This is a claim I dare make after having had the privilege to work with leading global corporations in Europe, the Middle East and Asia on numerous inventory reduction initiatives for about two decades. Cash release through inventory reduction has been used to finance growth, repay debt, reduce capital restraints or pay shareholders, and has long remained a priority issue on the executive agenda. In speeding up the cash conversion of companies, I have found that releasing cash from inventories has been a fascinating, challenging and rewarding task!
Everyone in the supply chain benefits from releasing cash!
In many cases, carrying inventories is an essential part of providing a service as raw materials, semi-finished or finished goods, at the supplier’s or at own site, in transit, or at the customer’s site. But, irrespective of who owns the inventory and who carries the inventory-related risks, all parties in the supply chain will benefit from not tying up excess cash in inventories at any stage. The key questions are how to optimise inventory levels throughout the supply chain, and how to collaborate for mutual benefit.
We can be both high on service and low on inventories!
Although there is a trade-off between product availability and inventory size, the risk of losing sales is all too often accepted as justification for failing to permanently reduce inventories. It is not either high service level, or low inventory levels, it can be both!
Inventory level is a result, not a parameter!
A common misconception is that we can meet the challenge of maintaining good service with proper inventory levels only by finding the right parameters. We certainly need parameters for managing inventories, but we must first understand the factors that drive inventory levels up or down.
For companies producing and selling goods business-to-business, answering the questions below will reveal the main factors driving inventory levels.
Service – What is the service we offer to customers? What is our product assortment? What availability guarantees, limitations and service levels do we have? What is the lead time? What is the customer demand, and how does it vary?
Steering the supply chain – How do we steer production in terms of batches and production cycles? How do we schedule inbound and outbound transports? What variability do we have in supply? How are cycles and schedules synchronised?
Structure of the supply chain – How are our resources spread, and how are they located in relation to suppliers and customers?
Reliability and trust – How reliable is the supply chain’s deliverability? Do customers trust our delivery dates? Does our sales & operations planning trust customer forecasts? Does our production trust the delivery dates given by sales? Do we trust suppliers to deliver on time and in full?
Rightsizing inventories is always worth the effort!
In my years of engaging with clients, I have experienced inventory reductions of a third, or even more. In each case, the key has been to identify the underlying factors driving the inventory levels, and to impact them systematically and persistently. This has resulted in released cash, improved service, lower inventory costs, and significantly lower risks of damage and obsoletion.