Despite all the advances in supply chain knowledge, capabilities, technology, and resources, supply chains are actually putting more financial strain on the enterprise and increasing capital requirements for corporations with days inventory outstanding (DIO) globally deteriorating 8% since 1987. DIO is the measurement of how many days it takes an organization to turn inventory into sales. The lower the DIO, the better. Less capital tied up in the operations of the business means increased financial dexterity, profitability, liquidity, and investment in strategic imperatives.
DIO has been on a roller coaster ride with overall performance deteriorating 6 days (8%) since 1987. Despite a period of globalization and expansion of the supply chain in the mid 90’s through the 2000s, massive Enterprise Resource Planning (ERP) adoption also took place, yielding significant improvements in DIO, 10% from 1997 to 2007. However, those improvements would be given back almost entirely over the next 10 years. The deterioration is across all sectors (Consumer Discretionary, Consumer Staples, Healthcare, Industrials, Information Technology, and Materials) and all global geographies with the worst in the Materials (10%) sector and Asia (11%).
The supply chain is getting more complex, not less; due to digitalization there are more supply chain capabilities now than at any other time in history; and improvements in the supply chain generate real tangible value, yet few are prioritizing. A recent McKinsey study found:
- The average supply chain has a digitization level of 43%, the lowest of five business areas that were examined
- A mere 2% of the surveyed executives said the supply chain is the focus of their digital strategies
- Companies that aggressively digitize their supply chains can expect to boost annual growth of earnings before interest and taxes by 3.2% —the largest increase from digitizing any business area—and annual revenue growth by 2.3%
- The Hackett Group’s Annual Working Capital Survey indicates there is a $443B working capital improvement opportunity from inventory management in North America alone
SAP analyzed public financial statements of 40,000 companies globally from 1987 to 2017 with the help of S&P Capital IQ. Companies with no DIO or DIO greater than 300 were excluded as well as those in the Energy, Financial, Real Estate, Telecommunication Services, and Utilities sectors. Acquisitions, mergers, divestitures, bankruptcies, and as well as availability of data meant not every company maintained data for all 30 years and sample sizes increased over time. However, analyzing the smaller sample sizes of companies with data every year through 1987, 1997, or 2007 to 2017 all revealed similar results of poor DIO performance. DIO: (Inventory ÷ Cost of Goods Sold) X Days in Time Period.
For more on the supply chain’s role in your business strategy, see Is Supply Chain Vulnerability Undermining Your Business Purpose?