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Forecasting in times of crises
A scientific approach to evaluate Forecasting
Accuracy at DSM Anti-Infectives
April 2010 - Bernard J. Dammingh
DSM PureActivesTM - PurimoxTM
• A unique range of enzymaticallyproduced antibiotics
• Brand names are registered worldwide
• Enzymatic production process has been patented
DSM creates innovative products and services that promote a healthier, more sustainable, enjoyable and efficient way of working and living.
DSM Anti-Infectives (DAI) is the leading supplier of active pharmaceutical ingredients for the most widely used broad-spectrum antibiotics.
DAI: Innovation in Amoxicillin production
Finished goodsWarehouse Delft
Netherlands
Transit PurimoxAlmeria -Delft
6APA production
ZjangJakou (China)
Penicillin/6APA
production Saltillo
(Mexico)
Purimox production
Almeria (Spain)
Transit 6APA
Zjangjakou - Almeria
Transit 6APASaltillo - Almeria
Sales Europe/NA
Customers
Sales AMEA
Customers
Sales ChinaCustomers
The Penicillin – Purimox supply chain
… puts out 200.000.000 patient treatments annually
Sales MLA
Customers
PlanForecast Execute Report
W
M
Q
Y
Manufactu-ring Plan Meeting
Manufactu-ring Plan Meeting
BG S&OP meeting
BG S&OP meeting
= output of every meetingA&D-log
BG/BU Budget Meeting
BG/BU Budget Meeting
Monthly BU S&OP meeting
Monthly BU S&OP meeting
Sales & Production ProcessShort interval control
Production plan
Sales plan
BU Budget
Agreed Demand Plan
Agreed Stock Plan
KPI report
Agreed Production Plan
BG S&OP meeting
BG S&OP meeting KPI
report
Scenario building
IC Demand Plan
Combined meeting
Manufactu-ring Plan Meeting
Manufactu-ring Plan Meeting
Demand Plan
Meeting
Demand Plan
Meeting
Demand Plan
Meeting
Demand Plan
Meeting
Production Plan
Demand Plan
KPI report
Combined meeting
Combined meeting
The Purimox S&OP cycle…
… monthly updates demand and supply forecasts
“If you cannot measure it, you cannot manage it”
Peter Drucker
writer and consultant
1909-2005
Measuring & forecasting
Forecasting Accuracy…
� Measured monthly
� Forecasted and
actual sales volumes
� At customer – product
level
� Average of all
customer
measurements
)%(∑= −
−−
−=
customers
n t
ttt
F
AFFA
1 1
1100
… is used to measure how well we forecast demand
Forecasting in times of crisis – the theory
� In economics, empirical testing of theories is not often possible
� Crises give us a great opportunity to falsify theories - ceteris paribus
� What do you expect to happen to Purimoxforecasting accuracy in times of crisis?
The philosophy of science
“Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood
the theory nor the problem which it was intended to solve”
Karl Popper
Philosopher
1902-1994
40%
60%
80%
100%
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
2008 2009
Northern
Rock collapses
(UK)
Lower house
sales
(NL)
Pension
funds warning
(NL)
Purimox Forecasting Accuracy Development
Lehmann
Brothers
collapses
(US)
Fortis
Bank
Nationa-lized (NL)
Iceland govern-
ment
collapses
Obama
regulation plan
(US)
2009 forecasting accuracy goes up…
� What happened here?
� Did we find a black swan?
40%
60%
80%
1 2 3 4 5 6 7 8 9 10 11 12
2009
…where we would still expect it to go down or remain stable
Cash driven initiative from DSM board level:
InPact
Cash is key. Cash is King. Cash is critical. You’ve probably heard some or all of these before. But today and looking ahead to how we manage our business, this could not be more true. And we can all make a difference. How we spend, when we pay, how much we spend, and when our customers pay us all drive our cash position. But our cash position is also influenced by how much inventory we have in products and spare parts, payment terms to our suppliers and capital expenditures.
InPact is focusing its efforts in the crisis approach, around three core pillars:
cash, opportunities and people.
Inventory reduction by reducing release time…
DSM Anti-Infectives
12We can reduce the QA release time in AlmeriaWe can reduce the QA release time in Almeria……
…… and at the same time reduce inventory by 3 daysand at the same time reduce inventory by 3 days
If we place an order for a full truck of Purimox on day 0
0 5
Production can change to the grade it produces on day 5
12
It takes 7 more days to release the
product from QC
13
It takes 1 day to arrange, and 3 days to
execute transport
16
Currently, QA release
takes 7 days on
average. By reducing
microbiological
assays we can
reduce to average 4
days.
