Forecasting and total supply chain inventory
Joseph DeFeo, product director at IntegriChain, on how tracking retail inventory leads to better forecasting and increased transparency.
By on Apr 13, 2010Joseph DeFeo, product director at IntegriChain, on how tracking retail inventory leads to better forecasting and increased transparency.
Inventory build-up by downstream customers can lead to significant setbacks for a pharmaceutical company: an underestimate of quarterly ex-factory sales, an overestimate of demand trend, short-term stock-outs or backorders. And yet many pharmaceutical companies dont have a good grasp of whats going on with downstream inventories.
Data from wholesalers is heavily redacted, and while its tempting to assume that products flow smoothly from wholesalers to retailers to end customers, Joseph DeFeo, product director at IntegriChain, says theres always more inventory downstream than you think.
False sense of security
Fee-for-service agreements with wholesalers, DeFeo says, have led to a false sense of security that inventory outside the company no longer fluctuates. The fact is, a lot of that fluctuation has been pushed from the wholesalers to their downstream customers, he says.
When youre looking at your supply chain, DeFeo continues, you really have to take into account the full supply chain, not just whats at your company. Once you have a better idea whats downstream and with the wholesalers, that gives you more confidence in how much product you can stock at the company.
IntegriChain specializes in measuring downstream inventory. The firm works with more than a dozen big pharma companies to determine the levels at which their products are inventoried at specific retailers and in various channels downstream (retail level, mail level, long-term care, etc.).
Measuring returns
DeFeo says that pharma companies need to be in tune with retail inventory levels now more than ever, for two reasons. First, in the next several years most pharma companies will have major products go off patent, and when they lose patent exclusivity, theres a need to measure returns and establish a returns reserve.
The better you have an understanding of how much product you have downstream, the better youre going to be able to estimate how returns are going to come back, DeFeo says.
Volatile retail environment
Second, the current retail environment is volatile. From 2007 to 2009, the major retail chains of CVS, Walgreens, Wal-Mart, Kroger, Rite-Aid, Medco, and Omnicare have cycled their inventories on a quarterly basis, peaking at seven weeks of supply and bottoming out at four weeks.
In 2009, most major retailers destocked as they adjusted to macro-economic influences. In the second quarter, Walgreens dropped from 5.2 weeks of supply to 4.7, Kroger from 4.0 to 3.6, Medco from 2.3 to 1.4, and Omnicare from 4.5 to 3.8.
Most entities are talking about the recession, and theyve lowered their inventories to levels we havent seen recently, says DeFeo. Really, the first key factor driving retailer inventories currently is the recession.
Individual retailers
Another key factor is developments with individual retailers. Wal-Mart, for instance, decided in the second quarter to no longer warehouse drugs. The result is that products now go directly from their wholesaler, McKesson, to their stores, rather than making a pit stop at Wal-Mart distribution centers. The result is a net reduction in Wal-Marts inventory.
Other developments are RiteAids financial woes and CVSs financial success, both of which could further drive down inventory levels. CVS to date has remained consistent with its inventory levels, but long-term its consolidation should reap greater efficiency and optimized inventory levels.
DeFeo says that all of these factors, when taken en masse, constitute a significant trend that pharma needs to follow if it wants to measure demand, forecast sales, and track inventory more accurately.
How the pipeline is changing
When you forecast your demand for your product to get the ex-factory sales, you really have to understand how the pipeline is changing, he explains. And in this case, the pipeline has been reducing more than what weve seen over the past couple years. Downstream short-term inventory volatility is a major factor in forecasting misses.
Another benefit of tracking retail inventory and downstream activity is that it allows a company to better allocate product.
If you have a better idea of who has product downstream from the wholesalers and not just how much product is at the wholesalers, DeFeo says, you can go to your wholesaler and say, Look, I want to direct the product to retailer X because retailer Y seems to have plenty of product. So there is ability to work with your downstream customers in a lot of incidences to mitigate some of these negative impacts.
Better forecasting
DeFeo says that, ultimately, the biggest benefit of tracking retail inventory, whether you use a specialist like IntegriChain or assume the task yourself, is better forecasting and increased transparency.
This gives you the opportunity not to replace data but an alternative to complement the data you use for forecasting your sales or reporting how much demand there is, he says. Youre able to get a lot more transparency of where your products going and get more of a comfort level around whats going on from the demand perspective.