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Measuring The Bullwhip Effect In The Pharmaceutical Industry Business Essay

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Published: Mon, 5 Dec 2016

CHAPTER 1

The bullwhip effect was the enlargement of demand fluctuations, not the amplification of the demand. The bullwhip effect was obvious in a supply chain when demand rises up and goes down. The effect was that these can be rise up and goes down were blown up the supply chain. The spirit of the bullwhip result was that information to suppliers tends to have larger difference than sales to the purchaser. The additional chains in the supply chain the more multifaceted this matter becomes. This modification of demand was enlarged the further than insist was passed up the supply chain. During our research, we came to know that there were a lot of reasons behind this amplification of demand of the products in pharmaceutical industry of Karachi and some of the causes that the bullwhip result occurs comprise the following:

Over act in response to the backlog orders.

Very little or no communication linking supply chain partners.

Holdup times between order dealing out, demand, and receiving of products.

Order batching: method for declining of ordering costs due to discounts for larger order, transport expense reduced by ordering full-truck loads, etc.

confines on order size (i.e. retailers can arrange goods in cases of 10 from trader; though, distributors take delivery of orders in cases of 1,000)

Imprecise demand forecasts.

Free of charge return policies.

Cost fluctuations

Short gaming

Delay in lead time

The research work includes measuring the bullwhip effect in Pharmaceutical industry – Karachi, for that we must know about the pharma sector of Karachi. Through finding from general survey we came to know that there were more than 400 qualified pharmaceutical companies in Pakistan, including the 30 multinationals that have 40 percent of the market share. Approximately half of Pakistan’s total expenditure or consumption of pharmaceuticals were imported and there were also local manufacturing concept was emerging now a days due to technology transfer of many products from international countries to Pakistan. After the brief analysis of the pharmaceutical industry and the bullwhip effect that affects the demand of the product in the market so eventually causes the problem in sales and marketing due to many reasons.

The bullwhip effect involves and turns around the terminology that was the usually involved in Supply chain which was the procedure of planning, executing, and scheming the operations as professionally as possible. Supply Chain extent all association and storage of raw resources, work-in-process records, and finished possessions from point-of-origin to the point-of-usage. Further, supply chain involves four district yet interrelated flows. These flows include material, information, ownership, and payment flows. Successful marketing required a successful supply chain management that ultimately requires planning, managing and controlling these four flows through the integration of key process, from original suppliers through manufactures, retailers to the end-users, which produce values to the ultimate consumers Christopher (1998); Lambert et al (1998). Bowersox et al. (2003) states that supply chain management emphasizes close coordination among the diverse companies involved in the chain. It requires supply chain members to recognize that they were part of the complex network. All the companies involved in the network were important in establishing a desired level of customer service in the supply chain and satisfying their customers’ requirements. These companies were interdependent in such a way that an individual company’s performance affects the performance of other members of the supply chain. If there was a problem in one company, the company consequently causes other problems in other areas and weakens the effectiveness of the whole supply chain. Since, a supply chain involves many players and different practices and policies, those complexities result in higher degree of uncertainty and dynamic within a supply chain of the pharmaceutical industry of Karachi.

In the marketing of the products one of the backbones involved was the supply chain in business includes the stages, which were built to fulfill the demand of the customers. A typical supply chain usually includes raw material suppliers, manufacturers, wholesalers, retailers, and end customers. In supply chain, the variability of order quantity may considerably increase relative to the variability of the end customer demand. In practical operation of any supply chain, the downstream members of the chain will observe the demand and transmit it to the upstream members by the replenishment orders. The information distortion during this transmission process has been observed and referred to as the bullwhip effect. In the presence of bullwhip effect, a small variation in the demand of the end customer may cause large variation in the demand facing by supplier. After analyzing the above facts, now using references we can define Supply chain management which was considered as one the major and biggest topic in our analysis as follows:

Mentzer et al. (2001): The systematic, strategic co-ordination of the conventional business function and the strategy across these business functions within in specific company and transversely business surrounded by the supply chain, for the reason of enhancing the lasting presentation of the entity companies and the supply chain as an entire.

