VIET NAM NATIONAL UNIVERSITY

HO CHI MINH CITY UNIVERSITY OF TECHNOLOGY

OFFICE FOR INTERNATIONAL STUDY PROGRAMS

FACULTY OF MECHANICAL ENGINEERING

DEPARTMENT OF INDUSTRIAL SYSTEM ENGINEERING

-----------------o0o-----------------

LOGISTICS SYSTEM DESIGN REPORT

INTEGRATED SUPPLY CHAIN PLANNING MODEL FOR
PHARMACEUTICAL INDUSTRY

Instructor: Assoc. Prof. Dr. Phan Thị Mai Hà

Class: CC20LQC

Student Name: Lê Đình Huân

Student ID: 2052488

Ho Chi Minh city, December 2023

ACKNOWLEDGEMENT
SUMMARY
 TABLE OF CONTENT

CHAPTER 1 INTRODUCTION.................................................................................1

1.1. Problem statement................................................................................................1

1.2. Objective...............................................................................................................2

1.3. Content..................................................................................................................2

1.4. Scope....................................................................................................................3

1.5. Report outline.......................................................................................................3

CHAPTER 2 LITERATURE REVIEW.....................................................................5

2.1. Thereotical basis...................................................................................................5

2.1.1. The concept of planning.................................................................................5

2.1.2. Decision-making model.................................................................................6

2.2. Related researches..............................................................................................11

2.3. Methodology.......................................................................................................12

CHAPTER 3 RESEARCH SUBJECTS ANALYSIS...............................................14

3.1. Research subjects................................................................................................14

3.1.1. Pharmaceutical Industry...............................................................................14

3.1.2. Related departments.....................................................................................15

3.2. Current situation.................................................................................................21

3.2.1. Overview of pharmaceutical supply chain...................................................21

3.2.2. Supply chain in a pharmaceutical company X.............................................24

CHAPTER 4 MODEL FORMULATION................................................................25

4.1. Description and assumption................................................................................25

4.2. Input and output of model..................................................................................25

4.2.1. Input.............................................................................................................25
 4.2.2. Output..........................................................................................................26

4.3. Notation..............................................................................................................26

4.3.1. Indices..........................................................................................................26

4.3.2. Parameters....................................................................................................26

4.3.3. Decision variables........................................................................................27

4.3.4. Dependent variables.....................................................................................28

4.4. Objective fuction................................................................................................28

4.5. Constraint............................................................................................................29

CHAPTER 5 MODEL TESTING.............................................................................31

CHAPTER 6 CONCLUSION....................................................................................34

REFERENCE
 CHAPTER 1 INTRODUCTION

1.1. Problem statement

The recent Covid-19 pandemic, as well as a series of events occurring

around the world in recent years, have greatly affected the global economy,
causing significant fluctuations in customer demand, especially in the
pharmaceutical industry. This requires businesses and manufacturing
companies in this pharmaceutical field to have improvements in thinking and
operating methods to be able to adapt to these changes.

With the development of the market and increasingly strong business

competitiveness, not only in Vietnam but also globally, businesses always
pay attention to the processes and products provided by the company to
ensure ensure that competitiveness in a challenging marketplace. One of the
important factors that help businesses strengthen their competitiveness is
their supply chain. A strong, tight, lean and effective supply chain will be a
solid and extremely good foundation for businesses to build company
development strategies. And one of the indispensable links in those supply
chains is the supplier.

According to R. J. Kuo (2010), supply chain management includes

connected logistics systems that integrate products and services into one
system and create a continuous and seamless link. In addition, all activities
from raw materials to end customers for goods are closely coordinated. Due
to such coordination, all links in the supply chain will be affected by other
links in the chain directly or indirectly. According to Lee (2002),
management of supply chains is a complex and challenging task because of
the changing trends in expanding variety of products, short product life
cycles, increased outsourcing, continuous advances in information
technology and globalization of businesses. It also includes expenditure of
high cost and time in conducting clinical trials with low success rate in
product discovery and clinical development, generic competition at the end

1
of product patent life followed by high uncertainties in demands and capacity
planning (Lainez et al., 2012) .

Continuing with the above argument, a study by Xie and Breen (2012)
showed that pharmaceutical supply chain is a special supply chain in which
drugs are produced, transported and consumed. This considers
pharmaceutical supply chain more complex because it significantly affects
different related stakeholders such as pharmaceutical manufacturers,
wholesalers, distributors, customers, information service providers and
regulatory agencies (Bhakoo and Chan, 2011). Since then, Pisano (2000) has
shown the need for the pharmaceutical industry to learn from other industries
on how to manage operational excellence in terms of cost-effective
development, which can be achieved through productivity gains in the supply
chain. . Moreover, it will be major challenges in the pharmaceutical sector
over the next few decades, following the observation of Grossmann (2004).
Therefore, to solve these challenges, pharmaceutical businesses are forced to
find optimal solutions, which supply chain optimization is an effective way
to change the landscape of pharmaceutical industries and is becoming current
practice, not only in pharmaceutical industries but also in other areas of
business.

