This post was authored by MIT students who worked with PIA Member Living Goods on a D-Lab: Supply Chains class project during the fall 2016 semester. These students are: Bridget Bassi (Civil and Environmental Engineering, 2017); Morgan Goodson (Civil & Environmental Engineering, Management Science, 2017); and Devin Williams (Mechanical Engineering, 2017).
This semester, as part of the Fall 2016 D-Lab Supply Chains class, we partnered with MIT Practical Impact Alliance member Living Goods, a non-profit organization that aims to reduce child mortality and alleviate poverty and disease in resource limited communities through the distribution of health-related products and services. Our goal for the project was to evaluate the procurement strategy of Living Goods Uganda operations, specifically the impact of transitioning from a quarterly to monthly procurement cycle. We found this project interesting because of the opportunity it presented to apply the classroom fundamentals in supply chains, as well as to learn more about how Living Goods impacts the lives of so many people through their Community Health Promoter distribution system.
Living Goods launched its work in Uganda in 2007, and launched a Community Health Promoter Network in Kenya in 2015.
Living Goods has been active in Uganda for the last seven years. Their main focus is a sustainable distribution platform for products and services, which aim to reduce child mortality and fight poverty and disease in the developing world. In developing countries, the traditional clinic model of providing health products and services has several shortcomings: clinics have a high likelihood of being out of stock, typically have very long wait times, and can be difficult for families to access.
Living Goods’ model centers around actual members of these communities who act as Community Health Promoters (CHPs). CHPs are typically women who are educated and monitored by Living Goods in order to make a certain impact. They buy products from a local branch office of Living Goods at wholesale prices, in order to sell them at retail and make a profit for themselves. They are incentivized to reach certain health targets and each CHP has about 100 target households in their area. The CHPs have an initial training by the Ministry of Health and receive a “starter pack” from Living Goods to get their business started. CHPs are known in their community and provide products to families who often are unable to get access to medicines and products that they need from clinics or other vendors.
Living Goods has a headquarter office in Kampala, Uganda, as well as 15 branch offices located in different regions of the country in order to provide supplies to as many people as possible. Each of their branches supports between 30-50 villages and about 100 CHPs. Living Goods procures a wide range of products to provide to CHPs for distribution. These products and services are broken down into five categories: Solar/Energy, Nutrition, Medicines, Family Health, and Hygiene.
To ensure our analysis was in line with project expectations, we spoke with our contact at Living Goods on a weekly basis to gain insight on the current rates of stock outs and inventory levels, as well as the frequency of inter-branch transfers, and the movement of goods from one branch to another in the middle of a quarter due to unsatisfactory inventory levels. We initially worked on developing a model in Excel to understand the effects of such a transition, however we quickly realized that a more qualitative analysis of several key factors would be more effective for the scope of our project.
When considering the option to switch to a monthly procurement schedule rather than quarterly, we identified the following major factors to consider: transport costs, service level, inventory holding costs, inventory shrink, inter-branch transfer frequency, and supplier reliability.
Our recommendation is that Living Goods change their procurement schedule from quarterly to monthly with the exception of products sourced from unreliable suppliers. As a general rule, we recommend that Living Goods continue to order quarterly for suppliers with lead times of 6 weeks and longer because of the reliability issues mentioned above. Based on how their current procurement tool was built, we expect that switching to forecast for monthly orders would be as simple as changing a few formulas in excel.
Sauda Babirye, a Community Health Promoter, helps mothers and newborns.
Relevance to Mission
We came to this decision based primarily on the effect on inventory levels. Living Goods’ mission is to expand access to life-changing products and services. Preventing stock outs is an essential component of achieving their mission and therefore a major consideration in our analysis. Our intuition that monthly procurement will decrease stock outs is based on two factors: the relative increase in the size of the buffer stock and the ability to more frequently adjust forecasts and ordering if demand is higher than anticipated. While monthly procurement puts them at the “low” point in their stock level twelve times per year rather than four, the risk is lessened by the fact that Living Goods will continue to have a month’s worth of buffer stock at all times meaning that demand can be twice the level that is forecasted before the branch will experience a stock out. We have conveyed our findings and suggested next steps to Living Goods and we thank them for a great partnership during the class!