Improving the accuracy of sales forecast a case study of opv pharmaceutical company in vietnam

Unit: VND’ Billion in Revenue All SO in 2018 Delivery Completion Problem In Progress Total Remain from 2017 New in 2018 Cancel Hold Ongoing Move to 2019 Table 3: Sales orders of Deale

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-DINH XUAN THONG

IMPROVING THE ACCURACY OF SALES FORECAST: A CASE STUDY

OF OPV PHARMACEUTICAL

COMPANY IN VIETNAM

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-DINH XUAN THONG

IMPROVING THE ACCURACY OF SALES FORECAST: A CASE STUDY

OF OPV PHARMACEUTICAL

COMPANY IN VIETNAM

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: PHAN THI MINH THU

Ho Chi Minh City – Year 2020

EXECUTIVE SUMMARY

OPVis leading pharmaceutical compnay in Vietnam which have one factory with WHO-GMP certificate in Dong Nai province and large distribution network in nationwide Consequently, OPV always commits to provide products with the highest international standards to customers Firstly, we introduce the history and the organization chart of OPV pharmaceutical About overview, OPV has the largest portfolio of the registered pharmaceutical products in Vietnam, including OTC and the prescription formulations across important therapeutic classes In this thesis, we only focus in analyzing responsible and activities of Planning team for understanding problems of OPV pharmaceutical company

In the next chapter, all operation activities in the dealer’s channel will be analyzed to find the potential problems through all symptoms manifesting outside which we can observation and perception According real data of OPV combining with literature and theory, we demonstrated and pointed out the central problem of dealer’s channel that are raw material shortage and this problem also leads to low performance and don’t achievement target 2018 of dealer’s channel This thesis were used the theory informed to identify the potential causes, which made the raw material shortage in dealer’s channel and inferred root cause is inaccurate demand forecasting which based on impacted range and important level Finally, we have the cause-and-effect diagram of raw material shortage that pointed out relationship of all factors from symptoms to root cause in issue of dealer’s channel

We have also given some ideals for the solution design by comparing efficient and accuracy between two demand forecasting model that are simple moving average method and linear regression method In this experiment, we used sales data 2017 for history data and applied two demand forecasting model for predict sales forecast 2018 After that, we would compare the results with the sales actual sales data in 2018 for find the better solution At the last, next one provides some ideals for the design of change process in demand forecast of dealer channel,

to be used for the realization of the solution

To be continued with the suggested plan for deploying linear regression method in demand forecasting that were expressed and explained clearly on this chapter We detail all steps from the data preparation to train all departments about the new demand forecast procedure and execute the linear regression model At the last, evaluation and adjustment will be do end of year to ensure the model always improvement and efficiency

In the conclusion, based on a quantitative and a qualitative analysis of sales result 2018 in dealer’s channel, we can be concluded that the main problem in dealer’s channel of OPV is shortage of raw material and the root cause of main problem is inaccurate forecasting The research aimd to identify the effective forecasting methods for dealer’s channel by using linear regression model and the results indicated that this model is improvement in more accurate and more efficient than other model

The next part were showed the details of two types of data used in this thesis that are secondary data was collected from quantitative data such as financial reports, sales reports, policies, and primary data was collected from qualitative research and used the in-depth interview as the main method Additionally, we also attached results of experiment in making demand forecasting by using linear regression model and simple moving average model

Finally, this is the list of all the articles and all the journals that were used in this thesis Those information used for verifying and demonstrating the pointed out problems and causes that are urgent and importance in the dealer’s channel of OPV as well as suggested solution is suitable and reasonable for solving the main problem

Table of Contents

1 CHAPTER 1: INTRODUCTION 4

1.1 Company Background 4

1.2 Organization Charts 4

2 CHAPTER 2: PROBLEM IDENTIFICATION 8

2.1 Problem Context 8

2.2 Identifying and Diagnosing Tentative Problems 10

2.2.1 Shortage of product 11

2.2.2 The prolonged completion time of sales orders 12

2.2.3 The high rate of overdue sales orders 13

2.2.4 High competitive price 14

2.3 Verifying Tentative Problems 15

2.4 Identify the central problem 21

2.4.1 High competitive price problem 21

2.4.2 The tardy work progress in production planning task 22

2.4.3 The central problem is raw material shortage 23

3 CHAPTER 3: CAUSE VALIDATION 25

3.1 Potential causes 25

3.1.1 Potential cause 1: Ingredient is out of date 25

3.1.2 Potential cause 2: Delivery delay 26

3.1.3 Potential cause 3: Material is used for another product 27

3.1.4 Potential cause 4: Short notice from planning 28

3.2 Root cause validation: Inaccurate forecasting cause 29

4 CHAPTER 4: ALTERNATIVE SOLUTIONS 32

4.1 The first alternative solution: the forecasting method based on the simple moving average (SMA) technique 33

4.2 The second alternative solution: the forecasting method based on the linear regression technique 34

4.3 Comparison two methods 35

5 CHAPTER 5: ACTION PLAN 38

6 CONCLUSION 40

7 SUPPORTING INFORMATION 41

8 REFERENCE 53

9 APPENDIX 57

1 CHAPTER 1: INTRODUCTION

1.1 Company Background

For over 65 years, OPV has been a leader in the Pharmaceutical sector in Vietnam OPV produces and markets OPV brands, develops products for third party distributors, and provides contract-manufacturing services for multinational companies The OPV factory is WHO-GMP certified and operates to highest international quality standards

