPV
Different Actual 18 vs Target 18 VND’ Billion %
In 2018, OPV's sales activities were invigorated by securing a new MSD customer in the contract manufacturing sector, showcasing OPV's manufacturing capabilities and product quality The company concentrated on enhancing its dealer channel to drive sales growth, avoiding the intense competition present in the retail sector However, the revenue generated from the dealer channel fell short of the Board of Directors' expectations, missing the target by 13.4 billion VND.
The sales result of first six months 2019 comparing between target and actual as below
Table 2: Sales performance result in first six months 2019
Source: OPV Semi-Annual Report 2019 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The poor performance in dealers channel continue to show in sales result of first six months
2019 by only dealers channel does not achieve target (shortage 2 billion VND vs target)
Firstly, the target of BoD in 2018 will be analyzed to ensure OPV sales team could achieve based on current resources of dealers channel without new agents development
Unit: VND’ Billion in Revenue
Delivery Completion Problem In Progress
2018 Cancel Hold Ongoing Move to
Table 3: Sales orders of Dealer’s channel in 2018
Source: OPV Sales Performance Report 2018
In 2018, the dealers channel generated actual revenue of 118.4 billion VND from 78 completed sales orders, which included 27 orders carried over from 2017 and 51 new orders The total sales orders for the dealers channel reached 103, resulting in a revenue of 147.1 billion VND, exceeding the Board of Directors' target by 15.2 billion VND, which was set at 131.9 billion VND.
Excluding problem sales orders with a status of cancel or hold, the total remaining revenue stands at 141.2 billion VND, exceeding the sales target of 131.9 billion VND by 9.3 billion VND (approximately 7%) This indicates that the dealer channel could not only meet but also surpass the 2018 sales target if all sales orders were successfully delivered.
Secondly, the target of BoD in 2018 is realistic so that the performance in dealers channel should be consideration for defining the issues in target 2018 achievement of BoD
Figure 3: Comparison of monthly sales between actual and target in 2018
Source: OPV Sales Performance Report 2018 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
In 2018, the total sales across all OPV channels reached 312.1 billion VND, falling short of the revenue target of 325.7 billion VND From January to May, sales performance was promising, with monthly results slightly exceeding the respective targets However, a noticeable decline in sales began in June, indicating a downward trend for the remainder of the year.
Total sales target and actual revenue of each channel in 2018 as below
Figure 4: Sales target achievement of all channels in 2018
Source: OPV Sales Performance Report 2018
In 2018, the sales target achievement varied significantly across different sales channels The Dealers channel recorded the lowest achievement rate at 89.8%, generating a revenue of 118.4 billion against a target of 131.9 billion In contrast, the Retail channel, represented by OPV Brands, achieved 99.6% of its target, with a revenue of 165.2 billion compared to a target of 165.8 billion Meanwhile, OPV Contract Manufacturing surpassed its target with an achievement rate of 101.6%, generating 28.4 billion against a target of 28 billion.
Under performance in Dealers Channel
The low performance in the dealers channel resulted in final sales of only 118.4 billion VND, falling short of the Board of Directors' target revenue of 131.9 billion VND by 13.5 billion VND in 2018 This indicates that the sales performance in the dealers channel did not meet expectations, highlighting an issue of underperformance in this area.
Identifying and Diagnosing Tentative Problems
This thesis uses data from the interviews combining with the sales data of OPV to find and analysis the potential problems which make under performance in dealer’s channel by 2018
In our interview with key figures from Đại Phát Corp, including Mr Nhân, the Business Development Manager, Ms Trinh, the Planning Manager, Mr Nik, the Production Manager, and Mr Thắng, the CEO, we aim to gain insights from both internal and external perspectives.
In addition, we analyzed the sales data from 2018 to gain quantitative insights into the issues at hand.
The primary symptom identified is "underperformance in the dealers channel," which is attributed to issues within OPV rather than the dealers themselves To represent the dealer perspective, we conducted an interview with Dai Phat company, serving as a representative for all OPV dealers The interview questions were designed solely to verify and confirm the existing secondary data, which has already highlighted the challenges faced by the OPV dealers channel.
In 2018, the OPV dealers channel received a total of 76 new sales orders, but only 51 orders were completed, resulting in a completion rate of approximately 67% This left 17 sales orders, or about 22%, either ongoing or postponed to 2019 Additionally, issues related to production delays affected 10% of the sales orders, resulting in 8 orders being held or canceled.
