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Feb. 15, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Are we Making Inventory Progress?

Seems like most of us in supply chain management and logistics talk about inventories all the time, and my experience is that, as you would expect, those responsible for inventories within a particular company usually have a pretty firm grasp of their own numbers.


Well, at least sort of, most of the time. That’s because for many companies, inventory is something like the multi-headed hydra of mythology fame. Cut one head off, and another tends to grow back in its place.


People often ask me about inventory levels, and frankly I don’t often have good numbers off the top of my head. So we decided to do some data analysis that we hope will provide all of us a frame of reference that may be helpful in the never ending inventory wars. We offer a first look at the numbers in this week’s column.


But first, one of my favorite supply chain quotes came a couple of years ago from Johnnie Dobbs, now head of all supply chain and logistics for Wal-Mart. Dobbs told a group at the Retail Industry Leaders Association Logistics conference that “There are so many different ways inventory can enter our system, it’s a constant challenge to keep it under control.”  Nearly everyone there could empathize.


And guess what? As good as Wal-Mart is in supply chain, in 2005/06 it found that inventories were rising much faster versus sales growth than the company had historically experienced, contributing to a slow down in its profit growth. Hence, the “Inventory DeLoad” program announced last year (see SCDigest’s Wal-Mart Inventory Policy Changes Impact Its Suppliers’ Financial Projections, Stock Prices).


In the U.S. overall, we have made a lot of progress in reducing inventory levels relative to sales. I don’t know the numbers for Western Europe or Japan, but would think they are similar (as a quick aside, SCDigest has a growing international readership). In January 1992, the monthly inventory-to-sales ratio in the U.S. overall stood at 1.56 – that is, for the month of January, there were 1.56 dollars of inventory for every dollar of goods sold.


You can see the subsequent progress:


  • January,  1992: 1.56
  • January,  1995: 1.45
  • January,  1998: 1.43
  • January,  2001: 1.44
  • January,  2004: 1.32
  • July,       2006: 1.26

This is the last month for which we have data. This means overall, average inventory levels across the economy are down about 20% from 1992 to 2006. Will the trend continue? Or have we reached a plateau?


Despite the apparent progress, Ohio State’s Bud LaLonde has pointed out that the numbers show most of the gains have really been in work-in-process inventories, as manufacturers got Lean religion. The finished goods story is not nearly as rosy, for a variety of reasons.


Some observers have also either seen or predicted a rise in inventory levels due to offshoring/global sourcing. It’s hard to be lean, really, with a very long supply chain, and most companies would seem to need increased inventory buffers due to the long lead times and greater uncertainty offshoring brings.


That’s the theory at least – do the data support it?

To see, we took the fine work done each year by CFO magazine and Hackett-REL in analyzing working capital efficiency, based on filings by public companies. Supply Chain Digest looked across the last three years of this data, focusing specifically on the Days Inventory Outstanding (DIO) component of the overall working capital analysis. DIO is basically the reverse of the “inventory turns” number that is probably more commonly used by supply chain professionals.

DIO is equal to inventory levels for the period divided by the average sales per day for the period. So, a company with average sales of $10 million per day and an average inventory of $200 million has a DIO of 20.

The CFO data goes back further, but unfortunately the industry groupings have changed quite a bit over the years, so that really only the last three years are good for industry sector analysis. I was hoping for five years, but the data past three years just doesn’t allow for comparisons.


Of the 24 sectors for which we have three years of data, eight of them saw DIO go up on average over the three years – sometimes substantially. Specialty retailers, for example, saw DIO rise from 57 in 2003 to 62 in 2005 (the last year calculated). More broad line retailers (mass merchants, department stores) faired even worse: from an average DIO across the sector of 44 in 2003 to a whopping 65 in 2005. Is offshoring the cause? Seems likely. I know others think so.


Interestingly, consumer packaged goods companies (consumer non-durables), which many people think of as leading the current charge  in terms of being demand-driven, using CPFR, etc., to lower inventories, also saw substantially increased DIO during that time, going from an average for the sector of 34 in 2003 to 40 in 2005. The other five sectors seeing a rise in DIO over the three years were Aerospace and Defense, Wholesale Distributors, Food Manufacturers, Home Furniture (offshoring again?), and Pharmaceuticals (which surprised me).


Now, rising inventory levels aren’t necessarily bad – higher DIO might well be worth the benefit of lower products costs from China, to take the easy example. Customer service policies, distribution strategies and many other factors influence the level of inventory that is right for a particular company, and the current state of the economy or forecasts for demand always have an impact.


Still, it’s interesting to look at the data. Sorry to tease, but we’ll have our full analysis available for you next week.


What are your perspectives on inventory trends? Do the numbers in retail and consumer goods surprise you? What do you think are the key factors? Let us know your thoughts at the button below.

Let us know your thoughts.


