Working Capital Optimization: The Power of Streamlined Inventory Management

HOST: Welcome to the Cherry Bekaert Industrial and Consumer Goods podcast series. We aim to explore this dynamic world, discuss the operating challenges facing manufacturers, and offer new ideas and solutions.

HOST: Join us as we uncover growth strategies and enhance after-tax cash flow in the ever-evolving industrial and consumer goods landscape.

MIKE PETROSKI: Good day and welcome back to our industrial manufacturing and consumer goods podcast series. I'm Mike Petroski, a finance strategy and operations professional at Cherry Bekaert, and I'll be your host today.

MIKE PETROSKI: Joining me is my colleague Corey York, a supply chain and inventory management strategist who's helped everyone from mid-market retailers to global manufacturers step up their inventory game. Corey is a virtuoso at getting to the root of a problem, defining smarter inventory strategies, and delivering measurable results.

MIKE PETROSKI: Today we're diving into one of the most powerful and overlooked ways to free up cash: inventory optimization. Inventory sits at the heart of everything—where finance, operations, and customer service intersect. When you manage it well, you can unlock millions in cash, cut storage costs, and keep customers happy; when you mismanage it, it can choke cash flow and cause numerous headaches.

MIKE PETROSKI: So Corey, for those who aren't in the weeds on this every day, why is inventory such a huge deal when it comes to working capital?

COREY YORK: Inventory is often the single largest component of a company's current assets on the balance sheet and can represent up to 50% of working capital. Working capital is calculated by subtracting current liabilities from current assets, so any inventory improvement has a direct and often immediate impact on cash flow.

COREY YORK: To extend the biological metaphor, inventory optimization is not cutting into muscle; it's removing excess fat—slow-moving, obsolete, or unnecessarily high stock levels—without sacrificing service. Done right, optimizing inventory improves operational efficiency, reduces carrying costs, and frees up space within distribution centers. It's a rare opportunity where finance and operations can both win.

MIKE PETROSKI: How can a company tell if it has an inventory optimization opportunity? What warning signs do you look for?

COREY YORK: Several red flags can appear quickly. A high Days Inventory Outstanding (DIO) is a simple mathematical check you can perform; it's defined as average inventory divided by cost of goods sold for a given period and can be compared to industry benchmarks.

COREY YORK: Operational indicators include frequent "bin denial" where pickers find nothing in the bin, stockouts despite high overall inventory, a large percentage of items that haven't moved in six, 12, or 18 months, and constant firefighting such as frequent order expedites, juggling allocations between customers, or availability issues tied to inventory location, quantity, or accuracy. Running clearance sales to remove excess stock is another signal.

COREY YORK: Underlying data can also tell the story: deteriorating turnover ratios, increasing levels of aged inventory on inventory aging reports, and poor forecast accuracy. All of these can reveal optimization opportunities if you know where to look.

MIKE PETROSKI: Once you've identified an opportunity, what are the main levers you can pull to improve inventory performance?

COREY YORK: There are four "big levers": improve demand forecasting; rationalize SKUs and part numbers; set appropriate reorder points and safety stock levels; and align purchasing with true demand patterns. Each lever yields benefits on its own, but the real impact comes from coordinating them together.

MIKE PETROSKI: Give us more detail on each of these levers. What do they mean in practice?

COREY YORK: Start with demand forecasting. Too many companies rely solely on last year's sales. We incorporate multiple data points—market trends, promotions, sales pipeline intelligence, and macroeconomic factors like tariffs—to get a more accurate picture. Better forecasts mean fewer stockouts and less excess inventory.

COREY YORK: If you lack bandwidth for a dedicated forecasting resource, basic methods tied to historical sales and seasonality are a reasonable starting point while you mature your approach.

COREY YORK: SKU rationalization is about trimming the tail: identifying low-margin, low-volume products that tie up cash and create complexity. This often requires tough conversations with sales or marketing, but the payoff is a leaner, faster-moving inventory.

