I recently read this comprehensive article on the Pharmaceutical Processing magazine website titled "How to Unlock $43 Billion in Value by Improving Working Capital Management." The section on what differentiates the pharmaceutical industry from other industries in working capital performance is quite revealing. Although three main areas are defined -- inventory turns, accounts receivable, and accounts payable -- it is the information on inventory that caught my eye.
The article claims that inventory turns are poor in the pharmaceutical industry due to three specific reasons:
- A “no stock-out philosophy" -- the high margins and impact on patients maintain this philosophy.
- FDA regulations -- which add to lead times.
- Unique labeling requirements and SKUs -- which result in greater inventory complexity.
In regard to improving performance, the article first suggests that pharmaceutical companies should adopt lean production techniques. In addition, it suggests using Toyota's two main metrics: cost structure and return on sales.
Do any readers have any experience working with pharmaceutical companies? Do you agree with the suggestions posited in this article?