Lummus et al (2001): Include the logistic flows, customer order management, the production process, and the information flows essential to observe all the activities at the supply chain nodes.

Min and Mentzer (2000): To manage the stream of a distribution channel from the supplier to the ultimate user.

Lambert et al (1998): To get the most out of competitiveness and profitability for the company as well as the whole supply chain network, including the end-customer.

Turner (1993): A technique that looks at all the links in the chain from raw materials suppliers, through the various levels of manufacturing, to warehousing and distribution to the final customers.

Christopher (1992): Supply chain was the system of organization that was concerned, through upstream and downstream linkage, in the dissimilar procedure and actions that each creates value in the shape of goods and services in the offer of the final consumer.

Cavinato (1992): The supply chain consists of vigorously managed channels of procurement and distribution and that it was made up of a group of firms that adds value along the products flow from original raw material to final customer.

Lee and Billington (1992): Networks of manufacturing and distribution sites that procure raw material, transform them into intermediate and finished products, and finally distribute the finished products to customer

In order to cover the topic of demand fluctuation, there must address the below problems that ultimately will cover Bullwhip effect and its tactics:

Distribution Network: Number, location of the partners in supply chain, facilities in production, different centers related to distribution, store rooms and final customers.

Distribution planning: Centralized against uncentralised, direct transportation, Cross docking, pull or push ways, 3PL.

Information: Processes of the supply chain to create the sharing valuable information.

Inventory Management.

1.1 Value Chain Of pharmaceutical Industry – Karachi:

The Bullwhip Effect was an effect in forecast or demand driven distribution channels. Because customer ordering demand was very few perfectly stable, the businesses must be of forecast demand. Forecasts were usually dependent on technical data, and they were rarely exact. Companies usually prefer to have avoided forecast errors by having a buffer stock. In this scenario there was a demand in stream from up to down with the variations in effects as shown in figure 1. Increasing global competition in the world market today makes the supply chain management more critical. Although people tried to avoid the influence of bullwhip effect, unfortunately, it always exists in every supply chains. Many researchers examined the bullwhip effect and managerial approaches to relieve bullwhip effect were also proposed. However, little research has been conducted on quantifying this effect and measurement of bullwhip effect still remains a challenging research direction

Causes of Bullwhip effect:

There were following causes of bullwhip effect:

Demand processing (in conjunction with long lead times): This refers to misinformation which may propagate up to the supply chain if only local information was used to take decisions under uncertainty. Long lead times can amplify this fact, since the longer the lead time, the higher the target inventory level set in the replenishment model.

Batching of the Orders: Batching exists because companies look for economies (e.g. large quantities discounts, full truck shipments, etc.) or because they resort to MRP systems, which were usually run on a monthly basis (see also Avery et al., 1993).

Price fluctuations. When there were price fluctuations, upstream actors tend to concentrate their orders and build up stocks; then they place no orders in the following periods since they have large amounts of inventory. As a result, a stable demand pattern can be significantly altered, and the BE may arise. Lummus et al. (2003) studied the impact of price promotions and other marketing initiatives on supply chain, while Rinks (2002) proposed a simulation study replicating the data structure of the Beer Game to show that once a fluctuation was triggered, it may take more that 20 periods for the system to come back to a steady state. When price promotions were run on a regular basis, this implies a steady state can never be reached, and the systems behavior appears to be chaotic.

Rationing and shortage gaming. When demand was larger than production capacity, the manufacturer rations products to its customers according to the size of the orders. If the customers recognize the rationing criterion, they will react by “inflating” orders, so to get the desired amount of products, and by later canceling the excessive ordered quantity. As a consequence, the manufacturer has a poor perception of the actual demand.

Forward buying: Goods may be purchased in earlier stage of the actual demand to take benefit of cost promotions.

