Should Pharma Companies Envy the ITO of Brewers?
Ryan Kershaw
Empowering Industrial Leaders to Transform Organizations with Business Expertise
At first glance, you wouldn’t think that there would be many similarities between these two manufacturers.? However, provided you’re comparing BioPharma rather than ChemPharma producers (compounding type applications, i.e. Advil), there are some interesting parallels between the two:
-????????? Both produce controlled substances
-????????? Both involve working with microbes
-????????? Both need to meet stringent cleanliness standards
-????????? Both are batch processes (though some pharma applications are moving to continuous)
-????????? Both involve numerous filtration steps
-????????? Both use power, heat and water as utilities
-????????? Both involve packaging small individual packages in high quantities rather than lower quantities of bulk shipments
-????????? Both processes are supported by laboratory measurements
-????????? Both manufacturing processes are in the 2-6 week range
So, with the number of manufacturing parallels, you would expect to see some parallels in other areas such as finance.? One such area is ITO, or Inventory TurnOver.
For those that are unfamiliar with ITO, this is a financial measurement that looks at how often a company turns over its inventory (hence the name) per year (or other period but per year is the norm).? This is calculated by taking the COGS (Cost Of Goods Sold – how much it cost to make the product, which includes materials, labour, and manufacturing overheads) and dividing it by the average inventory for the year ([beginning inventory + ending inventory]/2).?
The majority of the ITO number will be made up from three major inventory sources: Raw materials, Work In Progress (WIP), and finished goods.? Raw materials refer to ingredients in storage.? WIP refers to materials currently in the manufacturing process. Finished goods are any goods ready for sale that are currently in the warehouse awaiting shipment.
If a company buys all of the inventory that it will need to produce all products sold for the year at once, then its ITO should be close to 1.? If a company replenishes its inventory twice a year, then it will only keep half the inventory in stock at any one time and its ITO should be closer to 2 and so on.? A higher number typically means better inventory control, though there will be certain standards per industry and this will also be impacted by the length of the production process.
To compare the two industries, I picked two companies that are of a similar size, Sanofi and AB InBev.? Here is how they stack up (numbers from the 2023 Annual Report from each company):
?Sanofi
Revenue €43,070M
COGS €14,236M
Average Inventory* €10,307M
ITO 1.38
AB InBev
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Revenue $59,380M
COGS $27,396M
Average Inventory* $5,723M
ITO 4.79
* Inventory number is sum of Raw Material, WIP, and Finished Goods inventories only.
Sanofi had an ITO that is 3x higher than AB InBev, which is significant, especially with processes that are similar in length.? This number essentially says that AB InBev turns its inventory over every 76 days, while it takes Sanofi 265 days to do the same.? This can also be read as the average time between raw material entering the facility and it leaving as a finished good.? This gets even more interesting when looking at the ITO of each separate type of inventory (Raw, WIP, and Finished).
Sanofi
Raw ITO 8.65
WIP ITO 2.47
Finished ITO 4.91
AB InBev
Raw ITO 7.73
WIP ITO 49.05
Finished ITO 16.75
?
Looking at it this way, Sanofi is marginally better than AB InBev at controlling its raw goods inventory.? However, this is probably due to the sheer size of this type of inventory.? AB InBev brings in rail cars of hops and grains, Sanofi doesn’t deal in the same size for its incoming goods.
The finished ITO shows some significant separation with AB InBev moving its finished goods about four times faster than Sanofi.? This is probably explainable due to the nature of the product.? Beer tends to be a lot easier to handle and store than the products that Sanofi manufactures, and Sanofi probably has specially designed storage areas conducive to longer term storage.? This combined with the storage capacities of end users (consider the size difference between the vaccine fridge at your doctors and the storage fridge at your local bar) helps to explain this difference.
The interesting part is the WIP ITO.? This metric has AB InBev turning its WIP inventory over every 7 days, while it takes Sanofi 148 days.? If both of these have a production process that is similar in length, 2-6 weeks, then this is an amazing difference between the two.? One thing that I assume is contributing to the difference is parallel production capacity.? Since AB InBev has a WIP ITO significantly less than their production cycle, then they must be running parallel processes, while Sanofi with its WIP ITO higher than its production cycle time would indicate fewer parallel processes.
This is typically true, breweries tend to have multiple batches in various stages at once, while there are fewer batches being processed at once in a pharma application.? However, while I think this is a contributing factor, there are other reasons.? One big one is the requirements and approach to quality.? In a brewery application, most of the critical measurements are done in line, while those that cannot be done inline are typically quick to do (i.e. colour – takes a minute).? In a pharma application, while there are many measurements being done inline, other critical measurements either cannot or are not being done inline and take significant time to complete (i.e. microbial measurements – can take weeks).
While there are significantly higher quality demands in pharma manufacturing, many critical measurements are now being done in or at line in something close to real time.? So why the hesitation to use these measurements?? Most of it comes down to validation and regulation.? If something hasn’t been used in the application before, it’s difficult to get it in there.? Even with the PAT initiative spearheaded by the FDA, there is still reluctance or suspicion around using new methods.? Contrast this with brewing where it is typically a question of cost.? Will the measurement pay for itself?? Due to the quick measurement time of many more complicated measurements, it can be difficult to justify moving it inline.
What are your thoughts?? Should pharma look to brewers to benchmark their ITO?? Let me know in the comments!
Empowering Industrial Leaders to Transform Organizations with Business Expertise
3 个月Here are the reports I pulled the data from: Sanofi: https://www.sanofi.com/assets/dotcom/content-app/publications/annual-report-on-form-20-f/2023-01-01-form-20-f-2023-en.pdf AB InBev: https://cdn.builder.io/o/assets%2F2e5c7fb020194c1a8ee80f743d0b923e%2Fc45d833164dc4e0a849c890cae931f4c?alt=media&token=5fe510b1-692d-4bc8-95f4-8a4ceb847bbc&apiKey=2e5c7fb020194c1a8ee80f743d0b923e