Figure 5: Total new sales orders of Dealer’s channel in 2018
Source: OPV Sales Performance Report 2018
In 2018, dealers received 76 new sales orders generating a revenue of 108.4 million VND; however, the quantity of manufactured products was only sufficient to fulfill 51 of these orders, resulting in a revenue of 79.7 million VND This means that the delivered products accounted for approximately 67% of the total quantity and 74% of the total revenue from new sales orders.
Accordingly, the quote in the interview of Business Development Manager pointed out that
The absence of a clear safety stock policy for the Tydol product at OPV has led to frequent shortages, particularly during urgent orders and peak sales seasons, such as the last three months of the year This issue has prompted complaints from the CEO of Đại Phát Corp regarding the ongoing Tydol product shortages.
The shortage of Tydol product make us challenges in sign contract and keep commitment with our customers
In 2018, the Tydol product shortage significantly impacted the OPV dealer channel, resulting in poor performance, particularly during the last three months of the year.
2.2.2 The prolonged completion time of sales orders The fully process of sales orders from deposit stage to logistic stage as below
Figure 6: OPV Dealer’s channel sales process procedure
Source: OPV Sales Policy and Regulation
Upon receiving the order and signing the contract, the agent has two weeks to provide a 70% deposit OPV will then have eight weeks to prepare the necessary resources for production, based on the availability of resources and the delivery commitments from material suppliers Following this preparation, production will take a maximum of two weeks, depending on the current factory design capacity In summary, the total timeframe for completing the manufacturing stage is ten weeks.
The due date for sales orders in OPV's contract is a maximum of 12 weeks from the deposit date, after which OPV will complete manufacturing and the agent will receive the full quantity specified in the sales order.
Lead-time of new sales orders on-time delivery
From Deposit to Manufacturing Completion From Deposit to Logistic Less 3M More 3M Less 3M More 3M
Table 4: Lead-time of on-time delivery new sales orders in 2018
Source: OPV Sales Performance Report 2018
In 2018, OPV achieved a total of 37 new sales orders with on-time delivery Notably, 27 of these orders, accounting for approximately 73%, had a lead time exceeding 3 months (12 weeks) from deposit to manufacturing completion Additionally, 32 orders, or about 86%, experienced a lead time greater than 3 months from deposit to logistics completion.
With the same comments about completion time of sales orders in the dealer’s channel by 2018,
Mr Thắng – CEO of Đại Phát Corp – Dealer of OPV expessed that
In 2018, the demand for antipyretics was high, leading to Dai Phat frequently facing product shortages This was primarily due to the OPV's frequent changes in order completion times, which extended delivery periods, forcing us to adapt to the situation.
Deposit Manufacturing Inventory Management Based on Dealer’s Sale Strategy
The due date for the sales order is set at 10 weeks, with logistic completion dependent on the terms outlined in the contract A deposit is required 2 weeks prior to this deadline.
Mr Nhân – Business Development Manager also said that
The dealers feedback good in communication of OPV sales and support for dealers but the time to complete the orders are so long and regularly overdue deadline delivery
Ms Trinh – Planning Manager talked about this issue affecting her team performance that
Throughout the year, we focused on developing an optimal production plan and maintaining a safety stock policy for our retail channel and contract manufacturing However, we encountered challenges in fulfilling dealer orders on time.
The manufacturing stage significantly impacts the completion time of sales orders, which is capped at 12 weeks However, many sales orders experience delays, often exceeding 3 months from the deposit date to the full receipt of OPV products This extended timeline poses challenges for business planning for both OPV and its customers.
2.2.3 The high rate of overdue sales orders
In 2018, total sales orders delivered amounted to 78, with 27 (approximately 34.6%) being carryover orders from 2017 and 51 (around 65.4%) representing new orders for 2018 The significant number of outstanding orders from 2017 highlights a critical issue that negatively impacts the performance of the sales team.
Figure 7: The total sales orders delivery in 2018
Source: OPV Sales Performance Report 2018
Furthermore, in 51 new sales order of 2018 have delivered then the number of sales orders completed on-time is 37 (approx 73%) and 14 for overdue rate respectively (approx 27%)
Figure 8: The delivery status of new sales orders in 2018
Source: OPV Sales Performance Report 2018 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Mr Thắng – CEO of Đại Phát Corp – OPV Dealer complainted about overdue sales orders that
Verifying Tentative Problems
Rajesh, Kumar, and Kumar (30) proposed a model highlighting the impact of strategic issues in the pharmaceutical supply chain on company performance, identifying two primary categories: resource and process issues These groups are crucial factors that directly influence the effectiveness of sales channels and sales teams.