For the above reasons, the thesis topic focuses on forming an integrated
planning model between departments in a pharmaceutical enterprise to
support relevant decisions to optimize costs in the chain. supply, helping to
meet fluctuations in customer and market demand, thereby enhancing
competitive advantage over competitors in the same industry in particular as
well as helping the pharmaceutical industry in general make important
contributions to Market economy.

1.2. Objective

The thesis was conducted to create an integrated planning model to

support integrated decision-making between relevant departments, helping

2
businesses optimize costs and maximize profits when operating the supply
chain as well as helping businesses optimize costs and maximize profits
when operating the supply chain. as meeting customer needs.

1.3. Content

The content of this thesis includes:

 Identify the root cause why the current pharmaceutical supply chain
performance in the enterprise is not as expected, thereby determining the
improvement requirements of managers related to this phenomenon.
 Model the problem and identify appropriate tools and mathematical models to
deploy a new set of supplier evaluation criteria to replace the old mathematical
model.
 Demonstrate the logic of the solution design process and the practical value of
the solution.

1.4. Scope

The thesis was carried out within the scope of 5 departments including:
Sales, Procurement, Production, Warehouse and Planning. During the
process of modeling the problem, assumptions are made, creating research
limits for the thesis.

1.5. Report outline

The report layout includes 6 chapters with the contents presented in Table below.

Chapter Content Description

The necessity of the thesis topic for business

operations, as well as the objectives, scope and
1 Introduction
limitations of the research and layout of the
outline.

2 Literature review Presentation of theoretical basis and

methodology. The thesis presents concepts
related to planning activities, defines the
3
 decision-making model, introduces current
popular decision-making models as well as
points out the difficulties in building the model.
decision making. Besides, related research
articles are also presented.

The analysis of the research object is the

integrated planning activity of pharmaceutical
companies. The thesis will analyze in depth each
Research subjects
3 activity of the departments including: Sales,
analysis
Procurement, Warehouse and Production. From
there, identify the existing problems in the above
activities and find the root cause of this problem.

Based on related research and actual problems of

the research object, a mathematical model as
4 Model formulation well as parameters, calculation formulas,
objective functions, and decision variables are
formed.

The mathematical model built above will be

verified with a small-scale problem. This
verification is done by listing all possible
5 Model testing
solutions to the problem through Excel software.
From there, choose the most optimal solution for
the problem corresponding to this model.

Briefly summarize what the project does and

6 Conclusion then give the next direction to complete this
project.

4
 CHAPTER 2 LITERATURE REVIEW

1.6. Thereotical basis

1.6.1. The concept of planning

Planning in management is a process of setting goals and determining the

best means to achieve those goals. Planning focuses on two main things. First
is to develop goals and targets to be achieved. The second stage is choosing
methods or creating appropriate implementation plans to achieve the above
goals. If one of these two activities is missing, the planning process cannot be
fully implemented and you will not be able to predict what may happen in
the future.

Planning in an enterprise or in the supply chain also has similar

characteristics. As we know, any business or company wants to satisfy their
customers with their products or services. To do so, one of the basic but
extremely important things, these firms must meet the needs of the customers
they target. However, variations in demand are quite common in many
industries and public services, especially after the recent Covid-19 pandemic
as well as in the current period of economic fluctuations. Generally speaking,
businesses cannot accurately predict the quantity and timing of demand for
any particular product or service under such conditions. Even so, they
typically must assess their capacity needs (e.g., labor, inventories) and costs
months in advance in order to be able to handle demand. Therefore, planning
is a key strategy that helps businesses solve this challenging problem,
because it not only helps the company meet customer needs, but well-
planning also helps the company optimize every cost. costs from the
manufacturing process until the product is shipped to the customer, in a
word, helping the company operate its supply chain with maximum
efficiency.

Organizations make plan on three levels: long term, intermediate term, and
short term. Long-term decisions relate to product and service selection (i.e.,

5
determine which products or services to offer), facility size and location,
equipment decisions, and layout of facilities. These long-term decisions
essentially establish the capacity constraints within which intermediate
planning must function. Intermediate decisions, as noted above, relate to
general levels of employment, output, and inventories, which in turn
establish boundaries within which short-range capacity decisions must be
made. Thus, short-term decisions essentially consist of deciding the best way
to achieve desired results within the constraints resulting from long-term and
intermediate-term decisions. Short-term decisions involve scheduling jobs,
workers and equipment, and the like.

Normally, to meet the expected demand customers, the company is to

create a plan, which is called aggregate planning, right after demand
forecasts have been conducted. Its purpose is to satisfy demand in a way that
maximizes profit for the company. The aggregate plan becomes the
framework within which short-term and intermediate decisions are made
about production, procurement, inventory, and distribution. Production
decisions involve setting parameters such as the rate of production and the
amount of production capacity to use, the size of the workforce, and how
much overtime and subcontracting to use. Procurement decisions indicate the
supply that company needs to create products as well as the consideration of
choosing the most appropriate supplier which is responsible for its supply.
Inventory decisions include how much demand will be met immediately by
inventory on hand and how much demand can be satisfied later and turned
into backlogged orders. Distribution decisions define how and when product
will be moved from the place of production to the place where it will be used
or purchased by customers. In this thesis, the author aims to consider the
planning in pharmaceutical industry in terms of three aspects including
Production, Procurement and Inventory (Warehouse).