Additional, OPV factory has capability to produce many different types of products (drugs, liquid, solid, cream and ointment) The production equipment and facilities are invested to meet the requirements in high quality standards which expected from OPV multinational partners

As a result, OPV has become the partner of choice of world leading pharmaceutical companies including MSD, GSK, Johnson & Johnson and Otsuka Furthermore, the business is managed

by a talented professional team who bring deep industry expertise and high ethical standards

to everything we do Our staff are amongst the best in Vietnam and we value them as critical

to OPV’s success so that OPV has the largest portfolio of registered pharmaceutical products

in Vietnam, including OTC and prescription formulations across important therapeutic classes OPV has dedicated itself to continuously improving its operations to meet current international quality standards and to provide reliable professional services to its customers, both local and multinational Finally, OPV will commit to improve access to affordable medicines and help patients “Stay healthy by combining technologies of the world and the traditions of Vietnam” 1.2 Organization Charts

Figure 1: OPV Organization Chart

Source: OPV Annual Report 2018

OPV company have the six primary divisions which presents for the important aspects in the pharmaceutical company that are

- Regulatory Affairs Division is accountable for licensing and maintaining pharmaceutical products of OPV They responsible for compliance with the policies of Drug Associate Vietnam - DAV in all OPV activities and OPV product portfolio

- Commercial Division is accountable for sales performance of OPV and engage core customers in company activity as well as maintain good relation with the customers to improve the company image in field and in front of the customers

- Supply Chain Division is accountable for all supply chain activities such as supply planning, demand planning, inventory management, import planning & forecasting, warehousing, expiry management, distribution, invoicing, etc with the objective of creating net value, building a competitive infrastructure, leveraging logistics, synchronizing supply with demand resulting the optimum customer satisfaction by minimizing the stock levels/CID, reduced lead time and expiries, and measuring performance against pre-agreed KPIs

- Quality Division is accountable for all production activities are delivered to the OPV standard of quality and drives compliance in accordance with the applicable regulatory requirements, the OPV Quality Management System, Policies and 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

- Support & Operation Division is the central core management function of OPV which involves managing people, equipment, technology, information, and all the other resources needed in the production of goods and services

OPV are committed to operating at the highest standards of corporate governance Most of systems and processes are well-defined to ensure minimum wastage of time and money We believe our governance structure underpins our ability to deliver the company strategy to create long-term value and benefit for our shareholders and stakeholders ‘Efficiency’ was added as

a part of ‘OPV Core Value’

The Planning Department

In this thesis scope, we will go deeply to the structure of the Planning Department which hold accountable in organizing production according to demand and quality standards as well as committing materials and equipment are available when the Production needed and ensuring everything runs smoothly

Figure 2: Planning Department Organization Chart

Source: OPV 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 Manager are in charge of developing the strategies to increase production efficiency and output in which is responsible for creating a better workflow that uses company resources more effectively and oversee all aspects all production process and recommend changes as needed Additionally, production planning managers share information about the future production changes with other managers and work closely with other managers of other departments to ensure a cohesive shipping process

- Planning Staff is responsible for the accuracy and timeliness of the production process

by maintaining an accurate inventory of items produced, as well as ensure all company and industry standards and regulations are followed Duties include a specific focus on the materials and goods required in the production phase, ensuring the working requirements is properly maintained in order to have optimal performance

The planning department plays a central role in the manufacturing and the production for OPV organizations, this process can be responsible for OPV success or failure in these core areas of responsibility Therefore, Planning department should be the one to commit that OPV goods are produced on time for distribution in a profitable manner This lead to the goal of Planning department is to ensure the smooth and cost-efficient flow of OPV production operations

In summary, the role of Planning department is to ensure that materials and equipment are available when needed and that everything runs smoothly so that Planning department involves what to produce, when to produce it, how much to produce, and more

Dealers channel and Tydol product

The OPV business in Vietnam with approximately 300 employees, focusses on bringing the prescription medicines and healthcare products to Vietnamese patients and consumers through three distribution channel as below

- 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)

- Dealers Channel: OPV factory produces the products under OPV brands according to sales orders of the dealers and the dealers will self to make sale policy based on their business and their resource

- 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

In boundary of this thesis, we only research the performance of the dealers channel in 2018 by analyzing sales results data combining with theory and interview results from head of related departments to define the issues and suggest the solutions for performance improvement

