2. How would you convince John to set an economically viable service level target for non-life-saving medical supplies?

SMU024 STOCK-UP VS STOCK-OUT: THE INVENTORY MANAGEMENT DILEMMA AT A MOBILE CLINIC In November 2021, Clara Hartono had just started her six-week internship at The Star Clinic, a network of mobile clinics in Indonesia, as a Management Trainee. She was posted to a branch in West Papua (formerly known as Irian Jaya), the easternmost province of Indonesia, some 3,400 kilometres away from Jakarta, the capital city of Indonesia. The Star Clinic operated a medical facility located near the Grasberg mine, one of the largest gold and copper mines in the world. While excited at the internship opportunity, Clara was also understandably anxious, as her performance would determine if the company offered her a job upon graduation in a few months. She realised she would be mostly on her own in this role as she was hired because of her knowledge of inventory management, which nobody else in the clinic had. She had studied and aced a Supply Chain Management course during her first year as an undergraduate in a local university, but had not had the opportunity to put the theory learned at school into practice. Clara's task was to review the inventory management at the clinic's in-house pharmacy to recommend improvements that would enhance inventory allocation and service levels. One specific problem was about ordering the right quantity of Panadol, a painkiller drug commonly prescribed by doctors, to avoid stock-outs while minimising its inventory holding costs. Weighing the pros and cons of the continuous review and periodic review policies of inventory control, she had to make a careful analysis before presenting her recommendation to the senior management team at The Star Clinic at the end of her internship. The Mobile Health Clinic The Star Clinic was a healthcare company with a mission to serve the medical needs of insured employees of client organisations through mobile medical care. Headquartered in Jakarta, Indonesia, it provided primary care medical services to mainly expatriates and business travellers in remote locations of the country, where local healthcare facilities were inaccessible or substandard. The scope of its primary care services included treatment of acute and chronic illnesses, follow-up care, referrals to specialty services, counselling, and patient education. The company had a network of more than 200 mobile clinics nationwide, in big cities as well as small suburbs. Each mobile clinic was staffed with a team of medical and non-clinical administrative personnel. While some clinics were very small and staffed only with a paramedic carrying a responder's bag, others were sizable with multiple medical teams who had access to a pharmacy store on-site. The medical staff was assigned to a particular mobile clinic on a rotation schedule, spending six weeks at the clinic, followed by another six weeks resting at home. Thereafter, they could continue at the same clinic as before, or be assigned to another location. When they were working on-site at a This case was written by Dr Alan W. Zeller, Or Wee Kwan Eng and Dr Cheah Sin Mei at the Singapore Management University The case was prepared solely to provide material for class discussion. The authors do not intend to dustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identilying information to protect confidentiality. Copyright @ 2022, Singapore Management University Version: 2022-01-10SMU-21-0039 Stock-up Stock-out mobile clinic, the doctors were on call 24/7 and worked eight-hour shifts. The administrative staff remained stationed at the same clinic all year round. An Introduction to the Prevailing Issues A Clash of Perspectives On the first day of her arrival at the West Papua branch of The Star Clinic, Clara was introduced to her new colleagues. The first person she met was Melka, who had been working in the logistics department for several years. She explained to Clara that all the medical supplies available on-site were delivered by a chartered flight from Jakarta every three working days. Their supply was guaranteed with a three- day lead-time due to the priority accorded to medical supplies on board the plane. Dr John Tan was the next person Clara spoke with at length. John was an emergency surgeon from Singapore, and had three more weeks left on duty before being scheduled for time-off. (Dr Paul Peters, an orthopaedist from Australia would replace him.) John complained profusely about the stock-out of the medical supplies he was prescribing. Life-saving drugs were not an issue because they had built an emergency stock at the clinic, but all the other commonly used medication were in short supply. He wanted something to be done quickly; otherwise, he would consider not returning to the same site at the next rotation. Noviana was the sole