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Why Have We Not Reduced Inventory?

“If only I had the money that the company was supposed to save from the multiple ERP and supply chain projects. There were a myriad of projects and we are at the same place that we were when we first started. I am a skeptic. I just don’t believe it anymore when I see it on a project justification.”  CFO of a major manufacturer
I want to believe. I really do. This year supply chain leaders will celebrate thirty years of progress in supply chain management; but we have not made progress on one of the funamentals:  inventory management.  I think that it is time for us to take the litmus test and ask the hard questions, “Have our practices impacted days of inventory?  Have the early adopters of inventory optimization seen a reduction in inventory on their balance sheets?” Sadly, I think that the answer is no. Here I give my logic.


How I Draw this Conclusion.

I have been an industry analyst since 2001.  I have written many articles about Advanced Planning Systems (APS), Enterprise Resource Planning (ERP) and Advanced Inventory Optimization. I want to believe. I am optimistic.  However, through this period, I did not have the access to financial balance sheet data to judge if the companies that were deploying the technologies were making an impact on the balance sheet.
When I started  Supply Chain Insights I wanted to put “research” at the core of the company.  As a result, I invested in building qualitative survey capabilities and built a database of twenty years of supply chain ratio data (for more on this capability reference the research report, The Effective Frontier and check out our community). Over the past three months, we have been mining this data, and the results disturb me.
In my prior work as an analyst, I did not have access to this data. While I could get two to five years of data from the Hackett studies done for CFO magazine, I did not have the ability to look across time, test it against macroeconomic factors and supply chain maturity.  I love having this capability now.  It is eye-opening.

What I See in the Data.

This week, as I prepare for our second webinar on October 26th at Supply Chain Insights, I am working with Abby Mayer (@indexgirl) to understand the performance of discrete industries over the past decade.  We have been running an analysis for the past fifteen years on discrete industries. (We covered the process industries last month.) As we run the analysis for industry after industry, as shown in figure 1, I am hanging my head.  So far I can only find one industry that has systemically reduced inventory and working capital over the ten-year period. This industry is High-tech.  The rest of the industries have the following characteristics:

  1. In the last decade, Days of Inventory are either unchanged or have slightly increased.
  2. If Days of Working Capital have decreased in an industry, it is largely the result of changing payment terms and decreasing Days Payable. We have squeezed suppliers. It is not an improvement in Days Receivable or Days of Inventory.
  3. There is no pattern between the adoption of advanced technologies for inventory reduction and balance sheet results.  There are a few outliers (e.g., Procter & Gamble and Kimberly Clark); but for most companies that I have worked with, I see that they have purchased and implemented inventory technologies, but there has not been an impact on future years results in either Days of Inventory or Days of Working Capital.

What I Think it Means.

I am searching for the answer to this sticky question.  I find that it is “sticky wicket.” Technology vendors have pushed advanced math and new technologies into the market, and early adopters have adopted the tools. I have avidly followed this market for the last ten years. I have attended conference after conference where I have seen the obligatory slide of “We reduced X days of inventory, improved costs and driven XX% improvement in customer service.”  I know that you have seen it as well. You see it conference after conference. It is in presentation after presentation. Are these supply chain leaders telling a lie? I think not.  Instead, I think that six factors are behind the results:

  • Bias. Supply chain leaders tend to overstate business results. (I find that it is analogous to asking a woman to put down her “true” weight on her driver’s license. Supply chain leaders tend to overstate results.) The projects are successful when first implemented, but they are usually a piece of the business and the results cannot be sustained over time.
  • Increased Complexity. The supply chain is a complex system.  Business complexity has increased with an impact on inventories. Too few companies understand the impact of sales policies, product proliferation and the long tail of the supply chain on inventory.
  • Project-based Focus. Multiple projects have been implemented without an overarching road map and a clear supply chain strategy. Companies cannot achieve supply chain excellence by working discrete projects in isolation.
  • Ownership of Inventory as a Metric.  In High-tech, there is greater ownership of the “inventory metric” across the organization. It matters for all functions.  A good example of this is the culture at Samsung.  By definition, the culture is inventory adverse. Regions are held accountable for obsolescence. I think that it is because the margin of High-tech products falls so fast as the product ages.  So, the longer that it is held, the greater the loss for the company.  In High-tech, this margin curve is more extreme than other industries.
  • True Understanding of Supply Chain as a Leadership Advantage.  I believe that the high-tech industry is heads-and-shoulders better at planning than the other industries. The stakes are higher.  As a result, the executive teams have a greater appreciation of supply chain due to the margin impact of new product launch. These industries paved the way on building supply chain practices. In other industries, the margin curves have not driven similar adoption.  (e.g., Why should a pharmaceutical company get good at inventory if the margins are so high? As they face the patent cliff inventory management will matter more. )
  • Forgetting Inventory Basics.  A decade ago, the supply chain had two buffers: inventory and manufacturing. With the move to outsource manufacturing, inventory became a more important buffer.  The focus shifted from just inventory levels to form and function of inventory.  However, as many companies outsourced manufacturing, they failed to look at the impact on inventory strategies and push/pull boundaries. I was even at one company last year that had outsourced manufacturing and forgot to figure out where these outsourced manufacturing locations would “store their inventory.”  Many companies have outsourced manufacturing, but not designed the supply chain to support the outsourcing decision.

I am looking for your insights. I am trying to figure this out.  Over the course of the next three months, I will be interviewing companies that have implemented these newer technologies and tracking their claims back to their balance sheets. Let me know if you have any thoughts to share.
For more on inventory management, reference the following articles by the Supply Chain Shaman:
So Proud…
Yes, I am a Contrarian
Rock, Scissors, Paper. The Pitfalls of Integrated Business Planning

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