The Tydol product temporarily relieves the common cold symptoms and is treatment pain from mild to moderate including: toothache, pain of osteoarthritis, headache, sore throat, pain in cold and flu, dysmenorrhoea, migraine, pain after vaccination or tooth extraction

Until 2018 year, OPV only have approval visa of Drug Administration Of Vietnam (DAV) for Tydol product in the distribution through dealers channel It means that Tydol product of OPV only distributes in dealers channel and on contrary, the agents only sale Tydol product to the customers as well

In the development strategy for 2020 – 2025 period, OPV will step up agents network extension and will plan to get the approval visa for more OPV product which be distributed through dealers channel because the stiff competition from rivals in other channels and the changes in management policy of Vietnam government in pharmaceutical market That are development strategy of OPV during period 2020 – 20225, OPV allocate almost all resources to support the dealers and improve sales policy for dealers

2 CHAPTER 2: PROBLEM IDENTIFICATION

2.1 Problem Context

In 2018, OPV have a good growth year especially the outstanding performance of the contract manufacturing team but unfortunately total sales revenue only achieves 312.1 billion VND and approx 96.5% of sales target 2018 (325.7 billion VND) therefore total sales revenue in 2018 does not meet sales target of BoD in 2018

Unit: VND’ Billion

All OPV

Target Revenue

2018

Actual Revenue

Table 1: Sales performance result 2018

Source: OPV Annual Report 2018 During 2018, OPV sales activities actually so exciting because OPV have new MSD customer

in contract manufacturing channel to demonstrate the OPV manufacturing competency and quality of OPV products From that OPV has focused to develop in dealers channel to push sales growth without stiff competition from rivals as in retail channel However, revenue 2018

of dealers channel still don’t meet expectation of BoD (shortage 13.4 billion VND vs target) The sales result of first six months 2019 comparing between target and actual as below

Unit: VND’ Billion

All OPV Revenue Actual

2018

Target Revenue

2019

Actual Revenue

Table 2: Sales performance result in first six months 2019

Source: OPV Semi-Annual Report 2019

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

All SO

in 2018

Delivery Completion Problem In Progress

Total Remain

from 2017 New in 2018 Cancel Hold Ongoing Move to 2019

Table 3: Sales orders of Dealer’s channel in 2018

Source: OPV Sales Performance Report 2018 The actual revenue of dealers channel in 2018 is 118.4 billion VND including 78 sales orders delivery completion which 27 sales orders remained from 2017 and only 51 sales orders is new

in 2018 However, total sales orders of dealers channel have in 2018 that are 103 corresponding with 147.1 billion VND revenue and it is higher 15.2 billion VND than the target of BoD is 131.9 billion VND

In case of exclusions all problem sales orders which have status in cancel or hold then the total remaining revenue is 141.2 billion VND and still higher 9.3 billion VND (approx 7%) than sales target is 131.9 billion VND This lead to dealers channel were be able not only achieve but also over target 2018 if all sales orders have been completed delivery

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

The actual sales in 2018 for all OPV channels is 312.1 billion VND and lower the revenue target 2018 of OPV is 325.7 billion VND in which the period time from Jan to May, the sales results seem to be good because the sales result per month slightly higher than respective sale target After that, the sales situation starts to decline increasingly from Jun

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 Comparison the sales target achievement in 2018 between sales channels (Retail, Dealers and Contract Manufacturing), the Dealers channel has lowest achievement rate with completion 89.8% of the target (corresponding to 118.4 billion revenue vs 131.9 billion target) against with 99.6% by OPV Brands in Retail channel (corresponding to 165.2 billion revenue vs 165.8 billion target) and 101.6% from OPV Contract Manufacturing (corresponding to 28.4 billion revenue vs 28 billion target)

Under performance in Dealers Channel

The conclusion that the low performance in dealers channel has leaded to final sales result only 118.4 billion VND and lower 13.5 billion VND than the target revenue of BoD in 2018 is 131.9 billion VND Finally, the symptom is “sales performance in dealers channel doesn’t meet sales target” or be briefly called “under performance in dealers channel”

2.2 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

We take the interview with Mr Nhân - Business Development Manager, Ms Trinh - Planning Manager, Mr Nik - Production Manager and Mr Thắng - CEO of Đại Phát Corp – Dealer of OPV because we desire observation from both directions that are internal and external Additional, we also analysis the sales data in 2018 to have more quantitative data for an overview about the problems

The symptom is “under performance in dealers channel” and the secondary data is shown that this is issues of OPV and do not issues of the dealers so that we just interview one dealer which

is the Dai Phat company for representing all the dealers of OPV Furthermore, all the interview questions of dealers only use to verify and confirm the secondary data which already manifest the problems of OPV dealers channel fully