6
 1.6.2. Decision-making model

As analyzed above, planning to meet customer needs in the short and

medium term is relatively complicated because it involves many parties. This
requires the company to have a good strategy to face this problem. Therefore,
the decision-making model was born as a key strategy that any business tries
to form and apply in its supply chain operations. A study by Janet Hanlan
and co-workers has shown that it is important to use decision-making model
in the concept of strategic planning because it represents a process through
which members of a community or organization attempt to create their future
with look to the realities of their external environment and internal
capabilities. Currently, in the business environment there exist many
decision-making models, the most popular of which are the three models:
MRP (Material Requirements Planning), MRP II and ERP (Enterprise
Resources Planning).

1.6.2.1. MRP

Material requirements planning (MRP) is a computer-based information

system that translates the finished product requirements of the master
schedule into time-phased requirements for subassemblies, component parts,
and raw materials, working backward from the due date using lead times and
other information to determine when and how much to order. Hence,
requirements for end items generate requirements for lower-level
components, which are broken down by planning periods (e.g., weeks) so
that ordering, fabrication, and assembly can be scheduled for timely
completion of end items while inventory levels are kept reasonably low.

MRP is generally applicable in situations of multiple items with complex

bills of materials and is especially suited to manufacturing settings where the
demands of many of the components and subassemblies depend on the
demands of items that face external demands. While demands for end items
are independent the demands for components used to manufacture end items

7
depend on the demands of the end items. The distinctions between
independent and dependent demands are important in classifying inventory
items and in developing systems to manage items within each demand
classification

(Starr, 1996).

The primary inputs of MRP are a bill of materials, which tells the
composition of a finished product; a master schedule, which tells how much
finished product is desired and when; and an inventory records file, which
tells how much inventory is on hand or on order. The planner processes this
information to determine the net requirements for each period of the planning
horizon. Outputs from the process include planned-order schedules, order
releases, changes, performance-control reports, planning reports, and
exception reports.

1.6.2.2. MRP II

MRP II is a method of effectively planning a manufacturing company's

resources. The system links all functions in a production system such as
strategic planning strategy, demand management, production capacity
planning, production planning and dispatching, Material requirement
planning, workshop control and procurement management. It is a system
with solutions for planning, implementation, and control production and
integration activities with feedback to demand forecasting and cashew
planning activities Production planning and control, material procurement
planning and control.

MRP was developed as a way for manufacturing companies to calculate

more precisely what materials were needed to produce a product, and when
and how much of those materials were needed. Manufacturing resources
planning (MRP II) evolved from MRP in the 1980s because manufacturers
recognized additional needs. MRP II did not replace or improve MRP.
Rather, it expanded the scope of materials planning to include capacity

8
requirements planning, and to involve other functional areas of the
organization such as marketing and finance in the planning process.

In addition to the obvious manufacturing resources needed to support the

plan, financing resources will be needed and must be planned for, both in
amount and timing. Similarly, marketing resources also will be needed in
varying degrees throughout the process. In order for the plan to work, the
firm must have all of the necessary resources available as needed. Often, an
initial plan must be revised based on an assessment of the availability of
various resources. Once these have been decided, the master production
schedule can be firmed up.

1.6.2.3. ERP

Enterprise resource planning (ERP) systems are large, complex software

packages that provide an integrated real-time environment based on an
enterprise-wide data model with a set of software applications that allow
processing of the core transactional data of the organization (Bancroft et al.,
1998).

The main features of ERP-software are the provided business solutions,

which support the core processes of the business and administrative
functionality. High functionality is one of the main differentiators of ERP.
ERP purports to support all business functions of an enterprise, especially
procurement, material management, production, logistics, maintenance,
sales, distribution, financial accounting, asset management, cash
management, controlling, strategic planning, and quality management. In
addition to these general business functions, ERP often supports industry
specific functions like patient management in hospitals, student
administration at universities and high volume warehousing transactions for
retailers.

ERP automates the tasks involved in performing a business process such

as order fulfillment, which involves taking an order from a customer,

9
shipping it and billing for it. With ERP, when a customer service
representative takes an order from a customer, he or she has all the
information necessary to complete the order (the customer’s credit rating and
order history, the company’s inventory levels and the shipping dock’s
trucking schedule). Everyone else in the company sees the same computer
screen and has access to the single database that holds the customer’s new
order. When one department finishes with the order it is automatically routed
via the ERP system to the next department. To find out where the order is at
any point, one need only log into the ERP system and track it down.
Therefore, the most important reasons encourage organizations to adopt the
ERP systems are decreasing operation cost, improving the process of
decision making, increasing the quality and flexibility of operations and
achieving a new market opportunity.

1.6.2.4. Difficulties in formulating decision-making model of business

One of the primary challenges associated with Material Requirements

Planning (MRP) systems revolves around the critical issue of data integrity.
Any inaccuracies in the inventory data, the Bill of Materials (BOM), or the
Master Production Schedule can significantly compromise the accuracy of
the outputted data. The entire system's reliability hinges on the meticulous
maintenance of these datasets.

