Pharmaceutical companies need to be smart about how aggressively they want to focus on working capital management. This is clear given the wide range of performance even seen within the pharmaceutical industry as shown in Figure 2 below. However, significant improvement opportunities exist. Given these unique challenges, it is unlikely that pharmaceutical companies can achieve WC positions similar to other industries (e.g. Entrenched Suppliers: Often purchasing departments are not engaged early on in the R&D phase when suppliers lock themselves in and then have most negotiating power when product reaches commercialization.

Additionally, there is no comprehensive program in place to consciously negotiate Terms and Conditions that maximize supply value.

Inconsistent Terms and Conditions: Many companies do not have consistent Terms and Conditions across different countries or Business Units.

Additionally, there is no thorough trade-off study between discount savings with early payment vs. There is often inadequate focus on boosting payables / maximizing discounts.

Lack of a Payables Strategy: Much of the purchasing of indirect materials is done on purchase orders and without formal contracts.

While issues affecting Accounts Payables are not necessarily unique to pharmaceuticals, many of them are systemic in the industry and result in poorer DPO performance. Additionally, geographically-specific characteristics (e.g., extremely long payment cycles in Europe, buying/bargaining power of pharmacy chains in the UK, complex distribution networks in the US ) lead to much longer payment cycles. For example, in some countries there has been a recent trend for manufacturers to go “Direct to Pharmacy,” resulting in much more fragmented customer base and impacting payment cycles. A large number of SKUs increases inventory complexity and leads to greater inventory levels.Īccounts Receivable turns have not improved due to characteristics unique to this industry. In order to comply with different regulations in different jurisdictions pharmaceutical companies need to have unique labels and hence unique SKUs.

Labeling Requirements : Pharmaceutical companies have to deal with complex labeling requirements.

At times the internal policies and procedures are either outdated or too stringent and can add days to manufacturing cycle times without contributing to improved quality. In addition, any companies have quality policies and procedures which compound the challenge. Strong FDA guidelines and regulations guiding the manufacturing and quality release processes often add days or weeks to manufacturing lead times.

Regulations : Pharmaceutical companies are highly regulated.As the focus on reducing stock outs increases so do the investments in inventory. impact on patients) are often cited as reasons for pursuing this philosophy. “ No Stock-Out Philosophy”: Many pharmaceutical companies strive for “no stock outs”.Inventory turns are poor due to several pharma-specific issues: These affect all the 3 key working capital measures.

Pharmaceutical companies face several issues that pose challenges for smart working capital management and which are unique to the industry. What differentiates the pharmaceutical industry from other industries in working capital performance? This article explores these key questions and in the process attempts to help executives at pharmaceutical companies improve working capital performance. What should pharmaceutical companies do to improve performance? What differentiates the pharmaceutical industry from other industries in working capital performance?ģ. These analyses raise three key questions:ġ. Recent inventory performance trends, over the past 10 years, show that pharmaceutical companies have made some improvements and are moving in the right direction, but the trends for accounts payable and accounts receivable are still worsening. In a variety of other measures – accounts receivable, average sales outstanding and accounts payable, pharmaceutical companies lag behind most other industries. Analysis of inventory performance of Fortune 1000 companies shows that pharmaceutical companies had an average of 170 days of inventory and medical products and equipment companies had an average of 139 days (see figure 1 below), twice that of other industries. Pharmaceutical companies lag many other industries in many key working capital measures, including inventory, receivables and payables. Raising the average working capital performance level of pharmaceutical companies to that of the industry’s top quartile would result in freeing up $43B of cash, money which could be productively invested in research, marketing and other value generating initiatives.

Working capital inventory turns