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  First Thoughts

    Dan Gilmore

    Editor

    Supply Chain Digest



 
Sept. 9, 2017

Supply Chain Inventory Performance 2017

Some Changes in Approach to this Year's Analysis; Days Inventory Outstanding versus Turns?

Since 2005, I have been doing reporting and analysis on company and sector inventory levels based on the annual Working Capital scorecard that is compiled The Hackett Group.

It is always one of our most popular columns of the year.

But there have been a few twists over the years, and another one this year, as I am going to explain here.

Gilmore Says....

Some categories (e.g., department stores) are pretty homogeneous - others have more variance between company business models within a category.

What do you say?

Click here to send us your comments
 

This data sent to me comes from Hackett's overall analysis of working capital performance for the 1000 largest publicly traded US companies. That means the full report and data set looks at three components working capital, changes in which of course then directly determine overall cash flow: Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payables Outstanding (DPO). Here, we are going to focus on just the inventory component.

Until two years ago, Hackett calculated DIO relative to how many days of sales a company held in inventory. That generated many complaints from readers, as the divisor in the formula was a day's worth of revenue, not a day's worth of cost of goods sold, as is typically how it is measured. As I said each year, that's how Hackett reported the data, and that's how thus had to deal with it.

Also frustrating was that you cannot directly convert DIO to inventory turns using that approach because each company's gross margin percent is different. If measuring inventory turns using cost of goods sold in the equation, you can't derive that Turns number if you calculated DIO based on a day's sales instead of COGS.

But starting with the data for 2014, the Hackett DIO calculation was changed to:


DIO = End of Year Inventory Level/[Total Cost of Goods Sold/365]


So, you calculate the average cost of goods sold for one day, and then see how many of those COGS days you keep in inventory (based on year-end balance sheet numbers).

As such, DIO is sort of the reverse of inventory turns, in that a higher DIO, all things being equal, means poorer inventory management performance, while a lower number signals improvement. You are being more efficient with inventory versus a given level of COGS.

So, let's take 3M. In 2016, it ended the year with COGS equal to $15.04 billion, and inventory levels of $3.335 billion. So its DIO is:



3,335,000,000/[15,040,000,000/365] = DIO of 82.1 Days

 


That DIO compares to inventory turns of:


15,040,000,000/3,335,000,000 = 4.4 Turns


Clear as mud?


Now, I usually get the data from Hackett in late July and do all the segmenting and analysis (more on that in a second) to produce my columns in early August. But this year, for reasons I won't get into, Hackett was not able to send the data until a couple of weeks ago.

So when I finally took a look, the companies in many sectors had somehow been cut back. Which takes me to me next point: the big value-add SCDigest has performed here is to re-sort individual companies into new categories, so the categories and comparisons in our view are more usable for supply chain thinking. For example, in the original Hackett data, home builders like Toll Brothers are mixed in the household durables category with companies like Whirlpool. That is one of the most blatant "apples and oranges" combinations, but there were a number of others that don't jive, at least from a supply chain perspective. Metal producers such as US Steel were in the same category as miners, while "spirits" beverage companies are in the same category as soft drink makers, when the inventory dynamics of each group are dramatically different, in two of many other examples.

So, we did the (really) hard work of first eliminating sectors that aren't useful for the supply chain (e.g., bankers, etc.), and then redefining and populating the categories in a way that makes more sense for comparisons. As another example, rather than having one giant category of all specialty retail, we break that down into apparel, department stores, auto parts, etc. It really does take a lot of time.

It is far from perfect. Should Johnson & Johnson be placed in the pharma group, the medical device category, or consumer packaged goods, as it is in all those segments? Is Honeywell in the aerospace or automotive sector, or one of the "industrial conglomerates" like GE or 3M? That's where we put it again this year. There are many such examples where the call is not obvious.

In the end, we simply make choices, including looking up more details on a number of companies with which we were not familiar so they could be placed appropriately. This is in fact very difficult: how do you segment the dozens of public companies that are in the general “machinery” category? Should just Ford, GM and Tesla be together in a small auto OEM group, or should we broaden the category and mix those companies say with freight truck manufacturers such as Navistar and PACCAR, along with motorcycle maker Harley-Davidson? (That's what we did).

So, category construction and comparisons are fraught with issues and questions, but we do the best that we can. Some categories (e.g., department stores) are pretty homogeneous - others have more variance between company business models within a category.

The other thing we've done in the past is add in companies that for whatever reason were left out of the Hackett data set, based on manual a data look-up. Mysteriously, for example, retail giant Lowes was left out of the data every year.

So to net it all out, given changes to the Hackett data, we developed a tool to pull numbers from sites like Google or Yahoo Finance, and then applied that data to the categories and companies we built last year.

