Health Care Costs, Working Capital Improvement and Supply Management in the Same Sentence?

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

A previous post showed that top performing companies among the US-headquartered 1000 companies, as measured by Days Working Capital (DWC) improvement, focus on all three sub-metrics of DWC:

  • DSO – Days Sales Outstanding
  • DIO – Days Inventory Out Standing
  • DPO – Days Payables Outstanding

The data, as compiled, analyzed and reported by CFO Magazine(c)also performs an analysis on the above metrics by industry sector. The top culprits, or bottom three performers, as per Table 1, were in Healthcare Equipment and Supplies, Biotechnology, and Life Sciences Tools and Services. Two other sectors, Pharmaceuticals and Health Care Technology were in the bottom third percentile of all 59 industry sectors (GICS Industry Level). All these industries can be classified as health related industries (HRI).

Table 1: Days Working Capital by Industry Sector


While many enterprises are different, thus requiring customized initiatives to improve working capital performance, a detailed look into the three sub-metrics yields the fact that HRI sub-sectors (other than pharmaceuticals) fall in the bottom third percentile of all industries in DPO, Table 2.

Table 2: Days Payables Outstanding by Industry Sector

To sum it up, HRI organizations, on average, pay suppliers much quicker than the average of all sectors — in some cases more than twice as fast as the overall average. The question can be asked: “why do these organizations pay their suppliers/sub-contractors so quickly”? Based on the very nature of HRI — highly proprietary and cutting edge products, and based on reviewing detailed SEC filings, the following conclusions can be made:

  • Some strategic materials are sole sourced,
  • Outsourced R&D (including clinical trials) and,
  • A reliance on favorable fluctuations in the strength of the US dollar

One can surmise that suppliers to HRI are very strategic and hold strong leverage to their HRI customers.

All point to the fact that this sector, perhaps like no other requires strong and senior-level attention to supply management initiatives.


One can conclude that in HRI, the suppliers hold the leverage in these relationships, which means it is paramount for HRI organizations to proactively approach supply-management in a collaborative manner that encourages mutual benefit. Of the various known strategies, two come to mind:

Leverage early-payment discounts: This strategy may already be occurring. HRI finance teams must perform a cost-benefit analysis to determine if taking advantage of early-payment discounts yields stronger returns vs. freeing up working capital.

Supply-Chain Finance: Potentially the best strategy since neither organization’s working capital is adversely affected. Again, a cost-benefit analysis must be performed to determine if any new finance charges yield stronger returns.

In general, enterprises in the HRI sector may wish to address the question:

How Do We Improve Each Other’s Working Capital Without Adversely Affecting Other Financials?

Thanks, Sudy.

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