Free Up Cash!

Inventory optimization -- more important than ever -- can preserve working capital in tough times.

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Like bloodletting, reducing inventory is a delicate matter that most people would prefer to avoid. Inventory can range from materials, to parts, to fully assembled products. Nobody wants to run out. If there's too little, customers won't get orders in a timely manner and market opportunities will be missed. Yet if a company carries too much and demand drops, then the inventory must be "bled down," or reduced in price, until it has a buyer.

During a strong economy and when cash flow is loosened, many companies can get by without rigorous inventory management practices, says Larry Lapide, director of demand management at the MIT Center for Transportation & Logistics in Cambridge, Mass. But during a recession, he adds, "companies had better bleed down inventory to reflect the downturn in sales. If they don't, it just sits there."

Inventory optimization is so critical now because of its impact on available cash, Lapide says. In accounting terms, inventory is an asset. So inventory that is on the books through manufacturing, assembly and distribution represents credit-funded inventory. With credit at a premium, it's in a company's best interest not only to keep inventory levels tight, but also to sell goods as soon as possible.

Reducing costs and squeezing maximum utility out of fixed assets is nothing new to Black & Decker Corp.'s Hardware and Home Improvement Group in Lake Forest, Calif. The unit supplies hardware to big-box retailers that have responded to the economic downturn with new low-price strategies. It now falls on Scott Strickland, vice president of IS, to help the group squeeze down its own costs and maintain profit margins.

"We had been loath to drive inventory down to this level," Strickland says. However, the company had gained invaluable experience by deploying an integrated inventory management system prior to the downturn. The result was that the key decision-makers throughout its supply chain were operating with the same information, planners focused only on exceptions, and supplier and material issues were quickly resolved. The system, Strickland says, does the heavy lifting, and as a result, the unit has cut planning cycles from weeks to days and improved forecast accuracy by 10.4%.

"If someone had told us nine months ago that we could lower inventory as fast as we could to address a sales decline, we would not have believed it was possible," Strickland says. However, "because of the impetus on freeing up working capital, we have been focused on lowering our inventory and levels. We figured we could do this, and it turned out to not be the bad experience we had imagined."

The effort to lower inventory levels to free up working capital has proved so effective that the Black & Decker unit and its partners are jointly considering making it standard practice even after the economy recovers, Strickland says.

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