February 26, 2007
Supply Chain Digest: Inventory Management – Are we Making Inventory Progress?
By Dan Gilmore, Editor-in-Chief, Supply Chain Digest
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)?
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Managing the inventories of a company include the entire logistics cycle. For most retailers, they don’t use a 360 degree feedback system as part of their logistics efficiency loop and miss out on the costs which they must bear to allow their suppliers to better manage their logistics cycles including their wip, finished goods and fabrication cycle times to align with the needs of the retailer. This often turns into a tug of war where everyone loses. Until this relationship is repaired and everyone plays on a level playing field, vendors like Wal-Mart will still have issues with changing inventories, alignment problems with their vendors and inability to maximize the logistics cycle the way it should be.
Though this might not be the largest driver of poor inventory performance, one of the things that has always confounded me is the lack of integration in sales forecasts across different functions like Supply Chain and Marketing.
Most Supply Chain forecasts base forecasts largely on supply-side factors like costs, capacity, material supply fluctuations etc. Marketing, on the other hand, concerns itself more with the demand side of things, with factors like consumption and the drivers of consumption like advertising and promotions (pricing is one of the few common factors that most forecasts factor in). Working with several clients in my consulting career, I have noticed that forecasting process is siloed within each of these different divisions, so inventory management may not be as aware of short term fluctuations in demand due to marketing activities as they need to be (and conversely marketing is not as aware as it needs to be about supply-side factors that may cause temporary fluctuation in sales).
The question posed here is timely and debatable. Certainly, the first set of numbers (monthly inventory-to-sales ratio trended from 1992 to 2006) suggests significant progress has been made, but the obvious question is at what cost has this “progress” been achieved. It seems to be a fairly one-dimensional view of business performance, which we know is far more complex. We know from other studies that the rate of out-of-stocks at store level has remained constant or increased despite focused efforts to reduce OOS occurrence. Trade-offs are inherent in business, but real progress can be achieved by using technology to improve visibility of physical stock and decreasing the “latency” of information…i.e. continuing the push toward real-time systems.
During the last five years, there has been a definite shift in fast moving CPG from the mindset of “sell what you buy” to “buy what you sell.” This shift is ongoing, leading to one of the factors causing high inventory levels. As retailers try to figure out what consumers really want, there are inevitably mistakes made, and those errors offset the inventory gains made by reducing the influence of trade dollars on merchandisers. Technology has been used to help get a better understanding of buying behavior for years, but there is still too much noise in the data being analyzed, and where data is being properly analyzed there is poor execution at store level that results in unnecessary out-of-stocks and over stocks.
Examination of the what products are more often over-stocked will yield another factor, namely that the life cycle of goods in fashion and consumer electronics has shortened during the last five years, Think about the flat screen TV revolution, and the move by companies like Claire’s to changeout most of their SKUs every few months. This is bound to result in supply and demand mismatches leading to inventory challenges. Interestingly, this has created new markets that Overstock.com and others are taking advantage of.
In the mid to late 90s a lot of companies were looking at ways to collaborate, reduce inventory and focus on replenishment. In the last two to three years I have heard a lot more industry people talking about forecasts again. To me, that signals a turn away from a replenishment model to a more traditional view of distribution. Along with that more traditional view goes high inventory. Yes, the port problems in California probably attributed to companies wanting the security of more inventory.
However, there are notable examples of companies that have continued to reduce inventory and work on more of a replenishment model. Tesco is coming to the US with its well-known low inventory replacement system. Some of the leading companies have reduced their inventory in the face of every challenge facing all companies.
I have the sense that many companies think the low inventory replenishment “fad” is over. As their competitor product turns and cash flow increases, those companies are in a better position to deliver on-time performance and make money. Those companies who slip behind the leaders become less competitive and less profitable.
The Days Inventory Outstanding metric completely masks the complexity of inventory management especially at the retail level. The retailers I deal with spend their days and nights dealing with out of stock key items. Without assortment-anchoring key items, retailers will lose even their best customers and experience rapid decline in complementary sales.
The industry in the early stages of becoming demand driven as best practices born of Business Intelligence and optimization software take hold. Unfortunately the industry has inherited many supply side metrics that don’t work very well in this world. Among them are open to buy, days inventory outstanding, and sales/stock ratios. To gain relevance in the demand world, these metrics must be applied at much lower level of granularity, at the assortment level, for example. New metrics such as velocity, imminent stock-out and seaonalized weeks of supply will help the demand driven retailer keep their key items in stock and in sufficient supply to meet demand.
At the end of the day, retailers must have the right inventory in stock.
