Forecasting in times of crises

A scientific approach to evaluate Forecasting

Accuracy at DSM Anti-Infectives

April 2010 - Bernard J. Dammingh

DSM PureActivesTM - PurimoxTM

• A unique range of enzymaticallyproduced antibiotics

• Brand names are registered worldwide

• Enzymatic production process has been patented

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.

DAI: Innovation in Amoxicillin production

Finished goodsWarehouse Delft

Netherlands

Transit PurimoxAlmeria -Delft

6APA production

ZjangJakou (China)

Penicillin/6APA

production Saltillo

(Mexico)

Purimox production

Almeria (Spain)

Transit 6APA

Zjangjakou - Almeria

Transit 6APASaltillo - Almeria

Sales Europe/NA

Customers

Sales AMEA

Customers

Sales ChinaCustomers

The Penicillin – Purimox supply chain

… puts out 200.000.000 patient treatments annually

Sales MLA

Customers

PlanForecast Execute Report

W

M

Q

Y

Manufactu-ring Plan Meeting

Manufactu-ring Plan Meeting

BG S&OP meeting

BG S&OP meeting

= output of every meetingA&D-log

BG/BU Budget Meeting

BG/BU Budget Meeting

Monthly BU S&OP meeting

Monthly BU S&OP meeting

Sales & Production ProcessShort interval control

Production plan

Sales plan

BU Budget

Agreed Demand Plan

Agreed Stock Plan

KPI report

Agreed Production Plan

BG S&OP meeting

BG S&OP meeting KPI

report

Scenario building

IC Demand Plan

Combined meeting

Manufactu-ring Plan Meeting

Manufactu-ring Plan Meeting

Demand Plan

Meeting

Demand Plan

Meeting

Demand Plan

Meeting

Demand Plan

Meeting

Production Plan

Demand Plan

KPI report

Combined meeting

Combined meeting

The Purimox S&OP cycle…

… monthly updates demand and supply forecasts

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

Peter Drucker

writer and consultant

1909-2005

Measuring & forecasting

Forecasting Accuracy…

� Measured monthly

� Forecasted and

actual sales volumes

� At customer – product

level

� Average of all

customer

measurements

)%(∑= −

−−

−=

customers

n t

ttt

F

AFFA

1 1

1100

… 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 Purimoxforecasting 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

40%

60%

80%

100%

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

Rock collapses

(UK)

Lower house

sales

(NL)

Pension

funds warning

(NL)

Purimox Forecasting Accuracy Development

Lehmann

Brothers

collapses

(US)

Fortis

Bank

Nationa-lized (NL)

Iceland govern-

ment

collapses

Obama

regulation plan

(US)

2009 forecasting accuracy goes up…

� What happened here?

� Did we find a black swan?

40%

60%

80%

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

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.

InPact is focusing its efforts in the crisis approach, around three core pillars:

cash, opportunities and people.

Inventory reduction by reducing release time…

DSM Anti-Infectives

12We can reduce the QA release time in AlmeriaWe can reduce the QA release time in Almeria……

…… and at the same time reduce inventory by 3 daysand at the same time reduce inventory by 3 days

If we place an order for a full truck of Purimox on day 0

0 5

Production can change to the grade it produces on day 5

12

It takes 7 more days to release the

product from QC

13

It takes 1 day to arrange, and 3 days to

execute transport

16

Currently, QA release

takes 7 days on

average. By reducing

microbiological

assays we can

reduce to average 4

days.

Batch

number

Date of

manufacture =

Date of sample

reception

Date of

Analysis by

QC

Testing total

time by QC

(in days)

Date of

release by

QA

Releasing total

time by QA (in

days)

Date of

departure

TOTAL TIME

(in days)

V350770 30-3-2009 8-4-2009 9 8-4-2009 9 8-4-2009 9V350771 31-3-2009 8-4-2009 8 8-4-2009 8 8-4-2009 8

V350772 1-4-2009 8-4-2009 7 8-4-2009 7 8-4-2009 7V350773 2-4-2009 8-4-2009 6 8-4-2009 6 8-4-2009 6

V350774 3-4-2009 13-4-2009 10 13-4-2009 10 14-4-2009 11V350775 4-4-2009 13-4-2009 9 13-4-2009 9 14-4-2009 10

V350776 12-4-2009 17-4-2009 5 17-4-2009 5 17-4-2009 5

Average

7,2

Source: Deretil SA PurimoxPowder

Average7,2

…and by increasing plant agility…

DSM Anti-Infectives

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

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

If we place an order

for a full truck of Purimox on day 0

0 5

Production can

change to the grade it produces on day 5

12

It takes 7 more days

to release the product from QC

13

It takes 1 day to

arrange, and 3 days to execute transport

16

Currently, the

planning looks 4

weeks ahead when scheduling

production. But in fact

it can be done in 16

days

DSM Anti-Infectives

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

… based on a given forecasting accuracy of 80%… based on a given forecasting accuracy of 80%

30

If the lead time for ordering a truck

is 30 days

But the sales forecast accuracy is 80%

6 Then the safety stock for wrong

forecasting of this material, to prevent

stock-outs, should be

20% of 30 = 6 days

And the rest of stock is caused by

other sub-optimal situations

Wrong forecasting is normally distributed

Order quantities, optimum

batch sizes, wrong stock policies etc.

…and by reducing safety stocks…

DSM Anti-Infectives

2The supply chain carries two types of stocksThe supply chain carries two types of stocks……

GITGIT WIPWIP QAQA STOCKSTOCK PICKPICK

Once we have ordered incoming intermediates, they are “ours” while in transit

We keep stocks in our ware-houses because we do not want to say “NO” to customers and do not want processes to stop

Once material is allocated to a customer order, it takes time to pick the order and we have to wait for the carrier

During manufacturing we have work in progress causing stocks

During quality release we cannot allocate material to customer orders

…… for managing for managing unpredictablilityunpredictablility and because steps take timeand because steps take time

… greatly reduced inventory of Purimox in the chain

0

50000

100000

150000

200000

250000

300000

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

Pu

rim

ox

sto

ck (

kg

)

R2 = 0,0456

R2 = 0,4427

30%

50%

70%

90%

110%

0 100000 200000 300000

Stock level (kg)

Fo

recasti

ng

Accu

racy

Accuracy Linear (Accuracy) Poly. (Accuracy)

Plotting accuracy against stocks…

� Correlation between stocks and

forecasting accuracy is not linear

� But shows an

optimum over 2008-

2009

� How can we explain?

… 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 behaviourmore 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

“The philosophers have only interpreted the world in

various ways – the point is to change it”

Karl Marx

philosopher

1818 - 1883

Change it!

Going Forward

� Suggestions for improvement of the Forecasting Accuracy measurement to better grasp customer

intimacy and forecasting ability, also at low stock levels