Inventory management is probably the most important overlooked area of working capital management, but is also the hardest to fix, as it involves financial and non-financial people working very closely together. Although inventory management is not normally the direct responsibility of corporate treasurer, it has a major impact on the overall working capital required in a company. The number of Days Inventory is Outstanding (DIO) has a major impact of the overall working capital carried by the company.
Managing inventory involves optimising the total ordering costs, balancing: increasing the size of the order which reduces the purchase price but which increases the cost of carrying the goods in stock whilst ensuring that there are no 'stock-outs' which can be very costly in terms of lost reputation and lost sales. Since 2008 many companies have started to carry higher levels of inventory to be sure that there are no stock-outs. To fine tune this balance many companies are using advanced systems to manage the key variables that affect their inventory by optimising where stock is held, improving forecasting accuracy, fine tuning their economic order quantities, and improving inventory visibility.
Stock management systems need to be efficient in logging goods received into inventory. If they are not it causes problems in the accounts payable department who cannot reconcile the invoice with 'goods received' causing unnecessary supplier disputes and also ensuring that any early payment discounts are missed.
In some businesses it has been possible cut DIO by adopting vendor managed inventory (VMI). This changes the supply chain from a push to a pull system where the buyer effectively manages the vendor's inventory levels. The VMI systems typically increase supply chain visibility, improve service levels, reducing inventory, and reduce working capital investment. They often also improve supplier relationships.
Developing effective inventory management strategies and programmes is a key skill.
Specialized inventory or stock financing programmes to minimize the cost of stocking sufficient inventory are available from banks and specialist financial institutions. These programmes enable manufacturers or dealers to purchase needed inventory and only pay as the product is sold.