Inventory Management Strategies to Free Up Working Capital
Published on by Jessica Doremus in Manufacturing
Supply chain strains and changes in inventory demand are just a few of the challenges manufacturing companies have seen over the last few years. Driven by multiple factors, these challenges have driven companies to look at internal changes to help them free up capital.
How inventory is managed, when it’s ordered, and how quickly it’s consumed have a meaningful impact on working capital, and there are several key optimization strategies you can use to improve inventory management in your manufacturing business.
Strategy 1 | reduce inventory
Since COVID-19, businesses have made a conscious effort to increase their inventory levels due to lead times not returning to their pre-pandemic levels. The key is finding the point where you can maintain the lowest amount of inventory without being understocked.
You can achieve this by tracking existing lead times, sharing sales data with suppliers, and reducing minimum order quantities. Additionally, looking at real-time tracking and reporting of inventory along with large-volume inventory management tools can enable more reliable inventory forecasts and prepare for lead times.
The ISM August 2024 report says “In August 2024, they saw decreased levels of new orders and decreased levels of output compared to July 2024. However, inventory levels are higher in August than in July. This is a result of manufacturers adjusting to lower new output levels and the subsequent timing issues. Additionally, customers’ inventory index slightly increased. The customers’ inventory levels decreased at a slower rate in August, with the index moving upward, showing that companies’ customers have just the right amount of their products in inventory compared to July 2024. This suggests a demand level that is typically neutral for future new orders and production.”
Strategy 2 | Optimize inventory turnover
Inventory turnover is the number of times that inventory stock is sold, used, or replaced in a given period. Analyzing the inventory turnover helps management understand the market demand for products and the amount of old inventory they’re carrying.
Various ways to increase inventory turnover are to get rid of old inventory, improve demand forecasting to prevent over or under-stocking, and automate inventory management to track inventory in real-time. Many companies monitor this in total, but doing it at a more granular level such as by product line, by part, or by type of component can help identify opportunities for improvement.
Strategy 3 | Establish inventory Key Performance Indicators (KPIs)
KPIs help a business measure performance toward inventory goals. Common KPIs include inventory turnover, lead time, inventory write-offs, and order cycle time, and evaluating these metrics regularly makes it easier to identify opportunities for improvement. You can also use KPI analysis to monitor the success of other strategies and identify opportunities for improvement.
A few small changes in inventory management can help better position businesses for unexpected market conditions and the future of manufacturers.
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Our latest Manufacturing Compensation & Benefits Benchmarking study is packed with information and insights from manufacturers throughout the region – and can help you build a competitive advantage. Download your free copy now. You might also be interested in Top 10 Tips for Recruiting and Retaining Manufacturing Talent (hint – you’re competing with free cheeseburgers). Or, maybe you’re interested in exploring GAAP alternatives and the implications of switching.
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If you’re a manufacturer considering ways to free up capital, or just have some questions, Barnes Dennig’s team of top manufacturing pros is here to help. Contact us for a free consultation.