2.2.1 Shortage of product

The dealers channel of OPV get total 76 new sales orders in 2018 but OPV only completed 51 sales orders (approx 67%) and still remained 17 sales orders for ongoing and postpone to 2019 (approx 22%) Additional, the hold and cancel status in the sales orders problems relevant late

in Production occupied 10% with 8 sales orders

Figure 5: Total new sales orders of Dealer’s channel in 2018

Source: OPV Sales Performance Report 2018 This result shows that dealers channel have 76 new sales orders corresponding to revenue is 108.4 million VND but the manufactured product quantity only enough delivered for 51 sales orders corresponding to revenue is 79.7 million VND that occupies approximately 67% total quantity and 74% total revenue of new sales orders in 2018

Accordingly, the quote in the interview of Business Development Manager pointed out that

OPV don’t have safety stock policy clearly for Tydol product so we are always shortage of Tydol product for urgent orders or during peak sales season such as 3 months end of year

and CEO of Đại Phát Corp complained about the shortage of Tydol

The shortage of Tydol product make us challenges in sign contract and keep commitment with our customers

As the result, the shortage of Tydol product is real problem of OPV dealer’s channel in 2018 which leads to the low performance of dealer’s channel especially 3 months end of year 2018

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 After OPV received order and signed contract, the agent have 2 weeks for 70% deposit amount and OPV have 8 weeks to prepare requirement resource for production The tentative timeline based on available resource combining with delivery commitments of material suppliers After that we take maximum 2 weeks for production which relied on the currently factory design capacity In brief, we have 10 weeks total for finishing manufacturing stage

Therefore, the due date of sales order in OPV’s contract is maximum 12 weeks from deposit date then OPV will complete manufacturing and agent will receive fully quantity in sales order

Lead-time of new sales

orders on-time delivery

From Deposit to Manufacturing Completion From Deposit to Logistic

Table 4: Lead-time of on-time delivery new sales orders in 2018

Source: OPV Sales Performance Report 2018

In 2018, OPV have total 37 new sales order on-time delivery in which 27 orders (approx 73%) have lead time from deposit to manufacturing completion larger 3 months (12 weeks) and 32 orders (approx 86%) have the lead time from deposit to logistic completion larger 3 months 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

The demand of antipyretic is very good in 2018 year therefore Dai Phat always fall into situation of no product for selling due to OPV frequent changed the completion time of orders for extending delivery time and we compelled to agree in this case

OPV’s Warehouse WarehouseDealers DistributionsDealer’s ConsumersProduction

Sales

Order Production Planning

Deposit Manufacturing Inventory Management Based on Dealer’s Sale Strategy

Due Date of Sales Order (10 weeks) Logistic Completion (Based on contract terms) Deposit Date (2 weeks)

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

We have efforts during the year for making the best production plan and keeping safety stock policy in retail channel and contract manufacturing but we failed in completed orders of dealers ontime

The manufacturing stage determines sales order completion time which is 12 weeks maximum but almost the sales orders had ontime delivery to dealers that were taken more than 3 months from deposit date to receive the OPV products fully Indeed, it is so a long time and influence

to business planning for both OPV and the customers also

2.2.3 The high rate of overdue sales orders

Total sales orders delivery in 2018 is 78 in which 27 (approx 34.6%) is remaining sales orders from 2017 and 51 (approx 65.4%) is new sales orders of 2018 Actually, the large quantities

of remaining orders from 2017 is serious issue, which directs to low performance of 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

Mr Thắng – CEO of Đại Phát Corp – OPV Dealer complainted about overdue sales orders that

We have won more tenders and more product consumption in 2018 but OPV didn’t complete our orders on time so that some orders must move to next year and the revenue can’t meet our expectation

Mr Nhân – Business Development Manager mentiond about satisfaction of agents in 2018 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 delivery

This shows that overdue rate of sale orders in OPV is very high due to the rate over 27% (approx 14 sales orders) and this problem serious affected to the satisfaction of agents which lead dealer’s channel to inefficient operations in 2018

2.2.4 High competitive price

Tydol 500 product of OPV uses for treatment in cold and flu which only sale through dealers channel and cold is one of the most common diseases that most of Vietnamese people have caught at least one in a year therefore it’s hot and popular product in the Vietnam market

In fact, Mr Thắng – CEO of Đại Phát Corp – Dealer of OPV also confirmed the high demand

of product for cold and flu treatment in the market by 2018 that

The demand of antipyretic is very good in 2018 year

Comparison with the products of other manufacturers in same sale segment of Tydol

Unit: VND in Price per box Price per caplet

Decolgen Forte (500mg) United Pharma 100 118,000 1,180

Table 5: Price comparision between Tydol and others product

Source: Retail price list of Pharmacity Store Chain in 2018

The Tydol 500 product has higher price than Biragan 500mg of Bidiphar when compare with nine product brands of other manufacturers in same sale segment and direct rivals of Tydol Consequently, the price of OPV product is slightly higher price as same as other product brands made in Vietnam which being sold in market

