Real Demand Forecasting

Dec. 19, 2007
How can leading pharma manufacturers be five times less likely to suffer stock outs yet carry ten months less inventory? Richard Prest, CSO of Edge Dynamics, assesses how to forecast supply and demand effectively.

In pharma, everyone knows that what gets prescribed doesn’t match what gets shipped from the factory.  And Dell’s much publicized build-to-order approach to reducing order-to-cash and working inventories might be fine for Dell, but most pharma manufacturers will continue to function as build-to-plan operations.  In addition, many are now facing margin pressures that have caused the old requirement of “never run out of stock” to be supplemented with the seemingly contradictory “and reduce costs”. 

With all the headaches coming from the increasing complexity, velocity and volatility of today’s markets, you’ve probably realized that now, more than ever, predicting the future is not getting easier, and no plan is ever going to be good enough.  For this reason, leading companies are using a combination of improved demand sensing and increased supply chain agility to improve product availability while reducing inventories.  In this article we reveal how leaders are leveraging recent developments in channel data and systems to contribute to superior operational excellence.

Demand volatility is the biggest risk to your supply chain
When the respected analyst firm, AMR Research, asked 100 U.S. companies, “Which of the following risk issues present a challenge to your company today?”, 64% of the respondents indicated that demand volatility is the greatest challenge to their supply chain. The primacy of demand-side risks over supply-side risks was found to be consistent across verticals. 

Over the last 5 years there have been some very public cases of companies surprised by quarterly earnings and consequently punished severely by the market.  In some cases, unexpected returns have been sufficient to drive earnings restatements.  A clear understanding of wholesaler inventory requirements and positions lessens the chances of these nasty surprises.  While wholesaler order variability has significantly declined with the recent shift away from investment buying to the Fee-For-Service distribution model, it is clearly still important to understand channel inventory plans and trends and incorporate this knowledge into production planning. 

Sensing demand is not easy in pharma
Demand in the pharmaceutical market is a complex combination of push and pull driven demand and regulatory and pricing pressures.  Third parties decide on formularies that influence prescription behavior, while pharmaceutical companies use lawyers, managed care, detailing, and direct-to-consumer campaigns to influence the FDA, pharmacy benefit providers, doctors and patients to prolong the patent, promote on formulary, prescribe and request their products.   

Unlike some other industries, point-of-sale data is not readily available, which creates a demand visibility problem.  Manufacturers typically purchase data on filled prescriptions and dispensed drugs from third parties.  Prescription data suffers from a time lag – it is usually available 10-12 days following the preceding month.  In addition, the data relies on sampling and extrapolation for locations such as independent pharmacies and clinics.

Channel data provides a timely indicator of demand
The movement of product through the distribution channel involves a wide assortment of wholesalers, mail order, chain warehouses, stores, secondary wholesalers, specialty wholesalers, hospitals, doctors, and clinics that share data on sales and inventories to varying degrees. While distributors typically provide channel sales and inventory as part of their distribution agreement with the manufacturer, some downstream customers require that the distributors block or mask their sales data from the manufacturer.

Despite these challenges, channel data provides a timely and reliable leading indicator of near-term wholesaler demand, as well as downstream demand. In addition, the inventory information helps to explain wholesaler positions.  Finally, the three largest wholesalers, which account for approximately 90% of US pharmaceutical distribution, all provide at least a four week prediction of demand.  One wholesaler provides a 13 week output from their procurement system.  The combination of wholesaler’s knowledge of their customers demand, together with the manufacturer’s knowledge of changes to formularies and campaigns, provides the best possible insight into demand. Leading manufacturers are using cleaned and validated channel data as a demand input to their Sales and Operation Planning processes, and to fine tune inventory planning. 

Rapid detection and response can increase market share
A rapidly growing biotech provides an example of how channel data can be used to increase market share following a product launch. Within days following the launch, it was clear from the channel data that physicians were prescribing more of the 15mg dosage than the 30mg, opposite to what had been expected. Left undetected, this would have led to shortages of the low dosage, and overstocks and returns of the high dosage product.  Fortunately, while there is often little flexibility and long timelines associated with pharma production planning, there is usually a much shorter timeline and flexibility to adjust final fill-and-finish inventories.  This manufacturer rapidly adjusted their fill-and-finish inventory plans to match actual demand, which resulting in maximized product sales and market share.

Leverage channel data to be a supply chain leader
There really is no excuse today to be surprised by what's going on in the channel.  Leaders are using channel data for real-time insight on the gaps between what’s being prescribed and what’s going out the door.  This knowledge powers rapid responses to demand changes and adjustments to the production plan, which is one reason why leaders are achieving improved product availability together with lower inventories, and avoiding nasty earnings surprises.

About the Author

Richard Prest | CSO Edge Dynamics