In many industries, 2022 was a period of inventory adjustment.
Days inventory outstanding (DIO) for the 1,000 largest non-financial companies in the U.S. fell 1.5 days, or 3%, to 54.9 last year, according to the CFO/The Hackett Group Working Capital Scorecard released last Wednesday.
After two years of increases, the improvement brought DIO back down near pre-pandemic levels. But only 19 industries (of 49) in 2022 reduced the average number of days they held inventory before turning it into sales.
Always challenging, inventory management became more complicated on the heels of pandemic lockdowns and supply disruptions. Companies faced a high-inflation economy with forecasts of weak economic growth and uncertain demand. How did companies manage 2022, and what hurdles lie ahead? Here are four issues we identified.
1. Retail Hesitancy. The household and personal care industry, which includes some consumer giants, was hit hard by inflated labor, transportation, and raw materials costs. Growth in the industry’s cost of goods sold (COGS) in 2022 doubled its revenue growth. Inventory rose 14%, outpacing the 11% increase in COGs (the denominator in the DIO calculation). So, the industry’s DIO worsened by three days.
What didn't help was the cautiousness of large retailers when ordering products, especially discretionary goods. One Church & Dwight executive called it a “ship-to-consumption” model, similar to just-in-time. The highly competitive household/personal care industry relies on close retailer relationships to prevent shelf destocking or product delisting. As the pandemic eased, the safety stocks companies had built up became uneconomical.
Now they have to rethink those stocks.
Watchmaker Fossil (part of the consumer durables sector) saw its DIO rise 12% in 2022 to 181 days, according to the Hackett report, due to the retailers’ conservative stances on consumer spending. In the first quarter, Fossil cut inventory by 13%, said CFO Sunil M. Doshi on the company’s May earnings call. It will continue to “reduce the future flow of inventory” and undertake initiatives like “structural reduction” of store inventory levels.
It's important to remember that this is a fixed-cost business. — David Zinsner, Intel
2. Lower Demand. A weak PC market and a significant inventory correction across the PC business characterized the second half of 2022. The highly cyclical and volatile semiconductor and equipment industry saw DIO jump 29% to 155 days, a level unseen in the past ten years. For chipmaker Intel, down 20% in revenue, DIO rose 24%. In April, Intel said the PC market had started to turn around, and Intel would start to burn through its inventory once customers’ inventory adjusted.
But high inventory levels mean idle factories. Factory underload charges lowered Intel’s gross margin by 300 basis points in the first quarter of 2023. The charges will drive higher costs per unit until Intel can ramp up factories again, said CFO David Z. Zinsner on Intel’s April earnings call.
“It's important to remember that this is a fixed-cost business,” Zinsner said, according to the S&P Global Intelligence transcript. “The impact of underloaded factories goes beyond the period charges we're seeing in the first half of the year and will be felt for several quarters as we sell through products with higher average unit costs.”
3. Innovation. As motor vehicle scarcity and high prices stalled car sales to consumers during the pandemic, carmakers sold more units to customers that buy on longer payment terms, like commercial fleets. But the culprit behind DIO rising to 55 days from 50 in 2022 was the pressure to develop electric vehicles (EV), according to The Hackett Group.
“To produce these new EVs, manufacturers are entering into long-term agreements with suppliers for the raw materials to produce batteries," according to the Hackett report. That, in turn, is causing manufacturers to hold higher amounts of raw materials.
Top performers like General Motors and Ford were able to slice a couple of days of inventory because of how they manage supplier relationships and keep on top of supplier performance, said István Bodó, a director at the Hackett Group. “When it comes to rolling out new products, they engage their suppliers upfront and synchronize the purchasing and the engineering functions to coordinate with the suppliers," he said.
4. Untangled Supply Chains. Total U.S. retail sales rose 7% in 2022. But the top general and specialty retailers, for the most part, didn’t drastically over-order. DIO for the large retail companies listed on the Hackett 1,000 rose 5% on average and 1% at the median.
We are managing our inventory tightly and believe our brands are in a flexible position to chase potential demand in the months to come. — Scott D. Lipesky, Abercrombie & Fitch
A smoother flow of products through supply chains helped. Preventing future supply disruptions has almost become a post-pandemic required masterclass. But some retailers have not been afraid to take advantage of freight costs decreasing, shipping times improving, and performance getting more consistent.
Clothing retailer Abercrombie & Fitch, which ditched its muscled, shirtless models years ago for a tamer image, has been among that group. It trimmed inventory by 20% by April 2023 after front-loading for supply disruptions in early and mid-2022.
“We are managing our inventory tightly and believe our brands are in a flexible position to chase potential demand in the months to come,” said Scott D. Lipesky, the company’s COO and CFO, on the May earnings call. “As we see wins, we can chase them pretty quickly.”
That may sound risky, but macroeconomic uncertainty generally makes it hard for companies to predict which parts and finished goods to stock, and when. Hackett’s perspective? U.S. companies must include risk and contingency planning in supply chain decision-making.
For more on last year's working capital benchmarks, see Working Capital Scorecard 2023: Supplier Clout Limits Liquidity Boost.
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