First, I will note again that I am struck by the impact mergers and acquisitions on shrinking the list - there are simply fewer companies out there. This will be the last year both Dow and DuPont are on the list, as that merger of chemical giants is just now complete. Johnson Controls recently swallowed up Tyco. We now have Kraft Heinz, which tried and failed to take over fellow CPG giant Unilever earlier this year after their merger.

It never ends - with impacts on the supply chain in many ways. I don't think it is good.

Across the 554 companies we annualized, average inventory turns in 2016 were 8.94. That compares with 8.48 in 2013 - or an improvement of about 5% over the last four years. That's actually pretty good - but many companies and sectors went nowhere or backwards since 2013. BTW, that 8.94 turns equates to a DIO of 40.8. As a check, the annual WERC DC metrics data found median DIO of 45, based on survy data.

That flatness is consistent with data on the US "inventory to sales" ratio (inventory levels divided by a month's worth of sales) from the Commerce Dept. As shown below, in late 2008/early 2009 the measure spiked as the recession caught companies with way more inventory than needed versus suddenly shrinking demand. But most companies cut away at that inventory ruthlessly, so that inventory was back on the longer term downward trend line by early 2010.

 

But since early 2012, inventory levels have headed slowly but consistently back up though down a bit here in 2017. Still, with a ratio of 1.38 in June overall inventories are up about 11% from the 1.25 ratio seen at the start of 2012.

That's some important backdrop for the detailed numbers I will lay on you next week. Sorry for the tease but I am out of space. Lots of detailed analysis next week.

What are your thoughts on measuring inventory performance? Why have inventories been rising since 2012? Let us know your thoughts at the Feedback button or section below.


Your Comments/Feedback

Srihari

Senior Consultant, Infosys
Posted on: May, 22 2016
Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different. 

That would only give a complete perspective with all the players in the pool.

Mike O'Brien

Senior editor, Access Intelligence
Posted on: May, 26 2016
Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Julie Leonard

Marketing Director, Inovity
Posted on: Jun, 27 2016
Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Carsten Baumann

Strategic Alliance Manager, Schneider Electric
Posted on: Aug, 19 2016

The IoT Platform in this year's (2016) Hype Cycle is on the ascending side, entering the "Peak of Inflated Expectation" area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn't this contradicting in itself?

Editor's Note: 

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.

 

 

Jo Ann Tudtud-Navalta

Materials Management Manager, Chong Hua Hospital, Cebu City, Philippines
Posted on: Aug, 21 2016

I agree totally with Mr. Schneider.

I have always lived by "put it in writing" all my work life.  I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This "putting in writing" can also be used for almost anything else.  Here are some general benefits (only some) of "putting in writing":

1. Everything is better understood between parties involved.  There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood.  This will ensure that all parties concerned confirm the details of the agreements as correct.  This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof.  Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor.  It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members.  "Learn from the past" it is said.

There are many more benefits.  Mr. Schneider is very correct about his call to "put it in writing".





Sandy Montalbano

Consultant, Reshoring Initiative
Posted on: Aug, 24 2016
U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of "Made in USA".

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative's free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

Robert

Transportation Manager, N/A
Posted on: Aug, 30 2016
 Good article!  I am sending this to my colleagues who work with me.  We have to keep this in mind.  Thanks!

Ian Jansen

Mr, NHLS
Posted on: Sep, 14 2016
SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I've worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many "picks" per day.

I've learned that one doesn't have to remind Germany about your EDI orders.

Don Benson

Partner, Warehouse Coach
Posted on: Sep, 15 2016
Challenge - to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment 

Jade

Admin, Fulfillment Logistics UK Ltd
Posted on: Oct, 02 2016
Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Mike Dargis

President of asset-based carrier based in the Midwest, Zip Xpress Inc. (at ZipXpress.net)
Posted on: Oct, 03 2016
Thanks for the article, but I know there's a lot more to this issue than just the pay rates. Please check out my blogs on the subject at www.zipxpress.net.

Blaine

Inventory Specialist, Syncron
Posted on: Nov, 16 2016
Lora, great article! I agree that companies choose the 'safe' solution more often than not. My solution is a bolt-on for legacy ERP's and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.

Blaine
blaine.schultz@syncron.com

Bob McIntyre

National Account Executive, DBK Concepts LLC
Posted on: Nov, 21 2016
This is a game changer in GE's production and prototyping.  It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network. 

Kai Furmans

Professor, KIT
Posted on: May, 22 2017
I am referencing to the comment that leasing of warehousing equipment (beyond forklift trucks) is a vision for 2030.
Just recently in Europe, such a business model has started, see here: https://next-intralogistics.de/

I am following with a lot of interest, how the business develops.