Figure 9: The performance framework in Pharmaceutical Company
Source: Strategic issues in pharmaceutical supply chains: a review (30)
This model encompasses all activities within a pharmaceutical company, integrating processes, organizations, and operations essential for the development, design, and manufacturing of pharmaceutical products However, the issue of underperformance in the dealer's channel, known as OPV, necessitates the identification and elimination of unrelated factors affecting this channel.
The resource group comprises assets essential for outlining the requirements for research and development of new products However, this process does not occur within the dealer channel of OPV, as it is limited to the distribution of the Tydol product.
Outsourcing logistics activities and reverse logistics processes can significantly optimize logistics operations by collaborating with logistics providers or wholesalers This approach is often not feasible within the dealer's channel due to logistical terms that fall outside agent contracts.
Quality management in the pharmaceutical process group must adhere to GMP regulations and comply with Vietnamese government standards, which are fundamental for all pharmaceutical companies in Vietnam Consequently, quality management will not pose an issue for OPV.
Green supply chain management (SCM) within the Process group promotes proactive practices like recycling, reclamation, reverse logistics, and remanufacturing to reduce environmental pollution and enhance ecological efficiency Consequently, this approach is not linked to the failure in meeting the 2018 target for OPV dealer channels.
The remaining items in the Process group focus on inventory management and lean manufacturing processes, addressing issues within the OPV dealer's channel Lean manufacturing aims to enhance manufacturing operations through a Lean Management approach Consequently, by 2018, it is essential to replace existing methods with improved inventory management and manufacturing processes to gain a comprehensive understanding of the challenges faced in the OPV dealer's channel.
The sales process procedure in OPV dealer’s channel describe as below
Figure 10: OPV Dealer’s channel sales process procedure
Source: OPV Sales Policy and Regulation
The contract execution involves two key stages: a deposit payment within two weeks of signing the contract, followed by a manufacturing phase that lasts ten weeks Consequently, the estimated delivery timeline for OPV contract manufacturing is 12 weeks Additionally, agents are responsible for arranging their own shipping methods for receiving goods at the OPV factory, as logistics are not included in the contract terms.
Business Development Manager stated tentative time for processing sales orders as below
The deposit date is defined as the moment OPV receives 70% of the sales order amount, while the delivery date marks the completion of production by OPV The total processing time for a sales order is approximately 12 weeks, and logistical conditions are not included in the contract terms.
In 2018, OPV received a total of 27 orders, achieving 37 new sales orders with an on-time delivery rate of 73% The completion of sales orders took an average of over 12 weeks, resulting in a 93% completion rate, while 13 out of 14 new sales orders experienced overdue delivery.
Deposit Manufacturing Inventory Management Based on Dealer’s Sale Strategy
The due date for the sales order is set at 10 weeks, with logistic completion dependent on the terms outlined in the contract A deposit is required two weeks prior to this deadline.
Unit: VND’ Billion in Revenue
Lead-time of new SOs
On-time Delivery Overdue Delivery Within 12 weeks More 12 weeks Within 12 weeks More 12 weeks
Revenue 12.7 billions 38 billions 1.8 billions 27.2 billions
Table 6: Lead-time new sales orders in 2018
Source: OPV Sales Performance Report 2018
The lengthy completion times for both on-time and overdue delivery of new sales orders indicate a need for OPV to assess its manufacturing processes By evaluating these activities, OPV can reduce completion times and enhance operational efficiency.
Backorders refer to the total number of customer orders that have not yet been shipped and are past their due date Unlike the traditional Make-to-Stock (MTS) system, where firms produce goods based on anticipated demand, backorders occur when products are unavailable to meet current customer demand, leading firms to rely on future production capacity This situation directly impacts sales, as delays in fulfilling orders can lead to customer dissatisfaction and postponed purchases As a result, backorders have emerged as a significant issue, characterized by high overdue sales orders and extended delivery times.
Following Mr Thắng – CEO of Dai Phat Corp said for due date of sales orders in 2018 that is
In 2018, the demand for antipyretics was high, leading Dai Phat to frequently face product shortages This situation arose due to the OPV's constant changes in order completion times, which extended delivery periods, forcing us to comply with these adjustments.
Similarly, Mr Thắng - CEO of Đại Phát Corp emphasized that
During peak sales periods, we often continue to place additional orders while still awaiting delivery of confirmed ones In certain instances, we must cancel existing orders and reorder larger quantities due to restrictions imposed by OPV regulations.
