Supply Chain Digest: Inventory Management - Are we Making Inventory Progress?
People often ask me about inventory levels, and frankly I don't often have good numbers off the top of my head. So we decided to do some data analysis that we hope will provide all of us a helpful frame of reference.
But first, one of my favorite supply chain quotes came a couple of years ago from Johnnie Dobbs, now head of all supply chain and logistics for Wal-Mart.
Mr. Dobbs told a group at the Retail Industry Leaders Association (RILA) Logistics conference, "There are so many different ways inventory can enter our system, it's a constant challenge to keep it under control."
And guess what? As good as Wal-Mart is in supply chain, in 2005/06 it found inventories were rising much faster versus sales than the company had historically experienced, contributing to a slow down in its profit growth. Hence, the "Inventory DeLoad" program announced last year.
In the U.S. overall, we have made progress in reducing inventory levels relative to sales. In January 1992, the monthly inventory-to-sales ratio stood at 1.56. There was $1.56 of inventory for every dollar of goods sold.
You can see the subsequent progress:
- January, 1992: $1.56
- January, 1995: $1.45
- January, 1998: $1.43
- January, 2001: $1.44
- January, 2004: $1.32
- July, 2006: $1.26
Overall, average inventory levels across the economy are down about 20 percent from 1992 to 2006. Will the trend continue or has it reached a plateau?
To see, we took the fine work done each year by CFO magazine and Hackett-REL in analyzing working capital efficiency, based on filings by public companies. Supply Chain Digest looked across the last three years of this data, focusing specifically on the Days Inventory Outstanding (DIO) component of the overall working capital analysis.
Of the 24 sectors for which we have three years of data, eight of them saw DIO go up on average over the three years - sometimes substantially.
Specialty retailers, for example, saw DIO rise from 57 in 2003 to 62 in 2005 (the last year calculated). More broad line retailers (mass merchants, department stores) faired even worse: from an average DIO across the sector of 44 in 2003 to a whopping 65 in 2005. Is offshoring the cause? Seems likely. I know others think so.
Sector |
2005 |
2004 |
2003 |
Retailers, Apparel |
52 |
54 |
57 |
Retailers, Broadline |
65 |
40 |
44 |
Retailers, Specialty |
62 |
58 |
57 |
Other sectors seeing a rise in DIO over the three years included food manufacturers, home furniture and pharmaceuticals (which surprised me).
Now, rising inventory levels aren't necessarily bad - higher DIO might well be worth the benefit of lower products costs from China, to take the easy example. Customer service policies, distribution strategies and many other factors influence the level of inventory that is right for a particular company, and the current state of the economy or forecasts for demand always have an impact.
Still there were a number of companies in retailing and related businesses that showed a lot of progress. Here are some of the standouts:
- General Mills, bucking the overall sector trend, reduced DIO from 48 in 2002 to 33 in 2005
- Staples focused on driving return on assets reduced DIO from 49 to 38
- Office Depot went from 42 DIO to 34
- GAP went from DIO of 52 to 38
- Federated Dept. Stores made major progress going from 82 to 68 DIO
- The apparel manufacturer Kellwood, which does a huge amount of offshoring, went from 60 to 36.
Discussion Questions: What are your perspectives on inventory trends and why has there been so little progress? Do the numbers in retail and consumer goods surprise you? What do you think are the key factors and what can be done to address the situation(s)?