This Week on SCDigest:
Readers Respond: Measuring Inventory Performance
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
SCDigest On-Target e-Magazine
Expert Insight - Supply Chain Insight for Medium-Sized Businesses - Opportunities for SMBs in a Difficult Economy
Guest Expert Insight - Optimizing the Supply Chain Network
Guest Expert Insight - Keeping Risk at Bay with SCRM
This Week on "Distribution Digest"
Your Supply Chain Questions Answered! This Week's Question - How Can We Calculate the Potential Throughput of our Distribution Center?
Trivia  Supply Chain Stock Index  Reader Feedback

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This Week's Supply Chain News Bites
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Supply Chain Graphic of the Week: Understanding Factors that Influence Truckload Capacity


This Week's Supply Chain by the Numbers - Ocean Carriers, CIT Group, JDA Software, Multi-Modal


The rally continued on Wall Street as all stocks in our Supply Chain and Logistics stock index closed out last week with positive activity.

In the software group, JDA soared 26.5% (up 35.4% in the last month).  Ariba finished a close second in the group (up 25.4%).  In the hardware group, both Intermec and Zebra had a modestly productive week (up 2.7% and 6.8%, respectively).  Double-digit gains were even realized in the troubled transportation and logistics group with Yellow Roadway up 19.4%, Ryder up 19%, and Prologis up 18.3% on the heels of a stock upgrade by J.P. Morgan analyst Michael Mueller.

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Each Week:

Global Supply Chain
Trends and Issues
Supply Chain Insight for
Medium-Sized Businesses

by Dr. Chris Norek, Chain Connectors, Inc.

Opportunities for SMBs in a Difficult Economy

Don't Bunker Down - Simple, Lower Cost Options to Survive

Guest Column
by Steve Cumbo, enVista

Optimizing the Supply Chain Network

An Important Opportunity to Reduce Costs and Improve Customer Service

Guest Column
by Mitul Shah, Infosys Consulting

Keeping Risk at Bay with SCRM

Six Essential Steps to Carry Out an Effective and Holistic SCRM Program



Holste's Blog:
How will the Changing Workforce Affect Distribution Operations?

Top Story: When Considering Multi-Modal Wireless Technology in Distribution, Analyze Each Task and Step

Supply Chain Video: Understanding Lean Thinking in Distribution

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Readers Respond: Measuring Inventory Performance

Again this year, I am biking across the state of Ohio, and am using that opportunity to let SCDigest readers carry the burden for this week’s column.


A number of weeks ago, I did a column on “Measuring Inventory Performance.”


It was really just meant to be a preliminary column to a subsequent one that would outline my thoughts in more detail. Nevertheless, we received a significant amount of reader feedback; we’ve had columns in the past that generated more, but I don’t think ever of this total quality. This week, I am sharing some of the highlights – am quite confident you will enjoy them.


David Gustin of Global Business Intelligence said that “This is a very complex journey you have embarked on Dan.” Why? In part because “CFOs and Treasurers of corporations are increasingly becoming responsible for “Supply Chain Finance” solutions, yet there is a general confusion as to how SCF works and the role of different players.”

Joseph Barnes Says:


Inventory is like any other “asset” which has to generate a return. I like to look at inventory as a portfolio of assets, each generating a return to shareholders.

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He also observes that “functional conflicts exist within companies due to different success factors for Procurement (obtain best price), Finance & Credit (increase DPO, reduce DSO, focus on buyer risk and maintain liquidity), and Sales (sell more and extend terms if need be). These are not easily resolved.” I guess we could say Sales, Inventory and Operations Planning (SIOP) is a tool to manage these trade-offs, but most are still very early in that venture.


Fred Schafer of Trane opined that “the best measure for inventory management/planning is Days Forward Inventory (DFW), or inventory/(forward sales forecast/days in forward forecast period). The forward forecast period may be set to reflect what is most meaningful for the respective business/need."


Why a forward forecast as the denominator? Because, Schafer said, “inventory is in place to satisfy forward demand.”


He adds “Another set metric is the “quality” of inventory. This is more about the make up of the inventory and readiness to serve.  There are three: (1  available to commit inventory;  (2) categories of inventory [which he explains as basically a categorization of inventory by status]; and (3) SKU level/ mix performance [how close SKU inventory levels are to targets].”


