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August 2, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Inventory Management Challenges Continue  

In early 2006, we took a look at the past several years of data from the annual CFO magazine working capital report. That data showed a continuing upward pressure on inventory levels, despite the great focus on supply chain management improvements in most companies.

This year’s report, summarizing data from 2006, is out earlier this year, and I don’t know if they saw what we did with their data, but for the first time it includes information from multiple years (2004 through 2006), making analysis about trends and performance by industry and individual company much easier.

The data show continued upward pressure on inventory levels, with average inventories across all industry sectors up 2.1% in 2006.

The largest driver of this increase is generally thought to be the rise in offshoring. As a greater percentage of a company’s total sales comes from offshore sources, its inventory levels are likely to rise, as higher inventories are used to buffer the impact of the longer supply chains, increased inventory risk, etc.

I believe this issue is compounded by the relative lack of experience the average company has in managing global supply chains, an issue we analyze in detail in our report on The 10 Keys to Global Logistics Excellence. So, the inherent upward pressure on inventories from offshoring is compounded by the years it takes to really get good at the process.

I believe another factor is the increase many companies have seen in raw material prices, as commodities from corn syrup to plastic resins have seen strong increases in supply prices. If a company cannot raise its own prices in step, as many have not been able to do, it has the effect of increasing the inventory level metric, as the cost of raw materials and work-in-process inventories goes up relative to sales. There has also been some forward buying of raw materials to lock in costs of commodities expected to rise.

The CFO data, compiled by consulting firm REL, measures three elements that impact Working Capital, of which average inventory levels is one. The report actually uses Days Inventory Outstanding (DIO), which is the other side of the coin from the Inventory Turns metric used by many supply chain professionals. It is generally good if Inventory Turns numbers are increasing; the opposite is true with DIO.

So just to cover the basics, why is DIO important? For several key reasons. First, working capital tied up in inventory can’t be used for more productive purposes that could generate higher returns or growth for the company.

Second, inventory is a component of the company’s overall capital investment. Those firms that can generate a given level of profit with a lower level of investment in inventory will generate higher cash flows and better return on invested capital – key metrics Wall Street types use to value companies and determine stock prices.

Third, higher levels of inventory tend to lead to more problems with write-offs of slow, excess and obsolete inventories (SLOBs), which can hammer a company’s profit line, especially in today’s environment of rapid product lifecycles.

Across all industry segments, the average DIO for 2006 was 31.2 days in 2006, up a little more than 2% from 2005.

But overall numbers don’t tell you much, given the huge differences in processes, requirements and belief systems in different industry verticals. Just for example, DIO in the food manufacturing sector in 2006 was 45, up from 40 in 2005; in the restaurant industry, DIO was only 5.

Details can be found by sector and individual company in a downloadable spreadsheet from the CFO site (See 2006 Working Capital Report – be sure to go to the middle column on DIO). In almost every industry sector, DIO rose from 1-7 days. Examples: the beverage industry, which went from 19 days on average in 2005 to 20 in 2006; computers, up from 21 days in 2005 to 27 in 2006.

Just to be clear, for large companies even a small change in the number of days of inventory being held, positive or negative, can be worth tens of millions of dollars in working capital swings.

Some noteworthy performances by sectors and companies we saw:

  • Perhaps indicative of the experience effect in global supply chain taking effect, the “Multi-line Retail” sector (mass merchandisers and department stores) drove down DIO on average from 68 in 2005 to 63 in 2006.
  • Within that sector, there has been continued improvement over the past three years in the Dollar stores retailers, as Dollar General has reduced DIO from 66 in 2004 to 63 in 2005 to just 57 in 2006; meanwhile, Dollar Tree’s numbers have shown the same pattern: 72, 62, 56 in the past three years.
  • The CFO article notes the improvement made by electronics retailer Game Stop, which has developed a proprietary inventory-management system that it pairs with point-of-sale technology to allow it to see its daily sales and in-store stock by title, by store. Last year, the company shaved its DIO figure impressively to 46 from 71 in 2005.
  • As we note nearby in News and Views (See Goodyear Finds New Insights to Inventory Management from Coping with Strike , tire maker Goodyear found during the challenges of a strike at its plants in 2006 that it could actually make do with less inventory that it thought. DIO is down 10% for the company since 2004.
  • The pharmaceutical industry in general is thought to be paying more attention to supply chain issues, and it shows. DIO is down across all three years while most other sectors were rising, from an average of 52 in 2004 to 46 in 2006. Schering-Plough has seen its numbers go from 70 to 62 to 58, while Wyeth has moved from 52 to 45 to 44. There are a few pharma companies, however, that have moved strongly in the other direction.
  • Chemical maker Lubrizol continues to make inventory progress, reducing DIO from 72 in 2004 to 59 in 2005 to 53 in 2006. Similar results from Olin, whose numbers go 47, 41, 30.
  • Aerospace parts maker Precision Castparts has also seen continuous improvement, seeing its numbers go from 87 in 2004 to 66 in 2005 to 59 in 2006.