Furthermore, MRP systems pose another significant obstacle by requiring

users to specify the time it takes for a factory to manufacture a product from
its constituent parts, assuming they are all readily available. Complicating
matters, the system assumes a consistent "lead time" for manufacturing,
irrespective of production quantity or concurrent manufacturing activities.
This oversimplified approach may lead to suboptimal planning and resource
allocation.

In the context of globalized manufacturing, where a company may have

facilities in different cities or countries, MRP systems face the challenge of

10
inadequate cross-factory coordination. Merely stating that a particular
material is plentiful thousands of miles away is insufficient. An effective
Enterprise Resource Planning (ERP) system should be capable of organizing
inventory and requirements on an individual factory basis, facilitating
communication between factories to optimize component redistribution and
meet overall enterprise needs.

Another noteworthy concern arises when changes occur in the design of a

part that is already in production, while customer orders for both the old and
new designs coexist in the system. The ERP system must possess a coding
mechanism to accurately calculate and track requirements for both versions
of the part, necessitating more frequent updates to the inventory records than
the typical MRP calculations.

Capacity planning remains a critical limitation of traditional MRP

systems. They often neglect to consider capacity constraints related to
manpower, machinery, or suppliers, resulting in impractical output
recommendations. However, the evolution to MRP II addresses this issue by
integrating financials and introducing capacity planning features. MRP II
systems can incorporate finite or infinite capacity planning, and they go
beyond mere material requirements to encompass broader organizational
functions. This evolution ultimately paved the way for Enterprise Resource
Planning (ERP), representing a comprehensive integration of various
company functions, including purchasing, marketing, and finance, for more
holistic and effective management.

From the above analysis, the decision-making system is the excellent idea.
However, in practice, the organization may find that the benefits from
implementing the system are too small compared to the investment.
Generally, there are a number of issues related to disadvantages of decision-
making systems.

11
  Cost: The first significant disadvantage of systems is that it needs a large capital
investment. Firstly, the organization has the directly costs related to the project
implementation e.g. investing in hardware and software, which is a
fundamentally requirement of MRP system. Moreover, there are some
indirectly costs such as increasing of salaries and maintenance. Finally, the
organization has to encounter the hidden costs, which cannot foresee at the
developing and design state.
 Uncertainty with software: Nowadays, there are a number of MRP software
packages in the existing market. Their performance is considerably excellent.
However, in particular, the software package usually does not consolidate with
the organization infrastructures and strategies. In practice, the software provider
usually supplies a customization for the particular customer which may lead to
an increasing of the direct costs as mentioned above. Moreover, if the company
have not researched and investigate the MRP solution before purchasing, the
core module of the software may be not appropriate.
 Training: Generally, when the MRP system has been implemented, it would
make a significant change to an existing operation system. For example, from
traditional operation that each department evaluates their own information, with
the MRP system, the entire organization may have to rely on the central
database system to enhance an information flow. Therefore, one of the critical
success factors for MRP implementation is to ensure that education and training
is employed to the organization.

1.7. Related researches

In term of supply chain in pharmaceutical industry, research by Asiye

Moosivand and co-workers has discovered the most common challenges that
a supply chain in pharmaceutical industry is facing. From there, it is
determined that supply chain entities must integrate inter and intra
organizational processes to obtain value for consumers and supply chain
network which is the final purpose of supply chain management, because a
firm's competitiveness is extremely related to integrated management. Simon

12
B. Lindahl and co-workers proposed a methodology for setting up and
solving integrated capacity and production planning problems for a given
manufacturing network. Also in this research, a case study from the literature
(Lakhdar et al., 2005) is used to illustrate and validate the consistency of the
method and two larger case studies show the method’s ability to solve
problems in industrial manufacturing.

Supply chain management in the process industries has long been used as
a tool to define production and as well as satisfy customer's demand. This is
the case of Kallrath (2000), who reported on a project in BASF where a
multi-site, multi-product, multi-period production/distribution network
planning model was developed, aiming to determine the production schedule
in order to meet a given demand.

Some authors solved the large models resulting from supply chain
optimization problems. In their work, Jackson and Grossmann (2003) built a
multiperiod optimization model for the planning and markets coordination of
production, transportation and sales for a network of geographically
distributed multiplant facilities supplying several. Two Lagrangean
decomposition methods were adopted to tackle the problem, spatial and
temporal decompositions. In both cases, the authors followed the regular
algorithm of Lagrangean decomposition to reach the optimal solution of the
original problem. Li and Ierapetritou (2009) formulated the integrated
production planning and scheduling as bilevel optimization problems with
one planning problem and multiple scheduling problems. A decomposition
approach based on convex polyhedral underestimation was proposed and
successfully applied to the integrated planning and scheduling problem of
multipurpose multiproduct batch plants.

From the literature discussed above, there is a gap in the research on

supply chain planning taking all related internal departments in the
pharmaceutical industry into account. This thesis aims to fill this gap.

