sc digest
August 11, 2016 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet Inventory Performance 2016 Part 2 bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & by the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues bullet Trivia      bullet Feedback
bullet Expert Insight Columns bullet New On Demand Videocast

first thought


Supply Chain Graphic of the Week
Working Capital Performance Over Time 2016


Walmart Hopes Acquisition will Drive eCommerce Growth

Does High Advertised Truck Driver Pay Not Equal Reality?
US Companies were Increasingly "Slow Pay" in 2015
US Baby Deficit in Progress


Innovation in 3PL Capabilities: Perspectives from Shippers and Providers

What Do Shippers Expect from 3PLs in Terms of Innovation? How Are 3PLs Responding?

We would appreciate you taking this brief survey, with separate paths for shippers and 3PLs. In the near future, we will send all respondents a copy of the survey results aggregated across all respondents. We know you will find it valuable.


Week of July 11, 2016 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!

Holste's Blog: High Frequency of Internet Orders Drives DC Automation

Weekly On-Target Newsletter:
August 10, 2016 Edition

Cartoon, WMT Buys Jet, Rail Q2 Results, RFID vs. Barcodes, DPO 2015 and more

Is It Time to Move Your Supply Chain Planning to the Cloud?
by Bill Harrison
Demand Solutions

The Expanded World of Supply Chain: Taking on Supplier and Customer Relations

by Dan Reeve
Director of Sales and
Business Development


Supplier Integration in an Outsourced World Benchmark Study 2016

Trends, Opportunities and Next Generation Solutions

Prefer to view the results instead? Watch the on-demand version of the Videocast summarizing the survey results:


What has been the compound annual growth rate in US 3PL expenditures from 1994 through 2015?

Answer Found at the
Bottom of the Page

Inventory Performance 2016 Part 2

I am going to let one big graphic do most of the talking this week.

Relative to inventory management that is. I am back again this week with more analysis of the working capital data compiled each year by REL, a Hackett Group company, after last week's first pass (see Inventory Performance 2016).


Why can't consumer packaged good companies, for example, muster up better than 5.5 turns per year, a number that hasn't really changed for years and is actually trending up?


Send us your
Feedback here

In that column, I explained how inventory by one measure - the US inventory-to-sales ratio - has been rising since 2010.(See question about this in the Feedback section below).

I also reviewed the REL working capital calculation methodology, and how for the the inventory component of that measure it uses Days Inventory Outstanding or DIO.


Finally, I described how SCDigest's biggest value-add in this process is taking the data REL makes available to us to first recategorize the companies into more narrow sectors, to make comparisons better. So for example, we take the three retail categories in the REL data and create more than a dozen more, grouping retailers into more specific categories.

We also eliminate sectors with very limited physical supply chains. It's hard work.


OK, so DIO is calculated by the following formula:


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.

What's nice is you can calculate turns from DIO, as follows:

Turns = 1/(DIO/365)

Below is a massive chart of the 60+ sectors we created, sorted by lowest to highest DIO in fiscal year 2015 on average in each sector (and thus turns from most to least as well). It also shows 2014 DIO, the percent change from 2014 to 2015 in the sector, how many companies were in each sector and some examples.

Yes this was also a lot of work. Will note REL makes some minor adjustments, so the numbers may be slightly different than if you worked off straight financial statement data.

Inventory Performance  by Sector 2016

Source: SCDigest, from REL Data

See Full Image

As can be seen, fast food restaurants had the lowest DIO of just 8.0 days on average, translating into 45.8 turns for the year. At the bottom was the biotech sector, with DIO of a whopping 348.1, or basically just one turn per year.

I will note that some sectors are far more homogenous than others. Consumer packaged goods, food manufacturers, and department stores, for example, have very comparable companies, as with other categories. But despite our best effort, some categories are much more varied, such as the machinery group. It includes companies ranging from Lincoln Electric (welders) to Briggs & Stratton (small engines) to Timken (bearings). We just couldn't do much more with that.

Still, it is interesting to consider much of this data. Why can't consumer packaged good companies, for example, muster up better than 5.5 turns per year, a number that hasn't really changed for years and is actually trending up?

Improved turns or DIO, of course, translates directly into less working capital and higher cash flow, a key component of shareholder value.

Anyway, take a look. We will do still more analysis of this data in OnTarget next week.