2.3 Verifying Tentative Problems

Rajesh, Kumar, Kumar(30) suggested the model for influence of the strategic issues in the pharmaceutical supply chain to the company performances which point out two main groups issues consisting resource and process In the facts, the resource group and process group are importance factor to affect directly the performance of sales channel and sales teams

Figure 9: The performance framework in Pharmaceutical Company

Source: Strategic issues in pharmaceutical supply chains: a review(30)

This model covers all activities of the pharmaceutical company which are a combination of processes, organizations and operations involved in the development, design and manufacture

of pharmaceutical products but the phenomenon of OPV is under performance in dealer’s channel so that we will eliminate the factors unrelated dealer’s channel below

- Resource group is assets which used to define the requirements for research and development of the new products(30) but it doesn’t happen in dealer’s channel of OPV due to only Tydol product for the distribution

- Outsourcing logistics activities and reverse logistics processes in the Process group mentions about logistics operation optimization by outsourcing or using logistics’s providers or cooperating with the wholesalers(30) that are not happen in dealer’s channel due to logistic terms is out of agent contracts

- Quality management in Process group prescribed the pharmaceutical must comply with the GMP regulations(30) as well as the Vietnam government regulations that is the basic matter of all the pharmaceutical companies in Vietnam which must compliance For this reason, the quality management will be never the problem in OPV

- Green supply chain management (SCM) in the Process group encourages the proactive practices such as the recycling, reclamation, reverses logistics and remanufacturing for lower the environmental pollution and raise ecological efficiency(38) Therefore it isn’t relative with the failure in achieving the 2018 target of OPV dealer’s channel

Finally, the remain items in Process group are inventory management and lean manufacturing process that will cover problems in dealer’s channel of OPV in which the lean manufacturing process is improvement of manufacturing operations through a Lean Management approach(8) Therefore, we should replacement by inventory management and manufacturing process for general view in the problems of OPV dealer’s channel by 2018

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 comprises 2 main stages that are the deposit money step during 2 weeks after signed contract then the manufacturing step takes 10 weeks for completion and logistics stage is in appendix terms of contract For this reason, the tentative delivery timeline in OPV contract manufacturing is only 12 weeks and the agents must self to arrange shipping methods for goods receipt at OPV factory because the logistics do not cover in the contract terms Business Development Manager stated tentative time for processing sales orders as below

We specified the deposit date is when OPV received 70% of sales order amount and delivery date is when OPV completed the production It takes around 12 weeks total for processing of a sales order and the logistic conditions isn’t belong to contract term

In 2018, OPV have 27 orders in total 37 new sales orders on-time delivery (accounted 73%), which have more 12 weeks for sales orders completion and the rate is 93% with 13 orders in total 14 new sales orders overdue delivery

OPV’s Warehouse WarehouseDealers DistributionsDealer’s ConsumersProduction

Sales

Order Production Planning

Deposit Manufacturing Inventory Management Based on Dealer’s Sale Strategy

Due Date of Sales Order (10 weeks) Logistic Completion (Based on contract terms) Deposit Date (2 weeks)

Unit: VND’ Billion in Revenue

Lead-time

of new SOs

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 This show that the completion time in the both on-time and overdue delivery of new sales orders is so long and OPV actually needs to evaluate the activities in the manufacturing process for reducing the completion time and improving operations efficiency

The backorders is the total number of the orders which the customers have sent that have not yet been shipped out and was also over the due date of the orders(35) The backorder is one example of the system wherein firm produces the product after receiving an order from the customer and they represent a stark contrast to the traditional Make-to-stock (MTS) system where firm anticipates demand and satisfies it from finished inventory(32) A backorder occurs when the product is not available to meet the customer’s demand today and the producing firm places an order on the future capacity to produce today’s demand(6) The backorders impact on sales directly because the firms need more day to complete the orders and the customers do not sastisfaction to postpone purchase to a later date(6) Consequently, the backorders is the new problem because overdue of sales orders are so high and delivery of sales orders are so long Following Mr Thắng – CEO of Dai Phat Corp said for due date of sales orders in 2018 that is

The demand of antipyretic is very good in 2018 year therefore Dai Phat always fall into situation of no product for selling due to OPV frequent changed the completion time of orders for extending delivery time and we compelled to agree in this case

Similarly, Mr Thắng - CEO of Đại Phát Corp emphasized that

In some peak time of sales, we even continue to book more although still be awaiting the delivery for confirmed orders Particularly, some cases must cancel and order again with larger quantity due to unallow change according OPV regulations

Sales Policy and Regulation determined that contract will complete during 12 weeks because

we just used 40% designed capacity of factory so production will be finished within 2 weeks

in all situations Additional, material suppliers already commited delivery time around 8 weeks