13
1.8. Methodology

Scientific methodology is the basis to orient and guide research and

problem solving in a systematic and consistent manner to ensure the
achievement of predetermined goals. The research methodology is shown
through the following stages:

Stage 1: Idea generation: The method begins with understanding the

object as well as the characteristics of the research object. Analyze and
evaluate supply chain optimization as well as integrated planning models
through related research to find appropriate directions.

Stage 2: Model design: From the data collected in phase 1, identify

relevant departments in the revenue integration planning model, thereby
modeling the input variables. Build a problem model and select a solution
model for the problem, and consider the feasibility of the chosen solution.
Model the problem, including: objective function and some constraints.

Stage 3: Implementation Build a programming program with the Python

programming language combined with optimal algorithms to solve the
problem. Then evaluate the feasibility of the problem. If the problem is
effective, proceed to stage 4. If the problem is not effective, re-evaluate the
algorithm as well as the mathematical model used.

Stage 4: Apply the built program to a real case. Compare and evaluate
solutions based on a number of criteria, and compare them with the current
situation. Complete the research, conclude the results achieved, limitations
and recommend directions for expanding future research..

14
 CHAPTER 3 RESEARCH SUBJECTS ANALYSIS

1.9. Research subjects

1.9.1. Pharmaceutical Industry

Also known as pharma, the pharmaceutical industry is defined by the

Encyclopedia Britannica as the industry that involves the process of
discovering, developing, and manufacturing drugs by both private and public
organizations . The pharma industry, as known in the modern era, was
established in the 19th century after several health challenges stimulated
research into the medicinal properties of plants, minerals, and animals. The
industry is estimated to be worth US$300 billion per year, and that figure is
expected to rise.

Pharmaceutical industry contributes to the welfare of humanity and

provides significant socioeconomic benefits to the society through creation of
jobs, supply chains and community development. The industry also plays an
important role in technological innovation, which may reduce costs of
economic activity elsewhere in the economy. It has over the years made
significant progress in infrastructure development, technical capability and
hence produced a wide range of pharmaceutical products. The industry now
produces bulk drugs under all major therapeutic groups. It has a sizable
technically skilled manpower with prowess in process development and
downstream processing.

The pharmaceutical industry spends more time and resources on

generation, collation, and dissemination of medical information than it does
on production of medicines. This information is essential as a resource for
development of medicines, but is also needed to satisfy licensing
requirements, protect patents, promote sales, and advise patients, prescribers,
and dispensers. Such information is of great commercial value, and most of it
is confidential, protected by regulations about intellectual property rights.
Through their generation and dissemination of information, transnational

15
companies can greatly influence clinical practice. Sometimes, their
commercially determined goals represent genuine advances in health-care
provision, but most often they are implicated in excessive and costly
production of information that is largely kept secret, often duplicated, and
can risk undermining the best interests of patients and society.

1.9.2. Related departments

The general planning process (Figure 2.11) of Davipharm is a coordinated activity of

departments:

 The sales department is responsible for synthesizing forecast data and receiving
customer orders.
 The planning division is responsible for production planning.
 Besides, the flexible coordination of the warehouse, purchasing, and production
departments helps the planning division complete the final production planning.

16
 Figure 2. 1 Planning process flow chart

Table 2. 1 Planning process detailed description

No. Task Responsible Description

1 Sales planning Sales The sales department aggregates data about orders from
department customers and makes necessary demand forecasts to

16
 synthesize a sales plan for the planning division to plan
production monthly.

Inventory updating Warehouse The warehouse division is in charge of updating the

controller inventory status of materials, packaging materials, and
2 remaining finished products of the last production to the
CPS system to help the planning division collect data to
prepare for production planning.

Independent production planning Production The planning division collects data from related
3 planner departments, from there to an independent production plan
as required by the sales department.

Purchasing confirmation Purchasing The purchasing department updates information from the
department independent production plan to determine the materials
and packaging that must be prepared with the specific
4
quantity and time required, confirming the production
supply according to the planning division’s independent
production plan.

5 Production capacity confirmation Production The production department updates the information of the

17
 department independent production plan, thereby determining the
required time and production capacity of the machine and
production line to confirm the production of the quantity
of finished products required by the independent
production plan.

Warehouse capacity confirmation Warehouse The warehouse division updates the information of the
Coordinator 1 independent production plan, thereby determining the
storage capacity of goods, including raw materials,
6
packaging, and finished products, according to the
requirements of the independent production plan and
issuing a confirmation.

Final production planning Production The planning division updates confirmation information
planner, Supply from stakeholders, adjusting production planning
7 chain manager, accordingly and, issuing a final production plan, preparing
Supply chain for the production phase.
senior manager

8 Controlling Production The planning division manages and controls problems that
planner, arise during the planning and preparation of the production
18
 production phase.
scheduler 1

Manufacturing Production The production department executes the production

9
department according to the final production plan.

Schedule tracking Production The planning division cooperates with the production
scheduler 2, department to make a weekly schedule to monitor the
10
production production progress, ensuring it is according to the set
department plan.

Storage Warehouse The warehouse division receives finished products from

Coordinator 2 the production department and stores them in suitable
11
conditions and environments according to SOP, preparing
for the distribution of goods.

