1. Increasing Access to Medicines in Southern Africa
Authors: Chelsey Graham and Ricardo Ghersa
Advisor: Dr. Jarrod Goentzel
Sponsor: Big Pharma Company
MIT SCM ResearchFest
May 22, 2014

2. Agenda
Key Questions/Scope
Methodology
Results
Conclusion

3. The Scope - Part 1 Key research questions
What was the impact of the subsidy implemented last year by our partner company?
Volume and value of sales? Goodwill?
Are there any other price reduction opportunities?
High mortality rates in Zimbabwe
Price inflation along the medicine distribution supply chain
Recent subsidy introduced by our partner company to lower the prices for the patient

4. What service level is being provided by the current 3PL?
The Scope - Part 2
Key research question
What level of sales volumes is needed in order for insourcing to become more financially attractive?
What service level is being provided by the current 3PL?
Sales volumes outgrowing the current distribution model

5. The Methodology - Part 1
The interviews with distributors and pharmacists in Harare
The questionnaire used to collect information
The sample selection of pharmacies
Value chain analysis
What are the mark-ups applied along the chain?
Sales & volume review
How were volume sales at the wholesaler and distributor level affected?
Sample selection of pharmacies: density & income level

6. The Methodology - Part 1 Pharmacy profitability
What are the revenues, costs, and profitability of a typical pharmacy?

7. The Results - Part 1
Uneven implementation but lower prices across distributors
Narrower gap between prices charged by the different distributors
-Make this table a graph?

8. The Results - Part 1
The retail price reduction applied by the pharmacies was a reflection of the pricing applied by the distributor
-Make this table a graph?

9. The Results - Part 1
A clear increase in volume sales was detected for two out of the five distributors.
Mention the pharmacy P&L statement

10. What service level is being provided by the current 3PL?
The Scope - Part 2
Key research question
What level of sales volumes does our partner company need in order for insourcing to become more financially attractive?
What service level is being provided by the current 3PL?
Sales volumes outgrowing the current distribution model

11. The Methodology - Part 2 Simulation
Use of Monte Carlo simulation to Question 1
 Service Level Sensitivity Analysis
Costs were calculated for 90/95/99.5% service levels to answer Question 2

12. The Methodology - Part 2  Data collected from the Southern African BU
Historical sales, forecasts, ocean and air rates by supplier, product dimensions
Model to calculate the costs related to insourcing
Inventory holding costs
Warehousing costs
Transportation costs by mode
Compared to current cost of outsourcing (5.3% of sales)
-Note that warehousing costs were provided by IHS (subcontractor) and compared to assumptions we had made.

13. The Methodology - Part 2  Inventory holding costs  Warehousing costs
Cycle and in-transit stock: EOQ versus MOQ
Safety stock and the role of forecast error
 Warehousing costs
Warehouse-in-a-Box™ solution
Determined size of the warehouse and labor costs
 Transportation costs
Average rate by mode for each supplier
Optimal interval between order and power of two policy by supplier
-Other transportation costs: Weighted average of number of orders and cheapest mode by supplier selected

14. The Results - Part 2 - The Inventory Model
Inventory holding costs make up 60% of the total costs, due to the high levels of safety stock and MOQ’s
Large MOQ’s increase inventory holding costs by 25%
-Note: MOQ’s were 77% > EOQ per SKU on average

15. The Results - Part 2 - The Simulation
Current cost of outsourcing is 67% cheaper than insourcing
4x’s current sales volume needed before outsourcing costs > insourcing

16. The Results - Part 2 – Sensitivity Analysis
At a 90% service level (excluding one-time cost of opening a warehouse), the total cost of outsourcing is 30% less than insourcing at the current level of sales volume.

17. Conclusion & Next Steps
Part 1
Data sharing will be key for the success of future price reductions
Streamlining of forecasting & inventory policies could bring further savings
Part 2:
Large MOQ’s and forecast accuracy contribute to decision to outsource vs. insource
Lower costs may lead to sacrificing high service levels

18. Questions?