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Feb. 22, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Are we Making Inventory Progress? Part II

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?

Let us know your thoughts.


Dan Gilmore


Supply Chain 

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A solid week overall for our supply chain and logistics stock index, with only two stocks in our group down, both by less than 1%.

The big winner was bar code/RFID printer and label vendor Zebra Technologies, which soared more than 14% for the week off strong quarterly results.  Rail and truck carriers were also up strong.

See stock report.


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

Feb. 22, 2007

Transportation News: Canadian Rail Strike Starting to Pinch Supply Chains

Feb. 22, 2007

Wall Street Journal Gets at Least Part of RFID Story Wrong

Feb. 21, 2007

Tommy Hilfiger to Sell Global Sourcing Group to Procurement Outsourcer Li & Fung

Feb. 19, 2007

Global Sourcing News: Amid a Surging Trade Deficit with China, Will Congress Press for Tariffs Against Chinese Imports?

Feb. 19, 2007

Dell Names New Supply Chain Chief


Feb. 22, 2007

RFID News: RFID Program at Wal-Mart Going Slow, Wall Street Journal Says

Not enough value for suppliers from EPC adoption yet, article says; we say, “This is news?”

Feb. 22, 2007

Xterprise CEO Rebuts Negative WSJ Article

Says story missed the bigger picture, wrong on facts, argues Dean Frew

Feb. 14, 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 Wal-Mart get its start?

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 just publishing a couple of letters this week, as we got behind doing the inventory report. Our feedback of the week is from Duane Raibel, who passionately laments companies just can't collaborate internally or get sales and operations planning right. We also here from Richard Watkins of The Delos Partnership Limited on ERP versus best of breed solutions.


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 Sales and Operations Planning

I turned to the internet to find a way to explain again for the 100x to folks in my company that what we are doing to improve forecasting is at the wrong point.  I read the article in SCDigest and it helped at least demonstrate I am not insane.  We suffer at many levels, for example:


  • incentives for marketing and sales is to over deliver, beat contract, etc.
  • no one in Marketing or Sales has working capital, forecast error, etc. as an objective
  • SC is trying to own and run our S&OP process
  • the business president and on down within marketing complain about how long it takes....they would rather focus on marketing is a good quote
  • we are now searching for new tools, APO, etc. thinking that this will drive the change
  • we are hiring consultants to help us analyze historical data to show marketing what we could have done
  • the sales over achievers award KPIs is ONLY based on beating the sales $$ values -- nothing about accuracy, customer service, etc.
  • capital and working capital are now being randomly cut to address longer term projected gaps.....where in the past these were crutches for the SC to compensate for
  • a poor S&OP the crutches are gone, and I started an over/under pool to see when we collapse
  • a big driver is also there are distinct annual contracts functional and in short the business and SC maintain 2 separate P&Ls


For so many people it is now a learned behavior and most do not see the issue, since we complain alot but in the end work 17 hours again fire fighting to fix things that in my last company never happened.  Perhaps the only way to change the behavior is to get everyone to switch jobs for 1 month and see what it is like to have someone piss down your neck constantly...using bad assumptions driven by misaligned incentive programs.


For all of the MBAs in the building, one would think we could screw the S&OP bulb into the right socket....or any socket for that matter.  It just is not that hard....but then again if we audited how many of these same people had balanced check books at home, the issue would become clear.


Are there any GOOD companies out there would are looking for an absolute passionate, Innovative, results orientated, driven individual that just wants to get it done and move on.




Duane Raible


On ERP Versus Best-of-Breed

Have just come across your article on the choice between ERP and Best of Breed when it comes to Supply Chain software. A key theme of this article is that the choice should be made by a business led team, who look for the business benefits that the system will derive. I believe that an important step often missed out is to get that business team to understand completely what they should be looking for in terms of the complete scope of Supply Chain planning and management software, as well as the interrelationship with business processes.


For instance when a forecast is wrong, abnormal demand should be identified through an effective forecast consumption process etc….


Hence I would believe that you should add that this cross-functional team should all understand through a formal and detailed education process all the elements that they need to make sure that a best of breed or ERP approach would deliver.


Richard Watkins

The Delos Partnership Limited



Q.  How did Wal-Mart get its start?

A. In 1945, when Sam Walton purchased a franchise from Ben Franklin stores.

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