Lean Manufacturing Solutions to Improve Working Capital Management

The competitive obstacles (and also inviting reasons to deploy lean manufacturing solutions) currently confronting pharmaceutical companies are increasing in both severity and number. One seldom specifically addressed in the lean manufacturing-pharmaceutical industry discussion is that of working capital. But here, too, Lean solutions can prove to be a boon.

In an article titled “How to Unlock $ 43 Billion in Value by Improving Working Capital Management,” Carol Cruickshank et al. (pharmpro.com, 27 April 2010) state that “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.” Companies in the pharmaceutical industry, according to these authors, generally trail those in other industries in “many key working capital measures, including inventory, receivables and payables.”

The pharmaceutical industry’s poor performance with respect to working capital is the result of several factors, some of which are unique to this industry. Here are the major ones:

 

1. Poor inventory turns

a) Too much emphasis on reducing stock outs (which increases investments in inventory)

b)  Delays resulting from regulatory burdens and less-than-optimal quality policies and procedures

 

2. Complex and onerous labeling requirements

 

3. Poor accounts-receivable turns

a) Recent direct-to-pharmacy trend in some countries

b) Longer payment cycles peculiar to some geographic areas

 

4. Unaddressed accounts-payable issues

a) Frequent lack of contract structure for the purchase of indirect materials

b) Lack of consistent “Terms and Conditions across different countries or Business Units”

c) Little purchasing-department engagement “early on in the R&D phase”

 

Still, Cruickshank et al. maintain that “significant improvement opportunities exist . . . given the wide range of performance even seen within the pharmaceutical industry.” One of the major components in the solution they propose is the adoption of lean manufacturing techniques for production. Doing this, they maintain, will improve “working capital position” and “will allow companies to reinvest cash more productively.” And, as many often do, they begin by invoking Toyota and suggest that pharmaceutical companies should emulate Toyota in its latest Lean efforts.

Toyota, as we know, has been going through its own quality crisis, which has dramatically affected profitability, during the last couple of years. In response to this situation, Toyota recently launched an initiative throughout the company—Gain Advantage, Maximize Efficiencies, and Overlook Nothing (GAME ON)—with the twin goals of reducing fixed costs and increasing the top line. This new initiative involves:

 

Aligning inventories with the market and customer demand;
Using as the chief metrics cost structure and the return on sales;
Implementing processes closely allied with manufacturing for production planning and distribution to balance supply and demand;
Reducing inventories of WIP and finished goods; and
Exercising caution about “not moving aggressively on DPO as they did not want to further impact the already precarious automotive supply base.”

 

According to Cruickshank et al., then, companies need to, as Toyota has been doing, “carefully examine all aspects of current operations with a focus on working capital to identify inefficiencies in current processes and practices that can be eliminated rapidly.”

Cruickshank et al. also include a couple of caveats. The first is that pharmaceutical companies’ patterning their implementation of lean manufacturing solutions on Toyota’s latest efforts is “necessary, but not sufficient.” Further, they contend that pharmaceutical companies should be “smart about how aggressively they want to focus on working capital management. Obsessive concern with reducing working capital is itself risky and can actually harm business.”

Lean manufacturing consultants can assist with the necessary aspect of implementing lean manufacturing solutions—and can also help discover and implement that which would be sufficient. Qualified consultants can head off the harmful obsessions, guiding pharmaceutical companies toward that “smart” focus.