Batch
number
Date of
manufacture =
Date of sample
reception
Date of
Analysis by
QC
Testing total
time by QC
(in days)
Date of
release by
QA
Releasing total
time by QA (in
days)
Date of
departure
TOTAL TIME
(in days)
V350770 30-3-2009 8-4-2009 9 8-4-2009 9 8-4-2009 9V350771 31-3-2009 8-4-2009 8 8-4-2009 8 8-4-2009 8
V350772 1-4-2009 8-4-2009 7 8-4-2009 7 8-4-2009 7V350773 2-4-2009 8-4-2009 6 8-4-2009 6 8-4-2009 6
V350774 3-4-2009 13-4-2009 10 13-4-2009 10 14-4-2009 11V350775 4-4-2009 13-4-2009 9 13-4-2009 9 14-4-2009 10
V350776 12-4-2009 17-4-2009 5 17-4-2009 5 17-4-2009 5
Average
7,2
Source: Deretil SA PurimoxPowder
Average7,2
…and by increasing plant agility…
DSM Anti-Infectives
10We can reduce the inventory by 3 days in DelftWe can reduce the inventory by 3 days in Delft……
…… and remain reliable if we can reduce the ordering lead time byand remain reliable if we can reduce the ordering lead time by 50%50%
If we place an order
for a full truck of Purimox on day 0
0 5
Production can
change to the grade it produces on day 5
12
It takes 7 more days
to release the product from QC
13
It takes 1 day to
arrange, and 3 days to execute transport
16
Currently, the
planning looks 4
weeks ahead when scheduling
production. But in fact
it can be done in 16
days
DSM Anti-Infectives
11Longer ordering Longer ordering lead timeslead times lead to excess safety stocklead to excess safety stock……
… based on a given forecasting accuracy of 80%… based on a given forecasting accuracy of 80%
30
If the lead time for ordering a truck
is 30 days
But the sales forecast accuracy is 80%
6 Then the safety stock for wrong
forecasting of this material, to prevent
stock-outs, should be
20% of 30 = 6 days
And the rest of stock is caused by
other sub-optimal situations
Wrong forecasting is normally distributed
Order quantities, optimum
batch sizes, wrong stock policies etc.
…and by reducing safety stocks…
DSM Anti-Infectives
2The supply chain carries two types of stocksThe supply chain carries two types of stocks……
GITGIT WIPWIP QAQA STOCKSTOCK PICKPICK
Once we have ordered incoming intermediates, they are “ours” while in transit
We keep stocks in our ware-houses because we do not want to say “NO” to customers and do not want processes to stop
Once material is allocated to a customer order, it takes time to pick the order and we have to wait for the carrier
During manufacturing we have work in progress causing stocks
During quality release we cannot allocate material to customer orders
…… for managing for managing unpredictablilityunpredictablility and because steps take timeand because steps take time
… greatly reduced inventory of Purimox in the chain
0
50000
100000
150000
200000
250000
300000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
2008 2009
Stock levels end 2009 were at 33% of the period average
Pu
rim
ox
sto
ck (
kg
)
R2 = 0,0456
R2 = 0,4427
30%
50%
70%
90%
110%
0 100000 200000 300000
Stock level (kg)
Fo
recasti
ng
Accu
racy
Accuracy Linear (Accuracy) Poly. (Accuracy)
Plotting accuracy against stocks…
� Correlation between stocks and
forecasting accuracy is not linear
� But shows an
optimum over 2008-
2009
� How can we explain?
… shows a curved instead of a linear trend
Lessons learned
1. The 2008-2009 economic crises lead to focus on cash creation and reduction of inventory
2. This made forecasting customer buying behaviourmore difficult
3. But also to high internal focus on stocks and inventory reduction
4. If there are no safety stocks to cover for unexpected sales, available stocks will determine sales
5. This will make forecasting accuracy seem to go up when measured against realized sales
6. Measuring forecasting ability should be done based on sales POTENTIAL rather than actual sales
“The philosophers have only interpreted the world in
various ways – the point is to change it”
Karl Marx
philosopher
1818 - 1883
Change it!
Going Forward
� Suggestions for improvement of the Forecasting Accuracy measurement to better grasp customer
intimacy and forecasting ability, also at low stock levels
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