In the face of COVID-19, companies are moving fast to preserve cash and maximize the return on spending. For many companies, raw materials and finished goods inventories are the largest consumers of cash—working capital that can be locked up for weeks or months before it yields a return. A key challenge in this uncertain time is to minimize this latency—it takes rethinking your approach and placing the right inventory bets.
After a decade of helping clients smartly reduce working capital to facilitate growth and increase profitability, we have found it is key to look beyond just the supply chain and also consider go-to-market approach and product offerings.
Consider making these six moves to boost liquidity now:
1. Consolidate raw materials and finished good inventory around your core offerings
Focus on products that are truly profitable and best aligned to your strategy. Exit products and even categories to maximize returns and maintain focus on your core markets. Use this time to identify and get out of misaligned and profit-destroying products.
2. Postpone conversion to limit finished good inventory and remain flexible
Do not produce or purchase inventory until the end product is sold or there is recognized imminent demand. Transition to make-to-order or procure-to-order where you can. Inventory is essential when production is longer than a customer’s expectations or needs, but do not prematurely acquire and hold it.
3. Enable factory-direct fulfillment to minimize downstream inventory
Minimize the touches and time it takes to ship and invoice by eliminating downstream movements in the supply chain. While many production facilities are not set-up to efficiently handle all customer orders, there are often larger orders that can be fulfilled directly from the plant (e.g., full pallets, containers, or truckloads).
4. Leverage the distribution channel to move inventory off your books
If inventory is required, work with distributors to hold inventory and keep it closer to the customer. Strengthen the benefits of this channel by reinforcing expectations and programs, as well as reevaluating incentives such as pricing and returns.
5. Consolidate inventory locations and deployment strategy to minimize holding requirements
Reconsider where and how much of each product you stock. While fewer locations for an item may mean longer lead times for some customers, it will reduce safety stock requirements. For inventory targets that are set by rules of thumb (e.g., 3 months on-hand), it is time to segment your inventory and apply statistical methods to precisely calculate needs.
6. Align customer service levels to customers’ needs and value
Accept lower fill-rates for what you will stock to reduce safety stock requirements. Reducing inventory service levels from the mid- to high-90% levels to the low-90% or high-80% levels will have the largest impact in the near-term and can be readjusted as cash returns.
Many of these tactics will require new processes and coordination with customers and the supply base, but the imperative for doing so is clear—preserving cash will help you weather the storm.