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A Supply Chain Matters Commentary Regarding Inventory Performance Trending

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Since our founding, we have always looked forward to the annual REL Working Capital Scorecard, and specifically its reporting of inventory performance.  We have provided Supply Chain Matters readers our observations and insights that were related to reported performance in individual industry sectors.

The data was collected by REL, which is now a division of The Hackett Group, and published each year in CFO Magazine. These indices, particularly the calculation of the metric Days Inventory Outstanding (DIO), are rather important because they reflect a generally accepted method for how CFO’s measured their supply chain inventory performance. While many in the supply chain community have adopted and are very comfortable with inventory turns calculation methods, DIO is, in our view and others, a broader financial indicator of inventory performance contrasted to annual sales trends. DIO reflects if inventory management is tracking to revenue performance, and that interests the C-Suite, stockholders and the Wall Street community.

Since CFO Magazine discontinued its sponsorship of the REL Scorecard, Supply Chain Digest took the initiative this year to actually perform the DIO calculations based on raw data supplied by REL.  A few weeks ago, Dan Gilmore issued a two-part commentary providing his analysis of 2012 inventory performance which our readers can review. Supply Chain Matters provides a shout-out to Dan and his editorial team for undertaking this calculation task and allowing our community to once again review performance. 

Gilmore discovered that the previous industry grouping categories were somewhat misaligned.  We also have been observing that since we began reviewing the annual reporting.  Gilmore further points out that mergers, acquisitions and private equity deals make the continuity of the industry groupings difficult to pin down. We speculate that the previous CFO Magazine industry groupings were formed to insure that readers in those industries would not rebel when reviewing specific industry results.  Supply Chain Digest was able to provide a DIO inventory performance view that spanned the years 2006, 2011 and 2012.  We reviewed our files and were able to review published data from 2008, 2009 and 2010.  Although we noted that there are problems in the continuity of the trend reporting, the numbers do provide important trend indicators.

An observation and insight we do want to share reflects on the marginally performing industry sectors, those whose performance reflects an increase in inventory when compared to revenue trends. A snapshot of the 6 year DIO inventory performance as reported by Supply Chain Digest reflects:

Construction Equipment                                                 58.4 percent increase

Chemicals and Gases                                                        27.2 percent

Metals Manufacturing and Distribution                      19.5 percent

Retail- Electronics and Home Improvement              12.5 and 11.6 percent respectively

Auto Parts and Components                                           12.7 percent

Toy Manufacturing                                                           10.2 percent

Apparel and Shoe Manufacturing                                  7.2 percent

Auto-Truck Related OEM’s                                             4.2 percent

Computers and Peripheral Manufacturing                  3.2 percent

 

Can you spot a common denominator?

Most of these industries plunged big-time into global sourcing and distribution of products and were subject to global economic developments, supply chain disruptions and slower transport times.  In 2011, the automotive and high tech sectors were significantly impacted by supply chain disruption. Apparel and toys have been forced to deal with exploding direct labor costs in China, and have since altered some sourcing of production. On a positive note, Consumer Packaged Goods, which also plunged into global markets, demonstrated a 7.3 percent decrease over six years.

We share one other comment regarding Aerospace and Defense Components, which according to the analysis had a 30.1 percent increase in DIO over 6 years. This should really not be all that surprising, given the multi-year delays encountered in the major new aircraft programs from both Airbus and Boeing that overlapped this period.  If there were a need for definitive evidence on the impact of these delays, particularly on aerospace component suppliers, it would be reflected in this DIO trending.

Despite all the technological and process advances in supply chain planning and inventory management, business factors often complicate overall supply chain inventory management.  It is not so much a reflection on the technology, but rather the implications of globalization and increased supply chain complexity and disruption.

What is your view?

Reviewing this six year trending data on inventory performance, along with your experience in having to manage inventory in these specific industries, do you believe that external business forces have been the real challenge?

Bob Ferrari

 

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