An Unforeseen Cause of Stock-Outs

Editor’s Note: Every year, 40 or so students in the MIT Center for Transportation & Logistics’ (MIT CTL) Master of Supply Chain Management (SCM) program complete one-year thesis research projects. The students are early-career business professionals from multiple countries with 2 to 10 years of experience in the industry. The research projects are sponsored by and carried out in collaboration with multinational corporations. Joint teams of company people, MIT SCM students, and MIT CTL faculty work on real-world problems chosen by the sponsoring companies. In this monthly, series we summarize a selection of the latest SCM research. The researchers for the project described below, Benny Sun and Bangqi Yin, analyzed the root causes of pharmaceutical stock-outs for their MIT Supply Chain Management Program master’s thesis. The work was carried out for a major pharmaceutical manufacturer, and the project was supervised by MIT CTL Research Associate Dr. Roberto Perez-Franco. For more information on the program, visit http://scm.mit.edu/program.

Stock-outs reduce revenues and frustrate customers in any business, but in the healthcare industry product shortages can also adversely affect human health.

In order to address this problem companies need to know the causes, and there are a number of well-known candidates such as forecast error and product changes. However, until a detailed analysis is carried out, the precise reasons are unknown and can be misconstrued – as happened at a leading pharmaceutical manufacturer referred to as PharCo.

The researchers completed a carefully structured, customized root cause analysis to identify the company’s stock-out problems, and recommend ways to fix the supply gaps.

Incident Analysis

PharCo’s stock-out challenges had become more evident as the company expanded globally and experienced a surge in product demand. The enterprise suspected that the main culprit was manufacturing quality issues.

To test this hypothesis, the researchers used a mixed method approach to a root cause analysis that combines qualitative and quantitative analytical methods. The three-step analysis identified the issues through creative thinking, translated comments on stock-out incidents into categories, and measured the impact of these incidents in terms of their frequency and predictability.

A cleaned dataset of 11,501 reported incidents was used for the analysis, and these were separated into 35 categories of stock-out causes. Two logistic regression models were developed for the purpose of quantifying the predictability metric.

Unexpected Culprit

The in-depth analysis showed that manufacturing quality was not the main cause of PharCo’s stock-out problems. The strongest root cause was a less likely factor: regulatory issues. Other factors such as forecast error and distribution were less influential, but also contributed to the problem of supply shortfalls.

Regulatory codes were relatively complex and varied from country to country, making it difficult for the manufacturer to ensure that its customers were fully stocked.

Further research was recommended to fully explain the underlying mechanisms. Ultimately, PharCo might have to create new procedures to address the regulatory issues. The other factors identified by the analysis can be tackled by optimizing PharCo’s operations using specialized tools or models.

The researchers also recommended that PharCo proactively addresses low-frequency, but highly predictable stock-out causes that can have serious supply chain consequences.

For further information on the research contact Dr. Bruce Arntzen, Executive Director, MIT Supply Chain Management Program, at [email protected].

SC
MR