Any reaction to this inventory data? Why have inventories been creeping up on the past 5 years?  What explains differences in turns between similar companies in a sector? Let us know your thoughts at the Feedback button below.

View Web/Printable Version of this Column

New On Demand Videocast:

Supply Chain Software Trends and Opportunities 2016 Benchmark Report

Results from SCDigest's New Benchmark Study, Including a Special Focus on Cloud-Based Solutions

In this outstanding Videocast, we'll summarize important trends and developments on both the user and technology provider fronts, based in part on results from a new SCDigest survey on trends, opportunities, and practices in supply chain software.

Featuring  Dan GilmoreJohn Murphy, Senior Director, SCM Applications Product Marketing, Oracle and Jim Heatherington, Vice President, AVATA.

Available On Demand

On Demand Videocast:

Supply Chain Design as a Continuous Business Process - The Whirlpool Story

From Project to Process: Here's How to Get It Done

In this outstanding Videocast, we'll explore the changes needed to make supply chain design a continuous process, emerging new best practices in supply chain design, and how consumer products leader Whirlpool has successfully embraced this 360-degree approach.

Featuring Dan Gilmore, Editor, SCDigest, and Toby Brzoznowski, Executive Vice President, LLamasoft and Brian Streu, Manager, Supply Chain Design, Whirlpool

Now Available On Demand

On-Demand Videocast:

A Benchmark Study on Supplier Integration in an Outsourced World

Featuring Real World Experiences from DuPont, Honeywell and Acsis, Inc.

A new benchmark study of practitioners reveals the priorities, expectations and challenges of achieving real-time visibility into goods as they move through third-party production cycles.

Featuring Dan Gilmore, Editor, SCDigest, and John Dipalo,Chief Strategy Officer, ACSIS, Peter Musser, IT Services Delivery Specialist, DUPONT and Bruce Stubbs, Director, Industry Marketing Honeywell Scanning & Mobility

Available On Demand


This week, just a few quick feedbacks from our first column last week on inventory performance 2016. That includes a question asking for more detail about calculating the inventory-to-sales ratio.

Feedback on Inventory Performance 2016


In your next column, can you clarify the calculation of the “Total Business Inventory/Sales Ratio”. I understand the DIO which is fairly intuitive.

I do wonder why the year-end inventory is used which is more capable of being gamed by someone incented to do so. Seems like an annual average would be more representative, especially for businesses which sell down their inventory over the Christmas peak season.

Eric Dagle
Senior Operations Planner
Dematic North America

Editor’s Note:

The inventory-to-sales compiled by the US Commerce Dept. is define as inventory levels being held by US companies in aggregate divided by one month’s worth of sales.

The Commerce Dept. collects this data from a series of surveys sent each month to manufacturers, retailers, and wholesalers.

So, for example, in May 2016, overall sales for the month across all businesses were $1.291 trillion. Inventories across those same companies were $1.810 trillion. So, $1.810 divided by $1.291 results in an inventory-to-sales ratio of 1.39.

I agree it would be better to use quarterly inventory data and take an average for the year, but the REL data we use as a base takes the year end snapshot, so we have to just run with that. I have looked at this before, and found that while the average inventories across quarters does tend to be a bit higher than the year end number, it is not meaningfully so.

Dan Gilmore


Good once again to see you looking beneath the headlines and trying to gain more meaningful information.

As to reasons for the increase in inventories it might just be due to companies deciding to stock more of what they really need, rather than run the risk of stockouts on popular lines, thus ensuring higher levels of service - using availability as a competitive weapon. Perhaps it is also due to an informal acknowledgment of the need for "slack" that I posed a few weeks ago.

If it is not on the shelf then it matters little how responsive your transport system is you cannot get it into the hands of the customer. It is also a reflection that it can take a huge amount of time to reduce redundant/slow-moving inventories and brand creep is still with us.

I look forward to reading about the answers from your side of the Atlantic.

David MacLeod
Learn Logistics Limited


Outstanding analysis as always from SCDigest. No one else out there, including the analysts, does what you do, and you do it week after week.

Great stuff - keep up the good work,

I agree that the rising US inventory levels have not been well covered or explained.


Thomas Detmann
Spokane, OR



Q: What has been the compound annual growth rate in US 3PL expenditures from 1994 through 2015?

A: 9.6%, according to the 3PL industry experts at Armstrong & Associates, meaning US 3PL spending has been about doubling every 7-8 years.

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