What levers does a company have for reducing working capital?

8 November 2010

Dan Hawker

Dan Hawker

Former Head of Tobacco, Wholesale & Retail

Working capital relating to inventory holding is a necessary evil in many industries, and consumer products and manufacturing are no exception. In an environment where capital flows are tighter, working capital ties up money that could be used for other purposes, and can be a drain on profitability because of things like damaged stock and obsolescence. Indeed, the costs relating to correct allocation of working capital has many drivers, not all of them obvious:

  • Cost of capital
  • Storage and insurance costs
  • Cost of writing off stock due to obsolescence, damage, etc.
  • Cost of lost sales due to under stocking

Advanced inventory analytics can allow organisations to optimize inventory holding, to ultimately reduce working capital, and improve profitability through reducing the cost of working capital.

However, for most companies the main information sources are from the operational systems, which have detailed reports on stock levels, but gaining a global overview across all product lines can be difficult. Enterprise Data Warehouses such as SAP BW provide an ideal environment to create a single, consistent view of global inventory levels on common, aligned data standards. There are complexities – such as the simple fact of reporting on top of figures that are non-cumulative – but getting it right can provide a key tool in freeing up working capital.

For example, at executive level, dashboards can highlight trends, exceptions, correlations and comparisons against targets and benchmarks. Whereas analytical reporting can allow deep dives into underlying causes, and what-if analyses. And canned reports can be automated and delivered direct to the relevant user on a periodic basis.

And because inventory levels impact cross-functionally, from customer service, through to production planning, and purchasing, having all the data in one place enables functions to collaborate effectively, rather than disagreeing on whose spreadsheet represents the “real truth”.

Companies often see replicating stock overview information within something like SAP BW as a waste of money, but if its positioned as a working capital optimization tool, it seems a bit more attractive.

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