This Week on SCDigest:
Analysis of the Inventory Numbers for 2008
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
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Guest Expert Insight - Talking Supply Chain Risk in a Language Everyone Understands - Money!!
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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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 inven-tory de-load near the end of the year to cope with the recession, is not clear.
"

What do you say?

 
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your Feedback here
 

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.

 

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 Amazon.com and Home Shopping Network with travel companies like Expedia.com, 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 Manu-facturers 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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YOUR FEEDBACK


What is the future of Supply Chain? That’s the question Dan Gilmore asked in a recent First Thoughts column, in preparation for a presentation he has to make on the topic in a few weeks.

 

We received a number of letters in response, including our Feedback of the Week from John Mariano of Fellowes, who says that although we will get much more automated, technology will never allow us to go on “auto pilot.”

 

Find that letter and much more 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
Fellowes



More On the Future of Supply Chain:

 

I find this topic very interesting.

 

My 2 cents will go back to a topic that you mentioned already in the article and it is the world of the future.

 

One of the trends that I think will impact the supply chain of the future is the digital divide. There is very little or null efforts from the corporate sector to tackle this problem that I think will strike the supply chain very hard.

 

Just think of this. The European population is rapidly aging, so somewhere in the future, the emerging economies will not be emerging, but simply the largest in the world and, in those countries (like mine), the technological infrastructure will not allow the big corporations' supply chains to operate like in the western economies today.

 

This is just a thought and I look forward to reading your comments in September.

 

Ivan Lopez
Industrial Engineering Europe
Brussels


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

Viewlocity


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


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


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
Buyer
Award Windows


SUPPLY CHAIN TRIVIA
Q.

By how much has the US rail industry been able to increase its revenue per ton mile since 2001?

A.

By about 48% through 2008, according to the industry analysts at Oliver Wyman. Revenue per loaded car has increased even more (90%), as average distances the cars are moved has also increased in addition to rates.