Bullwhip Effect results in too many swings in various demands or inventory stocking points throughout the supply chain. This swing was also likely to be wider upstream in supply chain. Owing to the excessive swings and the amplification of demands, the Bullwhip Effect was a major concern for participants involve in a supply chain and marketing. The increase variability and uncertainty requires each member to increase the level of stocks in order to maintain established service levels causing increased inventory holding costs due to overstocking throughout the supply chain, and leads to insufficient use of resources and eventually results in poor customer service and profitability. Because the bullwhip effect has the detrimental impacts on the performance of the whole supply chain, many researchers have attempted to identify possible causes of bullwhip effects.

1.3 Pharmaceutical Industry – Karachi:

In Pakistan, there were around 400 pharmaceutical companies operating under the umbrella of pharmaceutical industry. Including 30 multinationals and who has good enough market position while others were local generic companies, now a days the situation was totally changed the local companies were emerging in the pharmaceutical market because of their cheap technology and labor as well as they were not bound to procure raw materials from the validated plants by higher authorities in this way they capture profit and focus on sales increase rather than qualities,. So in order to calculate the bullwhip effect in the pharmaceutical industry which was the main cause of sales fluctuation we have focused on pharmaceutical industry. If we go towards market potential then we usually see that the pharmaceutical industry was good for many therapeutic segments including anti-biotic, vaccines, and analgesics, anti cancerous or hematological drugs. Through the geographic survey the Health sector has budget around 40 billion, which merely increases every year by 15 – 16 percent. The existing network of those people related to medical representatives consists of about 1000 hospitals, about 100 maternity and child birth centers and around 300 tuberculosis centers etc.

Pakistan pharmaceutical industry was composed largely on multinational companies which were producing marketing research based or innovative products and also other small or bigger local companies which were predominantly produce and market generic products in Pakistan.

There were many economic drives and some of them were illustrated down the line:

Awareness Programs on issues related to health and realization amongst the population for the same.

Health securities by the emphasis of government

Marketing research data by national companies.

Increase per capital income which provided high disposable income for health related matters.

Large population of Pakistan

Export opportunities.

Production process improvement.

New generic molecules by cheaper raw materials.

Cheap raw material sources from abroad.

Chinese machinery system for manufacturing the products.

New generation’s entrepreneur in the local companies.

Increase in sales and marketing expenditures

Doctor’s prescriptions were the main source of sales in pharmaceutical industry.

Business Vertical Module on Pharmaceutical Industry:

1.4 Healthy Competition of Pakistan Pharmaceutical Industry:

The Pakistan pharmaceutical industry was increasing day by day in growth. The utility rates and other factors of production have been increased in steady rate over the last couple of years. Prices of drugs were increasing since 2008 and china revoking its export by supplying to Pakistan. Here the point should be well noted that the china and India were exporting their raw materials and different and unique machineries to Pakistan in a huge quantity. Mostly the machineries were imported from China, Taiwan, Korea, India, Germany, UK, USA and Japan besides other countries 10% of the demand was fulfilled by the local fabricated equipments. Furthermore, World trade organization has shown a significant impact on pharmaceutical trade in shape of National treatment programs in which other parties get tender through WTO and in return their sales increases, another option was harmonization of standard through ICH guidelines which requires intensive capital requirement to come to the pharma industry business last but nit the least was the TRIPS agreement in which the patented documents were there and generic manufacturing companies cannot come under this unless and until they will have patents for their own product or molecule. In view of above factors organizations have to make themselves stronger to capture the pharmaceutical market in Pakistan and grow in the same field.

One of the backbones factor was information system in pharmaceutical industry which was the main or core system that should be smooth to carry out the process in the industry because it does not have any physical existence in pharmaceuticals. Information connects the serve between various stages in manufacturing or marketing or supply chain in pharmaceutical industry which coordinates and brings new and innovative ideas to maximize the sales in pharmaceutical industry. Also, in order to perform the daily operations in the processes.

