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The siren song of inventory reductions

  • October 2009
  • Number of views: 2735
  • Article rating: No rating

Dr. Albert D. Bates
President, Profit Planning Group
Boulder, Colorado 

The downturn in economic activity caught many firms somewhat off guard. As a result of sales challenges, cash suf­ficiency has become a very serious issue. For the typical EASA member, cash now represents only 6.7% of total as­sets. It is a cash position that does not leave a lot of room for error.

To offset the cash chal­lenge, most firms have looked at reducing the “cash traps” in the busi­ness, particularly inventory. While reducing the investment in inventory is a laudable objective, it is fraught with some danger. It is possible, and maybe even likely, that the drive to lower in­vestment levels will trigger further sales declines, through a higher occurrence of out-of-stock situations. 

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