Inventory optimization creates expanded working capital

The business landscape has changed dramatically over the last few years. Evolving regulations have forced many businesses to change their operating models, creating a ripple effect across key vendors and partners, leading to supply chain strains. The result has been a sharp decline in new sales, difficulty obtaining materials and other inputs, and diminished ability to deliver products which leads to issues with working capital.

Many businesses are facing an immediate need to secure new sources of capital. To bridge the gap, some are turning to existing financing relationships, creating new banking relationships or taking advantage of federal loan programs.

Now, businesses are looking at internal changes that can be made to free up capital. Key elements of the change process include optimization of several processes, including inventory management. How inventory is managed, when it is ordered and how quickly it is consumed has a meaningful impact on working capital.

The importance of working capital management

Not all businesses are experiencing working capital gaps. According to the Working Capital Management Report issued by the National Center for the Middle Market, 59% of participants do not at all experience issues with working capital and only 36% have issues more than twice per year.

For those facing regular issues, the challenge is typically solved by tapping lines of credit or taking additional business loans. Businesses need to carefully review various practices, including inventory management, to determine where optimization can occur. Even relatively minor adjustments to inventory can result in significant payoffs.

Inventory management best practices

Several optimization steps can be followed to improve inventory management. The best practices outlined below apply to businesses across multiple industries.

• Establish inventory KPIs: These key performance indicators (KPIs) help a business measure performance toward inventory management goals. They are especially useful tools for businesses seeking to improve in one or more areas. Common inventory KPIs include inventory carrying costs, inventory write-offs or write-downs, rate of inventory turnover, cycle time and fill rate. By regularly evaluating processes in these areas, it becomes easy to identify trouble areas where changes are needed.
• Reduce inventory: Most businesses have between 25% to30% of working capital tied up in inventory. For this reason, it is important to find the point where the lowest amount of inventory can be maintained without being understocked. Common inventory reduction methods include:
• Lowering lead times: This can be accomplished by tracking existing lead times, sharing sales data with suppliers and reducing minimum order quantities.
• Liquidating obsolete inventory: This can be accomplished by offering customers discounts or positioning it as a tax write-off.
• Improving inventory forecasting: By implementing real-time tracking and reporting, integrated communication and large-volume inventory management tools, businesses can make more reliable forecasts.
• Optimize inventory turnover: Inventory turnover refers to the number of times inventory is sold or used in a given period. This will help management understand the market demand for products and the amount of old or obsolete inventory being carried. Common ways to increase inventory turnover include testing new pricing strategies, getting rid of old inventory, improving demand forecasting and streamlining the supply chain to reduce delivery costs and in-transit times.
• Carry safety inventory: This is a small amount of select inventory designed to protect from sudden spikes in market demand and lead times. Without this reserve inventory, a business could be exposed to a loss of revenue, customers and market share if unable to fulfill orders. When properly used, it manages against risks of unexpected demand and acts as a buffer for longer than expected lead times.

How Wipfli can help

A few small changes in inventory management can free up critical working capital to better position businesses for unexpected market conditions. Businesses are looking for new ways to manage capital concerns, and our distribution associates are ready to help. Contact us today to see how we can help you optimize your inventory to better weather whatever challenges lie ahead.