Stuart Rosenberg

Supply Chain Consultant, First Choice Supply Chain
Posted on: Jun, 05 2017
If we limit the standard on judging or determining the best supply chain to just three calculations it does not tell the entire picture.  Financial performance metrics are valuable as they capture the economic consequences of business decisions.  But supply chain managers make decsions and use organizational resources that impact a company's financial well being.  Where is a firm's earnings over a period of time determined by sales less product costs and general/adminsitrative costs?  Where is the metric for determining the sources and uses of cash from three perspectives - operational, investment and financial?  Where are these supply chain metrics: on-time delivery, lead time, response time to customers, product returns, procurement costs, network distance, inventory carrying costs, forecasting accuracy, sourcing time, etc,.  Without knowing the results of all these supply chain calculations the there must be a question as to the accuracy of the 25 top supply chains.

Dustin Calitz

Project Commercialization Manager, Mondelez
Posted on: Jun, 06 2017
I feel this ranking misses the mark in SC. It does not seem to consider a key indicator in days inventory on hand, which is key to determining a SC company's ability to forecast, manage inventory costs and reduce aged stock. In additiion I realize it's difficult to understand what goes into the customer survey, but would I assume specific metrics are being asked. For examples customer's opinion on service level differentiation and the ability to deliver the right product on time, which should then be allocated a bigger weighting than 10%. It would also be interesting to take a view of the above list's SKU portfolio complexity, seasonality and launches/promotions. I would again assume some companies on the list above have a far more complex SC to manage and lead, ultimately requiring a lot more innovation within a SC to stay ahead of competitors, and ultimately satisfy their customers demands.  I understand above metrics are difficult to measure, as mentioned in the article, but they somehow need to be considered to give a true reflection. 

Michael Hurd

Lean Consultant, Unemployed
Posted on: Jun, 10 2017

A Very Good Article...

While some feel that lean is a scam that pushes for more out of the personnel and out of the companies through reduction of waste and adding value for the customer, there are several things to remember:

1) Lean methodologies are designed and implemented to reduce time wasting, so this may seem that you are working harder as an employee.

2) Lean methdoligies only work when everyone from the janitor to the owner of the company get involved and back the program.

3) Lean methods are there to make you work smarter not harder, although it may feel you are working harder.

4) YES... Sometimes lean methodologies fail! This is due to project overun or taking on too large a problem and trying to fix it all in one go and not taking the smaller problems that are associated with the large problem and fixing them first. Sometimes fixing the small problems leads to resolution of the larger problem.

Akhil

Director Supply Chain , skuchain
Posted on: Jul, 31 2017
The Supply Chain technology is not considered a problem because traditionally supply chains are thought to be cost centres unlike sales functions. The tendency, in general, to limit expenses and cost cutting on upgrades for technology and for talent have been hindering progress for the businesses. Supply chains lack real time visbility and above all trust across the value chain (not that the participants are dishonest) rather it's about the cascading effects referred to as the bull-whip effect which causes higher magnitudes of disruptions. 

Supply chain real time information should top the list .

Another problem is that of multi homing as so much data is available across several feeds of IOT/Email/Internet /Mobility/ERP that organisations tend to have issues around finding a single platform to collate them for meaning analysis. 

Blockchain (if deployed appropriately) can be a great solution for solving the issues around the supply chain.

Mike Ledyard

Vested Program Faculty, Vested Way / University ofTennessee
Posted on: Aug, 04 2017
Excellent article.  It very much points to the need for Shared Risk / Shared Reward as we teach at Vested.  Suppliers will respond when they are made part of the team, and they have a lot to bring to the game.  The service provider is the subject matter expert in the services provided, and in an excellent position to enhance the capabilities and services offered by the shipper.

Andrew Downard

Managing Director, AD Supply Chain Group Pty Ltd
Posted on: Aug, 05 2017
As the article points out it is not a lack of technology that is holding back performance but rather a failure to form the right sort of relationships.  As well as the length of such relatiohships, practitioners should consider employing arrangements that incentivise both parties to innovate and deliver levels of performance and profit that neither thought possible.  By far the best model I have come across to achieve this is the Vested Outsourcing model developed by researchers from the University of Tennessee.  See www.vestedway.com for information on the model and case studies that show how others have benefited from creating a Vested deal.

Najma

logistics, threelineshipping
Posted on: Aug, 23 2017
Very informational article. The major focus of logistics is on e-commerce. There is a need to optimize every component of logistics by following the latest trends and technologies. Thanks for uploading this article.
 
 
 
 

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