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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digital business could look like.
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March 2014 Publication
2013 Publications
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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 59.0 57.0 62.0 64.0 67.0 67.0 68.0 70.0 70.0 64.0 64.0 67.0
Chemical 71.5 71.9 78.2 75.1 62.0 70.3 68.1 64.3 64.3 78.6 72.9 72.8
Pharma 122.2 133.7 190.1 171.0 184.3 175.6 167.8 149.8 154.9 198.7 154.3 131.8
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 86.5 80.0 94.2 89.6 87.3 87.5 86.9 80.2 81.0 95.6 81.5 75.5
0.0
50.0
100.0
150.0
200.0
250.0
DaysofInventory

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
2002
2012
2002
2012
2002
2012
0
1
2
3
4
5
200 300 400 500 600 700 800
InventoryTurns
Revenue per Employee (K$)
Bristol-Myers Squibb Co. Eli Lilly & Co. Pfizer Inc.
Best Scenario
BMY
526, 3.3
PFE
500, 1.5
LLY
445, 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 Complexity
Common 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
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 Ratio
Days 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

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)
Medical Distribution Equation
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Medical Distribution Ranking
(2012)
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 LLC
Morningstar 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)
Medical Distribution 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 Source
Rankings 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)
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:
lora.cecere@supplychaininsights.com
Blog: www.supplychainshaman.com
(4000 pageviews/month)
Twitter: lcecere 4200 followers.
LinkedIn: linkedin.com/pub/lora-
cecere/0/196/573 (3850 in the network)

Pharmaceutical versus Consumer Products: The Race for Supply Chain Excellence

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Pharmaceutical versus Consumer Products: The Race for Supply Chain Excellence