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Accurate Forecast Modeling Reduces Inventory Shortages

Writer's picture: Nick LeachNick Leach

Forecast graph
Forecast accuracy

In a recent presentation, I underscored the critical importance of forecast modeling in managing inventory, highlighting that the majority of inventory shortages and supply chain disruptions stem from poor forecasting or the failure to promptly recognize shifts in demand.


Pharmaceutical supply chains typically operate with lead times of 3-4 months. While this lead time is understandable given the complexity of pharmaceutical manufacturing and international distribution, it's essential to acknowledge its implications for inventory management.


A Harvard Business Review study (linked below) conducted in the retail sector revealed that 72% of stockouts were attributable to poor forecasting, with disruptions to the supply chain accounting for only 28%. While this study focused on retail, its findings likely extend to the pharmaceutical industry. In fact, considering the potentially longer lead times in pharmaceuticals compared to retail, the forecasting challenges in the pharmaceutical sector may be even more pronounced.


During my tenure with Abbott and AbbVie, I played a pivotal role in implementing Oliver Wight Class A forecasting and supply chain management practices.

So, how can organizations improve their forecasting capabilities and better respond to shifts in demand?


Step 1: Measure Forecast Accuracy

Regularly measure forecast accuracy by SKU, at least on a monthly basis. Establish parameters to categorize forecast deviations – for instance, designate deviations within +-5% as green, +-10% as orange, and deviations exceeding +-10% as red. This approach allows for the quick identification of products with forecast issues, enabling timely adjustments.


Step 2: Identify and Address Bias

Recognize bias in forecasts, even if accuracy falls within tolerance levels. Consistent over or under-forecasting can impact safety stock levels and inventory management. Maintain a record of forecast accuracy history to identify and address bias effectively.


Step 3: Recognize Changes in Demand

Be vigilant about abnormal demand patterns, which may signal shifts in market dynamics. Rapidly identifying and understanding the drivers behind such fluctuations is crucial for informed decision-making. Whether it's a temporary spike due to competitor stockouts or a long-term trend, adjusting forecasts accordingly is key to mitigating supply chain disruptions.


By implementing these controls, organizations can enhance their forecasting accuracy and significantly reduce supply chain issues. After all, as the adage goes, "What you measure, you manage."


At WellMed.NZ, we specialise in forecasting, with robust systems to monitor accuracy, identify bias, and flag abnormal demand. All our clients receive monthly forecast accuracy reports and 24-month forecasts to ensure seamless alignment with the demands of the New Zealand health system.


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