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September 8, 2017 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet Supply Chain Inventory Performance 2017 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 Supply Chain by Design and Expert Columns bullet On Demand Videocasts

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Approaches to Education and Training – Turn Human Capital
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first thought


Supply Chain Graphic of the Week
Carrier Operating Performance by Mode for Q2 2017


Unionization Rates Still Headed Down in US

Real Driver Crisis May Still be Years Away
Amazon Expands Treasure Truck Cities
US Trade Deficits with China, Mexico are Headed back Up


August 9, 2017 Contest

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

Holste's Blog: The Cause & Effect of Operational Changes on Order Fulfillment System Performance


Register Now for this Upcoming Webinar: Approaches to Education and Training – Turn Human Capital Into an Enduring Competitive Advantage 

Weekly On-Target Newsletter:
September 6, 2017 Edition

RFID Cartoon, Driver Shortage Yes No? MIT's RFID Drone for DCs; AI Insight and more

Three Things That Supply Chain Managers Should Know about Artificial Intelligence

by Dr. Michael Watson

Great Expectations: Supply Chain Control

by Jim Preuninger
Chief Executive Officer
Global Product Marketing
Amber Road

Constraints, Constraints, Constraints: Building the Optimal Supply Chain

by Henry Canitz
Product Marketing & Business Development Director


How much did Amazon report it lost on shipping (shipping revenue versus shipping expense) in 2016?

Answer Found at the
Bottom of the Page

Supply Chain Inventory Performance 2017

Since 2005, I have been doing reporting and analysis on company and sector inventory levels based on the annual Working Capital scorecard that is compiled by The Hackett Group.

It is always one of our most popular columns of the year.

But there have been a few twists over the years, and another one this year, as I am going to explain here.


Some categories (e.g., department stores) are pretty homogeneous - others have more variance between company business models within a category.


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This data sent to me comes from Hackett's overall analysis of working capital performance for the 1000 largest publicly traded US companies. That means the full report and data set looks at three components of working capital, changes in which of course then directly determine overall cash flow, Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payables Outstanding (DPO). Here, we are going to focus on just the inventory component.

Until two years ago, Hackett calculated DIO relative to how many days of sales a company held in inventory. That generated many complaints from readers, as the divisor in the formula was a day's worth of revenue, not a day's worth of cost of goods sold, as is typically how it is measured. As I said each year, that's how Hackett reported the data, and that's how thus I had to deal with it.

Also frustrating was that you cannot directly convert DIO to inventory turns using that approach because each company's gross margin percent is different. If you are measuring inventory turns using cost of goods sold in the equation, you can't derive that turns number if you calculated DIO based on a day's sales instead of COGS.

But starting with the data for 2014, the Hackett DIO calculation was changed to:

     DIO = 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.

So, let's take 3M. In 2016, it ended the year with COGS equal to $15.04 billion, and inventory levels of $3.335 billion. So its DIO is:

     3,335,000,000/[15,040,000,000/365] = DIO of 82.1 Days

That DIO compares to inventory turns of:

     15,040,000,000/3,335,000,000 = 4.4 Turns

Clear as mud?

Now, I usually get the data from Hackett in late July and do all the segmenting and analysis (more on that in a second) to produce my columns in early August. But this year, for reasons I won't get into, Hackett was not able to send the data until a couple of weeks ago.

So when I finally took a look, the companies in many sectors had somehow been cut back. Which takes me to me next point: the big value-add SCDigest has performed is to re-sort individual companies into new categories, so the categories and comparisons in our view are more usable for supply chain thinking. For example, in the original Hackett data, home builders like Toll Brothers are mixed in the household durables category with companies like Whirlpool. That is one of the most blatant "apples and oranges" combinations, but there were a number of others that don't jive, at least from a supply chain perspective. Metal producers such as US Steel were in the same category as miners, while "spirits" beverage companies were in the same category as soft drink companies, when the inventory dynamics of each group are dramatically different, in two of many other examples.

So, we did the (really) hard work of first eliminating sectors that aren't useful for the supply chain (e.g., bankers, etc.), and then redefining and populating the categories in a way that makes more sense for comparisons. As another example, rather than having one giant category of all specialty retail, we break that down into apparel, department stores, auto parts, etc. It really does take a lot of time.

It is far from perfect. Should Johnson & Johnson be placed in the pharma group, the medical device category, or consumer packaged goods, as it is in all those segments? Is Honeywell in the aerospace or automotive sector, or one of the "industrial conglomerates" like GE or 3M? That's where we put it again this year. There are many such examples where the call is not obvious.

In the end, we simply make choices, including looking up more details on a number of companies with which we were not familiar so they could be placed appropriately. This is in fact very difficult: how do you segment the dozens of public companies that are in the general “machinery” category? Should just Ford, GM and Tesla be together in a small auto OEM group, or should we broaden the category and mix those companies say with freight truck manufacturers such as Navistar and PACCAR, along with motorcycle maker Harley-Davidson? (That's what we did).

So, category construction and comparisons are fraught with issues and questions, but we do the best that we can. Some categories (e.g., department stores) are pretty homogeneous - others have more variance between company business models within a category.