While there have been substantial efforts to improve the management of the retail supply chain, the system continues to be tested.
The total number of items carried by most retailers has grown in recent years. Grocery stores once carried only about 10,000 items; now many carry 30,000 items. Supercenters stock over 100,000 items. While the average inventory may stay the same or even decline, the problem may get worse within some segments.
Item proliferation is also a factor. Over 10,000 new items are introduced each year just in food and beverages. The fact is that most of these items either fail outright or fail to generate a sales rate that keeps up with the norm.
While it is certainly useful to track metrics, it is more important to identify root causes and develop solutions.
While there has been slow progress in reducing inventory, I still get the calls for high inventory coupled with low service level. Just having inventory is not the issue; the key is to have the right inventory in the right locations. Technology has improved the supply chain visibility and buyer/seller communication has helped. The fact that the net inventory is down speaks for greater improvement due to the increase in foreign sourcing, which increases supply chain inventory.
I am advising to look to the next great evolution in supply chain management. This I see as expanding the scope at both the input and output ends. For retailers, this means transmitting daily sales to suppliers as a driver for Demand Driven Management. Use the time element in the supply chain, not the quantities for optimum economics to reduce inventory.
Today’s shelving software apps allow for sophisticated analysis of the shelf, when used properly. Also, assortment always needs to be considered when analyzing the shelf.
The problem is that many retailers and suppliers opt out of using these analytical tools, because of the problem of linking shelving databases with item level data that is properly segmented. So many planograms end up being “pretty pictures” that don’t address the financial implications on the shelf.
This work is very process driven, and once the correct process is in place, understanding inventory and turns becomes much easier. And then implementation at stores is higher, because retail operations understands the benefits of the new shelf set.
I don’t think off shoring or outsourcing should by themselves increase inventory. Yes they may increase in-transit inventory but store level inventory would only increase by the amount necessary to cover the additional uncertainty of a longer lead time. I am not sure that amount would even be perceivable at store level. As far as the total retailer on hand–which includes warehouse–there are some obvious reasons why consolidations like the Federated Stores would result in less inventory lying around in various locations. As they streamline operations, there becomes less duplication of safety stock.
The full article links identify the biggest factor. Broadening assortment increases the amount of “presentation stock” which is needed at store level. We see a continuing broadening of the assortment as manufacturers come up with new ways to present the same products (canned spinach, dehydrated spinach, frozen spinach, spinach and apricots (just kidding)) and variations on one product (pulp, no pulp, lots of pulp, some pulp). This increase in assortment works to increase the amount of inventory on hand.
But there is another aspect not mentioned. It is the direct to consumer angle that some retailers have been able to exploit. Especially in the specialty channel, if you are looking for a unique birthday gift, I can’t think of a better way to find it than through the internet. A few keyword searches and you are sure to find a website that caters directly to the celebrant’s unique interests. The specialty stores are going to have to reconsider whether they need inventory lying around in malls if it is not going to be productive.
There are a lot of factors to consider, as others have stated, when you perform an analysis of the DIO numbers and vendor managed inventory. The points mentioned are valid and deserve consideration. Certainly, reducing the inventory to a point that creates an adverse affect on customer service would not be beneficial. When reviewing the complete supply chain pipeline and analyzing the reduction of vendor-to-shelf days, it creates a more positive result in cost. Producing a more effective and efficient supply chain with new processes or software will increase inventory turns and reduce excess inventory. When reviewing a supply chain pipeline there are usually “black holes” which are opportunities to become more efficient. Travel time in the supply chain is just one simple area where there is usually opportunity.
Visibility systems today offer complete views of inventory, pending receipts, etc. so that the Johnny Dobbs, VP Wal-Mart, quote doesn’t become a reality in your supply chain.
Are we making progress? Likely yes, across numerous aspects especially in terms of replenishment. But the data suggests a plateau. Retailers continue to try to use old logic with new technologies; new logic makes better sense.
The class/store level is where the demand is being registered, yet supply is generally distributed in a top to down fashion. Merchandisers have had little success matching their assortments to the local store/class demand. If demand can be registered from the bottom to the top, then appropriately trended, the supply can be distributed more efficiently.
It goes without saying that every business, worldwide, is trying to minimize its inventory. Apples to apples comparisons are hard to make. Companies change their business mix. For example, the Wal-Mart figures include non-US retailing. Furthermore, contracted inventory that’s not legally owned might still be an obligation. Those obligations are generally not reported. Certainly that is a big issue for any retailer with a major private-label business. Captive suppliers, like Visteon, are also subject to that issue. There’s a saying, “Listen to the music, not the notes.” The theme of The Inventory Management Opera is own as little as you can. Everyone’s a performer in this opera. And the fat lady hasn’t sung yet.
