Cash: Avenues to unlock it in a recessionary environment (part 1 of 2)
In a depressed fiscal environment, cash tends to be an elusive commodity. An exercise in inventory optimization will not only help unlock much needed cash but also improve delivery rates and ultimately customer satisfaction.
In a depressed fiscal environment, cash tends to be an elusive commodity. The market is constrained and typically refuses to release traditional levers of mobilizing cash such as fresh investments, increased collections or simply better sales. However in spite of such a cash poor climate we find that the top 1000 US companies have $740 billion tied up in excess inventory representing nearly 36% of their working capital needs. This represents a rich opportunity to not only unlock cash required to finance further sales and growth but also to correct and optimize inefficient inventory management systems. An exercise in inventory optimization will not only help unlock much needed cash but also improve delivery rates and ultimately customer satisfaction.
But aiming at improving inventory turns typically comes at the cost of delivery or order fill rates. A delicate balance between the two must be made - hence the emphasis is more on inventory "optimization" rather than "improvement".
Though the effort expended in optimizing inventory will require a close understanding of the business and the competitive market (and customers) in which the business functions, the returns will more than compensate for the same. A company with turnover of $ 1 billion can expect to unlock $ 10 million in inventory cost by reducing the days in inventory by just 5 days. But reduced inventory can lead to stock outs and reduced fill rates leading to customer dissatisfaction. Another fact to keep in mind is that a small increase in fill rates also leads to an increase in sales - a quick approximation would be an increase of 1.5% in fill rate can improve sales by $15 million (for the same company with a total turnover of $ 1 billion). Thus the focus on inventory costs and sales revenues need to be carefully balanced.
Industry has evolved tools/applications to address this conundrum - mainly by designing analytics using historic and forecasted demand with fill rates demanded by the customer. Parameters used to arrive at desired inventory levels are usually lead times, volatility, VED, consumption patterns etc. But the questions remain as to how often are these actually done by companies? Inventory optimization needs to be done regularly to cope with the constant change in these parameters. Typically a monthly analytics report and bi-annual inventory optimization project is required to cope with the rapid changes in the market. However, recessionary times make executives run to short time fixes or constantly fire fight and not take a longer term view to inventory management. A centralized inventory optimization analytics group is a good answer to this problem...one which can also easily pay for itself in the short term. In the next post let's look at what the Central Inventory Optimization Group (CIOG) can achieve.
Note: Click here to read part 2 of this post.