Culling the Herd: How to Stop Pharma Inventory Waste and Protect What Matters
In the pharmaceutical world, inventory management is a high-stakes game. Companies often carry a vast number of product variations, or SKUs (Stock Keeping Units), to meet market demands. However, this common practice leads to a silent but significant problem: a warehouse full of slow-moving stock that eventually expires, forcing companies to write it off as a total loss. At the same time, this clutter can obscure the true state of the supply chain, leaving critical, life-saving drugs understocked.
This challenge is a classic case for the Theory of Constraints (TOC), which provides a clear path to prioritize and protect what's most important. Instead of treating all products equally, TOC helps us differentiate between what truly matters and what's simply taking up space and costing money.
The Problem: A Tale of Two SKUs
Imagine a pharmaceutical company with thousands of different product variants. Some are blockbuster drugs used daily by millions, while others are rare medications for a specific, small patient population. Without a smart strategy, both are treated similarly by the inventory system. This results in:
Excessive Waste: Low-demand SKUs sit on shelves for months or years, ultimately expiring and being thrown away. This is not just a financial loss; it's a major source of waste.
Patient Risk: The company's focus is spread thin, and the most important, fast-moving drugs may not receive the attention they need. This can lead to stockouts of life-saving medicines, which carries a far greater cost than any financial loss.
The TOC Cure: A Simple, Three-Step Prescription
The solution lies in applying TOC's principles to inventory management. It’s about being strategic and focusing on throughput, which is the rate at which the system generates money.
Rank Your SKUs by Throughput:
First, we must stop treating all products as equal. Using throughput accounting, we rank every SKU not just by sales volume, but by its contribution to the company's throughput. This means we look at the gross profit an SKU generates, minus any direct costs. More importantly, we also consider its clinical value. This step gives us a clear picture of what’s truly valuable.
Example with Numbers:
Let's look at three hypothetical SKUs:
SKU A (Lifesaving Vaccine): Sells 100 units per month, with a profit of $500 per unit. Monthly Throughput: $50,000. Clinical Value: Extremely high.
SKU B (Common Pain Reliever): Sells 10,000 units per month, with a profit of $10 per unit. Monthly Throughput: $100,000. Clinical Value: High.
SKU C (Rare Dietary Supplement): Sells 20 units per month, with a profit of $20 per unit. Monthly Throughput: $400. Clinical Value: Low.
Throughput accounting immediately highlights that while SKU B has the highest sales volume, SKU A's critical nature and high per-unit value make it equally, if not more, important to protect. SKU C, however, has a negligible contribution.
Cull the Non-Performers:
Once you've ranked your SKUs, you'll find that a small number of products are responsible for the vast majority of your throughput. You'll also identify a group of low-impact SKUs with negligible throughput contribution. The cure is simple: reduce the SKU count by eliminating these non-essential products. This frees up capital, warehouse space, and management focus, all of which were previously wasted on items that provided minimal value.
Example with Numbers:
After our analysis, the company decides to discontinue SKU C. By doing this, they free up the space and labor previously dedicated to managing a product that only generated $400 per month in throughput. This resource can now be redirected to more profitable or critical products.
Differentiate Your Buffers:
With your inventory streamlined, you can now apply a tailored approach to managing what's left. Instead of one-size-fits-all safety stock levels, you create differentiated buffers.
Example with Numbers:
Let's assume a typical safety stock is a 2-month supply for all products.
SKU A (Lifesaving Vaccine): We increase the buffer to a 4-month supply to protect against any disruption. Instead of just 200 units on hand, we now maintain 400 units, ensuring patients are never at risk of a stockout.
SKU B (Common Pain Reliever): We keep its buffer at a 2-month supply, which is sufficient for a high-demand, stable product. We maintain 20,000 units.
SKU C (Rare Dietary Supplement): Having culled it from the inventory, we have a 0-month supplyas it is no longer stocked.
The Result: A Healthier Inventory
By applying these TOC principles, a pharma company can transform its inventory from a cluttered, wasteful mess into a lean, efficient system. They stop focusing on products that drain resources and start protecting the products that save lives. This approach not only lowers waste and cost but, more importantly, protects patient-critical flows, ensuring the right drug is always available at the right time.