How much excess cash is sitting in your warehouse?

A common question for supply chain leaders is, "How well is your inventory turning, and how does that compare to peers in other industries?" However, in the life sciences sector, this question doesn't come up as often or as intensely. Given that their gross profit margins are typically much higher than other industries, they tend to focus more on revenue growth and avoid the risk of stockouts.

While I agree that inventory turns aren't the ultimate metric, it's still crucial for any organization to understand the potential benefits of managing inventory more carefully.

Simple Benchmarking Exercise

To dive deeper, I conducted a straightforward benchmarking exercise that any organization can perform in about 15 minutes. Here's what you need:

1. Company COGS$
2. Company inventory $
3. Industry benchmarks

The first two are readily available in financial statements. Industry benchmarks might be harder to find, but shoot me a quick message, and I'll share the benchmarks I've calculated.

For this analysis, I focused on companies with revenues between $500M and $2.5B in the biotechnology, pharmaceutical, medical device, and diagnostics research industries.

Measuring Excess Inventory

To measure excess inventory, I compared each company's inventory turns to their peers. Benchmarking isn't an exact science, so I didn't compare against the best performers, as there could be mitigating factors. Instead, I looked at companies in the 2nd performance quartile, i.e., those in the 25th to 50th percentile. I chose the 37th percentile as the benchmark, representing above-average but not outstanding performance. This seemed a reasonable target for companies below the 50th percentile.

For example, if the benchmark in Company A’s industry is 3.0 turns, here's how to calculate their excess inventory:

• Company A COGS$ = $500MInventory = $250MTurns = 2.0 (500/250)
• Excess inventory = Company inventory - (COGS / Industry turns) = $250M – ($500M / 3.0) = $83M

Results

Here are some summary statistics from my dataset of 118 companies using this approach:

• Total revenue = $105B
• Excess inventory = $6.5B
• 25% of companies have excess inventory more than 10% of annual revenue

I'll let you decide if this is an opportunity worth pursuing. But consider how much effort your company would exert to achieve a 6-10% revenue improvement.