pharmacist at the clinic. She kept a daily record of the demand and the stock positions of all medical supplies that had been prescribed over the past seven months at the clinic. As she spoke to Clara, she affirmed what John had mentioned and was equally frustrated because she had to manage the expectations of dissatisfied patients who had to wait three days for their medicine until the next charter flight. Later that day, Clara met Lily, who had been transferred to the procurement department from the finance department a year ago. She was familiar with the cost of the medical supplies, including the holding and ordering cost. Clara knew this information would be required to calculate the economic order quantity and was glad to have access to Lily's knowledge. With a finance background, Lily looked at the situation from a profit-and-loss perspective. She was adamant that there was more than enough of stock on site, and that the cost of expired drugs was substantial. She also grumbled about the doctors prescribing so many variations of the same therapeutic class of drug, which required her to stock multiple items for the same medical purpose. Taking the example of Panadol, a branded paracetamol used to reduce mild pain and fever, Lily shared, We have more than 97.5% service level on dispensing Panadol at the moment. The doctors dreamed of a 99% service level, but they need to realise we are providing remote medical services with logistical, storage and financial constraints. Instead of throwing a stone at the Procurement The economic order quantity refers to the optimal amount of inventory that a company should buy to meet customer demand while minimising its setup and inventory holding costs. Gerard Cachon, and Christian Terwiesch, "Chapter 5 Baiching and Other Flow Interruptions: Setup Times and the Economic Ouder Quantity Model" in Matching Supply with Demand: An Introduction to Operations Management, 4" Edition, 2019, New York, McGraw-Hill Education. 2/9SMU-21-0039 Stock-up Stock-out Department that is managing 100 diferent medicines, they could look at optimising the number of different drugs they prescribe; that would certainly help... It was an eventful first day on the job for Clara! After a few short conversations, Clara could sense the tense situation at the clinic. The conflict of interest was focused on the disagreement between the medical team and the administrative staff. The former wanted ample stocks and a very high customer service level, while the latter had to manage the resource constraints and make the business operations profitable. At The Star Clinic, the medical team reported directly to the company's medical director, whose priority was to meet the medical needs of the patients. The doctors were thus incentivised by the medical service outcome and did not have any financial KPIs. On the contrary, the administrative staff was responsible for the financials but could only work within the boundaries set by the medical team. Under this environment, Clara knew that she would have to reconcile the views of both sides diplomatically. How Much Panadol Should the Clinic Order? While the situation seemed challenging, on a positive note, Clara knew that she would have access to the following information she needed to analyse the cost position and service levels: . Historical daily demand over the last seven months (refer to Exhibit 1) Historical stock movement of the last seven months Lead time Holding cost Ordering cost Of the four conversations, Clara had been most intrigued by the Panadol shortage described by Noviana. The issue had been a hotly debatable topic that led to the medical and administrative staff having multiple arguments in the past. To form her own opinions, she decided to ask Noviana for the daily demand and stock positions of Panadol over the past seven months and started her analysis with this single stock item. Next, she would have to evaluate the appropriate inventory policy to manage the stocks. Inventory Control Policies The Continuous Review Inventory System Clara recalled learning a few inventory control policies in her Supply Chain Management course. The two policies that came to her mind were the continuous review policy and the periodic review policy. She clearly remembered the fundamental principle of the continuous review inventory system, which was to buy the re-order quantity when the re-order point was reached. 