How inventory management can unlock capital for pharma firms

The pandemic spun the pharmaceutical industry into overdrive, with many firms seeing their sales skyrocket as the demand for vaccines and life-saving medicines accelerated. Some of the largest firms in the pharma industry saw their revenues rise to record heights during the pandemic. Now, the challenge is to sustain this growth and ensure that profits are reinvested in research and development to enhance patient outcomes.

However, pharma firms have been far from immune to the cash flow challenges gripping global economies. Recent years have seen central banks, including the Bank of England, hike interest rates sharply—from 0.1% in December 2021 to 5.25% in June 2024 in the UK.  This has steadily increased the cost of doing business, hitting industries that need to manage large inventories hard.

Coupled with this, pharma companies are still battling with supply chain complexities lingering from the pandemic, from difficulties in raw material supply to demand volatility. This is stirring a perfect storm for the pharma industry, as firms face pressure to generate additional cash to reinvest in drug development programmes.

The challenge is to sustain this growth and ensure that profits are reinvested in research and development to enhance patient outcomes

But many pharma companies could be unknowingly sitting on a goldmine, ready to be unlocked to free up working capital which in turn can be used to fuel their growth initiatives.

Effective inventory management 

Most pharma firms hold a lot of inventory. Strategic handling of inventory involves meticulous coordination of ordering, delivery, storage, and usage of products. Inventory management has traditionally been perceived as just a ‘tick-box exercise’, as pharma firms look to adhere to regulatory demands – overshadowing its potential. Yet modern inventory management has evolved into a strategic value driver; when optimised effectively, it can generate extra cash, minimise waste, and reduce storage costs to allow firms to channel funds back into the business. These optimisation programmes can reduce inventory by 15-30 per cent, significantly lowering the costs associated with warehousing and depreciation.

However, managing inventory is a highly complex process. Pharma firms must be able to quickly respond to uncertain demand, market trends, and economic conditions – making it difficult to determine optimal inventory levels and avoid excess stock or shortages. Another complication is managing lead times and variability; the longer the lead times for transportation and production schedules, the greater the uncertainty of demand and the need for stocks. Managing lead time variability is crucial to maintaining service levels while avoiding stockouts or overstock situations.

Pharma firms must be able to quickly respond to uncertain demand, market trends, and economic conditions – making it difficult to determine optimal inventory levels and avoid excess stock or shortages

The challenge is compounded by diverse product lines and SKU proliferation, each with unique demand patterns and lifecycle stages. What’s more, optimising inventory is often more challenging for pharma companies than the average manufacturing firm, given the reliance on perishable raw materials, strict regulations, and complicated production processes.

But optimising inventory alone isn’t enough – the human element is key. Even with advanced systems in place, the skills and capabilities of the team managing inventory must match the complexity of the task. Ensuring that the organisation has the right talent and structure in place to sustain inventory optimisation is critical to success. A strong inventory management team needs to work hand-in-hand with other functions such as production, logistics, and procurement. Without the right skills and people in place, any improvements made to inventory systems may be unsustainable in the long run.

The keys to success

Success in inventory optimisation projects hinges on several critical factors. When these projects fail, it is typically due to unrealistic ambitions, a lack of resources, or action plans that are not kept up to date.

Identifying areas where supply chain and inventory management can be streamlined is a good starting point for any pharmaceutical firm looking to generate additional working capital that would otherwise lie dormant on the warehouse floor. Part of this means striking the right balance between procurement costs and inventory – ensuring that supply chain costs are kept to a minimum without sacrificing sufficient inventory levels needed to meet demand. Strong C-suite buy-in is essential for setting realistic goals and managing trade-offs. For instance, there is often a delicate balancing act between cost and service when managing cash flow optimisation projects. This means finding the optimal balance between service levels and controlling costs – which requires a nuanced understanding of business objectives, competitors’ service offerings, and customer expectations.

A well-crafted roadmap, engaging all stakeholders, is crucial for launching an effective inventory optimisation programme

A well-crafted roadmap, engaging all stakeholders, is crucial for launching an effective inventory optimisation programme. This should include an examination of all the processes that surround the firms’ supply chain, including mapping out lag times, to help pharma firms anticipate the effects of their changing inventory.

Assessing lag times was a fundamental part of a recent project that we worked on with one of the world’s largest pharmaceutical and biotech companies, which services over 100 million patients. As a brand, they were seeking to sustain the growth that the pandemic had enabled by investing more capital into investment without impacting the company’s balance sheet.

We developed an inventory optimisation projection for each of its markets and brands over five years and included specific targets for inventory holdings for each brand per year. By understanding the lag times involved in the supply chain process, where changes often take a year or more to show their true effects and benefits, we were able to assess the impact of decisions and their benefits.  But just as importantly, we identified the critical skills gaps within their teams and developed a tailored capability-building programme to ensure they could sustain improvements.

Unearthing buried treasure

When companies face debt or cash flow challenges, the natural response is to freeze capital expenditure when necessary, or manage receivables and payables. Inventory leverage, however, is less frequently activated.

Inventory management can be the hidden pot of gold that pharma firms need to unlock capital, but its cross-functional nature and the need for trade-offs between various company functions can make it inherently complex. If done correctly, and with the right planning around it, firms can see great benefits – on the project referenced, the optimisations will lead to a €800m inventory reduction globally over the next few years, which is capital that would have been left buried on the warehouse floor.

Effective inventory optimisation requires coordination across key business functions such as purchasing, logistics, supply, production, and sales. But without ensuring that the right skills and team structures are in place, these gains are likely to be short-lived. When these efforts are aligned, these projects can generate the vital cash needed to improve pharma firms’ cash flow, reduce debt, and set them on the right track for sustained growth.

Mohib Rahmani is managing principal at Argon & Co

Pic: Shutterstock