COREY YORK: Reorder points and safety stock are where math meets strategy. Use statistical models that account for lead times, demand variability, and service level targets so you carry the right buffer without overstocking. For predictable items, a low-tech two-bin system or basic EOQ may suffice initially.

COREY YORK: Aligning purchasing with demand means moving away from set-and-forget buying. Work with procurement to create vendor agreements that allow for flexibility, phased delivery, and just-in-time replenishment so you avoid costly expedites and delays while protecting service levels.

MIKE PETROSKI: What are some of the most common inventory management challenges you are seeing across industries right now?

COREY YORK: Three issues stand out. First, overreliance on historical data without adjusting for changing market conditions leaves forecasts stale before they're used and leads to ordering the wrong production quantities and surplus.

COREY YORK: Second, lack of visibility across the supply chain—uncertainty about what's in transit, at suppliers, with subcontractors, at job sites, or in secondary warehouses—prevents accurate planning and execution.

COREY YORK: Third, poor master data: inaccurate lead times, inconsistent part numbers, outdated standard costs, and problematic unit-of-measure conversions. Even sophisticated organizations struggle with these issues.

MIKE PETROSKI: Can you share examples of how we've helped clients address these issues and what the results looked like?

COREY YORK: We worked with a business-to-business food service equipment company that had grown through acquisitions and had inconsistent records across portfolio companies. We implemented a robust excess and obsolescence review process using historical sales, forecasted demand, and qualitative reviews of on-hand inventory. That effort identified over $1 million of surplus and obsolete inventory across locations.

COREY YORK: For a large multi-state integrated manufacturer, we consolidated redundant SKUs, designed a volume-based cycle count program, and instituted inventory KPIs to monitor daily performance. Root cause corrective actions from daily counts led to a 10% improvement in inventory accuracy at month end and drastically reduced inventory adjustments and write-offs.

COREY YORK: In both cases, the changes stuck because we built cross-functional governance with regular meetings that involved finance, operations, supply chain, sales, and marketing, and assigned ownership of the process across stakeholders.

MIKE PETROSKI: For listeners who want to start improving inventory optimization today, what practical steps can they take right now?

COREY YORK: First, start tracking and benchmarking key metrics: Days Inventory Outstanding, inventory turns, and forecast accuracy. Quantitatively identify slow-moving, surplus, and obsolete items, and pair that analysis with a qualitative review to validate disposition decisions.

COREY YORK: Avoid immediately writing off items without consulting stakeholders who may have insights about impending demand. Evaluate disposition options—discount, donate, or scrap—only after informed review.

COREY YORK: Set clear service level targets so stakeholders understand the trade-off between availability and cost, and review reorder and safety stock policies to ensure they reflect current realities rather than outdated assumptions.

COREY YORK: Establish recurring review processes, ideally quarterly or monthly, and treat inventory as a living asset rather than an annual cleanup project. Include related areas such as warranty in your reviews.

MIKE PETROSKI: Where do you see the biggest opportunities for companies to use technology, data, or traditional process improvements to get better at managing inventory in the future?

COREY YORK: Advanced analytics and automation in demand planning offer significant opportunities, though they carry risks—automation without proper controls can lead to outsized mistakes, such as overordering items with limited shelf life.

COREY YORK: Integrating business planning platforms to connect sales, operations, and finance on a single view delivers real benefits so teams aren't operating in silos. New ERPs alone won't fix bad data or broken processes; they often institutionalize them into more expensive systems.

COREY YORK: The companies that will win pair smart tools with disciplined execution and cross-functional ownership across the organization.

MIKE PETROSKI: Thanks for sharing these insights on inventory optimization, which is a critical driver of working capital efficiency and overall business performance. To our listeners, we hope you can apply these ideas right away.

MIKE PETROSKI: Tune in to our next episode where we'll focus on accounts receivable management, another powerful lever for improving cash flow and strengthening working capital.

MIKE PETROSKI: Thank you for listening. For more information, visit our website at cbh.com/manufacturing where you can give feedback and connect with our professionals. If you enjoyed this podcast, please subscribe, leave a review wherever you listen to your podcasts, and share with your colleagues.