The coordination occurs when all the processes in the supply chain were performed under secure and beneficial information that boost the sales in pharmaceutical industry. The information sharing process was involved in each and every stage of the operations and reduces the losses in the supply chain. Another important matter was forecasting which was the art and science of making projections about future demands and circumstances will be in the pharma industry. Future sales can be depicted through the forecasting techniques in the pharma industry. The company makes a plan to act on the forecast. The forecasting technique should be perfect and accurate so that the demand can be fulfilled to the customers. Any ignorance in the supply chain can bear losses in huge so the forecasting should be done in a well mannered to avoid any shortages in the market for fulfilling customers demand.

Pricing was a process of gaining profit for a firm that how much they charge to the customers for their goods or services. Demand and supply information was a special input for pricing in pharmaceutical industry. A firm has to understand the impact of pricing and the competition amongst the competitors due to prices of the products. For effective revenue management the supply chain must have good information about the products and their pricing strategy.

CHAPTER 2

LITERATURE REVIEW

Frank Chen (1998) summarized the study on enumerate the effect of the bullwhip in a simple way of supply chain and the affect of predictions, due time, and sources. The author quantified the bullwhip effect by using retailer and a single manufacturer and emphasized on the causes of the bullwhip effect in which they focused on the demand forecasting and order lead times. Author focused on determining the impact of demand forecasting on the bullwhip effect and secondly, not only to find out the presence of the bullwhip effect, but also to quantify and measure the bullwhip effect, i.e., to quantify the increase in unpredictability or variability at each stage either in retailer, manufacturer or wholesaler side. In this research author had used the retailer information and observed the level of inventory system and their way of ordering to fulfill the demand and if there were any unfilled demand then those demands were backlogged, and also focused on the lead time between an order placed by the retailer and the fulfillment of the order.

Lee et al. (1997a, b) identified the five main reasons of the bullwhip effect that were the use of demand forecasting, supply shortages, lead times, batch ordering, and price variations while most of the previous research on the bullwhip effect has focused on demonstrating its existence, identifying its possible grounds that creates bullwhip effect, and the methods of reducing its impact. Lee et al. also suggested the process of centralization of the demand information in each step of the supply chain with full, proper and complete information to fulfill the customer demand.

Lee et al. (1997b) studied the measurement of demand by the use of retailer and the lead time and also analyzed the bullwhip effect. The author had also focused on the inventory Policy and forecasting technique which assume that the retailer follows a simple order-up-to inventory policy, also focused on the forecast error while taking the order-up-to point. Not only their findings and studies on the forecasting error and the inventory policy, the author studied the relationship between the two quantities.

Hax and Candea (1984) studied that after the findings they came to the conclusion that it was more appropriate to calculate the inventory policy based on the former quantity. It was also focused that the forecasting was a major variable that can be used to measure the existence of bullwhip effect so this paper also focused on the same concept. To measure the bullwhip effect the author also had determined the variance of the orders placed by the retailer to the manufacturer relative to the variance of the demand faced by the retailer where they have assumed. The important point to understand that the smother the demand forecasts the smaller the increase in variability / deviation and the increase in the variability of orders from the retailer to the manufacturer was an increasing function of the lead time parameter.

Lee et al. (1997) suggested that “one remedy was to make demand data at a downstream site available to the upstream site.” Centralized demand information was a great strategy for reducing the magnitude of the bullwhip effect. i.e., the demand information should be available at every step of the supply chain process or manufacturing till marketing to make customer demand information available. Although it was also a fact that the bullwhip effect still exist even we have a centralized demand system by the retailers. That is, even if each stage of the supply chain has complete knowledge of the demands seen by the retailer, the bullwhip effect will still exist. Their result in the research paper demonstrates the following three major points of views:

All required demand information was centralized

Every phase of the supply chain uses the identical forecasting technique, and

Every stage uses the same inventory policy; there will still be an increase in variability at every stage of the supply chain.