Distribution Warehouse The warehouse division performs the distribution of goods

Coordinator 3 from the company’s finished product warehouse to the
12 distribution center; the products from there are delivered to
the company’s customers according to the information and
requirements of the sales department.

19
 Customer confirmation Sales The sales department confirms with customers and
13
department completes orders according to plan.

20
1.10. Current situation

1.10.1. Overview of pharmaceutical supply chain

According to a study conducted by Oliver Eitelwein, it is evident that numerous

pharmaceutical companies must improve several critical aspects of their supply chain
operations. These areas encompass customer satisfaction, the precision of demand
forecasting, inventory management, and the overall expenditure within the supply
chain. Additionally, Eitelwein underscores that the intricate nature of products and
processes presents significant challenges. These complexities can arise from various
factors, including the extensive range of finished goods, diverse material requirements,
intricate distribution networks, substantial investments in new product development,
capacity limitations, and regulatory constraints.

Specifically, Oliver Eitelwein engaged participants in evaluating their supply chain

performance and outlining their priorities for the forthcoming year. The study involved
over 30 major global pharmaceutical companies, representing six of the world’s top 10
enterprises. The participants encompassed supply chain thought leaders from various
corners of the world, spanning various businesses, including prescription medications,
generics, vaccines, over-the-counter drugs, biotechnology, and animal health. (see
Figure 4.1).

21
 The A.T. Kearney Pharma Supply Chain Panel covers a highly representative sample
of leading companies

The study shows that many pharmaceutical firms have significant potential to
improve across the leading supply chain areas (see Figure 4.2).

Summary of benchmark results

The customer service level at the top pharmaceutical companies is of exceptional

quality, closely trailing just behind the leading consumer goods companies. On
average, however, these standards are around 5 percent lower. Even seemingly minor
differences in service levels, as small as two percentage points, can have a substantial
impact. For instance, they can result in an 80 percent reduction in instances of non-
availability of prescription drugs in non-generic pharmaceutical firms. The disparities
between these two scenarios are pretty significant.

Forecast accuracy is pivotal in maintaining optimal inventory levels and ensuring

consistent production. Dealing with unpredictable demand and intricate portfolios of
finished products can indeed be a formidable challenge. Some companies, particularly
those in the non-generic pharmaceutical sector, have mastered this skill. Nevertheless,
the pharmaceutical industry still has a considerable distance to achieve excellence.

22
 Compared to the most efficient consumer goods companies, the total inventory held
by the best-performing pharmaceutical companies translates to 70 percent fewer days
of sales. Even though the top contenders in our evaluation have yet to narrow this gap
to less than 61 days (approximately 34 percent), it is possible to aim for figures below
100 days by optimizing all supply chain components to match world-class standards.

Examining total supply chain costs as a percentage of the Cost of Goods Sold
(COGS), average-performing companies in the pharmaceutical sector show a 40
percent disparity compared to the industry’s top-tier supply chains. The latter,
operating at around 10 percent, are on par with the supply chain costs of the most
efficient consumer goods companies. Consequently, there is potential for significant
cost reduction, potentially up to 7 percentage points, for most pharmaceutical firms by
enhancing their supply chain practices.

The study’s participants openly acknowledge grappling with several significant

supply chain obstacles the previous year (refer to Figure 4.3). The most frequently
mentioned challenge was the intricate nature of products and processes, stemming
from expansive product portfolios and a global operational presence. Concurrently,
production capacity limitations emerged as another recurring concern, particularly
amplified by prolonged regulatory timelines extending new manufacturing facility
setup.

Main supply chain challenges in the pharmaceutical company

23
 Additionally, some industry players encountered supply disruptions tied to quality
issues. This count does not encompass the numerous notices the FDA’s district offices
dispatched nationwide. Insights drawn from past years underscore that actions taken to
rectify these situations often wield substantial influence over supply chain
performance—an aspect of the industry that has frequently been underestimated.

1.10.2. Supply chain in a pharmaceutical company X

Through interviews with company staff and expert opinion from the supply chain
manager & warehouse leader, supply chain management activities of Davipharm are
currently carried out through the CPS system implemented by parent company
Adamed. This system still has a lot of manual steps. It depends on many staff
experiences, as evidenced by the company’s employees also needing to use Excel
software to support supply chain management activities on the CPS system.
Furthermore, employees across departments lack the optimal tools to support making
volatile decisions and are influenced by conflicting goals. The lack of any optimization
tools to support may make the final plan may not be the most optimal for the plant,
especially amid the current volatile situation. Moreover, this activity takes a lot of
effort and time to do at present. This issue leads to some situations that still occur at
the factory, such as the planned production volume does not meet the demand with
customer orders or does not meet the capacity of the warehouse; the related costs are
not optimized. as well as bias still present in the testing and comparison of data.

Therefore, building an integrated model between related departments and

supporting optimal decision-making for production planning is necessary for
Davipharm in particular and pharmaceutical companies in general. The author will
research and implement this project in the future.