Finally, the total time for a sales order completion is 12 weeks which comprise manufacturing step is 10 weeks and deposit step is 2 weeks However, the data oflead-time new sales orders

in 2018 and interview result of CEO Dai Phat Corp have demonstrated that the completion time of the almost sales orders are over 12 weeks and take longer as OPV commitment in the contract so it makes agents shortage of goods for selling in 2018 and leads to the backorders which is the new factor besides the possible problems are shortage of product, high rate of overdue sales orders and prolonged completion time of sales orders

Figure 11: Initial Causes and Effects Chart The secondary data pointed out that the “under performance in dealers channel” symptom is only related to OPV and do not issues of dealers because the completed orders by OPV is less than the total orders which have been placed by dealers as well as market demand and business situation of dealers are very good which already showed by shortage of Tydol product in 2018

As we have mentioned in beginning of this chapter, the secondary data have demonstrated the problems of dealers channel fully so that we only interviewed Dai Phat Corp for representing viewpoint of dealers about the problems of OPV and also for confirming secondary data again

In the previous section, we only have remaining two items for analyzing performance problems

of dealer’s channel that are inventory management process and lean manufacturing process However, inventory management and distribution requirements planning by determining the demands after that aggregated and imposed on appropriate warehouse/distribution centers(33)

and only applied in retail channel of OPV because in dealer’s channel, all distribution activities

in Vietnam market are executed by the agents therefore OPV do not have the policy for control warehouse of dealers and also the dealer’s contracts do not include the distribution terms In the addition, all potential problems related only related to manufacturing process due to the due date of sales orders be determined before the inventory management process

Consequently, we eliminate inventory management process and only focus on manufacturing process for finding the central problem, which leads to under performance in dealer’s channel

Under performance

in dealers channelHigh rate of overdue sales orders

The backordersShortage of productProlonged completion time of sales orders

The high competitive price

According to OPV Sales Policy and Regulation, the manufacturing process include two main tasks below:

- Production Planning: Planning team will prepare requirements for production and control execution of relevant teams based on respective responsible in each task of production such as Procurement buys material, HR arranges seasonal workers, Production builds production schedule and Quality prepares inspection plan Total tentative time of those tasks is 8 weeks

- Production: After all resource for production activities have received completion, Planning team will inform to Production team for manufacturing In the next, the factory will start to produce OPV products according to production schedule which has approved by BoD and complying to quality standard of DAV Total tentative time of this task is 2 weeks

Tentative completion time of manufacturing stage is 10 weeks

As Mr Nik – Production Manager of OPV expresses that

My team will start the job when Business development team informs that the customer has deposited money following OPV requirements In preliminary step, Planning department will request Procurement for purchasing the raw materials and feedback to my team about fully receiving raw materials expectation date Based on this, I will prepare the production plan and propose HR to recruit seasonal workers The Production step will start when all raw materials received and we took 2 weeks maximum for completion After finished goods release, I inform

to Business Development team for contacting customers to get the Tydol product as soon as possible

Figure 12: Delivery details of new sales orders in 2018

Source: OPV Sales Performance Report 2018

Total on-time delivery of new sales orders in 2018 is 37 (approx 73%) and overdue is 14 (approx 27%) in which overdue new sales orders related production planning task accounted

13 (approx 93% of total overdue) and only have 1 orders (approx 7% of total overdue) related production task as well as no sales orders related the both tasks

Completion time details of all new orders 2018 for each task of manufacturing stage as below

Table 7: Lead-time of all new sales orders in manufacturing stage

Source: OPV Sales Performance Report 2018 Almost all sales orders take more time in production planning task than the completion timeline standard of the OPV contract with 43 orders (approx 84%) occurred in the production planning task and 1 order (approx 2%) occurred in production task

As Mr Nik – Production Manager of OPV complained that

Production schedule in 2018 frequent changes because of slow at preparing resources which required for production especially raw materials meantime other resources were always ready

As the result, the unusual high late rate in production planning affects to production schedule and lead time of sales orders because the production only start when all resource requirements have fully Consequently, the dealers were forced to wait a long time than due date of contract and so they have to agree for signing new maturity term or terminate sales orders

All demonstrated that the tardy work progress in the production planning have impacted indirectly to the sales performance of dealer’s channel in 2018 through group problems which include the backorders, shortage of product, high rate of overdue sales orders and prolonged completion time of sales orders

Figure 13: Updated Causes and Effects Chart

2.4 Identify the central problem

2.4.1 High competitive price problem

Comparison between production cost norm and actual production cost for Tydol 500 below

Unit: VND

Tydol 500

Direct Cost

Indirect Cost

Cost per Box

Cost per Caplet

Raw Material Packaging 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

However, the retail price per caplet of Biragan 500mg (approx 360 VND) is still lower than Tydol 500mg (approx 450 VND) even lower 12% than cost of goods sold of Tydol 500mg (approx 407 VND per caplet)

That demonstrated the high competitive price is unsolved problem in this time because OPV also Production team has made all things for production cost lowest as they can but it is still higher than retail price of Biragan 500mg Moreover, the production cost norm more related to technology and facility of factory which is over scale of this thesis