In this paper Lee et al. have demonstrated that the phenomenon known as the bullwhip effect was due to the effects of demand forecasting. More importantly, we have shown that providing each stage of the supply chain with complete access to customer demand order information can considerably reduce this increase in variability. However, we have also shown that the bullwhip effect will still exist even when demand information was shared by all stages of the supply chain and all stages use the same forecasting technique and inventory policy. Even though the retailer has complete knowledge of the observed customer demands, as a result, the manufacturer sees an increase in variability. Indeed, we believe that when evaluating the bullwhip effect it was most appropriate to consider inventory policies and forecasting techniques that were used in practice.

Alderson (1957) distinguished and recognized that the interdependence between companies business activities in marketing channels.

Forrester (1958) also acknowledges the association and linkages between business activities in marketing channels, e.g. in terms of the communications and interactions between the flows of information, materials, money, and manpower, and capital equipment.

Furthermore, Weld (1916) stressed the significance of concentrating on the distribution channel as a whole. SCM addresses the supply chain from the spot of beginning to the spot of spending (Mentzer et al., 2001; Lambert, 1992; Cavinato, 1992). Furthermore, SCM requires co-operation and co-ordination between companies’ activities and resources in a supply chain (Xu et al., 2001; Holmstro¬®m, 1997). Otherwise, the variability of business activities in a supply chain tend to be amplified as it was moved upstream in the supply chain (Towill, 1996; Lee and Billington, 1992).

Lee et al. (1997a) write that the variability of the orders may be greater than that of the sales and the fluctuation tends to rise up as one move upstream in the supply chain. Lee et al. (1997b) claim that the information transferred tends to be indistinct and can mislead upstream associates in their accounts and manufacture decisions. This phenomenon was referred to in literature as the “bullwhip effect” (Chen et al., 2000). In fact, practitioners and consultants have struggled to treat with the bullwhip effect, e.g. in the automotive, textile, and retail industries. In the retail industries the terms “quick response” (e.g. Stern et al., 1996) and “efficient consumer response” (e.g. Kurt Salmon Associates, 1993; Fernie, 1994) have been applied. These terms, or business philosophies, aim at reducing the unpredictability or variability in supply chains and in the end improves the productivity, profitability, cutting costs and increases the overall presentation or performance of the company’s business. The bullwhip effect indicates that the stocks and inventories in the supply chain tend to be higher or greater in the upstream than downstream, e.g. they were caused by factors such as deficient information sharing, insufficient market data, deficient forecasts or other uncertainties or unpredictability.

Fransoo and Wouters (2000) discussed that the effects of bullwhip defines the variability of the demand that increases further upstream in the supply chain, and concluded that the theory of measurement of the bullwhip effect in a practical setting has received limited attention. The research of the bullwhip effect has considered inter-organizational echelons, such as two echelons between companies (e.g. Yu et al., 2001; Chen et al., 2000; Fransoo and Wouters, 2000; Kelle and Milne, 1999), or three/multi echelons between a sequence of companies (e.g. McCullen and Towill, 2001; Jacobs, 2000; Metters, 1997; Lee et al., 1997a, b), in supply chains. There was therefore a need for research of the bullwhip effect on a company’s internal inventories, e.g. sandwiched between a company’s inbound flows and outbound logistics flows (i.e. two internal stocking levels). In some conditions a company maintains higher levels of stocks and inventories that was called as speculation, while in situation the company maintains lower levels of inventories and this condition was termed ad postponement, in the inbound and outbound logistics flows. The process of rational decision making was also influenced by the companies’ business activities adding value in a value chain. Lee et al. (1997a) conclude that the bullwhip effect results from the rational decision making between the actors in a supply chain (i.e. inter-organizational echelons). This rational decision was making might also be based upon the relationship between actors within a company (i.e. intra-organizational echelons), such as the actors in charge of business activities dealing with procurement and physical distribution. The principles of postponement and speculation previously stated that a bullwhip effect between a company’s inbound and outbound logistics flows should indicate a higher level of inventories in the inbound logistics flows than in the outbound logistics flows, e.g. caused by insufficient market data, deficient forecasts or other uncertainties. It could also be explained by the effects or consequences of the principle of postponement (Alderson, 1950) and the principle of speculation (Bucklin, 1965).

