Best Practices in Demand and Inventory Planning

Managing the supply chain is critical to a manufacturer's overall operations and to the bottom line.
May 01, 2006
Volume 19, Issue 5

Chris Taunton, PhD
In the pharmaceutical industry—as in any other—supply chain management is critical to a successful operation. Supply chain management includes demand forecasting and planning, distribution inventory planning, and plant capacity planning and scheduling. These activities help ensure that items are produced at the right time and delivered to the right place when they are needed. The proper mix of strategy, education, and systems greatly affects a manufacturer's overall operations and bottom line. Yet, many key decision makers in the pharmaceutical industry lack knowledge about the essentials of supply chain management. An understanding of this discipline can result in better coordination among organizational units and greater stability in the production plan.


Jonathan Feinbaum
Implementing a good, systematic forecasting process is the foundation of a sound supply chain planning infrastructure. The benefits include a reliable forecast, greater stability of plans, and higher customer service levels, among other benefits.

Planners are often frustrated by the quality of the forecasts they receive from their sales and marketing organizations. Sometimes, planners override the marketing forecast and use their own judgement. While this is sometimes effective, it means that marketing and planning are not working to a coordinated plan.

Forecasts at each separate location are often the least reliable; through aggregation, a more credible forecast can be generated. By looking at multiple products of a similar type across all locations, a brand level forecast can be generated, further reducing variability and forecast error. Through a method of proration, adjustments to the forecast made at the higher brand levels can be prorated down to the location level.

This gives distribution a clearer expectation of shipping requirements, while giving production a better demand number for planning and scheduling at the plant level.

With today's technology, forecasting can occur instantaneously at the desktop, and the results can be easily shared throughout the network for use by multiple divisions within the organization (Figure 1).


There is often confusion about the relationship between safety stock, reorder point, reorder batch size, and customer service levels. Many pharmaceutical companies develop production plans around "days of supply" or "cover period." Some will derive their figures by simply dividing annual demand by the number of forecast periods—without taking into account seasonality, trends, or the cost of production and carrying costs.

Figure 1. Leading forecasting systems can allow planners to generate reliable, statistical forecasts at multiple levels of aggregation, increasing accuracy for further planning processes of inventory and production.
Generally, low-volume products should be produced less often, with a longer cover period so that production changeover costs are reduced. High-volume products should be produced more frequently. Reducing the cover period of production orders for high-volume products shortens the lead time for inventory replenishment and reduces the potential for stock-outs. Since inventory is replenished more frequently, effective service levels should improve, allowing production to be more fine-tuned to customer demand patterns. The converse is also true for low-volume items.

Knowledge of basic inventory policies, and how they interrelate, can help planners develop an inventory replenishment plan that achieves stated customer service.

lorem ipsum