Smart Inventory Management Opens the Way for Driving Out Cost

In my last blog, I spoke about the radical transformation across the life sciences supply chain from a product-focused model to a make-to-order approach. Certainly this is being driven to a large degree by the growing emphasis on personalized medicine. Equally, however, there are important considerations around transforming from a cost center to a profit center while remaining – or indeed becoming more – innovative.

By Rick Ruiz, Partner, CSC Life Sciences

One of the clearest areas for cost takeout in the supply chain is inventory management, and the potential for making a difference in terms of spend is huge because inventory management spans almost the entire length of the overall supply chain. Its breadth is probably not well-understood, and most people tend to think of inventory management as merely the movement of product in or out of storage.

However, it’s a complicated area and, in reality, inventory becomes integral to all parts of the business once orders are taken and processed.

Defining Inventory

It probably helps to define what we mean by inventory. At an abstract level, even before a particular product is physically available to satisfy the processed order, that future product is inventory. At the other end of the scale, it remains inventory even as it is loaded on a truck, ship or aircraft to meet delivery. Should the product be returned for any reason, it once again becomes part of “available” inventory.

At a superficial level, we might think of inventory as being available product, but from an inventory management point of view there are very real and costly considerations. While in the inventory cycle, an available product has significant financial impact. Not only do various cost factors need to be considered relative to full price, discounts, adjunctions and other financial arrangements, the very management of inventory is a serious cost issue for a company.

Think about it this way: for every day a pharmaceutical product sits at rest as inventory, it comes closer to its expiration date, while a medical device moves closer to obsolescence, because companies will either recraft the product or develop something new.

There are also regulatory considerations. Drug products can begin to lose their effectiveness and efficacy while sitting on a shelf and, in order to ensure that products distributed are safe and efficacious, companies may have to remove and destroy inventory if it remains in stock too long. Again, with medical devices that are caught in the inventory cycle, the challenge for companies beyond cost is that distributing obsolete medical devices may create a significant liability position.

Inventory management then is where companies can gain significant improvement in terms of cost takeout – and regulatory adherence – and there are now more and more opportunities to do just that.

Technology and Partnership

Leveraging advanced technology such as MEMS (Microelectromechanical systems), Industry 4.0 and the Internet of Things (IoT) provides the ability to track products from the point of entry into the delivery cycle, to the point of disbursement, to the re-entry of the product into inventory as part of a return process. This financial investment must be managed tightly, and improved, as the company moves from a product focus to an order-based approach. In other words, let the demand drive the supply availability.

Digitization gives companies the ability to eliminate paper-based lag time, the time consuming processing of physician/hospital/pharmacy orders, and the time wasted in the manufacturing process. Ultimately, digitization means a more agile and flexible flow of data across a process, which allows a much tighter alignment between demand and production of product and thus inventory.

As technology advances, and the manufacturing and production lines become more intelligent, companies will be able to successfully drive cost out of the overall operations. There will be minimal inventory at “rest,” fewer quality issues and, therefore, less need to scrap product.

In order to drive out costs from the supply chain, life sciences companies need to pay close attention to the management of inventory. There are significant opportunities for cost takeout by collaborating with trusted partners and vendors, for example through the application of advanced technology for more accurate tracking, and by establishing a much tighter alignment in the demand and supply processes.

Comments

  1. Steve Caulkins says:

    Rick, an important topic to be sure. One of the things I’ve observed is that many Life Sciences companies consider the availability (the opportunity to positively impact a patient) as outweighing the risk of obsolescence and overriding opportunity to potentially reduce cost in their “hierarchy of needs”. This appears not only in inventory management, but also in areas like Logistics in the form of premium/expedited freight. Trying to accomplish multiple objectives, many organizations are drawn to late stage customization / postponement as a strategy. Unfortunately, that requires higher levels of sophistication and agility that take time to develop. Maybe that could be a future blog.

    Like

    • Rick Ruiz says:

      Steve….great insights as usual. I totally agree. There is a huge opportunity in the optimization of logistics and the accurate expenditure on freight. With the growing need for and use of cold storage the complexity of shipping product is growing. I believe this is prime area for the collection of and leveraging of detailed shipping information transactions, history and financials to determine the best packaging, contracts and shipping methods. I also agree that this would be an excellent subject to address in a future blog.

      Like

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