Dan Gilmore


Supply Chain 

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Most of our supply chain and logistics stocks suffered declines last week along with the general market.

On the software side, i2 dropped 7.9%, as some investors took profits after a big gain in the stock the week before.

Prologis was the weekly standout on the transportation and logistics stocks, up 8% after the 3PL and distribution real estate manager announced quarterly profits were up over 30%.

See stock report.


This Week’s Supply Chain News Bites – Only from SCDigest

Hershey Will Significantly Revamped it Supply Chain, Cut Manufacturing Costs

Coca Cola Appears to Have Settled Lawsuit Over Distribution to Retail Distribution Centers

ConAgra Continues Manufacturing Restructuring, with Goal of $100 Million in Savings

Home Depot Reverses Course, Seems Likely to Put Wholesale Unit on the Block

Is an IBM and SAP Marriage in the Works?


Feb. 15, 2007

From RetailWire: Will the Store of the Future be RFID-Driven?

Japanese department store chain Mitsukoshi pilots RFID-based kiosks for cosmetics; is tracking customer behavior getting "creepy"?

Feb. 14, 2007

Supply Chain Risk Management: The Global Risk Map for 2007

There a lot to consider in doing business globally, though annual study finds some improvement in the overall supply chain risk profile in 2006, outside of energy

Feb. 12 2007

Michael Dell's Memo to Dell Computer Employees Leaked

Returning as CEO, he warns bureaucracy, lack of internal collaboration, and costs are hurting the company; new supply chain head is on the way



Q. How did supply chain software vendor Manhattan Associates get its name?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're still behind - be patient if your letter has not yet been published

We're catching up a bit this week. Our feedback of the week is another letter on our "top 10 supply chain trends of 2006" column. We also have comments on our top trechnologies picks for 2007, demand management and S&OP, the value of Supply Chain Digest (thank you!) and how to handle the losing internal candidates for management or executive positions in supply chain and logistics.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – On Top 10 SCM Trends of 2006

For my money, 2007 was the year when a significant number of companies finally learned how to turn supply chain upside down and begin to manage a demand chain.
Standard products offered to a wide homogeneous audience is inherently efficient, and a fair amount of everyone's work is predicated on the assumption that this is the destination.

Increasingly, that assumption is open to change - as Safeway and Kroger and Delhaize all began to cluster stores, changing distribution systematically; as the limitless "long tail" concept began to seep into retailers consciousness beyond just specialty web application; as tribal marketing and other ideas began to supplant mass media -- in a host of ways we are seeing a marketplace that begins to fragment and differentiate.

The supply chain improvement focus has always been about fulfilling large-scale predictable demand. The next challenge is how to fulfill small demands at the lowest possible level -- the individual, the household.

John Rand

Director, Retail Insight Management Ventures

On Best Technologies and Strategies for 2007

Regarding your Top 10  SCM Technologies, I agree with the fact that companies are saving money with the “use of  technology tools to drive on-line contract bidding for a growing array of both indirect and indirect materials” however, the problem I have is that calling out “e-auctions” as the answer is not the best suggestion in today’s business environment.


A majority of clients that I’ve worked with are no longer trying to simply drive their supplier pricing into the ground as that creates a relationship that is parasitic instead of a mutualistic.


To ensure long term service and cost benefit for both parties, buyers and suppliers must collaborate in a way that considers both parties needs and evaluates alternatives to buy/source products and services.


Gregg A. Lanyard

Director, Product Management


On Demand Management and S&OP

I wholeheartedly agree with your observations regarding Demand Management.  You can't solve replenishment execution issues with retrospective sales reporting tools, which is what most CPG companies are attempting to do today. 

The good news is it doesn't have to be a "four band-aid" process to achieve success: most CPG companies have access to the necessary data (point-of-sale, orders, etc.), and the retail account teams are small enough that these proactive solutions can be rolled out in as little as four weeks.  The benefits derived from this managed deployment approach will accelerate adoption by the other supporting organizations across the extended supply chain.


Jim Morganstern

Vice President

Blue Agave Software, Inc

On Supply Chain Digest:

For what it’s worth, I just thought I’d say what a great tool this is for a job seeker in SCM! I feel confident in citing some of these in conversations with potential hiring managers, especially since I can see a direct link between my past experiences and implementing some of these ideas.


Keep up the great newsletter and website!


Kevin Bonin

On Handling Losing Job Candidates:

I recommend you explain the non-winning candidates the selection process and their opportunity areas (or gaps) which the selection panel consider for not having selected them for such position

Luis Alfredo Nieto
Whirlpool México



Q.  How did supply chain software vendor Manhattan Associates get its name?

A. Most people assume it has something to do with New York City. Actually, the company got it start in Manhattan Beach, CA, before moving its headquarters to Atlanta in the early 1990s, and that was the genesis of the name.

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