Forecasting in times of crises

A scientific approach to evaluate Forecasting

Accuracy at DSM Anti-Infectives

April 2010 - Bernard J. Dammingh

 DAI: Innovation in Amoxicillin production
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.

DSM PureActivesTM - PurimoxTM

• A unique range of enzymatically

produced antibiotics
• Brand names are registered worldwide
• Enzymatic production process has been
patented
 The Penicillin – Purimox supply chain

Finished goods
Warehouse Delft
Netherlands
Sales Europe/NA
Customers
Transit Purimox Sales China
Transit 6APA Almeria -Delft Customers
Saltillo - Almeria

Penicillin/6APA Transit 6APA

Purimox production Zjangjakou - Almeria
production Saltillo 6APA production
Almeria (Spain)
(Mexico) ZjangJakou (China)

Sales MLA Sales AMEA

Customers Customers

… puts out 200.000.000 patient treatments annually

 The Purimox S&OP cycle…
Forecast Plan Execute Report

Producti
on plan
Sales
BG/BU
BG/BU
plan Budget
Budget
Y Meeting
Meeting
BU
Budget
Combined meeting BG
BG
BG S&OP
S&OP BG S&OP
S&OP
KPI
Q meeting
meeting meeting
meeting
report
IC
Demand
Plan

Demand
Demand Combined meeting Demand
Demand
Plan
Plan Plan
Plan
Meeting KPI Meeting
Meeting Manufactu-
Manufactu- Combined meeting Meeting Manufactu-
Manufactu-
report
Demand ring
ring Plan
Plan ring
ring Plan
Plan
Plan
M Meeting
Meeting KPI Meeting
Meeting
Producti Monthly
Monthly BU
BU report
on Plan Scenario building S&OP
S&OP
meeting
meeting Agreed
Agreed Demand
Stock Agreed
Producti Plan
Plan Sales & Production Process
A&D-log = output of every meeting on Plan
Short interval control
W

… monthly updates demand and supply forecasts

 Measuring & forecasting

“If you cannot measure it, you cannot manage it”

Peter Drucker
writer and consultant
1909-2005
 Forecasting Accuracy…

Measured monthly

Forecasted and
actual sales volumes

At customer – product
level
customers

Average of all Ft −1 − At
FAt = ∑ (100% − )
customer n =1 Ft −1
measurements

… 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 Purimox
forecasting 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
 Purimox Forecasting Accuracy Development
100%

80%

60%

40%
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 Pension Fortis Obama
Rock funds Bank regulation
collapses warning Nationa- plan
(UK) (NL) lized (NL) (US)

Lower Lehmann Iceland

house Brothers govern-
sales collapses ment
(NL) (US) collapses
 2009 forecasting accuracy goes up…

80%

What happened here?

Did we find a black

swan?
60%

40%
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

InPact is focusing its efforts in the crisis approach, around three core pillars:
cash, opportunities and people.

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.
Inventory reduction by reducing release time…

We can reduce the QA release time in Almeria… 12

Batch Date of Date of Testing total Date of Releasing total Date of TOTAL TIME
manufacture =
Analysis by time by QC release by time by QA (in
number
Date of sample
reception QC (in days) QA days) departure (in days)
Currently, QA release
V350770 30-3-2009 8-4-2009 9 8-4-2009 9 8-4-2009 9
V350771 31-3-2009 8-4-2009 8 8-4-2009 8 8-4-2009 8 takes 7 days on
V350772 1-4-2009 8-4-2009 7 8-4-2009 7 8-4-2009 7
V350773
V350774
2-4-2009
3-4-2009
8-4-2009
13-4-2009
6
10
8-4-2009
13-4-2009
6
10
8-4-2009
14-4-2009
6
11
average. By reducing
V350775
V350776
4-4-2009
12-4-2009
13-4-2009
17-4-2009
9
5
13-4-2009
17-4-2009
9
5
14-4-2009
17-4-2009
10
5
microbiological
assays we can
Average
7,2
Average
reduce to average 4
Source: Deretil SA Purimox
Powder 7,2 days.

0 5 12 13 16

If we place an order Production can It takes 7 more days It takes 1 day to

for a full truck of change to the grade to release the arrange, and 3 days to
Purimox on day 0 it produces on day 5 product from QC execute transport

… and at the same time reduce inventory by 3 days

DSM Anti-Infectives
 …and by increasing plant agility…

We can reduce the inventory by 3 days in Delft… 10

Longer ordering lead times lead to excess safety stock…
stock… 11

If the lead time for ordering a truck

Wrong
forecasting
is 30 days Currently, the
is normally
distributed 30 planning looks 4
But the sales forecast accuracy is 80%

weeks ahead when

6 Then the safety stock for wrong
forecasting of this material, to prevent scheduling
stock-outs, should be
20% of 30 = 6 days production. But in fact
Order
quantities, it can be done in 16
optimum And the rest of stock is caused by
batch sizes,
wrong stock
policies etc.
other sub-optimal situations days
…
… based
based on
on aa given
given forecasting
forecasting accuracy
accuracy of
of 80%
80%
DSM Anti-Infectives

0 5 12 13 16

If we place an order Production can It takes 7 more days It takes 1 day to

for a full truck of change to the grade to release the arrange, and 3 days to
Purimox on day 0 it produces on day 5 product from QC execute transport

… and remain reliable if we can reduce the ordering lead time by 50%

DSM Anti-Infectives
 …and by reducing safety stocks…

The supply chain carries two types of stocks… 2

GIT
GIT WIP
WIP QA
QA STOCK
STOCK PICK
PICK

Once we have During During quality We keep stocks Once material is

ordered manufacturing release we in our ware- allocated to a
incoming we have work in cannot allocate houses because customer order, it
intermediates, progress causing material to we do not want takes time to pick
they are stocks customer orders to say “NO” to the order and we
“ours” while customers and have to wait for
in transit do not want the carrier
processes to
stop

… for managing unpredictablility and because steps take time

DSM Anti-Infectives
 … greatly reduced inventory of Purimox in the chain

300000

250000
Purimox stock (kg)

200000

150000

100000

50000

0
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

 Plotting accuracy against stocks…
Accuracy Linear (Accuracy) Poly. (Accuracy)
110%

Correlation between
stocks and R2 = 0,4427
90%

Forecasting Accuracy
forecasting accuracy
is not linear
70%

But shows an R2 = 0,0456

optimum over 2008- 50%

2009

30%

How can we 0 100000 200000 300000
explain? Stock level (kg)

… 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 behaviour
more 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
 Change it!

“The philosophers have only interpreted the world in

various ways – the point is to change it”

Karl Marx
philosopher
1818 - 1883
 Going Forward

Suggestions for improvement of the Forecasting

Accuracy measurement to better grasp customer
intimacy and forecasting ability, also at low stock levels