Joseph Barnes of Orco Construction Supply says that “Inventory is like any other “asset” which has to generate a return. I like to look at inventory as a portfolio of assets, each generating a return to shareholders. That return is based on a number of different factors, including how often it sells, the gross margin it returns, the cost for holding it, buying it and moving it along with some expectations on shelf-life. By looking at inventory this way, it basically equalizes across industries what the true value of inventory is for the investor."


David Armstrong of Inventory Curve agreed with my point that there are often definitional problems with how we calculate some inventory measures – even something as simple as “turns.”


“The complications mentioned in the article include calculation of average inventory along with use of cost of goods sold versus sales revenue to calculate turnover,” Armstrong says. “The reality is that there is not a single, defined standard method for either of these, so one must be careful in reviewing data to try to understand exactly what is being calculated and how.”


Daniel Araujo from Brazil’s DAC & C also notes some challenges in the area of measuring “turns.”


“I prefer to calculate either Turns or DIO (Days Inventory Outstanding) at an aggregate level using the value of inventories and the cost of goods to be sold. Using revenues (with profits and sales, administration, distribution and advertising expenses) distorts the performance of the inventories,” he wrote. He added that “At the item level, where good or bad management of inventories really needs to happen, units instead of $ is the most appropriate. If you calculate aggregate turns, including profits and expenses and item level turns in units, you will never be able to reconcile management policies and planners' actions.”


Bob Belshaw of GE Capital says getting to inventory measures that are most meaningful to CEO/CFOs is critical.


“The impact of decisions made around inventory policies, including strategies like JIT, VIM, timing of title change and the newly packaged financial products that target supply chain finance require significant thought and discussions,” he wrote. “I have come to believe the power of using the CFO metrics is that the organization begins to find a language to communicate in that is understood in the C-levels and on Wall Street,” adding that often, in his view, the impact of inventory on key corporate financial metrics “has gotten to senior leaders in our supply chain and procurement organizations.”


I also really like what Dwayne Wildhagen of Springs Window Fashions had to say about looking at inventory and demand.


I believe the best measure of inventory performance is to compare average inventory over a period of time (typically monthly) to the inventory consumption over the same period of time,” he wrote. “This is the only "true" measure in my mind because it removes all the other variables contained in COGS, so it is a true reflection of how well your inventory is "turning" or being managed.” Like Schafer, he prefers a more forward looking view, “because we are not bringing in inventory to support last month's sales, rather next month's sales.”


Jennifer Vaughn of private equity company American Capital says inventory management effectiveness is key to the success of the company’s they invest in and that the tool they prefer is the Inventory Quality Ratio (IQR). We’ll cover this in more detail in a future column, but, in summary, IQR looks at inventory levels versus targets for different SKU velocity categories (e.g., ABCD), and at levels of slow and obsolete inventories, all of which results in a “score,” with 100 being a perfect score.

“IQR is a better metric of inventory performance than either turns or DIO because it is based on future demand, provides a performance measure for each segment of the inventory, and shows you where you can actually take action to reduce excess inventories, free-up working capital, etc.,” Vaughn says. She adds, “It has opened our eyes to better ways of managing one of our largest balance sheet items – Inventory.”

Brian Coats of Carrier agrees. “Inventory metrics which fail to address the usability of on-hand inventory are insufficient in measuring the true value of what is in stock. Inventory Turns and DIO both are inadequate in that they do not take into account the usefulness of the inventory on hand,” he wrote. “With IQR, Carrier has been able to quickly monitor performance at individual factories and identify opportunities for improving Inventory Performance.”

I could add lots more, but am out of space. As always, I am simply impressed with the collective knowledge and wisdom of SCDigest readers. Thank you.

What is your reaction to the feedback from SCDigest readers on Measuring Inventory Performance? What would you like to add? Let us know your thoughts at the Feedback button below.

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We received some very good letters on our article exploring The Supply Chain of the Future.


Our Feedback of the Week is from John Mariano at Fellowes, who believes that the future of supply chain will involve an emphasis on the basics.

Loire Marteney of Novozymes A/S says the supply chain future will see continuing efforts to create efficiency, while Jim Uchneat of Viewlocity says to look for a wider application of rules-based pricing that adjusts dynamically to both supply and demand at the point of purchase.


You will find those, plus a couple of other interesting letters below.

Feedback of the Week – On The Supply Chain of the Future

Back to the future of Supply Chain:

Meat and potatoes, blocking and tackling, back to basics, and back to the future in supply chain. What I see in the supply chain crystal ball is that we all will still be reliant for some time to come on the fundamentals, namely sourcing and purchase order management, global transportation, compliance and regulatory management, visibility, event and total cost of ownership management. Above all, the requirement to successfully manage relationships will remain a critical factor in managing the S.C., not only of the present, but of the future as well.