24
 CHAPTER 4 MODEL FORMULATION

1.11. Description and assumption

With a set of p products that the company needs to produce to meet customer needs
based on data collected and compiled from the Sales department. The planning
department creates integrated plans to support the Procurement, Production and
Warehouse departments in making decisions corresponding to each department's
requirements. From there, the model will combine input data, constraints, and
assumptions of the integrated planning problem to produce the optimal value of each
decision in the departments to help the company. Maximize product profits. Some
conditions of the problem include:

 Customer's orders are identified, but Sales department can adjust the needed
quantity of finished products to increase the demand and revenue.
 Product profits ignore marketing costs to increase effort.
 Costs of materials (till they are in warehouse) between suppliers are
different.
 Unit procurement cost includes the process from supplier to receipt at the
company's warehouse.
 Unit production cost includes labor costs, machinery costs,...
 Production lines are flexible used.
 The warehouse is used for packaging materials, raw materials and finished
products..

1.12. Input and output of model

1.12.1. Input

Sales department: the number of orders of each type of product from indirect
customers as well as the maximum rate of increase in sales effort for direct customers
that this department desires to increase demand of products over time period and
selling price corresponding to each type of customer.

25
 Procurement department: unit price of each type of material from suppliers along
with the minimum order quantity per unit of that material.

Production department: the time required to produce a batch of each product type at
each line in the factory and the cost to produce one unit of product.

Warehouse department: volume of space occupied by each type of goods (finished

products, raw materials) and maximum capacity of the warehouse.

Master data includes the information of batch size, packaging specification of every
product and the requirement quantity of material (raw and packaging) used in one unit
of product p, which is developed by R&D department.

1.12.2. Output

Sales department: amount of goods to sell to indirect and direct customers (related
with the rate of increased effort in sales) and product revenue.

Procurement department: the amount of raw materials purchased for each type at
the respective supplier and the total procurement cost.

Production department: number of batches needed to produce each type of product

at the corresponding line and total production cost.

Warehouse department: inventory costs.

1.13. Notation

1.13.1. Indices

p: product

r 1: packaging material

r 2: raw material

s: supplier

m: line

w: week

26
1.13.2. Parameters

S1p: Sale price of product p to indirect customer

S2p: Sale price of product p to direct customer

R w : Rate of increased effort in sales in week w

Dpw : Sales demand of product p at week w of direct customer and indirect customer

Cr1s: Unit cost of packaging material r 1 from supplier s

Cr2s: Unit cost of raw material r 2 from supplier s

Br1p : The requirement quantity of packaging material r 1 used in one unit of product p

Br2p : The requirement quantity of raw material r 2 used in one unit of product p

CPmax,w : Maximum procurement cost in week w

CPR pm : Unit production cost of product p produced at line m

Bpm : Batch size of product p produced.

Gpm : The requirement running time to produce one batch of product p at line m

Vr 1: Unit volume of packaging material r 1 (m 3)

Vr 2: Unit volume of raw material r 2 (m 3)

V p: Unit volume of product p (m 3)

V: Warehouse capacity (m3)

1.13.3. Decision variables

X 1 pw : Quantity of product p sold to indirect customer in week w

X 2 pw : Quantity of product p sold to direct customer in week w

Yr 1 ,sw : Order quantity of packaging material r 1 from supplier s in week w

Yr 2 ,sw : Order quantity of raw material r 2 from supplier s in week w

K pmw: Number of batches of product p produced at line m in week w

27
 1.13.4. Dependent variables

I r 1 w : Inventory level of packaging material r 1 in week w

I r 2 w : Inventory level of raw material r 2 in week w

I pw: Inventory level of product p in week w

I r 1 ,0 : Inventory level of packaging material r 1 in initial week

I r 2 ,0 : Inventory level of raw material r 2 in initial week

I p ,0 : Inventory level of product p in initial week

1.14. Objective fuction

Sales revenue

π=∑ S1p . X1 pw +S2p . X2 pw (4.1)

p

Product revenue is equal to the total quantity of all products sold multiplied by the
selling price of each product for each corresponding customer type.

Procurement cost

α =∑ ∑ Yr 1 , sw . Cr1s+ ∑ ∑ Yr 2 ,sw . Cr2s(4.2)

r1 s r2 s

Total purchasing costs include the total order quantity of raw materials at the
respective supplier and the total order quantity of packaging materials at the respective
supplier multiplied by the corresponding unit price of each type.

Production cost

β=∑ ∑ CPR pm . Bpm .K pmw(4.3)

p m

Total production cost equals the number of batches of each product times to batch
size and unit production cost of corresponding proudcts.

Inventory cost

γ =∑ ∑ Cr1s . I r 1 w + ∑ ∑ Cr2s .I r 2 w + ∑ ∑ CPR pm . I pw (4.4)

r1 s r2 s p m

28
 Inventory costs include the total holding inventory cost of raw materials, packaging
materials and finished products which are stored in the warehouse.

The objective function is given by the equation:

Max ∑ Z =π −α −β−γ (4.5)

w

From there, we calculate the product's profit by the total revenue of the products
minus the costs listed above.

