The Bullwhip Effect In Pharmaceutical Industry Karachi Business Essay

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 rose up and goes down. The effect was that these could 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 this research, 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 occurred 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 could 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 there must be know about the pharma sector of Karachi. Through finding from general survey the research concluded 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 emerging now 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 caused 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 all the way through the incorporation of key procedure, from new suppliers through manufactures, retailers to the end-users, which produce values to the ultimate consumers.

Lambert et al (1998) stated that supply chain management emphasizes close coordination among the diverse companies involved in the chain. It requires supply chain members to recognize which was 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 significantly add to relative to the unpredictability of the end customer demand. In practical operation of any supply chain, the downstream members of the chain would observe the demand and transmit it to the upstream members by the replenishment orders. The information distortion during this transmission process had 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 Supply chain management which was considered as one the major and biggest topic in our analysis as follows:

Mentzer et al. (2001): stated that 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): included the logistic flows, client order organization, the manufacture process, and the information stream necessary to monitor all the behavior at the supply chain sites.

Min and Mentzer (2000): showed that the “to manage the stream of a allocation control from the provider to the final client”.

Lambert et al (1998): observed that 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): said that the technique that looks at all the links in the sequence from unprocessed materials dealer, through a variety of levels of developing, to warehousing and allocation to the ending customers.

Christopher (1992): studied that the 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): studied that the supply chain consisted 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): showed that networks of manufacturing and distribution sites that procured raw material, transformed 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 covered the 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 have forecast demand. Forecasts were usually dependent on technical data, and 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. Increasing global competition in the world market made 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 had 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 referred to misinformation which may propagate up to the supply chain if only local information was used to take decisions under uncertainty. Long lead times could 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 existed because companies look for economies (e.g. large quantities discounts, full truck shipments, etc.) or because actually resort to MRP systems, which were usually run on a monthly basis.

Price fluctuations. When there were price fluctuations, upstream actors tend to concentrate their orders and build up stocks; then there would be place no orders in the following periods since large amounts of inventory. As a result, a stable demand pattern could 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 that showed 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 could 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, that would 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 had 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 resulted 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 required 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 lead to insufficient use of resources and eventually results in poor customer service and profitability. Because of the bullwhip effect had the detrimental impacts on the performance of the whole supply chain; many researchers had 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 had 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 there were not bound to procure raw materials from the validated plants by higher authorities in this way, captured 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 had focused on pharmaceutical industry. Towards market potential then usually had seen 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 had budget around 40 billion, which merely increased every year by 15 – 16 percent. The existing network of those people related to medical representatives consisted 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 produced 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

1.5 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 had 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 required intensive capital requirement to come to the pharma industry business last but not the least was the TRIPS agreement in which the patented documents were there and generic manufacturing companies cannot come under this unless and until would had patents for their own product or molecule. In view of above factors organizations had 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 did not had any physical existence in pharmaceuticals. Information connected the serve between various stages in manufacturing or marketing or supply chain in pharmaceutical industry which coordinated and brought 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 would be in the pharma industry. Future sales could be depicted through the forecasting techniques in the pharma industry. The company made a plan to act on the forecast. The forecasting technique should have been perfect and accurate so that the demand could be fulfilled to the customers. Any ignorance in the supply chain could 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 had charge to the customers for their goods or services. Demand and supply information was a special input for pricing in pharmaceutical industry. A firm had 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 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 had 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 followed 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 studied on the forecasting error and the inventory policy, the author had also studied the relationship between the two quantities.

Hax and Candea (1984) studied that after the findings, authors 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 could 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 in the direction of the producer relative to the difference of the required goods faced by the vendor where authors 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 a growing purpose of the front time factor.

Lee et al. (1997) suggested that “one remedy made demand information at a down direction site obtainable to the upstream location.” 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 had a centralized demand system by the retailers. That is, even if each stage of the supply chain had complete knowledge of the demands seen by the retailer, the bullwhip effect would still exist. The result in the research paper demonstrated the following three major points of views:

All required demand information was centralized

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

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

In this paper Lee et al. had demonstrated that the phenomenon known as the bullwhip effect was due to the effects of demand forecasting. More importantly, authors had shown that providing each stage of the supply chain with complete access to customer demand order information could considerably reduce this increase in variability. However, researcher also had shown that the bullwhip effect would 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 had complete knowledge of the observed customer demands, as a result, the manufacturer observed an increase in variability. Indeed, the author had also believed 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 acknowledged the association and linkages between business activities in marketing channels, e.g. in terms of the communications and connections among the flows of information, resources, wealth, and human resource, and assets gear.

Weld (1916) stressed the significance of concentrating on the distribution channel as a whole.

Mentzer et al., (2001) addressed the fact that the supply chain from the spot of beginning to the spot of spending. Furthermore,

Xu et al., (2001) said that SCM required co-operation and co-ordination between companies’ activities and resources in a supply chain.

Towill, Lee and Billington, (1992) studied that the otherwise, the variability of business activities in a supply chain tend to be amplified as it was moved upstream in the supply chain.

Lee et al. (1997a) wrote 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) also claimed that the information transferred tends to be indistinct and could mislead upstream associated in their accounts and manufacture decisions. This phenomenon was referred to in literature as the “bullwhip effect”. In fact, practitioners and consultants had struggled to treat with the bullwhip effect, e.g. in the automotive, textile, and retail industries. In the retail industries the terms “quick response” and “efficient consumer response” was usually used.

Fernie (1994) also demonstrated that those 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 indicated that the stocks and inventories in the supply chain tend to be higher or greater in the upstream than downstream, e.g. effects were caused by factors such as deficient information sharing, insufficient market data, deficient forecasts or other uncertainties or unpredictability.