- Outsourcing
- Strategy
Economic instability and poor or lacking physical infrastructure are some of the factors that contribute to price inflation along the supply chain in Zimbabwe. Our research, in partnership with one of the Big Pharma companies, addressed two intertwined yet distinct research areas. On one hand, we evaluated how price reductions (i.e. subsidy) offered by our partner company to the distributor translated down the value chain. On the other, we analyzed the costs of insourcing versus outsourcing of our partner’s company distribution function, and the sales volumes at which the two alternatives are equivalent. We conducted a set of field interviews with local distributors and pharmacies; this combined with data gathered by a third party market research team and input from our partner company’s South African business unit equipped us with the data required to address these questions. We realized how trust, information sharing and tailored incentive schemes played a pivotal role in the rollout of the price reduction scheme, making it relatively more successful for certain distributors, pharmacies, and product lines. Specifically, we were able to demonstrate how sales volume throughout the chain increased post subsidy implementation for two key distributors who passed on the largest price reductions as compared to the other distributors who were under review. In addition, through the application of inventory policies, such as economic order quantities and the power of two policy, and Monte Carlo simulation we were able to determine the impact that forecasting error, minimum order quantities, and sales volumes can have on the decision to outsource. At the current sales volumes experienced by our partner company, the minimum order quantity was greater than the economic order quantity for 80% of the products, which resulted in a 25% increase in inventory holding costs.
Authors: Ricardo Ghersa and Chelsey Graham
Advisor: Dr. Jarrod Goentzel