Treasury Today Country Profiles in association with Citi

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Best Working Capital Management Solution Winner: Pfizer Inc.

Roger Fleischmann, J.P. Morgan, Beth Blumenfeld, Arijit Dasgupta and Sylvia Malone, Pfizer, Steven Elms, Citi, Chris Jameson, Bank of America Merrill Lynch, Simon Knightbridge, Pfizer and Steve Payne, EY

This is all about improvements to Pfizer’s cash conversion cycle and cash flow generation. Last year alone, Pfizer generated approximately US$1.5bn of incremental cash flow, largely due to the efforts from each of the five work streams it established.

Photo of Roger Fleischmann, J.P. Morgan, Beth Blumenfeld, Arijit Dasgupta and Sylvia Malone, Pfizer, Steven Elms, Citi, Chris Jameson, Bank of America Merrill Lynch, Simon Knightbridge, Pfizer and Steve Payne, EY.

Working Capital Team

Pfizer Inc. is a research-based global biopharmaceutical company. The company is engaged in the discovery, development and manufacture of healthcare products. Its global portfolio includes medicines and vaccines, as well as consumer healthcare products. As of 31st December 2016, the company sold its products in over 125 countries.

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Improved cash conversion cycle feeds straight through to bottom line

The challenge

To identify opportunities to improve the cash conversion cycle (CCC) and cash flow generation without adversely impacting the income statement. With an increasingly challenging operating environment, Pfizer saw an opportunity to increase its focus on working capital management (WCM) and to improve cash flow generation in parallel with a continued focus on P&L.

In an effort to determine a baseline, Pfizer conducted a benchmarking analysis on working capital metrics across the biopharmaceutical space, which compared Pfizer against several of its large-cap peers. A team, sponsored by its CFO and led by corporate treasury, was mobilised.

The solution

Pfizer established five workstreams to focus on the key areas within WCM. Each of the workstreams brainstormed actions and solutions for their respective areas, prioritising those initiatives with a focus on maximising improvement to the CCC and/or improving cash flow generation (noting that the VAT and other working capital workstreams do not directly impact the CCC calculation).

  • Accounts receivable:

    Pfizer moved from fourth quartile versus its peers to first quartile between 2010 and 2016 in an adverse mix environment. This substantial improvement is directly attributable to operational improvements on collections and terms. Pfizer implemented best in class collections practices across the world, including Europe where pharmaceutical companies have faced challenges due to the financial crisis. The team proactively partnered with governments and hospitals in order to ensure past due, receivables were collected from these markets.

  • Accounts payable:

    improvements to their DPO were made possible due to:

    • Improvement of supplier payment terms.

    • Shift of payment trigger from invoice date to receipt date.

    • Reduction in payment-run frequencies.

    • Availability of operating data and metrics due to rollout of a global SAP.

    • Implementation of a treasury-led supply chain financing programme, which benefits both Pfizer and its suppliers.

  • Inventory:

    Pfizer Global Supply (PGS) established and continues inventory optimisation initiatives across the supply chain, making improvements to its gross inventory balance. The focus ranges from procured raw materials at manufacturing facilities all the way through to finished goods. In addition, PGS implemented organisation and process change enabling end-to-end supply chain orchestration for all of Pfizer’s major brands. All of Pfizer’s supply chain processes are built upon its growing SAP footprint and are “aimed at ensuring the right product, in the right place, at the right time and at the right cost for the patient,” explains Keenan.

  • Value-added tax and other working capital:

    Pfizer has been optimising other areas of the balance sheet including indirect taxes/VAT, prepaids, non-trade receivables, rebates and accruals. Initiatives implemented by the company that resulted in the improvement include, but are not limited to, recovery of VAT receivables from international markets, reduction of prepaids globally and improved collections of non-trade receivables and rebates.

“We at Pfizer are grateful for being recognised by Treasury Today for our efforts in managing our working capital. Winning this award validates the hard work and dedication our colleagues across the company have put into this initiative and we will continue to strive to be best in class in working capital management.”

Best practice and innovation

The project management team compiles and distributes a monthly dashboard to finance leadership which monitors various working capital key performance indicators (KPIs) to ensure they are improving.

Pfizer’s inventory workstream uses several systems including the Global Market Exchange (GMX) system to analyse SKU-based inventory pricing, SAP Business Insights to review brand specific demand and supply analytics and Tableau for data visualisation on their supply chain performance. Any key business decisions that could have implications on working capital are considered before being finalised.

Key benefits

  • Improved the CCC by 25.2 days to 77.1 days from 102.2 days (from 2010 to 2016).

  • Generated approximately US$1.5bn of incremental cash flow in 2016.

  • P&L benefits.

Key learning points

  • Early and continuous support from Executive Leadership is essential in driving results.

  • Working capital management is an enterprise-wide endeavour and taking efforts to improve your working capital position should be communicated to all levels of the organisation.

  • Embed best in class working capital processes into every day operational decisions.

  • Look for improvements beyond the traditional accounts which typically define working capital. Opportunities for cash preservation can be found by analysing all areas of the balance sheet.