Articles

New Year’s Resolutions: Optimizing Working Capital and Inventory Management

By: M. Scott Moon – Vice President, Solution Modeling, Tompkins Fulfillment Services

New Year’s Resolutions: Optimizing Working Capital and Inventory Management

With a clear understanding of your customer, brand and image, the next focus is on the products your business should provide. While history can provide insight into past customers’ shopping behaviors, the time is now to take stock of your position and the products you are investing in. Take time to review the competitive landscape and make sure you are investing in tomorrow’s desired products and not those of last year’s customers.

The worst thing a supply chain can do is constrain inventory supply so that upside selling opportunities cannot be satisfied. Having the necessary working capital available is critical to allowing the business to react as it needs to. As you start the new year, what are you doing to build the business? Do you have available capital to drive expansion and growth?

Working Capital

Working capital is a financial metric used to define the operating liquidity available to a business for use on investment, daily operations and long-term growth. Along with fixed assets such as plant and equipment, working capital that is invested in inventory and change is critical to review as part of operating capital equation. Managing daily activities is funded through liquid working capital, which is simply computed by taking the receivables and inventory and subtracting the payables.

All aspects of these components must be effectively managed to ensure funds are available to support project investment that helps position the business for the future. Appropriately managing all risk and aging is critical to optimizing a realistic view of the available working capital.

Inventory Management

Inventory is the lifeblood of every business and without it, there is nothing to sell. Managing inventory levels with precision is critical to propelling growth and ensuring funds are available to facilitate capital projects that drive growth. Consuming all available funds to manage basic business functions will prevent a business from growing and/or expanding.

Digital commerce provides a dynamic relationship between customers and sellers to understand likes and dislikes. By mining this data with business intelligence tools, you can ferret out product interests that may not be readily apparent. Doing this, however, requires the unleashing of statistical approaches that identify relationships that can be analytically proven.

Historical-based analytics can no longer serve a business well today. A critical assessment of product assortments, color choices and size scales must be evaluated to minimize slow-moving inventory. When slow-moving occurs, implementing aggressive markdowns is critical to clearing working capital risks. Developing a strategy that systematically plans for aged product reduces internal struggles in managing risk and driving product clearance.

Critical Metric

Focusing the entire business on a comprehensive metric concerning working capital helps all areas focus on what is critical for sustaining the business. One such metric, inventory to working capital ratio, defines the portion of a company’s inventories that is financed from its available cash. While the ratio varies from industry to industry, developing a good understanding of the right metric for your business is essential to effectively managing inventory levels within the available cash supplies.

The goal is to keep this ratio as low as possible (≤1), for it foretells the liquidity of the business. Keeping the business liquid avoids the need to loan money to run the business and frees up capital for business growth, expansion and other projects that ensure competitiveness. Many traditional retailers have lost sight of this paradox and gotten themselves into a vicious cycle of lending money to run day-to-day activities.

Summary

While consumers love warehouse sales and the discounts they provide, they are a sign that the inventory management process is not clearing inventory effectively to free working capital. By engaging today’s consumers through digital processes, sellers can get a better read on the market and their preferences to take aggressive actions to clear inventory.

Developing robust business practices that rapidly react to market dynamics ensures that inventory risks are managed and profits are optimized. Waiting for shoppers to come is a thing of the past. Managing sell-through metrics that monitor sales performance should rule the day in today’s omnichannel, 24/7 dynamic market.

Conversely, freeing slow-moving products is critical to providing the working capital needed to chase highly demanded items. This symbiotic relationship is vital for driving market relevance and profit optimization. Failing to set up business operations that enable the team to flow with demand will ensure a low working capital level and a struggling business.

How much of your working capital is used for future initiatives? How reactive are you to the marketplace? The time is now to define strategic use of your working capital to lead the market rather than follow it.