Identify the central problem
Material Labor Production Cost Norm 11,703 5,359 3,283 20,506 40,852 408
The Average Actual Production Cost 12,439 4,765 3,165 20,418 40,787 407
Table 8: Compare between policy and actual for cost of goods sold of Tydol product
Source: OPV Manufacturing Policy and Regulation
Mr Nik – Production Manager said that
The price of raw material is increased higher than 2017 but OPV still keep the product retail price in 2018 by many efforts of production team for decreasing operation costs
The retail price of Biragan 500mg caplets is approximately 360 VND, making it 12% lower than the cost of goods sold for Tydol 500mg, which is around 407 VND per caplet In comparison, Tydol 500mg is priced at approximately 450 VND per caplet.
The issue of high competitive pricing remains unresolved, as the OPV production team has worked diligently to minimize production costs, yet these costs still exceed the retail price of Biragan 500mg Additionally, production costs are closely tied to the technology and facilities used in manufacturing, which extends beyond the scope of this thesis.
Additionally, Business Development Manager showed the competitive advantage of Tydol product that
The competitive pricing of Tydol 500mg has not affected the sales performance of dealer channels, as agents operate in distinct market segments with varied target customers In 2018, they continued to place bulk orders for Tydol 500mg at an average price of 42,995 VND per box (approximately 430 VND per caplet), allowing them to sell Tydol 500mg at a higher price than the retail price, which also includes the cost of Biragan 500mg.
We have addressed the issue of high pricing competition, which has minimal impact on the performance of the dealer's channel Currently, unresolved problems are more closely related to technology and facilities.
2.4.2 The tardy work progress in production planning task
Production planning involves the design and management of the entire manufacturing process, encompassing raw material scheduling, acquisition, process design, and material handling control It typically refers to collective processes such as capacity planning, material requirements planning, and shop floor control Production plans are optimized while adhering to material and capacity constraints.
An optimized production plan effectively considers various constraints such as raw material availability, machine and operator capabilities, service levels, and secure stock levels Conversely, inefficient production planning can lead to significant issues, including excess finished goods inventories, poor customer service, insufficient capacity utilization, and raw material shortages.
Figure 14: Last Updated Causes and Effects Chart CEO of Dai Phat company mentioned about lack of Tydol product for selling in 2018
The demand of antipyretic is very good in 2018 year therefore Dai Phat always fall into situation of no product for selling
Planning Manager also expressed about problem of planning for production of Tydol that
In 2018, the raw material shortage significantly impacted the production of Tydol products, causing delays as we awaited the full delivery of essential materials and negotiated with agents to extend completion dates.
Beside that Production Manager said about surplus capacity of factory that
In 2018, the production schedule experienced frequent changes due to delays in preparing essential resources, particularly raw materials Meanwhile, other resources were consistently available, as OPV utilized outsourcing HR services to secure sufficient seasonal workers for production The factory's capacity remained at 50% throughout the year, while OPV regularly performed maintenance on machines to prevent unplanned downtime.
Business Development Manager stated that
The dealers feedback good in communication of OPV sales and support for dealers This showed clearly in feedback of CEO of Dai Phat company about customer service that
OPV provides excellent sales and after-sales service, consistently offering attractive sales packages for my company Their sales team is always available to support and promptly address any questions my customers have regarding Tydol products.
Poor customer service and low capacity utilization are not significant factors affecting the performance of OPV dealers, as all necessary resources are available to meet dealer demand Additionally, the issue of excess finished goods inventory will be resolved, as OPV currently faces a shortage of Tydol products for sale Ultimately, the primary challenge hindering timely progress in production planning is the shortage of raw materials.
2.4.3 The central problem is raw material shortage
Effective production planning is crucial for meeting required quantities and delivery dates, particularly in the pharmaceutical industry where raw materials play a vital role Maintaining adequate stocks of active pharmaceutical ingredients is essential to ensure high service levels and smooth operational processes.
The production step will start when all raw materials received and we took 2 weeks maximum for completion
Delays in supplier lead times significantly impact the planning, production, and delivery of finished products To ensure a smooth manufacturing process, it is essential to prepare all necessary raw materials at the start of each production run Any issues with raw material delivery or quality can lead to late production planning, resulting in overdue sales orders, extended completion times, product shortages, and backorders.
According the interview result of Business Development Manager suggested that
OPV should establish an inventory policy for the Tydol product that specifies a minimum amount of raw materials to ensure that previous orders are fulfilled while new orders are being processed and manufactured This approach will reduce waiting times for material preparation and expedite the completion of orders.
