Demand forecasting in pharmaceutical supply chains: A case study

Q1. Analyse the attached case study and answer the following; (15 Marks)

 Identify the most important facts surrounding the case.

Pharma_Log acts as a wholesaler who provides pharmaceutical products from European manufacturers
to the distributors in Central Asia. They have data access from the manufacturer’s side like historical
sales data, product availability, future product changes, stockouts, planned marketing activities etc.

Pharma_Dis is a stratup company who distributes the in-market pharmaceutical products from
Pharma_Log. Pharma_Dis are present in the emerginf market and has direct access to market and sales
data records.

Pharma_Dis lacks historical data, being the startup company, and they are operating during the period
less than a year, plus volatility is also there for Pharma_Dis in the emerging market environment.

Due to volatility, high fluctuations occurs in the available data which is difficult to model and hard to fit.

Purchase orders generated by regional distributors based on product demand. The demand forecasting
fucntion is performed by the wholesaler using market sales data from the distributor. Moving Average
method is used weekly by using last 13 weeks sales data. No additional data is used for consideration.

 Identify the key issue or issues.

The key issues are the following:

1. Pharmaceutical companies are new to the innovative methods of forecasting because they tend
to bear the large supply chain costs due to gaining high margins of profit.
2. Due to the lack of forecasting, high lead times and incorrect demand forecasting causes
overstocks and oversupplies.
3. The demand forecasting is necessary for the pharmaceutical companies in order to expand in
the emerging market. Incorrect demand forecasting leads to high inventory and high casts
provided the product life cycle of the pharmaceutical products.
4. Lack of advancement in the forecasting methods are also one of the key issue of the given case
study.
5. High complexity is also one of the barriers in improving supply chain performance of
pharmaceutical products.

 Specify alternative courses of action.

The alternative courses of actions are selected using three scenarios in the given case study. In each
scenario, three different forecasting methods are applied. The three different forecasting methods in
each scenario are as follows;

1. Simple Moving Average Method.

2. Multiple Linear Regression Method.
 3. Symbolic Regression with Genetic Programming.

The factors affected product demand are taken into consideration in each scenario are as follows;

1. Distributor Price List.

2. The Discounted Selling Price of the Product.
3. Weekly Number of Sales in a Month.
4. Weekly Average Currency Rate.

 Evaluate each course of action.

1. Simple Moving Average Method:

Simple Moving Average Method (SMA) is used as the first course of action. The calculations have
been performed for the observations n = 4 and n= 13. In both of the calculations, the absolute error
calculated is high against the total demand observed. The forecast appears to be biased and
underestimated.

SMA model falls in the category of adaptive forecasting that allows updating the moving average
value of demand after each observation. SMA is unable to respond to the high fluctuations in the
sales data that’s why SMA model shows inaccurate sales forecast.

2. Multiple Linear Regression Method:

In the second scenario, multiple linear regression model is conducted to find the relation between
product demand and demand influencing factors. Initially the multiple regression model is run with
3 different independent variables such as base price, discounted price, and week number of sales for
the month. The base price is not considered as statistically significant because its P value is equals to
0.678 in the ANOVA table, so it is excluded for further consideration.

In the next iteration, the demand multiple regression is run with two indepandent variables such as
discounted price and weekly sales for the month. The absolute error and mean absolute deviation
are more than 50% lower than the SMA Model error calculations. Multiple regression model shows
better results and have the capability to fit the demand pattern but it still lacks to predict the
demand peak sales. The forecast shows underestimated results.

3. Symbolic Regression with Genetic Programming:

In the third scenario, symbolic regression is applied with genetic programming and its results are
analysed. Using tree based genetic programming algorithm, symbolic regression model is produced
in the HeuristicLab software. The data is same as the data used in the iteration 2 of multiple linear
regression model. The maximum number of generationsis experimentally defined, population size of
1000 individuals have been selected. Fitness function of the population size is evaluated by Pearson
R2 coefficient. Explanatory variables, arithmetic functions, logarithmic and exponential functions are
also included.
The results shows the best fit to the demand curve and shows least error and deviations. The
symbolic regression with genetic programming algorithm showed the least absolute error and mean
absolute deviation.

 Recommend the best course of action.

The best course of action among the three different forecasting methods is found out to be symbolic
regression with the application of genetic programming algorithm. It provides the best fit to the
product demand curve with high fluctuations in the sales data. It shows the lowest absolute error
and mean absolute deviation as compare to moving average method and multiple regression model.
It can also predict the peaks in the sales data more accurately than the two different methods
applied. It is because in the symbolic regression, different factors and non linear factors are also
considered to predict a more accurate product demand. So, symbolic regression method is proved
to be the best course of action.