How cutting inventory levels could save companies millions

Amidst rising interest rates globally, businesses are under pressure to manage cash flow effectively. There are typically three main operational levers to reduce cash flow requirement/ increase free cash flow generation: addressing accounts receivable/ payable, minimising capital expenditure (CAPEX) and optimising inventory.

While the optimisation of accounts receivable and payable are the most obvious lever, other levers, less financial and more operational, appear to be more challenging to address.

Capital expenditure is generally dealt with by stopping investment altogether, coupled with operational excellence initiatives aimed at producing more without CAPEX.

Inventory management stands out as a critical area, fraught with complexities stemming from uncertain demand, lead times, and product variety. Successful inventory management necessitates collaboration across departments and functions, striking a balance between cost efficiency and customer satisfaction.

These programs can typically reduce inventory by 15-30%, and avoid the costs associated with ownership, warehousing, and depreciation.

The following two case studies illustrate the efficacy of supply chain optimisation in enhancing cash flow management.

Industrial manufacturer inventory reduction

Argon & Co collaborated with a major industrial manufacturer to slash inventory levels by 30% (approx. €400m) to deal with a significant debt. By optimising capacity allocation and production planning, this manufacturer achieved a sizable inventory reduction without compromising delivery times or customer satisfaction. This represents a huge potential reduction in working capital requirements, freeing up funds to pay down debt and fuel future growth.

Pharmaceutical giant value unlocking

In partnership with Argon & Co, a pharmaceutical giant embarked on supply chain optimisation to unlock value while maintaining financial stability. By projecting inventory optimisation targets for each market and brand, this pharmaceutical company could reinvest freed-up capital (approx. €800m) into growth initiatives without compromising dividend distribution policies or credit ratings.

These case studies highlight the transformative impact of inventory reduction on cash flow management. Supply chain optimisation offers an additional compelling lever for businesses to navigate the challenges posed by rising interest rates; by effectively managing and optimising inventory, companies can improve cash flow efficiency and drive sustainable growth in a dynamic economic landscape.

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