Besides, Ms Trinh – Planning Manager said crucial issue in the work of Planning team that
In 2018, OPV faced significant challenges due to a shortage of raw materials for the Tydol product, primarily caused by delays from the main supplier in the US The lack of a backup supplier registered with DAV exacerbated the situation, leading to prolonged waiting times for essential materials and necessitating negotiations with agents to extend completion dates This disruption severely impacted my team's ability to prepare production plans and adjust schedules in response to the fluctuating delivery timelines, making it a particularly challenging year for us.
Raw material shortages are a significant global issue, primarily due to long and complex production chains that limit the number of operating companies Many finished product manufacturers depend on subcontractors, who in turn rely on specific raw material producers When these producers encounter quality issues, it disrupts the supply chain, leading to production variances and unfulfilled customer orders Consequently, raw material shortages are a central factor contributing to delays in production planning, as other production planning elements remain stable and available.
CHAPTER 3: CAUSE VALIDATION
Potential causes
Atilgan and McCullen (3) identified cause and effect relationships to analyze interactions among suppliers, customers, and producers in the Pharmaceutical Sector They emphasized that issues on one side of the supply chain can trigger problems on the other side Their uncertainty circle analysis revealed that raw material shortages lead to production variances and unfulfilled customer orders (3).
Figure 16: Analysis for raw material problems Source: Improving supply chain performance through auditing: a change management perspective (3)
According to Atilgan and McCullen, the issues related to raw material shortages can be categorized into four main causes: delivery delays, materials allocated for other products, short notice from planning, and expired ingredients In the following section, we will analyze data to validate these theories and literature in order to identify the root causes of poor performance in the dealer channel.
3.1.1 Potential cause 1: Ingredient is out of date
Excess inventory of raw materials can result in ingredients becoming outdated due to stringent government regulations regarding expiration dates, ultimately leading to a shortage of essential raw materials.
About ingredient is out of date, Production Manager states that
In 2018, the production schedule experienced frequent changes due to delays in resource preparation, particularly concerning raw materials.
And Planning Manager mentioned reasons that
In 2018, the primary supplier of raw materials in the U.S faced delivery issues, resulting in a shortage for the production of Tydol products Additionally, OPV did not register a backup supplier with DAV, exacerbating the raw material scarcity.
The shortage of active pharmaceutical ingredients (API) significantly disrupts production at OPV factories, leading to raw material stockouts This situation differs from having expired ingredients, which results from overstocking or poor stock control regarding expiration dates.
Finally, we eliminate out of date in ingredient in the potential group causes because it does not causes of material shortage for production in OPV
Delivery delays can occur due to the fact that not all materials imported from overseas manufacturers are entirely produced in-house Often, raw materials are sourced from various countries, leading manufacturers to keep a certain level of inventory However, they may face shortages if demand from customers increases simultaneously and if their suppliers encounter issues.
Ms Trinh – Planning Manager determined that
In 2018, the primary supplier of raw materials in the U.S faced delivery issues, resulting in a shortage for the production of Tydol products Additionally, OPV did not register a backup supplier with DAV, exacerbating the raw material shortage.
Mr Nik – Production manager also confirmed that
The planning team has consistently reported issues with raw material supply, resulting in delayed deliveries Despite the ongoing nature of this problem, it remains unclear why no solutions have been implemented to address it.
Supply disruption refers to the sudden halt of supply due to unexpected events that render the main source completely unavailable Although infrequent, such disruptions pose significant risks to the entire supply chain, as they can severely impact cash flow and halt operations.
Huang investigated the performance of a two-level supply chain that includes a backup supplier to mitigate supply disruptions, taking into account a constant supply lead time and normally distributed demand.
The unavailability of raw materials can be attributed to several factors, including limited suppliers and manufacturers, political conflicts that create import challenges, and regulatory restrictions on controlled substances Additionally, long delivery times, environmental changes affecting extraction, a complex production chain, quality issues, and transport and storage problems contribute to this issue These factors highlight that inadequate supply management and supply-side problems are significant causes of delivery delays, ultimately leading to raw material shortages.
3.1.3 Potential cause 3: Material is used for another product
In manufacturing, it is essential to prepare all necessary raw materials at the start of each production run to ensure the completion of the finished goods lot size Uncertainties in the supply chain, stemming from demand fluctuations and production delays, can negatively impact supplier performance, the reliability of manufacturing systems, transportation processes, and customer order fulfillment.
Ms Trinh – Planning Manager stated that
Production begins as soon as the manufacturing team receives all materials for agent orders However, inconsistent demand can arise, particularly for Tydol products, which do not always align with local market needs This is especially true during the year-end season when there is a surge in demand for cold and flu medications Additionally, OPV agents may find themselves out of stock when they unexpectedly receive large orders from new customers To address the Tydol product shortage, OPV agents will promptly adjust their confirmed orders with the Business Development team It is important to note that raw materials must be imported from overseas, which typically involves delays.
