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There is an old saying in business that ‘Cash is King’. Inventory, no matter what type, ties up cash and diverts it from other uses. Therefore the aim of inventory management should be to minimize the inventory investment for a particular customer service level. The approach taken

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

should ensure that the target level of service is met while also minimising the cash investment. In turn this will maximize the overall benefit for the company.

To achieve this many companies adopt supply chain techniques for managing their inventory without realising that the effe

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

tiveness of these techniques is limited to only a certain type of inventory. That is direct inventory. These companies don’t realise, that for their indirect inventory such as parts and components, finished goods, OEM spares, engineering spares, MRO inventory and industrial supplie

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

, a more complete approach is required. As a result, the opportunity for cash release with this type of inventory is often disproportionately large for the inventory investment.

Some companies take a completely different view, they treat inventory as an expense and this is partic

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

larly the case with MRO inventories. You might expect this with companies that don’t carry other types of inventory (such as utilities) but in fact it is the case with many types of companies, even those in manufacturing. For many engineers inventory isn’t a serious business topic;

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

nventory is something that accountants count and storemen store. For the average maintenance engineer the issues are uptime and reliability. Spares don’t improve reliability and they only improve uptime by being available when needed. Hence their issue is availability and not invent

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

ry reduction. However, whether they realise this or not, their purchase of MRO inventory is an investment of the company’s cash. It represents a use of cash that may, or may not, be better used in either a capital purchase or elsewhere in the company.

In an environment where downt

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

ime is costly, and relatively speaking the cost of individual spares is cheap, it is easy to justify carrying any number of spares. In this case MRO inventory is viewed as insurance. This perspective almost invariably results in the over purchase of MRO inventory and subsequently a

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

over investment in inventory. In this case MRO inventory is the forgotten investment.

If, however, we view MRO inventory as an investment then logically we will manage the inventory differently. Our goal will be to maximise the return on investment. That does not mean risking our

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

perational outcomes but it does mean ensuring that there is no excess or unnecessary inventory investment. It does mean consciously managing the cash investment. The challenge with MRO inventory, as with all inventory, is whether to free the cash or carry the inventory.

Co

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

parison of Investment Measures

So far we have explained that MRO inventory is an investment of the company’s cash and that the ‘insurance’ approach will lead to over investment. What is needed is a way to compare that investment to other investments such as fixed capital.

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

he two most common approaches for comparing different investments are ‘Payback’ and Return on Investment (ROI).

Payback measures how long it takes for the investment to ‘payback’ the original funds invested. So, if we purchase a machine for (say) $1,000,000 and the machine reduces

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

osts in some way by $500,000 per year then the ‘payback’ is 2 years ($1,000,000 / $500,000).

Return on investment (ROI) measures the percentage return that the investment generates per year. So, in the above example, the investment of $1,000,000 returns $500,000 per year, which is

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

0%.

These types of measures provide a means of comparing different uses of cash and help us to prioritise the use of that cash. For example, if we can achieve a $500,000 return by investing $750,000 (an ROI of 66%) then because of the superior ROI we may redirect our cash into that

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

investment rather than the $1,000,000 investment above.

However, MRO inventory is not quite so easy to evaluate and this is why the investment is so easily over looked. We cannot so easily identify the return on investment with MRO inventory because the benefit of MRO inventory is

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

the prevention of loss through reduced downtime.

We can though, use our understanding of cash management and investment measures to lead us to a better understanding of inventory management and the impact of safely reducing inventory. So, while it is difficult to quantify the benef

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

t of holding inventory we can most definitely quantify the investment and we know that if we can reduce the level of the investment (without impacting our downtime) not only will we increase the ROI but we will also free up cash and improve the company cash flow.

In addition, if we

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

hold too much inventory of an item and that excess adds no value because it is never used, then the ROI is zero. In effect we would be better off putting this money into the bank at zero interest than holding the inventory – at least we would still have the original capital! This ex

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

ess inventory uses up the cash and can be removed with no risk to the business.

We can also use the investment approach as a means of determining the ROI from applying resources to reducing that inventory. If, for example, we spend $100,000 identifying and taking action to reduce i

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

ventory and we achieve a reduction of $1,000,000 then the ‘payback’ on that investment is 1.2 months and the ROI is 1000%. Now wouldn’t we like that return on our other investments! That $100,000 might, from a pure business perspective, be the best investment that a company can make

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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