Pharmaceutical versus Consumer Products: The Race for Supply Chain Excellence

In Search of Supply Chain Excellence

Lora Cecere of Supply Chain Insights

Supply Chain Insights LLC Copyright © 2013, p. 2

Supply Chain Insights is focused on delivering independent, actionable and objective advice for supply chain leaders. A company dedicated to research, turn to us when you want the latest insights on supply chain trends, technologies to know and metrics that matter.

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A Look at History: Progress in Productivity

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A Look at Retail


Current State: Corporate Social Responsibility


Source: Supply Chain Insights, Corporate Annual Reports 2000-2011

Inventory Performance

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Consumer Packaged Goods

59 57 62 64 67 67 68 70 70 64 64 67

Chemical

71.5 71.9 78.2 75.1 62 70.3 68.1 64.3 64.3 78.6 72.9 72.8

Pharma

122.236691097

869

133.699100562

175

190.147616165

968

170.986522478

989

184.342617399

859

175.550260476

877

167.799951139

247

149.815153981

283

154.915781882

591

198.663134119

976

154.313480863

244

131.819794240

294

High Tech

93.1 57.6 46.5 48.5 35.9 37.3 43.8 36.8 34.6 41.3 34.8 30.4

Average

86.4591727744

674

80.0497751405

437

94.2119040414

919

89.6466306197

472

87.3106543499

647

87.5375651192

192

86.9249877848

117

80.2287884953

207

80.9539454706

477

95.6407835299

941

81.5033702158

11

75.5049485600

736

25.0

75.0

125.0

175.0

225.0

Da

ys

o

f In

ve

nto

ry


Current State: Sales and Operations Planning


A Supply Chain

is a Complex System

with Complex Processes

with Increasing Complexity


Trying to Reach Balance


Cross Industry View: (2000-2011)

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Industry Averages


Consumer Packaged Goods Industry Performance


Three Different Strategies


CPG: An Industry with Leaders

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Pharmaceutical


Drug Manufacturers- Major (1)

Source: Supply Chain Insights LLC, Corporate Annual Reports 2002-2012 from One Source

200 300 400 500 600 700 8000

1

2

3

4

5

20022012

2002

2012

2002

2012

Bristol-Myers Squibb Co. Eli Lilly & Co. Pfizer Inc.

Revenue per Employee (K$)

Inv

en

tory

Tu

rns

Best Scenario

BMY526, 3.3

PFE500, 1.5

LLY445, 1.7

Average (Revenue per Employee, Inventory Turns)


Healthcare Value Chain Financial Metrics


Industry Progress


Introducing the Supply Chain Index

A formulaic representation of how companies are trading off growth, profitability, cycle and

complexity performance on selected supply chain financial

metrics against market valuation.

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Selected 14 Core Supply Chain Ratios to Study

Financial Metrics

Growth Profitability Cycle ComplexityCommon Shares Cash Cash-to-Cash Cycle Altman Z

Employee Growth Cash Change in Period Days of Finished Goods Capital Turnover

Employees Cash on Hand Days of Inventory Current Ratio

Market Capitalization Cash Ratio TTM Days of Payables Outstanding Quick Ratio

R&D Margin Cash Ratio Quarter Days of Raw Materials Return on Assets

R&D Ratio Cash Ratio Year Days of Sales Outstanding Return on Equity

R&D to COGS Ratio Cost of Goods Sold Days of Work in Progress Return on Invested Capital

Revenue EBITDA DPO/DSO Return on Net Assets

Revenue Growth Free Cash Flow Ratio Finished Goods Inventory Revenue per Employee

