Stronger inventory controls can help manufacturers protect cash flow and margins

Key Takeaways:
  • Excess inventory ties up cash, increases overhead and often hides deeper issues in forecasting, purchasing or production. 
  • Manufacturers can improve inventory turnover by trusting their data, updating reorder points and focusing on the right inventory instead of simply carrying less. 
  • Strong inventory controls help free up working capital, protect margins and keep operations aligned with customer demand. 

 

Excess inventory usually starts with reasonable decisions. 

A buyer orders extra because a supplier has been late. Production asks for more material because no one wants a job delayed by one missing component. Sales wants finished goods available because customers expect quick turnaround. Someone orders more to get a price break. 

None of those decisions are wrong by themselves. But over time, they can create a bigger problem: excess inventory and low turnover. For a manufacturer, that means wasted resources and lost profits. Between tied up capital and growing overhead expenses, valuable time, money and opportunities are at risk. 

Inventory sitting on the shelf is not just product. It is cash that cannot be used somewhere else. It is warehouse space, labor, handling, damage, obsolescence and write-offs. It also puts pressure on the line of credit, cash flow and margins. 

Inventory gets harder to manage as the business grows. There are more SKUs, more customers, more supplier issues and more people touching the process. 

At that point, the question is not simply, “How do we carry less inventory?” The better question is, “Why do we have this inventory, and is it still helping the business?” 

Start With Inventory you can Trust

Most manufacturers have an ERP, scanners, reports and spreadsheets. But even with those tools, the same issue comes up: the system says one thing, the floor says another and finance finds out about the problem at month-end. 

Before a company can improve inventory turns, it has to trust the inventory number. Leadership needs to know what is on hand, where it is, whether it is usable, whether it is committed to a job and whether it is still needed. 

Advanced inventory tracking can help. Barcoding, RFID, automation and manufacturing-specific software can improve visibility. But technology is not the goal. Accurate information is. You do not need another report if the data behind it is wrong. 

Better tracking should answer practical questions. What has not moved in 90, 180 or 365 days? What is committed to production but still showing as available? What was purchased for demand that never came? 

If those questions are hard to answer, inventory carrying costs are probably higher than they need to be. 

Separate Needed Inventory from Comfort Inventory

Not all inventory is bad. Manufacturers need materials on hand to meet customer demand, keep production moving and avoid unnecessary delays. The problem is comfort inventory. 

Comfort inventory is stock the company carries because it does not fully trust the forecast, the supplier, the schedule, the system or the process. Some of that may be necessary. Manufacturing is not perfectly predictable. But when every department adds its own cushion, inventory grows quickly. 

This is how a company ends up with too much of the wrong inventory and still not enough of what production actually needs. 

That is one of the most frustrating situations for manufacturers: inventory dollars are high, but stockouts are still happening. The problem is not just inventory volume. It is inventory mix. 

ABC analysis can help. Not every inventory item should be managed the same way. A items are high-value or critical items that need close attention. B items need regular review. C items need simple, efficient controls. 

The goal is not to cut inventory across the board. The goal is to manage the right inventory more carefully. 

Look for the Problems Inventory is Hiding

Excess inventory is often a symptom of another issue: unreliable suppliers, weak forecasting, inaccurate bills of materials, poor scheduling, long setup times, customer changes or production bottlenecks. 

Inventory becomes the cushion, and that cushion gets expensive. 

If the company carries extra raw material because supplier lead times are unreliable, that is a supplier issue. If WIP keeps building up between production steps, that is a flow issue. If finished goods sit too long because the sales forecast missed, that is a planning issue. 

The practical question is: Is this inventory supporting customer demand, or is it covering up a process problem? 

Instead of saying, “We need less inventory,” leadership can ask: Why was this ordered? Is it tied to current demand? What changed after we bought it? Is it still needed? Are we holding it because we have a plan, or because no one has made a decision? 

Those questions usually lead to better inventory control than a broad mandate to reduce stock. 

Revisit Reorder Points and Safety Stock

A lot of excess inventory comes from reorder points and safety stock levels that have not been reviewed in years. The business changed. Customers changed. Suppliers changed. Lead times changed. Demand changed. But the reorder point stayed the same. 

That is how old assumptions become current costs. 

A basic reorder point formula is: reorder point = demand during lead time + safety stock. 

The formula is not the hard part. The hard part is using current data. 

