By John Manners-Bell
June 25th 2019
Ti’s CEO John Manners-Bell and Quantitative Analyst Andy Ralls discuss Ti’s new report Inventory Benchmarking Vertical Sector Trends.
Hello and welcome, my name is John Manners-Bell and I am Chief Executive of Transport Intelligence, Ti insight, and welcome to our latest in our series of podcasts. In this podcast, I’m joined by our Quantitative Analyst, Andy Ralls, and we are going to be talking about our latest report: Inventory Benchmarking Vertical Sector trends.
Inventory Benchmarking is measured by days of inventory and is one of the most important supply chain benchmarks. It allows for supply chain strategies of companies in similar sectors to be compared and contrasted. In the past, a low number of inventory days has been always perceived to be very good although as we are going to be discussing this is not always the case.
Too low a number of risks stock outs, that is unsatisfied demand which of course is a cardinal sin in supply chain management, whereas too high a number is obsolescent and right down to shrinkage as well as unnecessary capital being tied up.
Our reports that we are going to be publishing in the next week or so allow sectors to be compared. For instance, supermarket retailers on average have the lowest days inventory at around 33 days whilst pharmaceutical companies have the highest at over 180. And there are very good reasons for this which we are going to discuss.
So, let us start with the pharmaceutical sector. Can you give us a brief overview of why inventory levels are particularly so high in this sector, Andy?
Andy: Yes, so as you say it is much higher than other sectors that we have investigated. I suppose inventory takes on a very different form, I suppose, for the pharmaceutical sector. Companies wish to maximise sales of drugs before a patent expires, for example. Also, there are extremely complex production processes, variations or interruptions in this process could mean that a whole batch of new goods could become worthless. In order to account for this, companies will stock up higher inventories to account for that and those changes. You also have these companies that have a broader supply chain all over the world, with various research facilities in different areas of the world – it’s quite a complex system, and so maintaining visibility on that isn’t always as easy as you might think. So, companies do try as much as possible to hold inventories effectively as possible and look for cost savings but as I say it holds a different meaning of inventory days than it does to other vertical sectors.
John: And there’s plenty of regulation isn’t there, in the pharmaceutical sector which means they must hold a certain amount of inventories.
Well, that really contrasts with the retail sector which is an area that I have been digging into and of course that’s being transformed by Amazon at the moment. And I think one of the things we highlight in the report is that there has been a fundamental change in strategy by many retailers, and this has been exemplified by Walmart, availability of stock has become really quite critical to counter Amazon’s next day prime service and even in some parts of the world, their same day delivery. This is starting to really impact on Walmart’s and many other retailers’ days of inventory, and we have been tracking that over the last few years and we will certainly be tracking that as we move forward.
Of course, increasing stock is one thing but doing so without visibility of inventory in stores and distribution centres has been described by one industry insider we talked to as ‘absolute madness’. For many retailers, course this is too late, as many big names have gone into bankruptcy and many others just don’t have the deep pockets that Amazon and Walmart do have.
So, there’s quite a contrast really between retailing and strategies being employed in the pharmaceutical sector, and as well as that also automotive.
Andy let’s come to you again, you looked at automotive sector where there are other sectors at work. What are the key trends that are affecting the inventory trends in this sector?
Andy: Auto was an interesting sector to look at it. It is very much where just-in-time principles were sort of born out of and the very concept of the lean supply chain is one you’d attribute to automotive manufacturers across the world. I find it interesting to look at how different companies, even the larger companies, have very different inventories strategies. For example, Toyota hold around about half as much inventory as Volkswagen, yet the production levels are very similar. So, what we are really seeing is that although lean supply chains were a very important factor many years ago, and still are of course, companies are less able to find the efficiencies that they have done in previous decades. But there is still some level of improvement that we have seen, and that can be found in the report.
John: Of course, you highlight profile Tesla in that’s sector which has a completely different strategy, doesn’t it?
Andy: Absolutely, it is sort of vertically integrated, but it is interesting to look at the numbers there and how, I suppose, the days of inventories numbers show complete fluctuations. It more tells the story of the company in how they have had to ramp up production in certain years to show it can meet demand and sort of low inventory in other points of time as well, so that’s been quite an interesting one and just tells the story of the company as much as anything.
John: So, in conclusion, I think one of the main things you can get from our report is that not only is it describing a complex issue and that inventory management strategy varies enormously from sector to sector, but as well as that, from company to company within the sectors, as you can see from Tesla compared to Volkswagen and Toyota.. So, some are favouring low inventory as a key benchmarking goal whilst others in retail and even in consumer electronics as well see the availability of products as becoming very much more important. Our report profiles many of the leading companies in each sector, will show these differences as well as providing comprehensive company data with all these benchmarks and sector averages.
So, thank you very much Andy and for all our listeners, if you want more information about the report which is called Industry Sector Inventory Benchmarking please visit our website: ti-insight.com. Thanks for joining us, and we look forward to you joining us in our next podcast.
Inventory Benchmarking Vertical Sector Trends is available to download today. To find out more click here.
The report, a critical benchmark for inventory management, compares many of the world’s leading manufacturers and retailers against key financial supply chain metrics.
In particular it:
The report also includes exclusive access to an online data pack with interactive charts, tables and downloadable data.