The other thing we've done in the past is add in companies that for whatever reason were left out of the Hackett data set, based on a manual data look-up. Mysteriously, for example, retail giant Lowes was left out of the data every year.

So to net it all out, given changes to the Hackett data, we developed a tool to pull numbers from sites like Google or Yahoo Finance, and then applied that data to the categories and companies we built last year.

First, I will note again that I am struck by the impact mergers and acquisitions on shrinking the list - there are simply fewer companies out there. This will be the last year both Dow and DuPont are on the list, as that merger of chemical giants is just now complete. Johnson Controls recently swallowed up Tyco. We now have Kraft Heinz, which tried and failed to take over fellow CPG giant Unilever earlier this year after their merger.

It never ends - with impacts on the supply chain in many ways. I don't think it is good.

Across the 554 companies we annualized, average inventory turns in 2016 were 8.94. That compares with 8.48 in 2013 - or an improvement of about 5% over the last four years. That's actually not bad- but many companies and sectors went nowhere or backwards since 2013. BTW, that 8.94 turns equates to a DIO of 40.8. As a check, the annual WERC DC metrics data found median DIO of 45, based on survey data.

That's consistent with data on the US "inventory to sales" ratio (inventory levels divided by a month's worth of sales) from the Commerce Dept. As shown below, in late 2008/early 2009 the measure spiked as the recession caught companies with way more inventory than needed versus suddenly shrinking demand. But most companies cut away at that inventory ruthlessly, so that inventory was back on the longer term downward trend line by early 2010.

But since early 2012, inventory levels have headed slowly but consistently back up, though down a bit here in 2017. Still, with a ratio of 1.38 in June overall inventories are up about 11% from the 1.25 ratio seen at the start of 2012.

That's some important backdrop for the detailed numbers I will lay on you next week. Sorry for the tease but I am out of space. Lots of detailed analysis next week.

What are your thoughts on measuring inventory performance? Why have inventories been rising since 2012? Let us know your thoughts at the Feedback button or section below.


On Demand Videocast:

How DOM and WMS Work Together to Power Omnichannel Supply Chains

Experts from Tompkins International and Softeon Set the Record Straight in Fast Paced, Q&A Format

This discussion will be based on an outstanding new "Executive Brief" on this same topic, developed jointly by Kevin Hume of Tompkins International and Satish Kumar, a vice president at Softeon.

Featuring SCDigest editor Dan Gilmore, Kevin Hume of well-known consulting firm Tompkins International and Satish Kumar, a vice president at Softeon.

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On Demand Videocast:

New Cloud WMS Solution is Game Changer for Warehouse Management Deployment and Flexibility

New Technology and Deployment Approach Offer a Simply Better Way to WMS Implementations - Learn How

In this outstanding Videocast, we will cover the latest in each-picking robotics, co-bots, artificial intelligence, autonomous vehicles, sensors, drones and droids.

Featuring  Dan Gilmore, Editor, along with Mark Hawksley and Bruno Dubreuil of TECSYS, a leading provider of WMS solutions.

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On Demand Videocast:

Innovation in Shipper-3PL Relationships Benchmark Study Results

New Research will be Unveiled from SCDigest and JDA On This Increasingly Important Topic

In this outstanding broadcast, SCDigest and JDA recently completed new research study on innovation in shipper-3PL relationships, with the goal of obtaining the perspectives of both shippers and service providers on this increasingly important topic. All registrants will be sent a copy of the report will all the data shortly after the Videocast.

Featuring SCDigest editor Dan Gilmore and Danny Halim and Lori Harner of JDA.


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We publish here some of the several emails we received from Dan Gilmore's column last week on The Greatest Time to be a Supply Chain Pro Ever?

More soon.

Feedback on The Greatest Time to be a Supply Chain Pro Ever?


My own career choice going back to 1968 continues to be vindicated.

Based on my undergraduate studies I saw that if you were involved in making "stuff" in just one sector you stood a good chance of having your employment disrupted. However if you were involved in moving "stuff" it didn’t really matter what you moved you still had a job.

49 years later and it is just as true; so as you say "keep it moving!"

David MacLeod
Learn Logistics Limited


You wrote: "It is not good to have some supply chain managers focused on all this innovation and cool stuff while others are stuck with grinding out the execution every day."

I wouldn't classify this situation as good or bad. It really depends on what each supply chain person likes to do and is good at doing. Just like some people are better at managers versus leaders and vice a versa.

Some supply chain people are better at doing versus innovation and some are better at innovation versus doing. For me personally I have more interest in and abilities at being an innovator.

The trick is to find that right mix of people skills, deploy them correctly, and give them the right tools to be successful. If you do that, you can support Bi-Modal Operations driving both efficient on-going operations and robust innovation.

Henry Canitz (Hank)
Director, Product Marketing & Business Development




When I read the article, I was struck by how important it is for me to share it with the supply chain students at the Illinois Institute of Technology. I am sure it will motivate them to read your thoughts.


Herb Shields




Q: How much did Amazon report it lost on shipping (shipping revenue versus shipping expense) in 2016?

A: An amazing $7.1 billion – a number sure to be exceeded this year.

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