CFO Magazine has been annually publishing its Working Capital Scorecard report, the latest of which was published in June. This scorecard tracks the key working capital performance measures of accounts receivable, days payable and most important to the supply chain community, Days Inventory Outstanding (DIO). As a senior supply chain marketing manager and industry analyst, I often leveraged the trends of this report to help companies to determine where supply chain improvement initiatives can best be leveraged.
Dan Gilmore, Editor of Supply Chain Digest, recently penned an article, Analysis of Inventory Numbers for 2008, referencing the specific CFO DIO trends. Dan notes that based on the numbers, 2008 were a good year for inventory management. That goes without saying, especially since the fourth quarter was where many businesses in many industries experienced very dramatic declines in product revenues. The good news for global supply chains was that on an aggregate basis, inventory was ratcheted down dramatically, a phenomenon I subsequently termed as the “great inventory backflush“.
While a larger number of industries showed improvement, I believe it is very important to also consider the inventory situation thus far in 2009, about three quarters into the year. The financial communities are winding down from many of the Q2 earnings announcements. One clear theme I kept hearing was that most companies managed to buffer dramatic erosion in revenues and profitability by aggressive cost control measures, which included inventory. Financial analysts who cover the retail industry have noted that overall that industry is at its leanest inventory levels in many years. The same could be stated for high tech and consumer electronics. But much work remains, since the overall economic recovery, at least in the U.S., is still lagging, and we cannot afford to take our eye off the inventory ball.
The U.S. Census Bureau has just released its latest Manufacturing and Trade Inventory report for the end of June. It notes that overall trade inventories are down 9.8 percent from a year ago levels, which certainly reinforces that the momentum of inventory reduction has continued But, similar to the measurement criteria of DIO, which ties inventory to sales activity, the more important inventory to sales ratio still has a very long way to go to reach levels of 2007/2008. The ratio stands at 1.38 vs. 1.26 a year ago. That means that there is 38 cents of additional inventory for every dollar of sales in the U.S.
There are other concerning trends brought out in the DIO statistics by industry. The spreads between best vs. laggards still remains extreme, indicating that the longer the recovery takes, the more problems laggards will have in drawing off inventory levels.
Another industry of note is healthcare, especially considering the current level of rancor and debate underway in the U.S. relative to healthcare reform. Healthcare equipment and supplies companies had a median of 50 days inventory outstanding, whereas pharmaceutical companies had 35. Now here is an area where savings can be made.
If your organization has aggressively managed inventory since the recession began, pat yourselves on the back. But, efforts need to continue, because more work remains.