This Week in SCDigest:
Interesting Inventory Times
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
SCDigest On Target e-Magazine
New Blog - Gilmore's Daily Jabs
Guest Expert Insight - Supply Chain Perspective by David Lengacher - Adding Lean to Your SCM Strategy
SCDigest Introduces "Distribution Digest"
Your Supply Chain Questions Answered! This Week's Question - Task Interleaving in WMS
Trivia, Supply Chain Stock Index
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November 6, 2008 - Supply Chain Digest Newsletter

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Interesting Inventory Times

This is an interesting time for inventory.

Just a short time ago – few months - transportation and fuel surcharge costs were through the roof, interest rates were low and money was flowing. That naturally led companies to, in aggregate, think about increasing inventory costs to reduce transportation expense. SCDigest ran several interesting articles, including analysis by MIT and ILOG’s David Simchi-Levi, on how a series of supply chain and inventory decisions might change under those conditions.

Incredibly, just a short time later, fuel costs have been roughly cut in half from their peaks, and ocean shipping rates are down even more – in some cases below the shipper’s variable cost to move the stuff. As the Baltic Dry Index, which tracks ocean rates for shipping of basic commodities, last week reached a level 90% percent below its peak, some are calling ocean shipping the greatest bubble of them all. One reader commented on that story by noting that one of his friends who ships wheat says he has recently seen rates drop from $3200 to $900. Unbelievable. It’s more astounding than the incredible rise in oil and fuel prices, which took a long time to reach their zenith in comparison to the dramatic descent in shipping rates.

All of which is just an introduction to my review of this year’s working capital survey, including inventory management performance, from CFO magazine and the researchers at REL, a division of the Hackett Group.

It was just recently released for 2007 data. That may seem a long delay, but they have to wait for the annual reports to come out in April or so, then crunch the numbers for 1000 publicly-traded companies, then have some delay between the report being finalized and the actual hard-copy publication of the magazine, etc.

I believe starting next year we are going to do something ourselves at SCDigest on this, focusing on just inventory management, versus the entire working capital spectrum, and get out a report much earlier in the year (note to self: get crack SCDigest staff working on this in early 2009.).

The CFO/REL report looks at Days Inventory Outstanding (DIO) as one component of working capital. DIO is in a sense the reverse of the more familiar inventory turns metric most supply chain practitioners use. You calculate DIO by taking a company’s year end inventory levels and dividing by total revenue and then multiplying by 365 – giving you how many days of sales a company on average holds in inventory.

Gilmore Says:  
"In other words, in a few years Wal-Mart has gone from inventory growth almost equal to sales growth to inventory growth that was just 12% of sales growth. That change contributed billions in free cash flow growth."

What do you say?
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It is close to the mirror image of inventory turns, except that most companies look at turns based on cost of goods sold, rather than the revenue used for DIO (COGS/inventory at COGS valuation). But, high levels of DIO mean low levels of inventory turns, and vice versa.

The consensus seems to be that supply chain practitioners need to be more savvy in understanding “supply chain finance” in general and the impact of inventory on working capital and other measures specifically.

It certainly is important. In 2006, Wal-Mart started to feel a lot of heat from Wall Street after letting its inventory levels rise at a much higher rate versus sales growth than it had historically. In 2005, I believe, inventory growth almost equaled sales growth.

Guess what was one of the prime messages in this year’s Wal-Mart annual report? That the company’s US stores group had “grown inventory at 0.7% versus a sales increase of 5.8%.” In other words, in a few years Wal-Mart has gone from inventory growth almost equal to sales growth to inventory growth that was just 12% of sales growth. That change contributed billions in free cash flow growth.

So now we have today’s environment. Transportation costs for a time have dropped substantially, while capital is tough to find and is expensive. Now is the time to free up working capital for the company by focusing hard on inventory management. (Note an interesting new program we saw from ToolsGroup to do just that.)

Ok, so finally on to the working capital report.

Across all sectors, inventory levels have been static for several years. DIO for all sectors excluding the auto industry was at 29.7 for 2007, an improvement of 3.5% from the 30.7 level of 2006. (Note this aggregate number includes many industries that have little in the way of inventories.) This is a little surprising to me, as I would have assumed that increasing transportation expense (and hence inventory trade-offs, such as deciding to use slower rail transport), would have led to more inventories. Maybe all that investment in inventory technology is paying off. It’s also interesting because there had been basically no improvement from 2003-2006.

