Scott Luton (03:47):
Hey, good morning, good afternoon, good evening, wherever you are. Scott Luton and special guest, Marcia Williams with you here today on Supply Chain. Now welcome to the show, Marcia, how you doing?
Marcia Williams (04:06):
Hi Scott, a pleasure to be here today with you and with the audience. Of course.
Scott Luton (04:13):
Great to have you back. We had a blast. It’s been too many years, so it’s great to have you back. I can’t wait to dive into a really neat and practical episode here today, especially for our supply chain now community on YouTube, we’re featuring a practical and efficient discussion on five count them, five inventory management metrics that every supply chain professional must master. So as you know, Marcia inventory optimization offers so many opportunities for organizations everywhere. Today’s five metrics are a critical part of the equation to start getting a better handle on your inventory so you can move it in the right direction and unlock all sorts of returns for your business. Now, before I introduce Marcia, for the handful of folks out there that may not know her, I think federal regulations require me to ask you to like and comment on this episode.
(05:03):
And hey, if you enjoy the episode, share it with a friend your organization, they’ll be glad you did. All right, so let’s get to know Marcia Williams, my friend and proven practitioner and supply chain leader, Marcia Williams, managing partner rather at USM supply chain. Now she has 18 years of supply chain management experience with deep expertise and optimizing supply chain finance planning at a variety of mid-sized and large companies for greater profitability and improved cash flows. Now Marcia holds an MBA from Michigan State University. She’s also a Forbes council contributor, a published author, and a recent TEDx talk speaker. So to welcome in Marcia Williams to the show. Marcia, it’s so great to have you back with us. It’s been, as I mentioned, way too long.
Marcia Williams (05:53):
Thank you so much and thank you so much for the kind introduction and it’s always a pleasure to come by here Scott. So thank you.
Scott Luton (06:03):
Well, you’ve been busy, really busy since the last time. So looking forward to plugging back into all your cool expertise, practitioner expertise and we’re going to get started. So again, to remind everybody out here, we’re going to be talking about five inventory management metrics that every supply chain professional must master. And where do we start there, Marcia? What’s the first one?
Marcia Williams (06:26):
The first metric that we have is inventory base of supply. That metric is very important because it shows why we are keeping inventory. The whole idea is to sell and make profit from that inventory. So with that metric, tell us how many days we have considering sales. And here on this slide you can see a very simple example. We have that if a company sells two items every day and we have 20 in inventory, that means that we have enough inventory to cover 10 days of sale. So that’s the key function or why we are having the metric because we want to make sure that we have inventory to make profit, profit. And the calculation is unit in inventory divided, unit sold per day.
Scott Luton (07:40):
Okay, that’s math even I can follow Marcia. So thank you very much. And profit is a great thing. And one quick question Marcia, we don’t necessarily want to have a thousand days of sales in inventory and it is different for every organization, but we want to keep a tight measure on that, right?
Marcia Williams (08:00):
Exactly Scott. And this one shows from the supply perspective the period that we are covering, but here we have other metrics that show that how many days if we have metrics showing how fast or slow the inventory is moving. And also we have metrics on obsolescence that is very important. So we want to have the right quantity of inventory, that’s why we use that word optimize inventory. It not minimized because then we cannot sell and it’s not to have lot of inventory to cover a year because in one year so many things can happen. Change,
Scott Luton (08:50):
Right? Lots of change. And I love the front end of your response here because again folks, these are just five critical ones, but five of many as Marcia’s pointing out. So alright, so moving to the second metric we’re covering here today. Inventory turnover. Tell us more, Marcia.
Marcia Williams (09:09):
Perfect. And this one show us the other side within metric. What we want to know is how fast the inventory moving. Because to a Scott point, we don’t want to keep inventory sitting there having that old cash tied to inventory for a long period of time. So the metric, what it shows is that if we are having inventory that is moving fast or slow, and of course the higher the metric, the better the calculation is cost of goods sold or cogs as you may have heard, divided average inventory. And here for average inventory, we are using simple math again and we are taking the beginning ending inventory divided by two. So that is the calculation and you may be wondering, okay, what information can I use for these calculations? So to get the cost of good sold or cost, you go to the profit and loss sustainment or p and l and for the average inventory that is on the balance sheet. So now you know what information you need to ask finance for and then perform the calculation.
Scott Luton (10:39):
Well said. And when I first saw that graphic, for folks that are watching this right along with us, I thought those were loaves of bread and in that case you want to move that inventory quick, right? Because it will expire quickly versus what it really is is boxes. And depending on what’s in the boxes, you might have more time and that might be a different target for inventory turnover. So, so many different factors in your overall equation for truly mastering inventory optimization. Okay, so Marcia, we’ve covered the first two, we’ve got three more to go with number three. Now this is going to be perhaps the most involved metric we’re covering here today. So we’re going to spend a little bit more time on the cash to cash cycle. So Marcia, tell us more.
Marcia Williams (11:24):
Yes, Scott, this is my favorite metric. I think it gives you operational and financial information and it shows the reason why we are keeping inventory here. What the measure is going to show is how many days from the investment that company makes on inventory until when the company get cash from that inventory. So we like one day, let’s say Coca-Cola buys ingredients and packaging for the products, then of course it is going to manufacture using those ingredients, packaging and then it going to sell. So we are seeing from the moment that Coca-Cola started with that investment in raw materials until get cash back from the customers. So that’s the concept and I think that is the key to understand the metric in addition to the calculation because the calculations we can see and we have them on the slides so we can use them, but the critical point is to understand the concept and why inventory is so important and is related how it relates also to the cash flows that the company has available.
