Inventory

Inventory: everyone worries about it, but gauging progress with inventory can't be done in a vacuum, say experts. "Generally speaking, inventory is an indicator of other issues," says Debra Hofman, practice director for Boston-based analyst firm AMR Research's Benchmark Analytix group. "By itself, it really doesn't tell you very much."

Inventory measures, says Hofman, in effect sit in the middle of a "web" of other measures. "You really need to know the perfect order information and the order cycle time to put it into perspective," she says.

Inventory problems can be traced to functional gaps. For example, says Hofman, if a company and its partners are experiencing a high number of stock-outs and inventory levels are high, then the company is likely making the wrong items, and a forecasting problem may exist.

Inventory levels can be measured three ways: by days, turns, or value as a percentage of revenue. Inventory also breaks down into three categories: raw material, work-in-progress, and finished goods.

Best-in-class measures for inventory are highly dependent on the vertical and mode of operation. "Pure automotive manufacturers tend to run on very lean inventories because they are so well connected," says Hofman. "On the other hand, consumer products makers tend to hold more inventory because they often are make-to-stock operations."