High inventory often looks like a safety net. Yet the exact parts needed for the next customer order may still be missing. Meanwhile, slow movers tie up cash, new variants displace old ones, and planners increase safety stock as a precaution. Management faces two problems at once: working capital is tied up while delivery reliability remains uncertain.

The cause is rarely one incorrect inventory metric. Demand errors, long or variable replenishment lead times, unsuitable lot sizes, outdated ERP parameters and an unmanaged product portfolio often interact. A blanket inventory cut can improve working capital on paper and damage service in practice. The useful question is: Which stock performs an economic function, and which no longer does?

1. ABC alone cannot determine the action

ABC analysis shows where inventory value is concentrated. It does not reveal how often an item is needed, why it remains on hand or what risk a reduction would create. A second view of movement frequency, for example Low, Medium and High turnover (LMH), distinguishes fast movers from seldom used items. Management also needs to consider:

• Customer and service criticality: Would a shortage stop production or can the item be substituted quickly?
• Demand and forecast bias: Is the variation real or is the business systematically overplanning?
• Replenishment: How reliable are supplier lead time, minimum order quantity and delivery performance?
• Life cycle and margin: Is the product profitable, being phased out or relevant to only a few customers?
• Value and age: How much capital is tied up and how much is at risk of losing value?

A high-value slow mover is not automatically obsolete. It may be a deliberate service buffer for a critical customer. Conversely, a fast-moving item may still tie up too much capital when minimum quantities and ordering cycles exceed actual demand. Segmentation frames the questions; the decision combines service, cash, margin and risk.

2. Three types of stock require three different actions

Usable excess can be sold or consumed internally but exceeds a justified target. Slowing replenishment, transferring stock between sites or changing lot sizes may release cash if future demand and consumption are credible.

Aging or obsolete stock calls for a different decision: return, rework, sell-off, spare-parts strategy or write-off. Book value does not promise realizable cash. Discounting may generate liquidity at the cost of margin; a write-off corrects the accounting value without putting cash in the bank.

Necessary buffer protects service against uncertain demand or supply. Cutting it blindly can move cost into expedited purchases, production stoppages and lost orders. First establish the cause of uncertainty and the service target.

This separation prevents a common error in working-capital programs: counting the same item as releasable through forecast improvement, parameter correction and portfolio cleanup. For the business case, count an item once, with one primary lever, a decision owner and a measurable target stock.

3. DIO is a guide, not a cash forecast

Consider a simplified example with entirely fictitious figures. Annual cost of goods sold is €60 million and average inventory is €12 million. On a 365-day basis, days inventory outstanding (DIO = average inventory ÷ annual cost of goods sold × 365) is approximately 73 days.

At the same cost base, an eight-day reduction would mathematically represent about €1.32 million of inventory value (€60 million ÷ 365 × 8). This is an order of magnitude to investigate, not a guaranteed cash inflow. Which items are actually reduced? Are repeat purchases avoided? What proceeds are achieved in a sell-off? What happens to service, margin and lead time? A single balance-sheet date and annual costs are not a substitute for a reliable time series.

1. Gross potential: The difference between current and justified target inventory at cost value.
2. Addressable potential: The portion reducible under actual demand, contract, service and supply constraints.
3. Realized cash effect: A verified reduction in funds tied up, traced through inventory and payment movements. Show costs and margin effects separately.

4. A 30/60/90-day path that protects service

First 30 days: Clean inventory data by item, site, age and value. Connect them to consumption, forecast, supplier lead time, minimum order quantity, service target and margin. Review the conspicuous combinations with their owners: high value with little movement, phase-out items with open purchase orders and safety stock without a current rationale. The output is a credible baseline, not a premature savings number.

By day 60: Decide on prioritized segments. Stop or slow replenishment, adjust parameters, negotiate supplier terms, transfer stock or phase out variants. Give each action a target stock, owner, due date and service guardrail. Test a limited pilot first for critical items.

By day 90: Verify whether value and coverage have actually declined. Watch shortages, OTIF, expedited costs, forecast bias and write-off risk at the same time. A working-capital improvement is sustainable only if it withstands these counterchecks.

The management question behind inventory

High stock can be a symptom of a deeper failure: S&OP decisions arrive too late, recurring forecast deviations lead to no action, or the product portfolio expands without phase-out rules. A new replenishment formula alone will not resolve these issues. The organization must decide who resolves conflicts between service, cash and margin, and when.

The free Inventory & Working Capital Health Check structures the initial diagnosis with 36 questions across seven dimensions. The first result is free; an in-depth Executive Report is optional once its purchase path is enabled. You can also view a sample report with fictional data.

Do not start with a blanket reduction target. Start by establishing which inventory protects customer value today and which merely reflects unresolved decisions. For a related production perspective, read where high utilization fails to translate into on-time deliveries.