There is a lot of data here, and if I’ve missed any standout performers please let me know.  And if you are one of these companies mentioned, or generally would like to tell your story about how you are reducing inventory levels, please send me an email at the Feedback button below.

All told, though, the numbers are flat to increasing for the majority of companies and industries. Interesting.

Is DIO a good indicator of inventory performance, especially when looked at over several years? What factors do you think are driving inventory numbers up? Have we reached a plateau of performance improvement that will be difficult to break through? Let us know your thoughts at the Feedback button below.

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Dan Gilmore


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

August 2, 2007
Procurement News: Kickback Scheme Lands Home Depot Buyers in the Unemployment Line; Possibly Doing Time

August 1, 2007
Supply Chain Software News: i2 CEO McGrath Resigns, Months Earlier than Originally Expected

July 31, 2007
Supply Chain by the Numbers: July 31, 2007

July 31, 2007
Supply Chain Graphic of the Week: Goodyear's Supply Chain Cost Reduction Strategy


It was rough week on Wall Street with all indexes taking a considerable plunge. 

Reflecting Wall Street’s movement, our Supply Chain and Logistics stock index also suffered overall losses. In the software group, JDA bucked the trend to net a gain of 5.9%.  Zebra, in the hardware group, suffered the week’s largest percentage loss (down 12.9%).  In the transport and logistics group, UPS managed to eek out slightly positive numbers (up 0.9%). 

See stock report.


Global Logistics: With 100% Cargo Screening Soon to be Law, What Will be the Real Impact to Shippers?

With Bill on its Way to the White House, Despite Opposition from Business, Will it Deliver Real Benefit, or Mostly Just Symbolism? Who Will Pay is Not Clear to Anyone

Supply Chain Strategy: Goodyear Finds New Insights to Inventory Management from Coping with Strike

Maybe All That Inventory Isn't Required After All; Building an Advantaged Supply Chain

This Month's Supply Chain Marketing News Exclusively for Supply Chain and Logistics Solution Providers

Expert Insight

by Ann Drake

Supply Chain InView: Ventures Requiring "Super" Powers

Outsourcing Sometimes Requires 3PLs to Take On New Responsibilities


Have a supply chain or logistics related questions you need answered?

Ask our panel of experts. See our growing list of questions and answers Share your insight.

Reader Question: What Kind of Savings Do Companies Typically See When They Do a Formal Carrier Bid Process by Lane?

Reader Question: Are Supply Chain Certifications Valuable?


Q. Computer maker Dell is known for running Lean inventories, with its make-to-order model, consigment inventories on many compoments, and other tactics. What was Dell's Days Inventory Outstanding number in 2006?

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 really behind again - bear with us. But keep the letters coming!

We received a number of letters on our First Thoughts column on Supply Chain Simulation versus Optimization. As promised, part 2 on this topic soon.

That includes our Feedback of the Week from Mike Adorjan, of Oswego Consulting Group, who says greater focus on simulation combined with operational execution excellence might be the winning ticket. You'll also find a great letter from Scott Brown of Plexus on this topic, and another good one from supply chain exec Tom Anderson.

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 Optimization Versus Simulation

I have been involved in many Supply Chain Optimization discussions and what it really means to the end users, and more importantly, how effective this process is in the execution part of the model.