Revenue Growth TTM Gross Margin Inventory Working Capital Ratio

Revenue TTM Gross Profit Inventory Turns

SG&A Margin Net Profit Margin Receivables Turns

SG&A Ratio Operating Cash Flow Ratio Raw Materials Inventory

SG&A to COGS Ratio Operating Margin Work in Progress Inventory

OPEX Ratio

Pretax Margin

Source: Supply Chain Insights LLC

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Selected Ratios

Summary of Progress

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Patterns


Healthcare Value Chain

Source: Supply Chain Insights LLC

Metrics That Matter by Industry

Medical Care Industry Medical Distribution Pharmaceutical Major

Free Cash Flow Ratio Operating Margin Free Cash Flow Ratio

Working Capital Ratio Return on Invested Capital Return on Invested Capital

Operating Margin Free Cash Flow Ratio Current Ratio

SG&A to COGS Ratio Working Capital RatioDays of Payables

Outstanding

YoY Revenue Growth Return on Net Assets

Current Ratio DPO/DSO Ratio

Days of Sales Outstanding Current Ratio

Days of Inventory Days of Inventory

Days of Payables Outstanding

0.73 0.84 78


Medical Distribution Equation

Ln(market cap) = 6.04 + 33.39(OM) – 24.69(ROIC) + 15.23(FCF) – 11.11(WC) + 1.49(RONA) + 1.37(DPODSO) +

0.83(CR) + 0.02(DOI)

Correlation Strength

NOTE: Full equation is Ln(market capitalization) =6.036327 + 33.38703(operating margin) -24.6924(return on invested capital) + 15.23431(free cash flow ratio) -11.1125(working capital ratio) + 1.488203(return on net assets) + 1.371671(dpo/dso ratio) + 0.83093(current ratio) + 0.018224(days of inventory)We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Medical Distribution Equation

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Medical Distribution Ranking (2012)


Rank Company

1 McKesson Corporation

2 Cardinal Health, Inc.

3 Henry Schein Inc.

4 Patterson Companies Inc.

5 Owens & Minor, Inc.

6 MWI Veterinary Supply, Inc.

Source: Supply Chain Insights LLCMorningstar peer group used as basis for equation included, AmerisourceBergen Corp., ALR Technologies Inc. and Chindex International, Inc. for which 2012 results were not available as of 5/15/2013.

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Medical Distribution Performance Ranking (2012)


Rank Company CR DOI DPODSO FCF OM ROIC RONA WC Equation Output

1 McKesson Corporation 1.09 31.66 1.91 0.021 0.017 0.065 0.474 0.016

2 Cardinal Health, Inc. 1.24 27.86 1.85 0.008 0.017 0.074 0.210 0.031

3 Henry Schein Inc. 1.84 68.10 0.78 0.040 0.069 0.116 0.259 0.137

4 Patterson Companies Inc.

2.65 49.08 0.45 0.082 0.101 0.131 0.200 0.246

5 Owens & Minor, Inc. 1.76 34.92 1.09 0.020 0.022 0.089 0.122 0.079

Source: Supply Chain Insights LLC, Corporate Annual Reports 2012 from One SourceRankings only include companies that had annual data available through One Source at time of calculation (May 2013).

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Drug Manufacturers:Major Equation

Ln(market cap) = 9.13 + 10.25(FCF) + 2.88(OM) – 1.20(WC) – 0.71(CR) + 0.01(DOI)

Correlation Strength

NOTE: Full equation is Ln(Market Cap) = 9.129101 + 10.247215 (Free Cash Flow Ratio) + 2.878945 (Operating Margin) – 1.201200 (Working Capital Ratio) – 0.707560 (Current Ratio) + 0.008198 (Days of Inventory)We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Drug Manufacturers - Major Equation

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Major Pharma: 2012


Major Pharma: 2011


Major Pharma: 2010


Major Pharma: 2009


Major Pharma: 2008


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Who Is Lora?

• Founder of Supply Chain Insights

• Partner at Altimeter Group (leader in open research)

• 7 years of Management Experience leading Analyst Teams at Gartner and AMR Research

• 8 years Experience in Marketing and Selling Supply Chain Software at Descartes Systems Group and Manugistics (now JDA)

• 15 Years Leading teams in Manufacturing and Distribution operations for Clorox, Kraft/General Foods, Nestle/Dreyers Grand Ice Cream and Procter & Gamble.


Where Do You Find Lora?

Contact Information: [email protected]

Blog: www.supplychainshaman.com (4000 pageviews/month)

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Pharmaceutical versus Consumer Products: The Race for Supply Chain Excellence