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Managing the inventories of a company include the entire logistics cycle. For most retailers, they don’t use a 360 degree feedback system as part of their logistics efficiency loop and miss out on the costs which they must bear to allow their suppliers to better manage their logistics cycles including their wip, finished goods and fabrication cycle times to align with the needs of the retailer. This often turns into a tug of war where everyone loses. Until this relationship is repaired and everyone plays on a level playing field, vendors like Wal-Mart will still have issues with changing inventories, alignment problems with their vendors and inability to maximize the logistics cycle the way it should be.
Though this might not be the largest driver of poor inventory performance, one of the things that has always confounded me is the lack of integration in sales forecasts across different functions like Supply Chain and Marketing.
Most Supply Chain forecasts base forecasts largely on supply-side factors like costs, capacity, material supply fluctuations etc. Marketing, on the other hand, concerns itself more with the demand side of things, with factors like consumption and the drivers of consumption like advertising and promotions (pricing is one of the few common factors that most forecasts factor in). Working with several clients in my consulting career, I have noticed that forecasting process is siloed within each of these different divisions, so inventory management may not be as aware of short term fluctuations in demand due to marketing activities as they need to be (and conversely marketing is not as aware as it needs to be about supply-side factors that may cause temporary fluctuation in sales).
The question posed here is timely and debatable. Certainly, the first set of numbers (monthly inventory-to-sales ratio trended from 1992 to 2006) suggests significant progress has been made, but the obvious question is at what cost has this “progress” been achieved. It seems to be a fairly one-dimensional view of business performance, which we know is far more complex. We know from other studies that the rate of out-of-stocks at store level has remained constant or increased despite focused efforts to reduce OOS occurrence. Trade-offs are inherent in business, but real progress can be achieved by using technology to improve visibility of physical stock and decreasing the “latency” of information…i.e. continuing the push toward real-time systems.
During the last five years, there has been a definite shift in fast moving CPG from the mindset of “sell what you buy” to “buy what you sell.” This shift is ongoing, leading to one of the factors causing high inventory levels. As retailers try to figure out what consumers really want, there are inevitably mistakes made, and those errors offset the inventory gains made by reducing the influence of trade dollars on merchandisers. Technology has been used to help get a better understanding of buying behavior for years, but there is still too much noise in the data being analyzed, and where data is being properly analyzed there is poor execution at store level that results in unnecessary out-of-stocks and over stocks.
Examination of the what products are more often over-stocked will yield another factor, namely that the life cycle of goods in fashion and consumer electronics has shortened during the last five years, Think about the flat screen TV revolution, and the move by companies like Claire’s to changeout most of their SKUs every few months. This is bound to result in supply and demand mismatches leading to inventory challenges. Interestingly, this has created new markets that Overstock.com and others are taking advantage of.
In the mid to late 90s a lot of companies were looking at ways to collaborate, reduce inventory and focus on replenishment. In the last two to three years I have heard a lot more industry people talking about forecasts again. To me, that signals a turn away from a replenishment model to a more traditional view of distribution. Along with that more traditional view goes high inventory. Yes, the port problems in California probably attributed to companies wanting the security of more inventory.
However, there are notable examples of companies that have continued to reduce inventory and work on more of a replenishment model. Tesco is coming to the US with its well-known low inventory replacement system. Some of the leading companies have reduced their inventory in the face of every challenge facing all companies.
I have the sense that many companies think the low inventory replenishment “fad” is over. As their competitor product turns and cash flow increases, those companies are in a better position to deliver on-time performance and make money. Those companies who slip behind the leaders become less competitive and less profitable.
The Days Inventory Outstanding metric completely masks the complexity of inventory management especially at the retail level. The retailers I deal with spend their days and nights dealing with out of stock key items. Without assortment-anchoring key items, retailers will lose even their best customers and experience rapid decline in complementary sales.
The industry in the early stages of becoming demand driven as best practices born of Business Intelligence and optimization software take hold. Unfortunately the industry has inherited many supply side metrics that don’t work very well in this world. Among them are open to buy, days inventory outstanding, and sales/stock ratios. To gain relevance in the demand world, these metrics must be applied at much lower level of granularity, at the assortment level, for example. New metrics such as velocity, imminent stock-out and seaonalized weeks of supply will help the demand driven retailer keep their key items in stock and in sufficient supply to meet demand.
At the end of the day, retailers must have the right inventory in stock.
While there have been substantial efforts to improve the management of the retail supply chain, the system continues to be tested.
