The efficient use of cash is an obsession for most pharma and med device companies. With long manufacturing lead times and a deliberate (i.e., slow) pace of change, the typical method for ensuring high service levels is plenty of finished goods inventory.
But high inventories represent a significant tie-up of cash for a company – working capital that can be used for many other business opportunities. And it’s also a key financial benchmark that investors use to evaluate companies.
Gartner data shows that pharma companies average about 2.2 turns of total inventory; med device companies average closer to 3.4 turns. These values have been fairly consistent over the last decade. But that might change soon.
The stresses that the COVID-19 pandemic has placed on supply chains will flow down to working capital strategy in the coming months. I think a tug-of-war on cash will result. Consider:
- Product demand is uncertain – and the best way to ensure high service levels when you can’t predict demand is to buffer with higher inventory.
- Raw material supply is uncertain – again, increased inventory is the typical way to mitigate.
- Some of your customers and suppliers are suffering financial hardship due to the effects of the pandemic – and requests to extend receivables terms and shorten payables terms are likely.
- The desire to drive share prices back to pre-pandemic levels will result in pressure to increase free cash flow.
- Limited time-frame opportunities (M&A, stock buybacks) will also require maximizing available cash.
So what do you do?
Here are some recommendations:
- Start company-wide discussions on cash strategies now, as recoveries are being planned. Include Commercial, Finance, and Supply Chain leadership at a minimum.
- Ensure realistic cash allocations are planned that prioritize business goals – especially service.
- Make and communicate high-level trade-off decisions: acknowledge that no cash strategy can please everyone.
- Flexibility is key – pandemic recovery is uncharted territory for businesses. If you can avoid cash impairment by building agility (e.g., shortening manufacturing and packaging lead times), do it.
- Improve your supply chain visibility to monitor changes that will require updates to your cash strategy, like supplier/customer health, unexpected demand, etc.
Thanks for reading, and stay healthy!
Links for Gartner clients:
- The Current State of Inventory Management in the Life Science Industry
- Supply Chain Brief: Life Science Inventory Reduction Does Not Have to Jeopardize Patient Outcome
- CFO Cash Flow Actions During COVID-19
- COVID-19: Take These Steps Now to Improve the Agility of Your Life Science Supply Chain
Read my latest research here: LINK
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