The production schedule for the ordered OPV agent indicates a six-week arrival timeframe, highlighting a unique challenge during peak season This issue likely arises from the limited inventory of OPV agents compared to market demand, and OPV lacks contingency plans to address this unexpected surge in demand.
Mr Nik – Production manager also confirmed that
The situation got worse when Planning team add more or push urgent batches to production priority so it leads production schedule disorder and shortage of materials
Root cause validation: Inaccurate forecasting cause
Atilgan and McCullen identified poor forecast accuracy and unexpected changes in customer orders as primary issues, while Rahman et al highlighted that inaccurate estimations lead to either supply shortages or oversupply Shortages can disrupt factory production, causing delays and increased costs, particularly when materials must be imported Furthermore, back orders can be incorporated into forecast demand beyond the master production schedule's time frame Overall, the importance of accurate forecasting outweighs the impact of unexpected customer order changes.
Planning Manager has complained about wrong or incorrect forecast data which will make more challenges in their job and also more issues in production
The Business Development team often neglects to send accurate sales forecasts, leading to challenges for my team in planning raw material purchases and production schedules based on incorrect data.
Balancing demand with supply is crucial for manufacturing organizations, as failure to do so can lead to increased production costs from unscheduled changeovers and raw material shortages Stocking discontinued or slow-moving items can be costly and wasteful, while inventory shortages of new and promoted products may hinder promotional efforts Frequent stockouts can result in higher costs from expedited orders and potential permanent loss of customers, making the challenge of maintaining demand and supply balance a constant struggle.
Sales forecasting is a crucial business process that enables companies to effectively align demand with supply It involves managing manufacturing output and other activities to meet planned sales levels while achieving key business objectives such as profitability, productivity, customer lead times, and inventory management.
Delivery delays can arise from short notice in planning and the allocation of materials to other products These issues can be mitigated by ensuring that sales forecasts provide comprehensive information for the necessary preparation of raw materials, even in the face of unexpected plans.
Sales forecasting involves estimating future sales by analyzing past sales data, industry comparisons, and economic trends A key component of this process is demand forecasting, which aims to identify what products will be purchased, as well as the locations, timing, and quantities of these purchases.
Accurate and timely sales forecasts are essential in the pharmaceutical industry due to the rigid nature of production processes These forecasts provide critical information that influences executive decisions regarding purchasing and manufacturing strategies.
Accurate sales forecasts empower companies to make informed business decisions and anticipate both short-term and long-term performance, helping to prevent raw material shortages and product scarcity in the market Forecast errors can lead to insufficient raw material stock, resulting in production delays, variances, and unfulfilled customer orders.
In fact, Production Manager has determined that
The forecast data of dealer’s channel have errors because the raw material shortage only occuring in Tydol product and others is still production good
And root cause according Business Development Manager implied that
The planning team has not provided the necessary template or defined the process for obtaining sales data from the dealer's channel, making it difficult for my team to understand which data is required and what conditions are mandatory.
The Planning Manager concluded that implementing a clear working policy in the dealer channel, which outlines the entire process from sales forecasting to production while incorporating safety stock quantities, will effectively resolve current issues This is due to OPV's strong promotional schemes and competitive pricing.
The sales forecast data issues identified by the Planning Manager, Production Manager, and Business Development Manager highlight that OPV lacks a structured process and policy for demand forecasting in the dealer channel, which has led to raw material shortages for production.
Based on the analysis that integrates data with relevant theories and literature, a cause and effect tree addressing the issue of raw material shortages will be developed.
Figure 17: Cause-and-effect diagram of raw material shortage
Accurate demand forecasting is essential for businesses to estimate future demand for products or services based on historical data and current economic, political, and social conditions This fundamental exercise in demand planning is crucial for efficient supply chain operations and overall profitability Reliable forecasts enable companies to adapt to market changes in both the short and long term, enhancing operational performance Research by Chihyun and Dae-Eun highlights that precise demand forecasting is vital for maintaining a firm's profitability, as it impacts strategy-setting and production planning Additionally, Gupta, Maranas, McDonald, and Doganis emphasize that accurate sales forecasting helps balance customer demand satisfaction with inventory costs In summary, effective forecasting is necessary for optimal inventory control, meeting customer demand, and reducing operational costs.
