Dr. Chris Hofer and I developed the Empirical Leanness Indicator (ELI) as a new way to measure inventory leanness of a firm. A detailed explanation can be found in Eroglu and Hofer (2011) which extends the idea of turnover curves introduced by Ballou (1981). A turnover curve is obtained when you plot inventories (y-axis) against sales (x-axis) for firms in a given industry (see below).
In the above figure, blue dots represent firms in a given industry and the red line is the industry turnover curve. The turnover curve shows how the average inventory level changes with sales (firm size). In many industries, the turnover curve is concave indicating that there are economies of scale in inventory management. That is, inventory turns increase as a firm grows and its sales increase. When this is the case, benchmarking firms with respect to their inventory turns without taking into account their sales (size) can be misleading. We solve this problem as follows: For a firm with a particular sales figure, we find the corresponding point on the industry turnover curve (red square in the above figure). This is the average inventory level a firm of the same size should hold. The difference between the actual inventory level (blue dot) and the sales-adjusted average inventory level (red square) forms the basis for inventory leanness. Firms below the industry turnover curve hold less inventory relative to their size, that is, they are lean. In contrast, firms above the industry turnover curve hold more inventory relative to their size, that is they are “unlean”.
To illustrate this concept with real life data, I have prepared the below Excel file. I collected inventory and sales figures of 1,349 firms in 46 manufacturing industries in 2013. For each industry, I have estimated the industry turnover curve. I have built a simple interface where you can select your industry, enter your firm’s inventory and sales figures and assess your inventory leanness on a graph. For more detailed instructions on how to use the Excel file, please watch the below video.
Example Excel File: ELI_Graph
Explanation Video: Explanation Video
For any questions or comments, please contact me at email@example.com
Ballou, R.H. 1981. Estimating and auditing aggregate inventory levels at multiple stocking points. Journal of Operations Management 1 (3), 143–153.
Eroglu, C. and Hofer, C. 2011. Lean, leaner, too lean? The inventory-performance link revisited. Journal of Operations Management 29, 356–369.