Supply Chain News: Inventory Performance 2016 Part 2

Numbers for Days Inventory Outstanding and Turns in 2015 for More than 60 Sectors

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).

Gilmore Says.... 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? What do you say? Click here to send us your comments

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

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 hgiher 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 section below.

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