In a previous blog, I mentioned work-in-process (WIP) inventory. One question I hear: Why WIP? Why not raw materials inventory? Why not finished goods inventory?
Depending on factors such as your business model, the products you manufacture, how much of your supply chain is outsourced, and many other issues, improving WIP can be one component of improving your overall value proposition, but not the only one. To substantiate how organizations are using WIP, we studied the public financials of 12 life sciences organizations and observed the following:
- Nine out of 12 use WIP as the largest component of their inventory.
- Of the 12 organizations, WIP accounts for 44% of overall inventory (see the left-hand pie chart below).
- Of the nine organizations where WIP is the largest component, 50% of overall inventory is WIP (see the right-hand pie chart below).
Figure: Nine out of 12 large life science organizations have 50% of their inventory tied up in WIP
Certainly, there are other challenges with inventory methods for organizations to tackle; we’ll discuss those strategies at another time and remain focused on issues related to WIP here.
A root cause
These observations give us the high-level financial issues around WIP, but not a root cause. Each stage of the pharmaceutical supply chain (e.g., active pharmaceutical ingredients, drug product, finished goods, market) may involve numerous locations and external entities, such as contract manufacturing organizations, third-party suppliers, third- or fourth-party logistics, or sub-contractors.
Based on requirements such as regulatory, customer fill-rates, and revenue, in WIP, keeping the stages above full with inventory is the number one priority, while working capital (such as inventory) may be sacrificed. As a result, these organizations (e.g., planners, buyers, etc.) may have full or overflowing buffers (locations where inventory in any stage is maintained).
The result can be higher-than-necessary inventories across the entire ecosystem. In cases where the brand owns the inventory, working capital can be affected. In situations where a third party (e.g., supplier, contract manufacturer, etc.) owns the inventory, the excess costs may be passed on to the brand owner as higher costs (e.g., cost of goods sold, fees, etc.).
While inventory and cost of goods sold can be two primary impacts, other financial effects can ripple throughout this ecosystem:
- Higher excess and obsolete inventory
- Customer delays
- Poor productivity or additional staffing
- Suboptimal IT costs
How can we fix this?
One way to fix this is to increase visibility of all materials throughout the entire ecosystem. Integrate better (more data and more often) with the planning system (demand, operations, production, material, etc.).
Another way is to improve the communication interval. Is monthly enough? Make it weekly. Is weekly enough? Try daily. Once a competency of collaboration is established and material flow is well understood, start to work with the ecosystem on improving capacity utilization and other drivers of value.
The conversation with suppliers
Fixing issues such as these requires open, clear, and partner-oriented discussions with suppliers. In most cases, the best posture is to approach suppliers with your objectives in a collaborative manner and solicit their input on how the entire ecosystem can benefit.