Inaccurate demand forecasts can lead to costly surplus inventory or loss of customer goodwill and sales, making forecasting accuracy a significant challenge in the pharmaceutical industry Accurate demand forecasting is essential for manufacturing companies and should be prioritized in retail environments like supermarkets and pharmacies due to their high stock levels and daily customer traffic To enhance the effectiveness of the sales forecasting process, collaboration and communication among key internal teams, including Business Development, Planning, Procurement, Production, and senior management, are crucial.
In conclusion, inaccurate forecasting stems from a combination of insufficient working principles and incomplete processes for executing sales orders within the dealer channel.
CHAPTER 4: ALTERNATIVE SOLUTIONS
The first alternative solution: the forecasting method based on the simple moving
According to Anusha, Swati, and Shaik, a simple moving average (SMA) is calculated by summing the recent closing values of a product and dividing by the number of periods considered The SMA model is used to predict the next value in a time series by averaging a fixed number \( n \) of preceding values.
Dt = actual demand in period t n = total number of periods in the average
The forecast calculation was conducted over periods of 2 and 3 months to account for the average fluctuations in demand data, based on actual orders from OPV dealers in the market These periods were selected based on the delivery time of contracts within the dealer's channel, which ranges from 8 to 12 weeks.
Mean absolute percent error SMA for n=2 2,691,482 165,588 122,559 170,125 81%
Table 9: Summarized error estimates for demand forecasting for SMA method
In 2018, Tydol achieved total sales of 2,525,894 boxes However, the absolute error in both experimental cases was significant, with a discrepancy of 165,588 boxes for the two-month scenario and 130,612 boxes for the three-month scenario when compared to the total actual demand.
The mean absolute deviation (MAD) indicates that the standard deviation of the forecast error is significantly larger than the actual data, with absolute values of 122,559 boxes for the two-month case and 109,427 boxes for the three-month case.
The forecasts exhibit a bias due to persistent errors, with the standard deviation of forecast errors measuring 170,125 units for the two-month scenario and 170,322 units for the three-month scenario.
The mean absolute percent error indicates that the forecast error averaged approximately 81% of actual demand for the two-month case and 78% for the three-month case.
The SMA model is an adaptive forecasting method that updates the moving average of demand with each new observation, allowing it to respond to the latest changes in the demand dataset However, in this experiment, the historical demand data is overly complex and lacks a clear correlation with periodic fluctuations, leading to inconsistent and inaccurate sales forecasts when using the SMA model.
The second alternative solution: the forecasting method based on the linear regression
Abolghasemi et al proposed a time series regression model that utilizes time series data and systematic event information to analyze sales dynamics and forecast future demand This model begins by gathering a list of potential systematic events and their anticipated impacts on demand from expert forecasters Consequently, a linear regression model will be developed with promotion cost and dealer price as the two independent variables, based on insights from the Planning Manager regarding the effectiveness of promotion and pricing in enhancing OPV sales service.
I believe that all current problems will solve because OPV is excellent in promotion scheme and price.
And Business Development Manager also agreed with that points
We are always self confident in our competence for work with the dealers to get the large quantity orders with good promotion scheme and competitive price.
In the second set of experiments, correlation and linear regression analyses were conducted to determine the causal relationship between product demand and its influencing factors, specifically promotion cost and dealer price When applying the simple moving average method, selecting the appropriate number of periods is crucial, with calculations performed for k values of 3 and 5.
7 (27) Accordingly, sales history data set is from June to December 2017
The linear regression analysis conducted on six months of sales data from 2017 reveals significant trends and insights This analysis provides a comprehensive understanding of sales performance, which can be crucial for strategic decision-making.
A significance level of less than 0.05 indicates that at least one independent variable significantly impacts the dependent variable, making the regression analysis appropriate Additionally, an R-squared value of 0.92 suggests that 92% of the variance in demand is explained by the independent variables, namely promotion cost and dealer price This demonstrates a strong correlation between promotion cost, product demand, and dealer price.
As a result, the demand regression equation expressed as follows:
Demand (y) = (–133,518.04) + 248.04 x Promotion Cost (x1) + 2.94 x Dealer Price (x2)
Moreover, the promotion factor will mainly affect to future demand if there are no change in dealer price because coefficient beta of promotion factor is highest (approx 248.04)
In 2018, we developed a demand forecast using a regression equation, resulting in a total demand of 2,694,608 boxes The forecast showed an absolute error of 72,242, a Mean Absolute Deviation (MAD) of 6,743, and a Mean Absolute Percentage Error (MAPE) of 2.6% This indicates that the linear regression model effectively captures the variations in demand patterns, as evidenced by the low error rate of 2.6%.
