Inventories are often regarded as ‘necessary evil’, and they tend to fall behind other priorities in leadership agenda. However, efficiently managed inventories enable benefits that are very much on the agenda of the CEO:
#1 Carry payload, not ballast
Locking company’s resources to places that don’t benefit the company is never a good idea. Efficient inventories enable availability with less money, and the released money can be used in more valuable places, like financing growth strategies.
#2 Light ship accelerates quickly
If operations are allowed to absorb cash into inventories without tight control, they become a heavy burden when companies want to grow: Not only does growth require financing the new products, sales, marketing and such that are set to deliver the growth, but they also need to finance the fatter inventories that are needed to support the larger business size. And since growth requires operating in more uncertain businesses, these new inventories tend to be proportionally less efficient than for legacy business. Operations that absorb less money into inventories enable fast and profitable growth.
#3 Light ship turns nimbly
Companies that irreversibly lock their bets far into the future by preparing availability and building inventories according to uncertain forecasts will have a hard time adjusting the course when reality and plans go separate ways. The more uncertain the business is, the more companies should focus on ensuring that they can respond quickly. One such element increasing the agility are well-designed risk sharing practices with suppliers and customers.
#4 All hands on deck
Inventories are the result of decisions made throughout the company. If the company struggles with high inventories and is unable to implement corrective actions, it can be due to misalignment between different parts of the company. If the misalignment leads to unnecessary inventories, it has a high risk to cause friction and complications elsewhere too. Improving inventory efficiency can reveal places where company is not aligned, which is the first step towards fixing it.
#5 Steady ahead
Efficient operations and inventories tie up and release cash in a predictable way that’s closely linked to company activities, performance and size. If inventory changes cause surprises and fluctuation into financial performance despite steady sales and growth, it can raise questions for investors on how robust or risky the company is. When operating in uncertain business one should minimize the variables that Murphy could flip the wrong way all at the same time.
Eero Soralahti, Senior Manager & Operations Lead, joined Capacent in 2018 after working 15+ years in various mangerial supply chain and operational roles for multinational companies. Eero holds extensive experience from change management programs, reforming business models and managing supply chains through difficult times.