1.15. Constraint

Sale constraint

The total quantity of sold product p will vary between the range of sales demand
Dpw including rate of increased effort in sales demand R w :

Dpw ≤ X1 pw + X2 pw ≤ Dpw ( 1+ R w ) (4.6)

Procurement constraint

The total order cost of packaging material r 1 and raw material r 2 does not exceed the
maximum requirement cost

Cr1s . Yr 1 , sw +Cr2s . Yr 2 , sw ≤ CP max,w(4.7)

The total order quantity of packaging material r 1 and raw material r 2 is not less than
the requirement quantity of material for production of product p in week w

∑ Yr 1 , sw ≥ ∑ ∑ Br1p . Bp . K pmw(4.8)
s p m

∑ Yr 2 , sw ≥ ∑ ∑ Br2p . Bp . K pmw(4.9)
s p m

Production constraint

The total running time of production does not exceed the total working time in one
week (6 days, 8 working hours a day)

∑ Gpm . K pmw ≤ 48 , ∀ m , w (4.10)

p

Inventory constraint

29
The inventory balance for the warehouse

I r 1 w =I r 1 , w−1+ ∑ Yr 1 , sw −∑ ∑ Br1p . Bp .K pmw (4.11)

s p m

I r 2 w =I r 2 , w−1+ ∑ Yr 2 , sw −∑ ∑ Br2p . Bp . Kpmw (4.12)

s p m

I pw =I p ,w−1 + ∑ Bp . Kpmw −(X1 pw +X2 pw ) (4.13)

m

Total inventory level does not exceed the warehouse capacity

∑ Ir 1 t . Vr 1 +∑ Ir 2 t . Vr 2+∑ Ipt . V p ≤ V (4.14)

r1 r1 p

30
 CHAPTER 5 MODEL TESTING

After building the problem model, this chapter tests the model by solving a small-
scale problem and evaluates the results after solving the problem model. First of all,
the author uses Excel software to list all solutions to the problem to find the optimal
solution. From there, verify the initially set goals of the problem and model.

The problem used for verification is described with the following input information:

 General information
Index Notation Quantity
Product p 2
Packaging material r1 3
Raw material r2 2
Supplier s 4
Line m 2
Week w 2
 Master data
Name Packing Type Batch Size Packaging 1 (tablet/box) Packaging 2 (box/carton)
A1 BOX 15,000 10 20
A2 BOX 20,000 20 25
 BOM
Requirement
Product Name quantity per Unit
product
P A1 20 kg
A1 P 10 kg
NL01 8 gam
P A2 25 kg
A2 P 15 kg
NL02 4 kg
 Sales
Order Quantity (box units)
Name
W1 W2
A1 62,702 71,262
A2 59,904 20,355
Sale rate (Rw) 0.2 0.15

31
  Production
The requirement running time
to produce one batch of product
at line (hour)
Name Unit Cost 1 2
A1 2,000 6 5
A2 1,000 4.5 5
 Procurement
Unit cost
Specificatio
Name Unit n S1 S2 S3 S4
P A1 kg 7 133,000 105,000 M M
P A2 kg 4.5 78,000 79,000 M M
P kg 6 74,000 84,000 M M
NL01 gam 25 M M 750,000 720,000
NL02 kg 2.5 M M 2,800,000 2,950,000
 Warehouse
Name Volume (Vp) (m3) Name Volume (Vr) (m3)
A1 0.216 P A1 0.336
A2 0.15 P A2 0.175
P 0.24
NL01 0.06
NL02 0.12

Warehouse capacity: 0.8 x 1.2 x 2400 x 5 25.00

With the above input information, the author proceeds to list good solutions that are
also possible decisions in each department in the first week. Then, the author
synthesizes all of these solutions to create a set of solutions in the integrated model, as
illustrated in the table below.

32
 Product name A1 A2 A1 A2 A1 A2 A1 A2
Department Number of
5 3 5 4 6 3 6 4
batches
Production 4 2 2 1
Procurement Number of 128 64 64 32
Sale solutions 1 4 4 16
Solution 512 512 512 512
Total solutions
2048

For the second week, the problem model was added to the corresponding inventory
values from the previous week. To make solving and checking the results of the
problem easier and more convenient, the product reviewed this week is only A1. By
doing the same, the author obtains a set of solutions in the integrated model, as shown
in the table below

Product name A1
Department
Number of batches 4 5
Inventory product 6 4
Production 2 2
Number of
Procurement 144 72
solutions
Sale 1 3
Solution 1728 1728
Total solution 3456

From the results of each solution in the second week combined with the first week,
the author determined the optimal solution of the problem based on the objective
function:

The maximum profit that the company can gain after two weeks is 40,866,013 VND

33
 CHAPTER 6 CONCLUSION

During the process of researching and building a model for the mentioned problem,
the author proposed a sample problem and performed trial solutions to evaluate the
performance of different methods. From the results obtained, the author finds that
solving problems with software or algorithms brings great benefits, especially when
facing large-sized situations in reality.

Therefore, in the future, the author's direction is to first validate the model using
software or other methods to ensure the model is complete. From there, the author
focused on formulating the proposed problem on a larger and more realistic scale, to
then find the most suitable algorithm to solve this problem, contributing to completing
the author's project.

34
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