First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  August 20, 2009  
  Supply Chain News: Analysis of the Inventory Numbers for 2008  

As we’ve noted before, 2008 was perhaps as strange a year as we will ever see in supply chain, ranging from a decent economy in the Spring, to oil prices spiking to nearly $150 per barrel in July, to the financial industry collapse in September, followed immediately by the start of the deep recession.


That’s just a bit of a backdrop as we take a look at inventory management performance for 2008, as we always do about this time, based on the annual analysis done by CFO magazine and consulting firm REL.


That report analyzes the overall working capital performance of numerous industries and hundreds of public companies, based on the annual reports for those companies for 2008. As those annual reports generally don’t get released until March or so, and then the analysis has to be done, the CFO report doesn’t usually come out until about this time. This year, the work was actually completed earlier than usual, in June, but we haven’t had an open spot in this column to discuss the data until now.


We look at this data because one of the three components of working capital performance is inventory efficiency (the other two are concerned with how fast you get paid by customers – Days Sales Outstanding - and how fast you pay your vendors – Days Payable Outstanding). If you are really good at all three, you have reduced your working capital requirements, which frees up more cash for the business – sometimes a lot more.

Gilmore Says:


Whether the 2008 results were really from improved inventory management, or simply a tremendous inventory de-load near the end of the year to cope with the recession, is not clear.

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The measure CFO uses for inventory performance is Days Inventory Outstanding (DIO) – it measures how many days of sales (i.e., the average day) a company holds in inventory. It is, in a sense, the mirror opposite of the familiar “inventory turns” metric. High DIO is bad, in general, while high turns are good, and vice-versa.


DIO is based on year-end inventory numbers and, as such, is subject to some manipulation. Still, it is a reasonable approach to use for analysis, especially over time. The specific formula is: Inventory/(total revenue/365), or year-end inventory divided by one day of average revenue, to put it into words.

(Note: Some would use cost of goods sold (COGS) rather than revenue to calculate DIO, but CFO magazine does it this way in part for consistency across its three measures related to working capital. See comments in the Feedback section below.)


In the past, I have not been wild about the way this particular study grouped companies into industries, as it often wound up mixing apples and oranges, in my view. There is still some of that this year, though it is by far the best organization of the companies to date, with relatively modest corporate grouping issues, though there are some. For example, the “Internet Retail Industry” group combines “inventory heavy” companies like and Home Shopping Network with travel companies like, which makes the aggregate numbers for the category somewhat dubious. But that’s one of the few groups for which there are major such concerns. Another might be the general category of “Specialty Retailers,” in which everyone from the GAP Stores, to Sherwin-Williams, to Radio Shack is in one big pool.


Given all that, it is still worth looking at the industry data and trends. All told, 2008 was a good year for inventory management, based on these numbers. In the past few years, in many sectors, inventory levels were actually going up, with some citing the effects of offshoring and longer supply chains as the cause. Others said that in the relatively good economic times of 2004-07, companies were less concerned with keeping inventories low and more focused on sales growth.


This year, a larger number of industries showed improvements in DIO in 2008 than we have seen the past several years, as measured by the median DIO for the companies in each sector. Whether that was really the result of improved inventory management, or simply a tremendous inventory de-load near the end of the year to cope with the recession is not clear.


As we noted just a few weeks ago, however, it is clear that many retailers and manufacturers are, at least for now, thinking they can make permanent reductions in overall inventory levels, in part by reducing total SKU counts. (See Will Large Retailers Help Manufacturers Drive Out Supply Chain Complexity?)


For example, consumer packaged goods company Dwight & Church has put a real focus on rationalizing its SKU base, and cut the number of new products it plans on launching this year by half. Voila! The company saw its DIO drop from 35 in 2007, to 30 in 2008 – a substantial improvement. In 2006, it was at 37.


All that said, below we break the industry sectors into Improved, Declining, and Unchanged (or nearly so) inventory performance. You should immediately notice that there are just three in the Declining list (much fewer than recent years) and, frankly, for one of those, the Building Products sector, to show only a modest decline in Inventory Performance for the year is really an accomplishment, given the meltdown in that industry.


Improved 2008 Inventory Performance (all numbers in median DIO for the sector):

  • Beverages: from 24 in 2007, to 19 in 2008
  • Biotech: 46 in 2007, to 35 in 2008
  • Chemicals: 47 in 2007, to 44 in 2008
  • Computers & Peripherals: 26 in 2007, to 22 in 2008
  • Containers & Packaging Materials: 46 in 2007, to 43 in 2008
  • Electrical Equipment: 46 in 2007, to 43 in 2008
  • Food/Grocery/Drug Retailing: 29 in 2007, to 27 in 2008
  • Metals and Mining: 50 in 2007, to 44 in 2008
  • Multi-Line Retail: 63 in 2007, to 61 in 2008
  • Personal Care Products: 44 in 2007, to 40 in 2008
  • Pharmaceuticals: 41 in 2007, to 35 in 2008
  • Specialty Retail: 55 in 2007, to 52 in 2008
  • Textiles and Apparel: 53 in 2007, to 50 in 2008

Declining 2008 Inventory Performance:

  • Building Products: 34 in 2007, to 36 in 2008
  • Household/Consumer Packaged Goods: 35 in 2007, to 37 in 2008
  • Industrial Machinery: 50 in 2007, to 52 in 2008

Unchanged 2008 Inventory Performance:

  • Aerospace: Constant at 53
  • Auto Parts: Constant at 31
  • Communication/Network Equipment: 30 in 2007, to 31 in 2008
  • Food Manufacturing: 38 in 2007, to 39 in 2008
  • Consumer Durables: 65 in 2007, to 66 in 2008
  • Leisure and Sporting Goods: Constant at 39
  • Paper and Forest Products: Constant at 43
  • Semiconductors and Equipment: Constant at 43

I am out of space here, but we will provide some more detail and visuals around this in the Trends and Issues section of next week’s SCDigest On-Target newsletter, where we will also highlight some strong individual company performers. I am also intrigued at how the view might have changed if we looked at averages rather than medians.


Any reaction to the 2008 inventory numbers? Was 2008 such a strange year that it is hard to really draw strong conclusions around inventory management trends? What do you think the 2009 numbers will show? Let us know your thoughts at the Feedback button below.

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