For many manufacturers, inventory is both a necessity and a cash
trap. Raw materials, work-in-process (WIP) and finished goods often represent
the largest use of working capital on the balance sheet. When inventory levels
creep higher than needed — or turn too slowly — cash that could be funding
growth, debt reduction or operational improvements gets stuck on the shelf. How
can you improve working capital? It doesn't always require new financing.
Strategic inventory management can unlock cash already inside the business.
Here are several strategies to consider.
Monitor key performance indicators
Key performance indicators (KPIs) are useful benchmarking tools
for tracking and evaluating the performance of your inventory management
systems and practices. They can help you identify opportunities to optimize
inventory levels and improve efficiency.
Relevant metrics vary from company to company. Common examples
include inventory turnover rate, days inventory outstanding, order cycle time,
backorder rate, carrying cost, stockout rate, fill rate and return rate.
Adopt just-in-time inventory practices
There's more to inventory costs than buying or manufacturing
inventory. You must factor in "carrying" costs, such as transportation,
storage, handling, insurance, financing, obsolescence and pilferage. In some
states, inventory is subject to personal property tax, which also must be
factored in. Just-in-time (JIT) inventory practices reduce carrying costs and
minimize waste by ensuring that raw materials and parts aren't received until
they're needed for production.
To be effective, JIT demands meticulous planning and solid
supplier relationships. Be sure to maintain a "safety stock" of critical
materials or parts to protect against sudden spikes in demand or unexpected
supply chain disruptions.
Improve production planning and
scheduling
Inefficient production schedules often lead to excess WIP, which
ties up cash without generating revenue. Aligning production runs more closely
with demand can significantly reduce WIP levels.
Lean manufacturing principles, such as smaller batch sizes and
shorter production cycles, can help convert materials into sellable products in
less time. Faster inventory turns mean cash moves through the business more
quickly — improving liquidity.
Right-size buffer stock based on data,
not habit
Many manufacturers carry excess buffer (or safety) stock simply
because "that's how it's always been done." But demand patterns, lead times and
supplier reliability change over time. Regularly reviewing historical sales
data and supplier performance can reveal opportunities to safely reduce buffer
inventory.
Advanced forecasting tools aren't always necessary. Basic
analysis — such as identifying slow-moving products or seasonal trends — can
help reset buffer stock to more realistic levels.
Strengthen supplier relationships
Supplier strategy plays a major role in inventory levels. Long
lead times and inconsistent deliveries often force manufacturers to overorder
"just in case." Working collaboratively with key suppliers to improve
reliability can reduce the need for excess stock.
In addition, negotiating better payment terms, such as extended
days payable outstanding, can ease working capital pressure. While payment
terms don't reduce inventory itself, they can offset the cash impact of holding
it.
Address obsolete and slow-moving
inventory
Obsolete inventory takes up space and ties up capital
indefinitely. It can also distort financial reporting. Many manufacturers delay
writing off inventory or selling excess at a steep discount because it feels
like admitting defeat. But holding unusable inventory often costs more over
time.
Conduct regular inventory reviews to identify items with little
or no movement. Options may include discounting, scrapping, returning to
suppliers or selling through secondary markets. Converting dead stock into cash
— even at a loss — can improve overall financial flexibility.
Align inventory metrics with financial
goals
Operational teams often focus on service levels and production
efficiency, while finance focuses on cash flow. Bridging this gap is critical.
Tracking inventory metrics, such as inventory turnover, days
inventory outstanding (DIO) and gross margin return on inventory (GMROI), helps
connect operational decisions to financial outcomes. When inventory performance
is tied to working capital goals, the decision-making process becomes more
disciplined across the organization.
Prepare to optimize
Inventory optimization is one of the most effective ways
manufacturers can improve their working capital. With the right mix of data
analysis, process improvement and financial insight, inventory can shift from a
cash drain to a competitive advantage. Contact us to discuss how your
manufacturing company can build an inventory strategy that balances liquidity
with operational needs.