The report is organized by industry sector, but sometimes in ways that make comparison difficult. For example, in the beverage sector, you have both beer maker Anheuser-Busch, with a DIO of just 16 in 2007, and spirits manufacturer Constellation Brands, with a DIO of 136, so the industry average of 23 loses a little meaning. Others are worse – home builders lumped in with appliance makers under “consumer durables.”

Having said that, looking at sector performance is interesting. Well-performing sectors in 2008 include:

  • Communications/network equipment: DIO down 15%, from 37 to 32
  • The wireless/cell phone industry: DIO down 16%, from 11 to 9
  • Specialty retailers, a very broad group, DIO down 4% from 54 to 52
  • The pharmaceutical industry: DIO down 9%, from 45 to 41
  • Metals industry: DIO down 5%, from 52 to 49
  • Life sciences/medical devices: DIO down 4%, from 43 to 41
  • Electronics: DIO down 8%, from 45 to 42
  • Internet and catalog retail: DIO down 4%, from 20 to 19

Laggards were the following:

  • Food and drug retailing: DIO up 8%, from 27 to 29
  • The consumer packaged goods sector: DIO up 5%, from 40 to 42
  • Department stores and mass merchants: DIO up 4%, from 62 to 64
  • Restaurants: DIO up 5%, from roughly 5.5 to 5.8
  • Containers and packaging: DIO up 6%, from 43 to 46

Most other groups were plus or minus 2% or less from 2006 to 2007. You can find the full report at: 2008 Working Capital Report.

We’re going to look at these numbers and some individual companies in more detail in next week’s issue of SCDigest On-Target.

Has your company started to make changes to lower inventory levels in the current environment? How so? Any reaction to the summary 2007 DIO numbers? Let us know your thoughts at the Feedback button below.


Let us know your thoughts.


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Supply Chain Consultants

This Week's Supply Chain News Bites Only from SCDigest

Supply Chain Graphic of the Week - Supply Chain Agility versus Adaptability

Supply Chain by the Numbers: November 6, 2008


Whether the beginning of a recovery or a brief respite in more of the same, there was finally some positive news on Wall Street last week.  Consequently, our Supply Chain and Logistics stock index had a good week.

In the software group, Ariba recovered all and more of last week’s losses – up 27.2%. In the hardware group, both Zebra and Intermec netted impressive gains (up 15.3% and 14.1%, respectively).  In the transportation and logistics group, Yellow Roadway increased an astonishing 40.1% for the week.  

See stock report.

Each Week:
-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
November 4, 2008 Edition

Gilmore's Daily Jabs

In Supply Chain Technology Market Sizing, The Reporting is Weak

Headline Numbers without any Context Really Tells Us Very Little

Supply Chain Perspective
by David Lengacher

Adding Lean to Your SCM Strategy

Lean Can Complement Optimization by Relaxing Constraints; Stealing Market Share through Flexibility

THIS WEEK ON Distribution Digest


Holste's Blog: Understanding Warehousing and Distribution Center Challenges based on Company Size

>> Top Story: Should You Use Integrated Logistics Services from a 3PL?
>> Fralick: Some Companies Short Sighted in Looking at Consulting Rates.
>> Tedford Blog on Warehouse Control Systems

Q. Besides DIO, what are the other two components used to calculate total working capital levels?

A. Click to find the answer below

Have supply chain or logistics-related questions you need answered?
Ask our panel of experts. Share your insight!

Featured Question and Answer:

Task Interleaving in WMS

Your article on task interleaving in a distribution center was excellent, but I have a follow up question. Which is mathematic algorithm that a WMS uses to do this optimization?

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Feedback continues to pour in each week – but we want more and, with this in mind, are pleased to announce our new “Fuel for Thought” program. If your response is selected as our Feedback of the Week, we’ll send you a $20 gas card. Must have complete name and company, and you can only win once every three months. Send in your Feedback regularly! Make it thoughtful if you would like to win.

More feedback this week on our two-part First Thoughts series on supply chain complexity. That includes our Feedback of the Week from Bob Weiand, CEO of Lean Supply Chain Services, who says complexity can be a good thing, and is often necessary for progress. Meanwhile, Tom Craig of LTD Supply Chain says complex supply chains are nothing new.

Albert Fong of Smart Turn offers some thoughts on our piece on whether to use the 3PL’s WMS or choose your own, while two other readers comment on the attempts to both prolong and kill the Mexican cross border trucking program.

Feedback of the Week - On Supply Chain Complexity:

Some things are complex and the most successful companies find good ways to manage the complexity.  Complexity for its own sake is useless, but avoiding complexity will diminish innovation.