Additionally, Business Development Manager showed the competitive advantage of Tydol product that

The competitive price of Tydol 500mg do not impact to sale performance of dealers channel because the agents have separate market share as well as different target customers so that they still bulk ordered Tydol 500mg in 2018 with the average price were 42,995 VND per box (approx 430 VND per caplet) because they can sell Tydol 500mg with higher price than retail price also including price of Biragan 500mg

Hence, we eliminated the high price competitive factor in the potential problems due to less affect to the dealer’s channel performance and it is unsolved problems in this time due to more relate in technology and facilities

2.4.2 The tardy work progress in production planning task

Production planning describes the design and management of the entire manufacturing process (including raw material scheduling and acquisition, manufacturing process design and scheduling, and material handling design and control)(5) In generally, production planning is generally used to describe collective processes of capacity planning, material requirements planning, shop floor control, works order release and control(28) and production plans are optimized within the boundaries of material and capacity constraints(26)

Especially, the production plan is considered as an optimized production plan when it has a wide range of constraints, including raw materials availability, machines and operators’ capability, service level, secure stock level(10) On the contrary, the production planning may count as inefficiency and fault when it creates many problems to the later production in which the main problems are often excess finished goods inventories(19), the poor customer service(19), the insufficient capacity utilization(19) and the raw material shortage(10)

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

The raw material shortage is really serious case of OPV in 2018 for making Tydol product because we have to wait a long time to receive raw material fully for production and also deal with agents to postpone completion date

Beside that Production Manager said about surplus capacity of factory that

The production schedule in 2018 frequent changes because of slow at preparing resources which required for production especially raw materials meantime other resources were always ready in which OPV use outsourcing HR services to ensure enough seasonal workers for production fastest and available capacity of factory always remained 50% during 2018 as well

as OPV regular execute maintenance the machines to prevent unplanned downtime of factory

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

The sales service and after sales service of OPV are very good OPV sales team always offer good sales packages for my company and always ready to support answering my customer’s questions about Tydol product

For this reason, poor customer service and insufficient capacity utilization do not main factors

to affect in performance of OPV dealer’s channel because all things is good and available to serve the dealers demand Additional, the excess finished goods inventories problem will be eliminated due to the real case of OPV is lack of Tydol product for selling Finally, raw material shortage is main problem leading to the tardy work progress in production planning task 2.4.3 The central problem is raw material shortage

The production planning task in order to meet required quantity and delivery date is the challenging(7) In the specially, the raw materials is highest importance for pharmaceutical manufacturing and the relatively large stocks of active pharmaceutical ingredient must be held

to ensure good service and ensure smooth operation at the interface of these processes(33) According to the explanation of Production Manager,

The production step will start when all raw materials received and we took 2 weeks maximum for completion

The lead time in delivering orders on the part of the suppliers also causes delays and all delays,

no matter their reasons, affect planning, production and delivering of finished products(11) In any manufacturing process, at the beginning of every production run, it is necessary to prepare all the raw materials required to complete lot size of the finished products(38) so that if the raw materials have problems such as late in delivery, failure quality, then production planning task will complete late and production cannot start that are reasons for high rate of overdue sales orders, prolonged completion time of sales orders, shortage of products and backorders According the interview result of Business Development Manager suggested that

I think that OPV need to build inventory policy of Tydol product which include minimum amount of raw material available to provide the previous orders while the departments are processing and manufacturing for next orders This will diminish the waiting time in material preparation for production as well as shorten orders completion

Besides, Ms Trinh – Planning Manager said crucial issue in the work of Planning team that

The main supplier of raw material in US have troubles which lead to late in delivery and OPV

do not register backup supplier with DAV for Tydol product so it was made OPV to raw material shortage for production in 2018 The raw material shortage is really serious case of OPV in 2018 for making Tydol product because we have to wait a long time to receive raw material fully for production and also deal with agents to postpone completion date When the supply source of raw material is difficulty, it will affect to my team in preparing production planning and adjusting production schedule following updated progress in raw material delivery of supplier This is truly a hard work for my team in 2018

Indeed, the raw material shortages were frequently considered a global issue, partly because long or complex production chains result in just a limited number of operating companies The problem occurs when many finished product manufacturers rely on subcontractors that in turn are dependent on a certain raw material producer When the raw material producer faces quality issues in their own production, the raw material is not forwarded to the subcontractors and on

to the manufacturers(14) For this reason, the raw material shortages were observed to be a cause

of production variances and unfilled customer orders(3) as well as demonstrate shortage of raw material which is main and central factor causing tardy work progress problem in production planning task because the other factors of production planning is always available and stable

In fact, the raw material shortage problem has been the highest influence level to the performance of OPV dealer’s channel through its importance role in the production planning task which leads to the issues making low performance in OPV dealer’s channel such as prolonged completion time of sales orders, high rate of overdue sales orders, shortage of products and backorders In short, the raw material shortage was made tardy production work progress especial in planning task that was caused problems directly impacting dealers channel