Mentzer et al. (2001) emphasizes on the coordination of the systemic and strategic functions in the conventional business and the plans transversely these business functions within a picky company and crosswise businesses for the motive of enhancing the continuing routine of the individual companies and the supply chain as an entire.

Lummus et al. (2001) take account of the logistics flows, customer order management, the production processes, and the information flows necessary to monitor all the activities at the company’s level of the business.

Lee and Billington (1992) gave the association of manufacturing and distribution sites that the procurement of the starting or raw materials, transform them into intermediate or medium and finished products, and finally distributes to the finished products to customers business activities lessen the risk by moving the differentiation nearer to the time of exchange. They have also provides a point of departure for a critical scrutiny to enhance the performance of companies’ business activities, and for a possible diminishing or reduction of the bullwhip effect in a company’s level.

Stevens (1990) emphasizes the management of the stream of substances from dealer, through the value-adding procedure and the channels of distribution to end users.

Ellram and Cooper (1990) worked on the philosophy to handle the whole stream of a sharing channel from supplier to final purchaser.

Houlihan (1988) covers the stream of commodities from trader through manufacturer and distributor to the end user.

Jones and Riley (1985) deal with the total flow of materials from supplier’s right through to the end users.

Oliver and Webber (1982) worked on the marketing channel should be seen as an integrated single entity. The disequilibrium between the points of inventory in a supply chain might be caused by the value adding process in companies’ different business activities. Therefore, the occurrence of the bullwhip effect does not necessarily have to do with demand variability. It could be explained by the effects or consequences of the value chain concept.

Porter (1985) studied that the value chain concept was a guide or tool for recognizing different ways of creating customer value the value chain disaggregates a firm into its strategically relevant activities. Generally, the value chain concept shows that the value chain may be useful in terms of identifying and understanding fundamental aspects to reach competitive or core strengths on the market.

Weld (1916) concluded that the idea of the value-added process was recognized “At each step an increment of value was added by those who handle or transform the product”. The value-added approach contributes in part to the understanding of the bullwhip effect between a company’s inbound and outbound logistics flows. As per International journal of physical distribution and logistics management, the bullwhip effect was also defined by the reliance or dependencies between actors, activities and resources that could cause negative consequence when variability occurs upstream or downstream.

Sterman (1989) demonstrated that the misleading or misperception about any information may lead to the over reaction of any human. Variability in the business environment was therefore troublesome to handle in a managerial context.

Lee et al. (1997a) stated that the variability could be symptoms of excessive inventory, deprived product prediction, inadequate or extreme capacities, poor client service due to out of stock products or long backlogs, unsure production planning and lofty costs for corrections.

Lee et al. (1997b) identified four major reasons of the bullwhip effect, namely demand forecast updating, order batching, rise and fall of price, and rationing and scarcity betting.

Xu et al. (2001) presented that when the forecasting errors were occurred by the manufacturer’s and was greater than those of the retailer’s before co-ordination or collaboration, co-ordination becomes effective in decreasing the manufacturer’s safety stocks.

Lee and Billington, Towill, Fransoo and Wouters (2000) concluded that the bullwhip effect can be diminished by reducing the lead times, looking again the reordering procedures, controlling the price fluctuations, and the incorporation of planning and performance measurement.

Baljko (1999) said that the bullwhip effect may be get rid of through measures such as: shared knowledge with suppliers and customers to better gauge demand strictly, co-operation and coordination with supply chain partners to determine what information was causing an overreaction, and the use of web based technology that was internet-enabled technology and the application of the web to speed up the communication among different customers and the improvement of response time.

Lee et al. (1997a) discussed the occurrence of factors that causes the bullwhip effect also the possibilities of reducing the bullwhip effect based upon the co-ordination mechanism in terms of information in sequence, alignment of the channel, and efficiency of the opertions. Demand information at a downstream site was conveyed to the upstream with information sharing. The harmonization of costing


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