3/9SMU-21-0039 Stock-up Stock-out Clara had even brought along her lecture notes, in the hope that the information would come in handy. It was at this point that she wished she had scribbled more details during the lecture sessions. What had seemed simple at the time the professor was explaining was now vague and confusing. However, at the very least, she knew she had only two items to figure out to design a continuous inventory management system: the Re-Order Point (ROP) and the Re-Order Quantity (ROQ). Re-Order Quantity Clara's class notes read: The total cost of ownership of a stock item is composed of the cost of the frem, its holding cost and it's ordering cost. The order quantity that minimises the total cost of ownership is the quantity that makes the ordering cost and the holding cost equivalent. The more she read, the more the class notes started to make sense to her. A discussion with Lily would help to fill in the numbers. The next day, Clara caught up with Lily. "Lily, I am trying to figure out what quantity of Panadol we should order to minimise our cost, and I need your help", said Clara. "Sure!" Lily replied enthusiastically, "but how do you intend to do that? How can I help?" Clara explained, Well, intuitively, If we order Panadol very often, we will incur a high ordering cost and a low holding cost since we will not have a lot of stock. However, If we order Panadol less often, we will incur less ordering cost but more holding cost. This makes a lot of sense, but I am now trying to figure out what quantity should we order to minimise the total cost. In theory, the quantity that minimises that total cost is the quantity that makes the holding cost and the ordering cost equivalent. I would therefore need you to help me to compute it. Lily's eyes lit up, and she sounded excited, "This is an interesting concept I have never heard of before! I am very happy to explore it with you. Let me explain the structure of our cost." She added, Our holding cost is simple. It is composed of a storage cost and a financing cost. The storage cost is USSO. 10 per unit per year and our financing cost is 10%% of the cost of the medical supplies per year. Our ordering cost is more complex as it involves multiple departments, but for simplicity, we allocate only the cost of the procurement deparment. We have three procurement officers in the department for a total loaded cost of US$ 100.000 per year and we placed 5,000 orders last year. Therefore, on average, each order cost US$20. A box of Panadol costs US$ 10 and the annual demand is 100,000 boxes. "Thank you, Lily! This is very useful to me. I will give it a try at the calculations and come back to you if I need more information", said Clara. 4/9SMU-21-0039 Stock-up Stock-out Re-Order Point As Clara sat down at her desk to digest the newly collected data, she remembered the re-order point was the sum of two components: the average demand during the lead-time and the safety stock level that was a safeguard against demand uncertainty. She also recalled that the safety stock was a function of three quantities: lead time, service level requirement, and demand volatility, which was expressed in terms of the standard deviation of the demand. Clara could easily compute the average and the standard deviation of the daily demand using the data provided by Noviana, and Melka had provided her with the lead time information too. However, Clara was not sure which service level should be used, whether 97.5% (which was Lily's target), or 99% (John's target). She also wondered how she could convince the other person to accept the service level she eventually proposed. Clara decided to take a closer look at the dataset, and discovered that something did not seem to make sense. Lily had ordered significantly more stock than usual at the beginning of April. In fact, she already had almost 5,000 packs of Panadol in stock, and yet she ordered another 4,000 packs. Clara knew that using historical data without engaging those who understood the supply and demand characteristics could lead to systematic errors. Therefore, she hoped that Lily could offer an explanation. Periodic Review Inventory System Clara then went through her lecture notes on the topic of periodic review inventory system. She struggled to recall the concept, and it was a sign that she desperately needed to refresh her memory. After reading for some time, she began to remember that in the periodic review inventory management system, the orders were placed at set times, for example every week, or every month, and that the quantity ordered varied every time. Clara reflected on the difference between the two inventory management systems. She realised that in the periodic review system, due to the orders being placed at set intervals, the periods of risk (during which the on-hand stock may not be sufficient to meet the demand) included the lead time and the review interval. Indeed, once an order was placed, there was nothing that could be done to replenish the stock until the time came for the next round of ordering. Review Interval The review interval was a straightforward concept for Clara. Her class notes read, "Once you decide how often to order, you always order following this frequency". However, deciding on the frequency to order was less intuitive. Clara started to analyse the structure of The