What will change according to this sage of S.C?

We will, as a discipline, achieve a much greater degree of how much we will be able to integrate all the members of the S.C. We will, via technology advances, be able to pull the supply chain knot much tighter and that will enable the entire chain to be more effective and efficient. I.T. will drive this and make it all possible; however, I.T. advances alone are not, and never will be, a panacea for supply chain execution. Rather, I.T. is a key enabler of a comprehensive, integrated supply chain solution, and work on this front will be ongoing as we move into the future.

The long-term fundamentals noted above will now need to incorporate sustainability considerations. The S.C. is greening and this will change how we do business in the future. We will all need to ensure we are on top of this segment and become conversant on this subject matter. The realization and recognition that oil will not stay cheap needs to be considered, as most of us have built our S.C. based on cheap oil. Now is the time to become more efficient, and plan for this reality.

Will the Supply chain ever go on auto-pilot? I do not think so. By definition, the S.C. is way too dynamic of an activity, heavily reliant on integral relationships. No surrogate for relationships indigenous to the S.C. has yet been devised, nor is it very likely in the future. Segments may become more refined and better managed, etc., by various means; however, until Cray builds a super-duper computer that can read body language, facial expressions, discern the pitch of a voice, or until demand for all industries becomes linear, or when they raise the Titanic, I think that we can all rest assured that our jobs will entail a bit more than hitting the auto-pilot switch.

John Mariano

More On The Supply Chain of the Future:


I believe that cash will still be king and efforts to create efficiencies will reign. Not all companies are able to pursue newer technologies to advance their supply chain performance, however, most companies are driving cost and complexity out of their processes as a way to improve their financial performance.

A company’s business model will dictate whether or not a supply chain strategy can support an increased lead time as a trade-off for increased financial performance – we are in the process of rationalizing our service portfolio and comparing proposed models against cost to serve data with the hope of providing differentiated services, as well as decreased costs.

Loire Marteney
Customer Logistics Manager, Americas
Novozymes A/S

I would have to say that Wal-Mart's retail link replenishment system is pretty close to the state-of-the-art that you are going to get today. I can see what I sold yesterday in the store. I can tell what I have in the store, the DC. I can see it all. Having this information does allow us to service the business at maybe a higher lever than a customer that we don’t see this level of detail. When the market place is stable, things run smoothly. Today a competitor drops a hot price at going from $3.80 a unit to $2.25. I can see tomorrow that my sales may have slowed a little or drastically. With a call to the field, I know what is going on and make my adjustment to the supply chain. I did not see that coming! Still have to react!

I think that the bottom line is that no mater the supply chain, you will not have control of all of the variables. There is always going to be a level of the unknown. The key is to be able to identify the anomaly as quickly as possible, make a decision, and set motions in action.

Forecasting would be easy if it wasn’t for promotions and merchandizing!

Thanks for your great insight.

Name withheld by request
Supply Chain Manager
Food Manufacturer

In my 16-year career and number of educational degrees in different disciplines, I think we are making supply chain more complex than what it is.

Two things we always have to remember while thinking about the future of the supply chain: financial aspect and Human aspect. If you honestly think about how any organization implements new technology or software system, it is mostly dominated by financial and manufacturing views.

I agree somewhat with that too, but truly, how many organizations have used cross-functional across the organization and outside organization, i.e., vendor and customer while developing the tool?

It is always simple math - each of role players, whether inside or outside of organization, have to perfom their part absolutely 100% and understand the immediate upstream and down-stream effect - better communication can solve at least 50% of our problems or risk in supply chain management.

For this, we need to educate people, because the supply chain is the only area which is highly dependent on others with too much responsibIlity, with too little authority or voice than anyone.

Mehul S. Pandya
Award Windows

Certainly continuous supply chain visibility of more granular data supported by robust rules engines will yield many more situational/localized optimization opportunities. Look for a wider application of rules based pricing that adjusts dynamically to both supply and demand at the point of purchase.

Jim Uchneat

Business Development


Q. What innovation are Gene Gagon and Eric Baum (separately) generally credited with bringing to logistics in the late 1970s?

Use of engineered standards in distribution, which had great value on their own and then formed the basis of today's Labor Management Systems.