Pharma companies continue to face challenges of globalization, complex supply chains and hyper-competition - all while demand for treatments continues to increase. As a result, the need for greater throughput, higher quality and reduced costs has become a top priority.
Over the last two decades, lean programs have become a popular approach to addressing these challenges in the pharmaceutical industry, as evidenced by the number of published case studies, conferences devoted to the topic and published articles. Unfortunately, the industry has seen little overall progress in becoming more “lean,” as indicated by the lack of improvement in inventory turns performance. In recent years, performance across the industry has lagged that of the previous decade with gains not appearing to be sustainable due to a widespread lack of understanding of lean’s strategic value at the senior leadership level, and how it should be optimally applied.
INVENTORY TURNS AS A LEAN METRIC
Lean is a business improvement approach that focuses on process improvement in new product development, manufacturing and distribution in order to cut lead times, improve quality and customer responsiveness, resulting in enhanced revenues, reduced investment and costs. Pioneered by Toyota in the 1950s and widely adopted across industries, lean’s objectives include using less human effort, less inventory, less space and less time to produce high-quality products as efficiently and economically as possible while being highly responsive to customer demand.1
Although there is no universally accepted measure of a company’s “leanness,” inventory turns are a reliable indicator.2 The trend of inventory turns over time indicates how well a company is progressing in terms of becoming more lean and improving its processes. Lower levels of inventory directly correlate to improvement in the competitive edge factors of speed, quality and cost. That’s why the companies that have successfully implemented lean have focused intently on reducing inventory, sometimes characterizing inventory as “evil.” Similarly, noted lean experts such as Richard Schonberger view inventory as a catch basin for a multitude of business ills.3
Inventory turns also straightforwardly correlate with the bottom-line measure of business success - cash flows. Reduced inventories mean more cash in the bank, freeing up cash that can be used for other purposes. However, reduced inventories are beneficial only if the reduction derives from process improvement - the core of lean. If a company cuts inventories without improving processes, then stock-outs and lost customers will far outweigh any benefits of increased cash flows.
In addition, inventory is a standard financial metric and is readily comparable company-to-company, as well as over time within a business. It is also highly visible - walk around a facility characterized by high levels of inventory and you can conclude that the facility is not lean.
Historically, the pharmaceutical industry has ranked at the very bottom in terms of the trend of inventory turns improvement.3 The pharma industry has been a late adopter of lean, due to the lack of a “burning platform” for change. In the 1990s when profit margins were at historic highs, little attention was paid to the competitive edge elements of speed and cost with the focus of money and resources on R&D rather than operations.
The little attention that operations did get was focused on compliance rather than process improvement.4 The standard practice of ensuring that more than enough of each product was available to meet customer needs coupled with a lack of attention to operational efficiencies led to excessive inventories. Further, the sales and market-share strategy of pushing more and more inventory into the pipelines also drove up inventories.
At the end of the 1990s, new pressures began forcing a change in mindset. The government and society exerted tremendous pressure on pharmaceutical companies to reduce costs and improve quality. As more brand drugs lost their patents in the 2000s and early 2010s, price increasingly became a key competitive factor. With globalization and modernization, demand for mission-critical treatments dramatically increased with capacity constraints becoming more commonplace. In addition, the global counterfeiting of drugs increased the regulation of safety and quality.
As the 1990s ended and the new century began, pharma companies such as Pfizer, AstraZeneca and GSK increasingly looked at lean as an approach to address these challenges by driving improvements in cost, quality and supply.
REVISITING LEAN'S PROGRESS: SEVEN YEARS LATER
An analysis performed in 20105 utilizing data from the top pharmaceutical companies by revenue on the trend of inventory turns indicated that the average inventory turns remained essentially flat over both the previous five- and 10-year periods. While there were some companies that had shown improvement, there wasn’t a strong enough trend to draw definitive conclusions.
A follow-up analysis was recently completed to determine whether there has been any improvement over the last seven years since the previous analysis. The top 20 pharma companies by revenue are listed in chart 1, along with their inventory turns for the corresponding annual period. The average inventory turns for these companies is also shown.