Measuring Forecast Accuracy in a Pharmacy

Read this article where forecasting approaches, along with a hybrid forecasting method are covered. What types of data can a company use in quantitative forecasts?


Forecasting has always been an attractive research area since it plays an important role in business planning process. With rapid and often unpredictable changes in economic and market conditions, managers are making decisions without knowing what will exactly happen in future. To achieve competitive advantage in an environment subject to constant fluctuations, organizations have to make correct and timely decisions based on accurate information-forecast. All decision making processes in the organization requires not just forecasts but accurate forecasts in order to select proper actions relevant for demand and sales planning, production planning, inventory control and so more. Demand planning is a fundamental business exercise that focuses on the forecasting of future actions which is a required for efficient supply chain operations and overall firm profitability and retail pharmacy is not an exception.

Accurate forecast is a requirement for optimal inventory control and customer demand and reduction of operational costs. Accurate forecasts help companies prepare for short and long term changes in market conditions and improve operating performance. Chihyun and Dae-Eun's study also confirmed that accurate demand forecasting is important for sustaining the profitability of the firm. This is because demand forecasts influence the firm in various ways, such as, in strategy-setting and developing production plans. Gupta, Maranas, McDonald and Doganis, asserted that exact sales forecasting is utilized for capturing the tradeoff between customer demand satisfaction and inventory costs. For this usefulness, especially in this recent rapid changing and less predictable business environmental variables, managers and academics have no choice but to devote more attention to how forecasting can be improved to increase demand forecast accuracy. In a retail pharmacy, successful sales forecasting systems can be very beneficial, due to the short expiring dates of many pharmaceutical products and the importance of the product quality which is closely related to the human health. As accurate demand forecasting is crucial to manufacturing companies and it must be taken more seriously in retail outlets such as supermarkets and retail pharmacy because of the high stock level, high customer needs and traffic they experience daily.

Generally, achieving forecasting accurate demand is difficult and the reasons for difficulty are due to several factors; (i) large variances between actual sales and demand, and (ii) no sales force forecast accountability, (iii) product characteristics in terms of the product life cycle (PLC), (iv) sources and information gathering processes (e.g., what information should be collected, where and how it should be collected), (v) approaches to be adopted (e.g., who should be in charge of forecasting, and what roles should be designed), measurement of accuracy (e.g., using the proper metric and defining proper incentive mechanisms), (vi) and using of unstructured forecasting techniques. In Pharmaceutical business especially retail pharmacy, forecasting the accurate demand for drug and medical supplies is a difficult task and one of the problems is the lack of a reliable inventory management system which should provide useful forecasting information. Also, high demand volatility of numerous products faced by retail pharmacy resulted to inaccurate demand forecasts. Betts opined that one major consequence of demand volatility is the increasing inaccuracy of forecasts which have resulted in excessive stocking leading to expiries and losses especially when considering products with a predetermined shelf life. Considering, the high varieties of products and demand volatility pharmaceutical products, continuous evaluation of fluctuations of inventory is critical to accurate demand forecast, customer satisfaction and overall firm profitability.

Retail pharmacies are a popular choice in low-income countries like Nigeria, Ghana, Togo, etc., for individuals seeking healthcare for minor ailments as a result of the ease of access as compared to the bureaucratic processes, cost and time involved in hospital visitations. Also, in many smaller towns where hospitals are unavailable or reside in bigger cities, retail pharmacies are the first point of call for treatment and advice. Retail pharmacy is confronted with several challenges, including high customer orders and traffic, high stock level, stiff competition, and tough government regulations and levies. It has to continually meet their customers' needs by stocking and delivering the right amount of products (medicines) at the right time.

In retail pharmacy, one of the major problems is the inability to predict the quantity of each drug and classes of drugs should be kept in the inventory. Despite the high stock level of product varieties in retail pharmacy the forecasting for each drug or class of drugs (anti-malaria, analgesic, hypertensive, blood tonic, cough relief, injections, bone cares, ulcers multivitamins, etc.) are related. On this note, the study adopted top-down approach to forecast the aggregate products where percentages can be allocated to drugs or the individual class of drugs. Bottom-up is another approach where one could forecast for each part and then sum up the whole. The latter approach seems best when there is reasonably good information on sale records of each drug. Despite the fact that empirically, the bottom-up approach is more accurate, which implies that it can generate more precise demand forecasts but it was not considered in this study owing to inapplicability. Reasons been that, most Nigerian retail pharmacy stores are not automated in terms of inventory control and sales records, so they manually generate total daily or monthly sales figures for all products not each product (drug) sales figures. Thus, sale figures cannot be easily generated for individual products. It is pertinent to mention that the survey reveals that most if not all retail pharmacy stores in Sango-Ota, Ogun State unconsciously rely on qualitative and naïve forecasting methods which produce far less accurate demand forecasts. Considering these situations and the fact that the quality of demand forecasting, as indicated by its accuracy, required improvements as it did not meet expectations Therefore, this study examines how to increase the operational efficiency of the retail pharmacy by improving the accuracy of sales forecasts using a combination of quantitative forecasting techniques and forecast accuracy measures.