Instant snapshot: Inventory “rightsizing” program softens impact of the credit crunch
By Manufacturing Business Technology Staff -- Manufacturing Business Technology, 10/22/2008 9:32:00 AM
Inventory management specialist ToolsGroup says it has an innovative new program to help companies quickly “rightsize” their inventories, free up millions of dollars of cash, and improve free cash flow—or FCF. The new program, called Rapid Inventory Rightsizing (RIR), seeks to reduce a company’s working capital needs.
In this era of tight credit and higher cost of capital, cash is king. According to the U.S. Federal Reserve’s most recent quarterly survey of senior bank loan officers, 58 percent have tightened lending standards to large and midsize businesses, and more than 80 percent surveyed say their customers are paying more for loans.
Rightsizing inventory presents a good source of short-term working capital and improved FCF. When the composition of inventory deteriorates over time, a large financial asset is not being used efficiently. Managers find that they have too many of the items they don’t need and not enough of the items most in demand.
RIR is suited for companies with large inventories not being put to optimal use. By improving inventory targets, companies reduce global inventory levels while still maintaining excellent customer-service levels—i.e., fill rates. The program is targeted at CEOs and CFOs looking for increased liquidity or free cash flow, and supply chain executives addressing corporate mandates to reduce inventory cost while maintaining customer service metrics.
For example, a supply chain director with a Fortune 1000 consumer packaged goods company recently commented, “We achieved a 25-percent reduction in inventory and 99-percent service levels. ToolsGroup let us re-mix the stock in two months. Needless to say, our finance people were ecstatic.”
Companies typically expect to generate cash of between 10 percent and 30 percent of their inventory value, while maintaining the same or improving customer service. The program costs a small fraction of the inventory saved and cash generated. According to ToolsGroup, the program also is easy to implement because it requires no changes to the company’s distribution/supply network or technology infrastructure.
Implementation involves three steps:
1. An immediate rightsizing of the inventory to eliminate the least effective inventory and insure profit-generating and strategic products are properly served. Capital is rapidly reallocated to the most financially productive areas. Inventories that are not aligned with profits and customer service are drawn down. Because this first step can be implemented in a few weeks, it can rapidly begin generating free cash flow, often within the same quarter.
2. All inventories are adjusted to avoid excess inventory experienced in a slow down, while maintaining customer service levels. As revenues slow in certain product streams, most companies neglect to adjust their inventory targets to changing circumstances. While individual items will vary, overall inventory requirements are reduced, freeing up additional cash flow.
3. An ongoing review process, managed either inside or outside the company, to keep inventory targets aligned with changing conditions and insure a sustainable results over time.
“Using the experience we’ve gained at more than 150 corporate clients in a variety of industries, we can run an instant snapshot of a company’s inventory and immediately identify the potential savings and time-to-benefit,” says Joseph Shamir, CEO, ToolsGroup. "In today’s tightening credit environment, this ability to move quickly is critically important to our clients."