Figure 15: Final Causes and Effects Chart Consequently, the shortage of raw materials is the central problem in the OPV dealer’s channel due to the importance level which mentioned in many literatures and identified in real data of OPV as well as revealed through internal interviews

3 CHAPTER 3: CAUSE VALIDATION

3.1 Potential causes

To understand the main reasons behind the raw material shortages, Atilgan and McCullen(3)

proposed the cause and effect relationships as tools for determining the interactions between suppliers, customers, and producer in Pharmaceutical Sector as shown below and stated that in the supply chain, problems occurring on one side of the chain can act as a catalyst for problems

on the other side In uncertainty circle analysis, raw material shortages were observed to be a cause of production variances and unfilled customer orders(3)

Figure 16: Analysis for raw material problems Source: Improving supply chain performance through auditing: a change management

perspective(3)

According Atilgan and McCullen, raw material shortage problem were classified into 4 causes groups that are delivery delay, material is used for another product, short notice from planning and ingredient is out of date(3) In the next section, we will use data for verifying thoeries and literatures to find root cause of the poor performance in dealer’s channel

3.1.1 Potential cause 1: Ingredient is out of date

The over stock of raw material will make out of date in the ingredient (3) because of government regulations strictly about expiry date of materials which leads to lack of raw material problem About ingredient is out of date, Production Manager states that

The production schedule in 2018 frequent changes because of slow at preparing resources which required for production especially raw materials

And Planning Manager mentioned reasons that

The main supplier of raw material in US have troubles which lead to late in delivery and OPV

do not register backup supplier with DAV for Tydol product so it was made OPV to raw material shortage for production in 2018

Those points illustrate that OPV occurs the shortage of material supply specifically in lack of active pharmaceutical ingredient (API) to lead production progress disruption on the OPV factory, namely out of stock in raw material and it totally differences than out of date in ingredent due to over stock raw material or inaccurate stock control for due date

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

3.1.2 Potential cause 2: Delivery delay

About the delivery delay cause, not all the materials imported from the overseas manufacturers are 100% produced by them because the raw materials are sometimes ordered and collected from some other countries so that the raw material manufacturers usually maintain a certain amount of storage of the raw materials, but they may also suffer from the shortage if they have more demands from customers in the same time and their suppliers have issues(29)

Ms Trinh – Planning Manager determined that

The main supplier of raw material in US have troubles which lead to late in delivery and OPV

do not register backup supplier with DAV for Tydol product so it was made OPV to raw material shortage for production in 2018

Mr Nik – Production manager also confirmed that

Planning team frequently informed that the raw material supply have issues leading to delivery late but I don’t know why they don’t have any solution for this problem although it occurs in a long time

That were defined as the supply disruption which mentioned the sudden stop of supply when unexpected events occur, the main source becomes totally unavailable Obviously, the supply disruption is infrequent risk but has large impact on the whole supply chain because it could cut off the cash flow and stop the operation of the entire supply chain(15)

As an effect, Huang have examined about performance of a two level supply chain with a backup supplier to address the issue of supply disruption considering constant supply lead time with normally distributed demand(16)

The reasons of unavailability of raw material could be limited suppliers or manufacturers of raw material, the political conflicts leading to import hurdles, the regulatory restrictions on the import and allocation of controlled substances, long delivery time, issues in the extraction of raw material due to the environmental changes, complex production chain, quality issues and issues in the transport and storage(24) It demonstrates that the poor supply management and the problems in supply side lead to cause of the delivery delay which will make the raw material shortage problem

3.1.3 Potential cause 3: Material is used for another product

About cause in material is used for another product, in any manufacturing process, at the begining of every production run, it is necessery to prepare all the raw materials required to complete lot size of the finished goods(25) So that the uncertainties existing along the supply chain due to demand and production and delivery generally adversely affect the performance

of suppliers, the reliability of manufacturing system, the transportation process and the customer order fulfilment process(16)

Ms Trinh – Planning Manager stated that

Production start the manufacturing work immediately when they received fully material for the orders of agent but in rare case, the inconsistent demand occurs when the sales of Tydol product do not depend on the demand of the local market Especially the end of year season, the customers have high demand in medicines treatment cold flu and the OPV agent were also without stock when suddenly they receive the new orders with large quantity from their new customer Consequently, the OPV agent will change the quantity of their order which already confirmed by Business Development team immediately to resolve Tydol product shortage in the market However, the raw material needs to be imported from overseas and it normally takes

6 weeks to arrive in OPV but the production schedule for the ordered of agent is available This seems to be a unique problem in peak seasonal, probably due to smaller inventory volume of OPV agent than demand of market and OPV do not have the backup plans in this unexpected case with spike in the market 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

Consequently, a relative free production planning together with production in uncontrol batch sizes can cause an unplanned use of material because it might be used needed material of this batch for another assembly or product that has to be produced urgent