New research suggests that manufacturers will be able to significantly improve cash flow as they recover from the inventory crisis of 2022.
Last year, data from 4,500 manufacturers using Unleashed inventory management software revealed firms were typically spending twice as much on stock as they were before the pandemic. This was largely a response to supply chain disruptions, with firms forced to stockpile in the face of shortages and billowing lead times.
However new analysis shows the extent of this necessary overcorrection, and the potential cash flow upside of paring back stock levels.
Stock that firms need vs stock that firms hold
Using industry-standard calculations that determine ideal stock levels using rate of sale and lead time data, Unleashed found that over the last 12 months the average firm held USD$142,000 of stock over and above what they’d actually needed in that year.
- In the UK this ‘overstock’ figure was, on average, £102,000.
- In Australia it was AUD$231,000
- In the United States is was USD$157,000
- And in New Zealand it was NZD$215,000
“It’s a genuinely eye-opening number,” says Jarrod Adam, Head of Product at Unleashed. “What we’re seeing here, really, is the cost of caution: a dollar value that shows where firms are, against where they could be – while still doing business at the same levels.”
Not all businesses will benefit
Accountants and industry experts are cautioning that – while the data will be good news for many seeking to run their operation leaner – not all businesses will be able to translate the findings into better cash flow; at least not immediately.
Maria Pearman, principal and beverage practice leader with GHJ, an advisory and accounting firm headquartered in Los Angeles, says that there are two kinds of businesses affected by the news.
“If you have a relatively short cash flow cycle – if you turn over goods quickly and buy new stock all the time – then these savings are something you can bank straight away. Simply by adjusting each re-supply order down to where it should be, you immediately have more cash in hand.”
But the situation will be different for many firms, says Pearman.
“These figures are calculated based on a ‘just in time’ approach – and not everyone can work like that. Some businesses have to order in bulk at set times – or to get a better price. Others have been forced to stockpile by volatile supply chains.”
“Companies in this boat will have longer cash flow cycles, and that means less opportunity to correct course on the purchasing side. For these people, acting on this new data might be more about selling excess stock before it’s obsolete.”
A cautious return to Just in Time
Pearman’s comments are echoed by businesses included in the study. Frankie Layton is a co-founder of The Dirt Company, an eco-friendly cleaning products manufacturer in Australia and New Zealand that largely sells online.
Layton says she’s looking forward to operating on a leaner, less capital-intensive model, but that they will be making any changes carefully.
“There is an opportunity currently to reduce our stock levels back to pre-pandemic levels, but we are hesitant. The rug came out so quickly from under our feet the first time.”
“Managing inventory during Covid was extremely challenging. By the time we had adapted to new lead times, they had changed again. Some of our ingredients went from four, to six, to eight, to 16, to 20 week lead times – and freight costs were through the roof,” she says.
“I’d like to ease back toward ‘just in time’, but I’m not going to make that leap until I need to, or I trust the supply chains enough to do so. We’ve learned that you have to operate with caution in what we have established is ongoing ‘unprecedented’ times.”
Looking back vs looking forward
Adam, whose team at Unleashed led the research into overstock levels, points out that any cash flow upside of their analysis benefits hugely from hindsight.
“Hindsight is 20-20 of course. In retrospect, it’s easy enough to say that firms could have saved ‘X’ by slimming down their buying. But these decisions were made in the middle of very volatile conditions, with lead times and prices changing by the week. So it’s hard to see how anyone could have handled it differently.”
“With that said, with the kind of nuanced data we’re now able to surface, today we’re able to build tools that let supply chain managers deal with fluctuating conditions much more easily. We can help them see exactly where they can – and can’t – trim back, and peer into the future by forecasting future inventory needs.”
Ultimately, says Adam, unlocking cash flow will be an ongoing priority for businesses over the coming years.
The cost of caution: Cash flow opportunities within overstock, by country & sector
Cash flow and overstock – how we calculated the data
To generate the cash flow and overstock figures in this report, we applied a standardised methodology that used the assumptions listed below. It should be noted that reasons for holding overstock vary from firm to firm, and individual circumstances will always determine if companies can release the cash flow held within overstock.
- Overstock figures were generated by comparing an ‘optimal’ stock position vs the actual stock held by 1,886 firms In the UK, New Zealand, Australia, the US and Canada.
- Optimal stock positions were calculated individually for 381,000 different product and component lines (SKUs)
- For each SKU we calculated a minimum and maximum stock level based on rate of sale (or use, in the case of components used in manufacturing) and lead time from suppliers. Minimum stock levels were set to actual average lead time, plus seven days. Maximum stock levels were based on this minimum stock level, plus 28 days.
- All figures were calculated based on the last 12 months of actual lead time and rate of sale (or use) data.
- Firms in the study were all manufacturers, manufacturer wholesalers or manufacturer retailers of under USD$25 million in turnover
Unleashed is cloud-based software that gives product businesses clarity and control across suppliers, production, inventory and sales. Founded in New Zealand in 2009 it was acquired by the UK’s Access Group in November 2020. With thousands of users in more than 80 countries, it’s one of the most respected names in inventory, manufacturing and product management software worldwide.