Safety stock should be based on demand variability and supplier reliability, not fear. There will always be uncertainty in manufacturing, but uncertainty should be measured. If a supplier consistently misses delivery dates, address that supplier relationship. 

The same is true for price breaks and minimum order quantities. Buying more to get a lower unit cost may look good on paper. But if the extra material sits for a year, takes up space and ties up cash, the real cost may be much higher. A lower purchase price does not always mean a lower total cost. 

Pay Attention to WIP and Slow-Moving Stock

Raw materials and finished goods are easier to see. Work-in-process inventory can be harder to manage. 

Too much WIP can make the plant look busy while cash is stuck in the middle of the process. Materials have been pulled. Labor has been used. Machine time has been applied. But the product is not finished, shipped or converted back into cash. 

If WIP keeps growing, leadership should ask where work is getting stuck. Is it waiting on a machine, inspection, labor or a missing component? Is it waiting because the schedule changed? Were too many jobs released at once? 

Slow-moving and obsolete inventory needs the same discipline. Every manufacturer has stock people avoid discussing: the component for a redesigned product, the raw material for an order that changed or the obsolete part no one wants to write off. 

Slow-moving inventory should be reviewed on a regular schedule with finance, operations, purchasing and sales in the same conversation. The discussion should be direct. Can we use it in another product? Can we sell it at a discount? Can we return it to the supplier? Can we refurbish it? Can we repurpose it? Can we recycle or scrap it? Does it need to be written down? 

The worst option is usually doing nothing. Doing nothing keeps the inventory on the books, keeps the warehouse full and pushes the decision into another month. 

Use Software, But Do Not Expect it to Fix the Process

ERP, MES and inventory management systems can improve inventory control. They can connect purchasing, production, sales and finance, reserve materials, flag shortages and track lead times. But software will not fix bad habits. 

If bills of materials are wrong, the system will be wrong. If employees do not issue materials correctly, the system will be wrong. If cycle counts are ignored, the system will be wrong. 

Many manufacturers do not need more technology as much as they need more consistency. The process feeding the system matters as much as the system itself. 

Strengthen Controls and Track What Matters

Inventory control usually improves when the basic rules are followed consistently. That includes receiving controls, putaway procedures, material issue procedures, cycle counting, adjustment policies, returns and scrap procedures and segregation of duties. 

None of this is flashy. But it protects margin, improves reporting and gives leadership better information. 

Useful metrics include inventory turnover, days inventory outstanding, carrying cost percentage, slow-moving inventory, obsolete inventory, inventory accuracy, stockouts, supplier lead-time performance and WIP aging. 

The point is not to build a dashboard no one uses. The point is to identify where cash is getting stuck and why. If inventory turns are declining, what is driving the change? If stockouts are happening while inventory levels are high, where is the mismatch? 

The Goal is Better Working Capital Discipline

Manufacturers do not need less inventory at any cost. They need the right inventory in the right place at the right time. 

Cut inventory too aggressively and the business may create production delays, missed shipments and frustrated customers. Carry too much and the business ties up capital, increases overhead and makes it harder to invest in growth. 

Inventory should be treated as one of the company’s largest controllable uses of cash. Improving inventory turns is not just an operations project. It is working capital discipline. 

The companies that make progress usually trust their inventory data, review slow-moving inventory before it becomes obsolete, update reorder points, manage critical items differently than low-risk items, reduce WIP and hold people accountable for following the system. 

Most important, they stop using inventory as a cushion for problems that need to be fixed somewhere else. 

If your company has excess inventory and low turnover, the question is not only, “What do we have on the shelf?” It is also: Why did it get there? Who still needs it? What is it costing us to keep it? And what decision are we avoiding? 

That is usually where the real inventory conversation starts. 

Questions?

If your team is dealing with excess inventory, low turnover or too much cash tied up in stock that is not moving, it may be time to look beyond the inventory report. The real issue may be unclear ownership, inconsistent processes, weak accountability or decisions that keep getting pushed into another month. 

Adams Brown works with manufacturers and business owners to bring structure to those conversations. Through the above+beyond® Operating System, advisors help leadership teams clarify priorities, define roles, track progress with meaningful KPIs and build a consistent process for solving the issues that slow the business down. The system is designed to help companies align around a clear vision, stronger accountability and measurable performance. 

If inventory has become a recurring frustration instead of a managed asset, let’s talk. Contact an Adams Brown manufacturing advisor to learn how the above+beyond® Operating System can help your leadership team identify what is holding the business back and build a practical plan to move forward.