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The siren song of inventory reductions

Publication date: 
October 2009
Author: 
Dr. Albert D. Bates, Profit Planning Group

Editor's note: Some of the data used in this article came from the 2009 Operating Performance Survey (of 2008 data).

The downturn in economic activity caught many firms somewhat off guard. As a result of sales challenges, cash suffciency has become a very serious issue. For the typical EASA member, cash now represents only 6.7% of total assets. It is a cash position that does not leave a lot of room for error.

To offset the cash challenge, most firms have looked at reducing the "cash traps" in the business, particularly inventory. While reducing the investment in inventory is a laudable objective, it is fraught with some danger. It is possible, and maybe even likely, that the drive to lower investment levels will trigger further sales declines, through a higher occurrence of out-of-stock situations.

This report will examine the trade-off between maintaining sales volume with an appropriate inventory investment versus having too much money tied up in non-productive assets. It will do that by addressing two key issues:

  • Inventory Versus Sales - An analysis of the relationship be-tween inventory reductions and sales declines.
  • Inventory Reduction Opportunities - A review of how inventory can be reduced without impacting sales volume.