As I read this article, I find myself agreeing that optimization as it is defined is really NOT the best tool for day to day activities.  The more decisions, the more time it takes, and productivity suffers.  If it takes 1 or two hours to “optimize” a plan, and the folks that need to do the work are waiting it causes frustration and decreases their confidence in the system.On another point, let’s say it takes 1 hour to optimize a plan.  Now one or two variables change (order added or deleted, maybe a customer changes a delivery date), do you run the process again?  Or do you simply make the changes manually and move on?  I have experienced more of the latter.  Again due to timing and productivity.I understand there are software vendors out there that have “continuous optimization” models.  My question on these are – When do you know the process is really finished?  Especially if there are changes being made continuously throughout the day. 

My thinking is that the focus be more on simulation, and less “real time” optimization.  The reasoning for this is that when productivity could suffer, and the plan is not complete after changes occur, where is the benefit?  The alternative is to use the simulation models, which are really optimizations in a controlled environment, then take the results from the many different scenarios, and develop a set of procedures for the people doing the daily activities like picking, loading, transport planning etc.  This way there are guidelines for them, and less waiting for results they may not agree with anyway. 

Of course it is extremely important to have the folks on the floor (reality), as well as the practitioners (planning) involved as a team.

Michael E. Adorjan
Oswego Consulting Group Inc.

More On Optimization Versus Simulation :

It is important that both supply chain practitioners and execs get at least a basic knowledge of these issues.  We are finding ourselves in a battle to design and run the most efficient supply chains that we can today. 

All the talk about cash to cash cycles, and return on invested capital, with on time delivery to requested dates really boil down to finding the best way to construct a predictably reliable supply chains.  Unless supply chain professionals and execs begin to understand how lead-times, demand and supply variability over lead-times, after receipt of order (ARO) lead-time requirements, order quantities and other variables all become elements in the complex supply chain modeling equation we will not achieve the potential that is there.  This is all about understanding lowest total cost given these variables and objectives. 

Understanding the inventory is a result of parts of the equations not just an input.  We have focused our efforts at Plexus on developing the tools to allow us to "optimize" the supply chain around ROIC and Service Level requirements. 

Understanding that there are tradeoffs that can be leveraged in the design process.  These tools have evolved into dynamic modeling and optimization tools to both initially construct the best supply chain for our goals.  But also to keep it in tune with the evolving marketplace on a dynamic update basis.  That is the holy grail, both the theoretical modeling and optimization AND the on going maintenance for hundreds of thousands of SKU's. 

Scott Brown CPIM, CSCP, CIRM
Manager Supply Chain Analysis & Design

I think you’ve asked the “key” operative question when we wonder if all this should be left to the Operations Research teams. I fear a software product that no one on my staff understands or can predict what it will do. One answer I will never accept from a staff member when looking for an answer to the question of “What happened?” is “but the system told us to do that!”.

I can’t justify implementing a system where the human specialists who have to use it can’t predict what an output will likely be, based on certain general inputs. Judgment and experience is what I’m paying for in my Human Resources. If they don’t understand what a software package does, why should I trust it to “manage” millions of dollars worth of my company’s assets? Or are we saying that only Operations Research degrees need apply for my supply chain positions? I still believe the simplest solutions are often the most effective. Lean philosophy hammers us with that. Complexity and sophistication has its place. However, as much as I understand the intellectual theory of this, I have to wonder if the simple application of demand and supply “fundamentals” isn’t just as effective overall.Sometimes is only takes one or two “super users” to lead the rest of the staff, but someone has to know what goes on inside the “black box”. I fear that too many companies have suffered “trauma” leading to financial problems because someone just “accepted” what the “system” told them to do without thinking through the ramifications. Too few of the software offerings today are capable of ramping from the simple to the complexly sophisticated OR solutions. The ones that do, aren’t doing enough to market that strength so practitioners can grow into the tools they invest in. 

Tom  Anderson
SVP, Supply Chain Management
Formerly with Rand McNally & Company



Q.  Computer maker Dell is known for running Lean inventories, with its make-to-order model, consigment inventories on many compoments, and other tactics. What was Dell's Days Inventory Outstanding number in 2006?

A. 4. That was actually up from 3 in 2005. Dell does carry finished goods inventory for peripherals and products like ink jet cartridges.

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