The total number of items carried by most retailers has grown in recent years. Grocery stores once carried only about 10,000 items; now many carry 30,000 items. Supercenters stock over 100,000 items. While the average inventory may stay the same or even decline, the problem may get worse within some segments.
Item proliferation is also a factor. Over 10,000 new items are introduced each year just in food and beverages. The fact is that most of these items either fail outright or fail to generate a sales rate that keeps up with the norm.
While it is certainly useful to track metrics, it is more important to identify root causes and develop solutions.
While there has been slow progress in reducing inventory, I still get the calls for high inventory coupled with low service level. Just having inventory is not the issue; the key is to have the right inventory in the right locations. Technology has improved the supply chain visibility and buyer/seller communication has helped. The fact that the net inventory is down speaks for greater improvement due to the increase in foreign sourcing, which increases supply chain inventory.
I am advising to look to the next great evolution in supply chain management. This I see as expanding the scope at both the input and output ends. For retailers, this means transmitting daily sales to suppliers as a driver for Demand Driven Management. Use the time element in the supply chain, not the quantities for optimum economics to reduce inventory.
Today’s shelving software apps allow for sophisticated analysis of the shelf, when used properly. Also, assortment always needs to be considered when analyzing the shelf.
The problem is that many retailers and suppliers opt out of using these analytical tools, because of the problem of linking shelving databases with item level data that is properly segmented. So many planograms end up being “pretty pictures” that don’t address the financial implications on the shelf.
This work is very process driven, and once the correct process is in place, understanding inventory and turns becomes much easier. And then implementation at stores is higher, because retail operations understands the benefits of the new shelf set.
I don’t think off shoring or outsourcing should by themselves increase inventory. Yes they may increase in-transit inventory but store level inventory would only increase by the amount necessary to cover the additional uncertainty of a longer lead time. I am not sure that amount would even be perceivable at store level. As far as the total retailer on hand–which includes warehouse–there are some obvious reasons why consolidations like the Federated Stores would result in less inventory lying around in various locations. As they streamline operations, there becomes less duplication of safety stock.
The full article links identify the biggest factor. Broadening assortment increases the amount of “presentation stock” which is needed at store level. We see a continuing broadening of the assortment as manufacturers come up with new ways to present the same products (canned spinach, dehydrated spinach, frozen spinach, spinach and apricots (just kidding)) and variations on one product (pulp, no pulp, lots of pulp, some pulp). This increase in assortment works to increase the amount of inventory on hand.
But there is another aspect not mentioned. It is the direct to consumer angle that some retailers have been able to exploit. Especially in the specialty channel, if you are looking for a unique birthday gift, I can’t think of a better way to find it than through the internet. A few keyword searches and you are sure to find a website that caters directly to the celebrant’s unique interests. The specialty stores are going to have to reconsider whether they need inventory lying around in malls if it is not going to be productive.
There are a lot of factors to consider, as others have stated, when you perform an analysis of the DIO numbers and vendor managed inventory. The points mentioned are valid and deserve consideration. Certainly, reducing the inventory to a point that creates an adverse affect on customer service would not be beneficial. When reviewing the complete supply chain pipeline and analyzing the reduction of vendor-to-shelf days, it creates a more positive result in cost. Producing a more effective and efficient supply chain with new processes or software will increase inventory turns and reduce excess inventory. When reviewing a supply chain pipeline there are usually “black holes” which are opportunities to become more efficient. Travel time in the supply chain is just one simple area where there is usually opportunity.
Visibility systems today offer complete views of inventory, pending receipts, etc. so that the Johnny Dobbs, VP Wal-Mart, quote doesn’t become a reality in your supply chain.
Are we making progress? Likely yes, across numerous aspects especially in terms of replenishment. But the data suggests a plateau. Retailers continue to try to use old logic with new technologies; new logic makes better sense.
The class/store level is where the demand is being registered, yet supply is generally distributed in a top to down fashion. Merchandisers have had little success matching their assortments to the local store/class demand. If demand can be registered from the bottom to the top, then appropriately trended, the supply can be distributed more efficiently.
It goes without saying that every business, worldwide, is trying to minimize its inventory. Apples to apples comparisons are hard to make. Companies change their business mix. For example, the Wal-Mart figures include non-US retailing. Furthermore, contracted inventory that’s not legally owned might still be an obligation. Those obligations are generally not reported. Certainly that is a big issue for any retailer with a major private-label business. Captive suppliers, like Visteon, are also subject to that issue. There’s a saying, “Listen to the music, not the notes.” The theme of The Inventory Management Opera is own as little as you can. Everyone’s a performer in this opera. And the fat lady hasn’t sung yet.