The linear regression model effectively fits historical data to generate accurate sales forecasts, yet it struggles to predict monthly demand at the intersection of uptrends and downtrends Additionally, non-price factors, including new regulations, tender ratios, and customer satisfaction, significantly influence product demand and should be systematically considered and analyzed.
Comparison two methods
The primary goal of forecasting is to minimize deviations from actual demand, and forecast error measures facilitate the comparison of different forecasting techniques Commonly used metrics for assessing demand forecast accuracy include Mean Absolute Percentage Error (MAPE), Mean Absolute Deviation (MAD), Forecast Bias, and Mean Squared Error (MSE) In this article, we will utilize these metrics to evaluate the accuracy of two forecasting methods.
Total Error MAD Standard deviation
Mean absolute percent error SMA for n=2 2,692,263 (–165,588) 110,822 146,424 60%
The article presents a comparison of errors in demand forecasting methods across various experiments, highlighting the effectiveness of each approach The findings are summarized in Table 10, which details the performance metrics and accuracy levels of the different forecasting techniques This analysis aims to provide insights into optimizing demand forecasting for improved decision-making in business operations.
The Mean Squared Error (MSE) factor emphasizes larger forecast errors, highlighting forecasts with significant inaccuracies A comparison of three MSE values reveals that the MSE for linear regression is approximately 92 million, significantly lower than the over 16 billion MSEs of the other two methods This indicates that the linear regression method outperforms the single moving average method, demonstrating its superior accuracy.
The Mean Absolute Deviation (MAD) measures the average difference between forecasted and actual demand, with a smaller MAD indicating a more accurate forecast When comparing the Simple Moving Average (SMA) model to the linear regression model, the MAD and absolute error are over 10% lower for the regression model Specifically, the MAD for the linear regression is 6,743, indicating an average forecast error of 6,743 units This demonstrates that the linear regression model outperforms the simple moving average model due to its lower MAD value.
The Mean Absolute Percentage Error (MAPE) provides a percentage-based comparison of forecast errors relative to actual values, making it relevant across various time series methods In this study, the MAPE for linear regression was found to be 2.6%, significantly lower than the MAPE of the Simple Moving Average (SMA) method, which was 60% for a 2-month forecast and 54% for a 3-month forecast This indicates that the forecast error for linear regression averaged only 2.6% of the actual demand.
According to Shah, pipeline stocks typically account for 30–90% of annual demand, with finished goods stocks ranging from 4 to 24 weeks However, high inventory levels are detrimental to enterprises as they represent low-return investments A linear regression model demonstrates superior efficiency and accuracy in forecasting compared to the Simple Moving Average (SMA) method, as it predicts actual sales data for 2018 at 72,242 boxes, while SMA values are significantly higher at 165,588 for 2 months and 130,612 for 3 months.
For a strict linear model having an R square value above 0.9 linear regression might outperform the non linear optimization method (31) and R 2 of regression statistics in this experiment is 0.92
We utilized Mean Absolute Deviation (MAD), Mean Squared Error (MSE), and Mean Absolute Percentage Error (MAPE) to assess the accuracy of various sales forecasting methods The results indicate that the linear regression method produces the lowest forecast error, making it the most accurate forecasting technique compared to others.
Forecasting calculation results comparison chart based on linear regression models and SMA that are shown below
Figure 19: Historical demand data and experimental demand forecasts
The linear regression model outperforms the simple moving average model by effectively capturing demand patterns and closely aligning with actual sales data from 2018 Its accuracy in forecasting monthly revenue is enhanced by incorporating promotion costs and dealer prices, which Fildes and Goodwin identified as crucial for making informed adjustments to demand forecasts This approach ensures a more ecologically valid supply chain forecasting process.
The effectiveness of statistical forecasting techniques relies heavily on the availability and quality of historical data While no single method can be deemed the best, linear regression stands out for providing the most accurate forecasts of OPV data with minimal error Future research should focus on conducting in-depth analyses of forecasts using the linear regression method, as well as exploring non-linear approaches, such as logarithmic, polynomial, and exponential models, to determine if they offer a better fit for the historical dataset.
Product demand is affected by various non-price factors, such as the male-to-female ratio, population size, and demographic aging It is essential to consider and systematically analyze these elements to understand their impact on demand.
The experimental analysis of three forecasting scenarios revealed that the linear regression-based forecasting model provided the best fit to historical demand data, exhibited the lowest forecast errors across all scenarios, and demonstrated superior accuracy in predicting peak sales demand.