An example that comes to my mind is the assembly of an automobile.  If you think about the thousands of components that go into an automobile of today and put the parts all in a pile on the floor and then asked someone to put the car together - it would be mission impossible! Not impossible when the model T was built, but for today's auto, it would be absolutely impossible.  But because of organization and order and departmental focus and information systems, the auto is broken up into logical groups where individual parts turn into assemblies and then assemblies are brought together into sections and then sections are made into a whole automobile or a space shuttle becomes possible.  Aren't we all glad that the automobile got more complex!  Who would want to still be driving model T's?

I believe we need to get better at accepting and managing complexity as it relates to the global supply chain. Many companies are still working like they did 10 or 20 years ago.  In the case of ordering goods from China to the USA for example; they issue a PO to a factory who requires a minimum order quantity and a lead time of 30 to 60 days.  They have a container load of product shipped from the factory to a Distribution Center, and often not to the end point DC, but to a location that will split the shipment and ship it again to other DC's.  Many of these companies order from dozens of different factories and consider it a win to have goods go to a consolidation point to fill containers.  This transactional process has been in place for a long, long time and is still the norm. Why??

What if you created an integrated solution with the factories?  It would require more complexity for sure, it would also require a level of commitment and information sharing.  From my experience, many companies, especially small to medium sized companies accept higher inventories and poorer service on goods from overseas.  Again I say why?  It is time for small to medium sized companies to innovate and integrate globally.  The longer global supply chain is indeed more complex.  Companies who own their factories overseas can optimize both sides.  Companies purchasing overseas need to be willing to make things more complex in order to assemble the pieces in a different and better manner to get a different and better end result.

Bob Weiand
President and CEO
Lean Supply Chain Services

More On Supply Chain Complexity:

Supply chain management with global sourcing, sales and manufacturing has been complex for many years. Let’s take a major product—PCs. How do you think PCs were made from various electronic parts from Japan, Singapore, Malaysia, Taiwan and other places and all assembled at plants worldwide? How do you think the most difficult PC issue—the keyboard—was done given the many languages and the different number of keys needed for the different languages. How did they decided what to manufacture completely for each country or partially manufacture during each quarter? Or how to ramp up during the hot 4th quarter and then take back down in January?

It takes process, people and technology—all of them. Add that to your formula idea---and add—corporate culture. Is the company a sales mentality, operations mentality or accounting mentality? That question has a large impact on everything—to some exponential factor. Take it from someone who has the battle scars.

Well, off my soap box and on to tilt more windmills.

Tom Craig
LTD Supply Chain

On Whose WMS to Use:

I read your interesting article and there are definitely pros and cons on who’s WMS to use especially when you’re talking about leading commercial packages out there. The usual commercial packages are your typical enterprise software application that can involve a costly and potentially lengthy implementation process.

One consideration for the majority of companies is using an on-demand/SaaS-based WMS where everything is done over the Web with little or no infrastructure investment needed. While traditional software commercial packages offer a high level of functionality that most 3PLs would find to be overkill, the reality is that most companies want something that just works without all the bells and whistles.

The added benefit of an on-demand WMS is that as your trading network grows and you add/subtract partners, you can scale with a few clicks of the mouse.

Albert Fong
Smart Turn

On Mexican Trucking Program:

Since statistically, Hispanics have a high accident rate and you can find construction and trucking incidents on the rise concerning Hispanics now, I don't want to be on those roads when the trucking business moves to Mexico and their "high standards" become the norm.

John Brook

Any Mexican carrier wishing to operate within the US or Canada needs to be subject to the same EVA tax that is currently applicable to a US company attempting to utilize Mexican carriers and warehousing companies in Mexico. 

This 35% tax on operations forces a US company to open up its own Mexican company to operate competitively in carrying goods from Mexican (read US) manufacturing companies from Mexico into the US.

Essentially when a US company incorporates a Mexican subsidiary in Mexico, the Mexican tax rules apply and the extraction of profits becomes subject to regular Mexican tax rules. This same set of rules needs to apply to Mexican carriers attempting to do business in the US. When a Mexican corporation incorporates a US subsidiary in the US, that subsidiary will become subject to the same rules and regulations with regard to minimum wages, workmen’s compensation, hours of operation etc..

Then we will all be on an equal footing.

CEO eF3 Systems Inc.


Q. Besides DIO, what are the other two components used to calculate total working capital levels?

A. Days sales outstanding (how fast the company gets paid) and days purchasing outstanding (how fast a company pays its suppliers). The supply chain can actually have a big impact on days sales outstanding through accurate, un-damanged orders, customer satisfaction, and other areas.

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