Supply Chain Inventory Turn Benchmarking
Executive Summary
- Companies regularly ask for supply chain inventory benchmarking.
- We cover the topics of benchmarking and what it means.
Introduction
One approach sometimes proposed to determine the potential opportunity for supply chain improvement has been to find benchmark studies of companies’ supply chain performance similar to the enterprise in question. This article will explain the availability of supply chain benchmarking studies and then move on to the applicability of these types of studies for opportunity identification.
The Availability of Supply Chain Benchmarking Studies:
In researching this area, I found very little in the way of supply chain benchmark studies and even fewer in the form of education that would be considered applicable to any one specific company. Studies that are either directed towards companies similar to a company specifically or where one can choose to filter the study based on a particular industry. The searched areas included:
- Analyst/consulting company studies
- Academic papers
While reviewing the information at the supply chain analyst firm, — which does not yet have but seems to have plans to perform supply chain benchmarks, I noticed their listing of “supply chains to admire.” In this listing, they had a series of companies listed there. It turns out that I have previously worked for two of the companies on the list — and would not consider them as leaders in supply chain management by any stretch of the imagination. One of them I recall was mentioned for following forecasting best practices in a prominent article. The author did not know what you would have to have worked within the company to know. Is the forecast accuracy arrived at by altering the forecast to match the actual after the supply planning window has passed? The demand planning group is falsifying the forecast accuracy within this company.
The Reliability of Self-Reported Metric Scores
The problem with relying upon self-reported information, which these surveys, of course, do, is that information that is not complimentary will tend not to be released. The companies would have to provide this type of information to be published, so self-reported, as information gleaned from consulting projects and confidentiality clauses protect other internal work in contracts. This is like asking a company to come clean on the success and failures of their implementations — self-reported information of this type is unreliable.
The Use of Supply Chain Benchmarking Information Generally
I brought up using benchmarking with a colleague of mine who with two decades of experience in strategy consulting and software marketing. The topic of the applicability of benchmarking information is an issue he has dealt with previously. He wrote this article that I have included a link below, which is quite pertinent to our situation, and which explains that benchmarking data should never be used to determine what to improve.
I quote from this article:
“The reality is, benchmarking in isolation provides a basic guideline, but it doesn’t help when it comes to identifying specific improvements for your business. To really understand the optimal level of service performance, you have to analyze and model the specific characteristics of your business, and determine which parameters can be tweaked and what tradeoffs can be made to achieve business objectives.”
The combination of the lack of availability of supply chain benchmarking data overall added to the fact that those who have faced this issue previously disagree with the premise that it can be used to identify specific improvements in the business and question the ability to leverage benchmark information for this project.
Inventory Information Available from Annual Reports
Let us take an example of supply chain information I could find from public sources, which is the inventory turnover. Here is the inventory turnover from companies that may be considered similar to a machining equipment company I was working with.
- John Deere: 4.71
- Caterpillar: 3.12
- Joy Global (mining equipment): 2.33
- Winnebago: 6.21
- Automotive Parts Generally: 4.4
Therefore, if a company has a lower inventory turnover — and can be considered in a similar field, is this evidence of an underperforming supply chain? It is not that simple. This is because it is not adequate to compare companies in the same general industry — because profit margin also comes into play.
Companies with higher profit margins tend to have lower inventory turns. For instance, McDonald’s has an inventory turn of 96. On the other end of the spectrum, in a jewelry store, the average inventory turn is .54. (Although there are questions as to how much this could be improved)
“The average US jewelry store has less than 10% of its inventory in fast selling inventory, yet close to 80% of a good stores sales will come from fast selling product. This means the success or failure of a stores performance depends on little more than a handful of items.”
The general topic of stock turn vs. margin is explained in the following quotation, which is an academic paper on inventory turn:
“In surveys of retailing firms conducted by us, we find that managers trade off inventory turns and gross margin in their decision-making. They set their business targets partly in terms of the product of gross margin and inventory turnover (this measure is called gross margin return on inventory, abbreviated as GMROI). Items with higher margins are given lower turns targets than items with lower margins. This tradeoff is commonly referred to by retailing managers as the “earns versus turns” tradeoff. It is consistent with the Du Pont model in accounting, and is prescribed in retailing textbooks, see for example, the strategic profit model in Levy and Weitz (2001: chapter 7)” – An Econometric Analysis of Inventory Turn Performance in Retail Services
Therefore, merely comparing inventory turns, even for “similar” companies, may lack validity as the margin of each would need to be analyzed. What is the right turn increase or reduction factor about the margin? I don’t think anyone would know for sure.
If it is already known that a company is following poor supply chain management practices, and following good supply chain management practices includes things like using correct lead times, calculating inventory parameters properly and then updating them, keeping records of the vendor on-time delivery performance, etc… These are all things that can be recommended as they are considered good practices and are necessary to run a supply chain system properly. Some companies that are not doing the basics to maintain their system look for benchmarking information when the areas to improve are quite clear already.
This brings up a topic that has been analyzed by Gartner and for which they wrote an excellent article titled Five Steps to Best Practices in Supply Chain Benchmarking: From Number to Action. This article is paid content, so providing the link will not enable anyone to read it without a Gartner subscription, but I have some of the quotations from this article below:
Key Challenges of Benchmarking
The benchmarking effort typically takes longer and is significantly more difficult than anticipated.
Finding a good comparison peer group with comparable metrics and data is difficult. Therefore, the results are not easily accepted by members of the organization.
Although they desperately want data, companies often struggle with how to use it effectively: what constitutes valid benchmark data; how to compare their own data to the benchmark data; and, most importantly, what conclusions they should draw from it, and how to translate those conclusions into decisions and, ultimately, into prioritized projects to achieve company goals. For many companies, the search for benchmarking data becomes the end in and of itself, rather than the means to an end.
Conclusion
Essentially supply chain benchmarks are a very iffy proposition. The less one knows about them, the more promise they appear to hold. However, the more one inspects the topic, the less that can be said about the definitive conclusions drawn from benchmarking. Secondly, it’s generally not necessary to perform benchmarking as a thorough analysis of any supply chain can turn up obvious things to change, some of which have been listed in this article.
References
https://smgpublish.bu.edu/ren/Seminar/Seminar/Vishal%20Gaur/RetailIT%2020040728.pdf
https://www.gartner.com/doc/2695319/steps-best-practices-supply-chain