I’ve learned one thing if nothing else: getting useful information about comparative inventory levels is hard.
Last week, we shared some thoughts on inventory levels, and previewed some analysis we were doing based on the annual working capital survey put out each year by CFO magazine (see Are We Making Inventory Progress?)
This week, we make that summary analysis by industry sector available (see Inventory Levels by Industry 2002-2005), which I hope is useful to SCDigest readers.
Our efforts were frustrated by the fact that the CFO survey changed the industry groupings a number of times over the years, generally for the better (more groupings that become more and more industry specific), but the price of that is we really can’t use the data well more than three years back.
Occasionally, the placement of companies within groupings is a little confusing, such as having one group of food manufacturers, and then having a company like JM Smucker, which sure seems like a food manufacturer to me, being placed in a category called “other food manufacturers.” Or placing Zimmer, which makes medical equipment, not in that category, but in medical supplies. Alas.
We talked last week about the challenge of separating raw materials inventories (at a company reporting level) from finished goods – more on that in a minute. Add to that that there are not too many “pure play” companies these days – should Johnson & Johnson’s numbers be looked at against other pharmaceutical companies, or consumer goods companies? The answer is some of both.
There are also just the vagaries of reporting, especially with year-end numbers. Companies can (legitimately) manipulate those, based on a number of factors.
I know there are several benchmarking services out there that may have better data, but I think we are not alone in finding it is a challenge to get good comparative information.
That said, I think the analysis provides some interesting insights at both the industry sector level and the individual company level. Again, the metric being used is Days Inventory Outstanding (DIO), which is basically the reverse of the inventory turns metric that many companies use.
For the industry sectors for which we have three years of data (2002-2005; 2006 numbers won’t be available for awhile), 12 industries overall saw improvements in inventory levels. The biggest absolute and relative improvement was in the commodity chemicals sector, which drove down DIO from 59 in 2002 to 43 in 2005. Specialty chemical manufacturers also improved, but not quite as much, going from 47 to 40 DIO.
Apparel manufacturers also did well as a sector, moving from a DIO of 55 in 2003 to 47 in 2005. This is a sector that has been offshoring for a long time, and may now be getting the process (and inventory buffers) down. Drug retailers and wholesalers also improved (DIO of 48 to 36), but it appears this was mostly on the wholesale side, showing the troubles with getting groupings right.
Eight sectors saw their DIOs increase during this time period (there were a few flat sectors, in addition). Worth noting, I think, these were mostly in the consumer goods-to-retail supply chain. Specialty retailers, for example, saw average DIO rise from 57 to 62 during the period. Broadline retailers such as Wal-Mart and the department stores saw, on average, DIO skyrocket from 44 to 65. Perhaps part of the same trend as apparel manufacturers in improved offshoring control, apparel retailers did show modest DIO improvement, however.
Consumer packaged goods companies saw DIO go on average from 34 to 40, and food manufacturers a modest increase of 40 to 43.
So what does this tell us?
It supports the notion that most of the overall progress in reducing inventories in the economy overall is coming from reduction in manufacturing inventory (raw materials and work-in-process), based on Lean-oriented thinking. The sectors that showed the least progress, or were headed the wrong way, were those most oriented towards finished consumer goods (consumer packaged goods and food producers, retailers).
SKU (stock keeping unit) proliferation would seem the primary villain. Lack of real true collaboration in most consumer goods-retail relationships would be another. In retail and some segments of consumer goods, the move to offshoring and the rise in inventory levels that most companies tell me they experience as a result could certainly also be a factor.
I’d welcome your opinion on this.
We also identified some standout individual company performers over the three year period. Again, lots of qualifications (DIO improvement is not necessarily, on its own, a real indicator of overall supply chain performance). The data didn’t provide visibility to all individual companies by any stretch, so some excellent performers may not be reflected here. Nonetheless, noteworthy DIO improvements came from:
- The Gap stores, which went from DIO of 52 in 2002 to 38 in 2005
- Autoparts makers Visteon (17 to 11.5) and Federal Mogul (54 to 47)
- Building products companies Owens-Corning, which went from 33 to 27, and Texas Industries (75 to 61)
- Arch Chemicals, taking DIO of 57 to 48 over the three years, and Eastman Chemicals (which has put a large emphasis on its supply chain), going from 49 to 34
- Apparel manufacturer Kellwood, which does a huge amount of offshoring, going from DIO of 60 in 2002 to 36 in 2005
- Drug wholesalers AmerisourceBergen (44 to 27) and Cardinal Health (53 to 36)
- Food giant General Mills, bucking the overall sector trend, reducing DIO from 48 to 33
- Industrial giant 3M, going from 43 to 37, as it found “Lean Six Sigma”
- Medical device manufacturer Stryker (52 to 42)
- Office products retailers Staples (49 to 38, as it focused its supply chain of driving Return on Assets) and Office Depot (42 to 34), both bucking the specialty retailer trend
- Paper company MeadWestvaco, which went from 51 to 42
- Federated Dept. Stores, which managed an outstanding improvement from 82 to 68
There were more, but these were a few worth highlighting. If we missed your company’s improvements, or you’re a technology vendor with a company story to share, drop us a line. Full report here.
What is your reaction to these sector inventory numbers? Anything stand out? How do DIO numbers needs to be taken into context? Why hasn’t there been more – or any – progress in consumer goods to retail?