Part 4 in the 4-part “Working Capital” series
Making an impact on working capital through inventory management involves even broader strategy and cross-enterprise coordination than in accounts receivable and payable. Not only are a lot of different departments impacted, but inventory levels cannot be adjusted as quickly as outgoing cash. Questions to consider include the following:
- Are inventory levels inflated to ensure that customer orders can be fulfilled at all times?
- How long is inventory kept in the production cycle?
- Is it necessary to keep raw material on hand to avoid risk of shortages?
Are inventory levels inflated?
Maintaining an inflated inventory level is often necessary when there is limited insight into stock on hand. What inventory managers do know is that their information is not accurate, so they keep a buffer to make sure they can consistently meet customer demand. Adding to the complexity is the involvement of logistics service providers that hold the inventory in their own warehouses and systems, often with limited integration or complex interfaces between different systems.
Can production cycles be shorter?
Inventory is also influenced by the production cycle. Shorter production cycles result in less inventory tied up; thus, optimizing the production cycle and increasing production efficiency can reduce inventory and boost working capital.
Another aspect to consider relative to inventory level is availability, especially of raw materials or purchased parts. Is the product available all the time or are there restrictions, such as agricultural produce affected by seasonal cycles? This is certainly a consideration for the purchasing department.
Are SKUs unprofitable?
Another question to address is product profitability. Are some SKUs offered only because of a marketing strategy, even if they are not profitable and negatively impact working capital? Marketing and sales must analyze the consequences when removing those SKUs from the portfolio and balance that with the impact on working capital.
Clearly, all of these issues show that automation, real-time insight, a single source of truth, and tight collaboration can also support improvements in inventory management – with a positive impact on working capital.