Star Clinic's ordering cost: The procurement team was made up of three people and had placed 5,000 orders last year. The team had to buy 100 different commodities for the clinic, so they could place 50 orders per year for the medical supplies, or roughly one order every week. 5/9SMU-21-0039 Stock -up Stock-out She was aware that changing the composition of the procurement team would be a difficult decision that would take time. She was not ready to have this discussion with the Human Resource team and with the profit-and-loss holders at this point. In order not to delay her project, she chose simplicity over complexity, and decided to set the review interval at five working days for now. Order up to Level Clara continued reading the class notes. She knew that all these formulas would only make sense if she understood the underlying concepts, and started to break them down in simpler parts. As far as she could remember, the safety stock was the quantity of inventory that was needed to absorb the variations of supply and demand during the period of risk. In the period review model, the period of risk was composed of the lead time and the review interval. Therefore, if the lead time at The Star Clinic was three working days and the orders were placed every week (or every five working days), the period of risk was computed to be eight (3+5 = 8) working days. As for the service level, Clara decided to study both the 97.5% and the 99% options, so that she could have a constructive discussion with both John and Lily. Recommendation Four weeks seemed to pass quickly. Clara had only one week left to prepare for her presentation. She had to present her recommendations to the local and regional management teams of The Star Clinic the following week. Her stress levels began to rise. She had computed the inventory management system using both the continuous and the periodic review models, and for both John's and Lily's service level targets. But which one should she recommend? Both models and services levels targets had their pros and cons. Clara knew that the senior management team's decision to offer her a full-time employment contract would hinge on the outcome of the meeting. In order to make a difference, she had to think out of the box. What other improvements could she suggest that would have an impact on cost and service level? 6/9SMU-21-0039 Stock-up Stock-out APPENDIX 1: CONTINUOUS REVIEW SYSTEM 1.1 Economic Order Quantity (EOQ) Model Total Ownership Cost (TOC) = Purchasing Cost + Holding Cost + Ordering Cost TOC = [De] + + h +2 . k Where: D = Demand over the period c = Unit cost Q = Order Quantity h = holding cost of one unit k = Ordering cost of one unit Q/2 = average inventory D/Q = Number of orders over the period Economic Order Quantity (EQQ) = 25 (TOC) = ((2 . D . b)/(h)) 1.2 Re-Order Point (ROP) Suppose Lead Time (L) is certain, known, and expressed in number of days. . . Suppose Demand (D) is uncertain but follows a daily Normal Distribution with mean p and Standard Deviation o In this case, AL and or are not readily available but can be computed as follows: HL =1 *L 01 =0* VL Re-Order Point (ROP) = Demand during the Lead Time + Safety Stock ROP = PL +2* OL 7/9SMU-21-0039 Stock-up Stock-out APPENDIX 2: PERIODIC REVIEW SYSTEM Suppose Lead Time (L) is certain, known, and expressed in number of days. Suppose the Review Interval (T), is certain, known and expressed in number of day's Suppose Demand (D) is uncertain but follows a daily Normal Distribution with mean p and Standard Deviation o In this case, Hou+7) and G(1+7) are not readily available but can be computed as follows: H(L+T) =H *(L+T) O(L+T) =0 * V(L+T) Order-up-to-Level (OUL) = Demand during the Lead Time + Safety Stock OUL = H(L+T) +2* O(L+T) 8/9MON THE WED THE FRI MON TUE WED THU FRI MON THE WID THU FRI MON THE WED THU FRI MON THE SMU-21-0039 Source: Authors 10 11 12 15 15 17 11 19 33 34 Month 2 WED | THU FRI WON TUE WED THU FRI WON THE WED THU FRI WON THE WED THU FRI WON THE WED THU FRI 3 3 13 14 15 16 17 31 21 32 24 34 610 60 20 0 140 Month NON THE WED THU FRI WON THE WED THU FRI WON THE WED THU FRI WON THE WED THU FRI MON 5 5 7 10 11 12 12 14 17 18 19 30 21 24 25 36 27 28 31 ThatDipheed 0 310 1040 140 0 340 510 0 Month THE WED THU FRI WON TUE WED THI FRI WON THE VED THU FRI WON THE WED THU FRI WON THE |WED 1 10 11 14 15 18 17 18 21 2 325828 4 0 30 1 1210 40 340 0 Month TH E RON TLE WED THU FRI MOW THE WED THU FRI MOW THE WED THU FRI MON TLE WED THI E 1 81 9 12 13 14 15 18 19 80 21 2 082 898 0 210 2:0 0 100 MOON THE WED THU FRI MON THE WED THI FRI MON THE WED THI FRI MON THE WED THU FRI MON 9/9 23 5 8 9 10 11 12 15 18 17 8 19 20 2 24 282 80 EXHIBIT 1: HISTORICAL DEMAND AT THE STAR CLINIC Month T THE WED THI FRI MON THE WED THI FRI MOW THE WED THI FRI MION THE WED THI FRI MON THE WED THI 2 3 4 7 8 9 10 1 14 5 8 17 18 21 2 3 2 3 323 31 10 Stock-up Stock-out