How Reducing Inventory Can Improve Working Capital


In a low interest rate environment companies tend to leverage up the business instead of focusing on optimising payables, receivables and inventory. This approach adopted by 1000 of the top US companies has left over a trillion dollars unnecessarily tied up in operations said a senior director of The Hacket Group.

What’s interesting, according to the the REL 1000 survey , published by The Hacket Group, is that top performers are seven times faster at converting working capital into cash than other typical companies.

Locking up cash in excess raw material purchases or general inventory can stifle the growth of a business. Alternatively, too little inventory increases reordering costs and eventually drives down margins.

Carrying additional buffer stock can also turn into a liability if market conditions change.

The Long Tail phenomenon causes a larger percentage of sales to come from a higher number of products with low sales frequency. Which also increases the pressure to manage supply chains containing more products.

Hence, it is imperative businesses understand how this affects their inventory and how they can maximise returns when opportunities are presented.

As supply chains have become globalised, inventory optimisation has become increasingly difficult to achieve.

Even the best companies have to relentlessly focus on inventory metrics to maintain the optimum balance.


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