Scott Luton (13:08):
And the shorter, as you point out here, the shorter that cash conversion cycle, that cash to cash cycle is typically the better for the business. Right now you use a Coca-Cola as an example, I got to throw in my favorite Coca-Cola beverage. That would be, you got to use a freestyle machine is only place I’ve found it, but it’s a caffeine-free cherry diet Coke. I’m so glad that there’s not a freestyle machine in my house. All I would drink all day long. All right, so good stuff. We’ve covered the first three metrics you got to master of five inventory management metrics and number four. Number four might be a little bit more involved for some folks out there. So let’s unpack it here. Obsolescence or percent obsolescence for raw material, work in progress and finished goods inventory. Your thoughts, Marcia?
Marcia Williams (14:01):
Yes, the metric is very important too because it show us that when we have inventory for too long we can have obsolescence. Sometimes it not that we keep inventory for too long is that there are changes and we didn’t manage the part, numbers change properly. Let’s say that there’s a change in packaging and then we just bought a huge quantity of the old packaging because we got discount. So those kind of situations could happen. And in the example that Scott provided about the bakery, there are some products that have short shelf life, so we need to be very careful on those aspects and this metric will measure that. So you can see that we have the obsolescence or the right of divided inventory and then we do just timed 100 to get the percentage. So this is a critical metric that of course we want to keep it as low as possible.
Scott Luton (15:21):
Right, excellent point. And I think one of the things you’re alluding to, and correct me if I’m wrong, but we start measuring, let’s make sure we’re measuring all of these factors that impact inventory. And as we pointed out time and time again for products and sectors, the goals and the objectives with these metrics may be different and in some cases they may be drastically different. But you got to start with measuring so we can create some baselines and then adjust the objectives or the standards or the goals from there. Would you agree, Marcia?
Marcia Williams (15:57):
Yes, completely Scott. And as you have pointed out, the metrics are going to be different depending on the industry. That is key. And another point to consider that I would like to add is the strategy. Many times we start with this inventory metrics, but we will have to do an analysis with other metrics too to have a two dimensional metric analysis.
Scott Luton (16:28):
Well said. And then one other thing, and before we hit number five here, Marcia said on the front end she was talked about a year and how much change takes place in a year. That’s another important factor when it comes to metrics because just because you set a metric or a standard or a goal in 2024, it doesn’t mean it’s going to be relevant in 2030 or even 2025. It may not even be relevant as we get into the second half of the year. So the important thing, none of these metrics are set it and forget it. You got to keep your finger on the pulse, know your business, always bring data to the table and constantly ask, Hey, why is this the standard? Right? Alright, so all of that brings us to the fifth metric we’re going to cover here and that’s inventory accuracy. Marcia, tell us more.
Marcia Williams (17:19):
Of course. Thank you Scott. The last metric that we are going to see is inventory accuracy. And this metric is when we have a physical count because the idea of course is that our system reflect how many units we have so we can trust our system if we have that, what we have physically matches in units in lots and in location that we have 100% accuracy. So with a comparison between what we have physically and the systems, what is interesting about the metric is that from the operational point of view, we check those three aspects, right? It needs to be a matching unit lot or batch number and the location. If we consider this from a financial perspective, we check the total number of units. So it doesn’t matter where they are if we have them, great. And that is what we have here. The example on the slide that inventory accuracy can be a certain percentage for operations and a different one for finance.
Scott Luton (18:54):
Yeah, well said. One last thought as it relates to inventory accuracy and you mentioned location, be one of those critical factors, folks out there as you’re looking to make the day easier and more successful for your people, check out a spaghetti diagram, especially in warehouses where you can track the movement, all the footsteps, because if things aren’t in the right place, and we’re talking about inventory or tools or you name it, all the things we use in warehouses and folks have to spend extra miles and footsteps each day, huge opportunities to not only become more efficient as an operation, but make the day easier for your people. And that’s the north star in my book. Okay, so Marcia, what a great primer on inventory management, inventory optimization. Let’s make sure folks know how to connect with you so they can learn more. You put out a lot of great information and infographics and knowledge and expertise regularly. We want you folks to follow you on LinkedIn, which we’ve got you here and your website, usm supply chain.com or those are places you would encourage.
Marcia Williams (20:00):
Yes, Scott, I’m very active on LinkedIn and please feel free to check out my website so we can connect.
Scott Luton (20:11):
Wonderful folks, your network, your knowledge will benefit from connecting with Marcia Williams and really leaning into the conversations that she’s part of across social and check out our website too. Alright, so big thanks to Marcia Williams, my friend, incredible leader, great practitioner, great to have you here today and we look forward to reconnecting soon.
Marcia Williams (20:34):
Thank you so much Scott. I enjoyed very much going over these inventory metrics and always a pleasure to be here, your podcast.
Scott Luton (20:49):
Well hey, enjoy it. I love the practicality of this last 20 minutes or so. So well done. Folks out there listening. Hope you’ve enjoyed this conversation with Marcia as much as I have. Be sure to connect with her. Check out our website after today’s episode. But now folks, as you know, the onus is on you to take at least one thing from today’s conversation, put it into practice deeds, not words, a better inventory management can offer all sorts of returns to the business like we’ve established. Let’s jump on that opportunity. Your team will surely appreciate it. And with all that said, Scott Lutin here on behalf of the Splott chain now team, challenging you to do good, to give forward and to be the change that’s needed. We’ll see you next time, right back here at Supply chain now. Thanks everybody.
