Inventory: A Strategic Opportunity for Manufacturers and Distributors

As Seen in Chicago Business Journal

Manufacturing and distribution companies are under constant pressure to do more with less, and inventory management is one of the clearest places where working capital can be easily won or lost. When stock levels are not aligned to actual demand, businesses can tie up cash in products that will not move for months, while also risking stockouts that disrupt customer service and sales.

According to our recent survey of over 500 manufacturing and distribution industry leaders, only two out of five report improvements in inventory turnover this year. Longer inventory turns have stretched the cash conversion cycle, and businesses are funding larger stockpiles of inventory through lines of credit rather than by accelerating vendor payments. A reluctance to push suppliers for matching terms, especially when serving large retailers that demand extended payment windows, can drive up interest costs and create added operational drag across accounts receivable and accounts payable workflows.

Navigating Inventory Challenges

One of the biggest mistakes companies make is relying on demand schedules that are inaccurate, incomplete, or outdated, leading to buying excess or slow-moving inventory and pulling working capital away from other priorities such as new business development or product innovation. It can also lead to buying too little, which creates service issues and forces teams to react instead of proactively plan. In both cases, the root issue is usually a lack of visibility into what should be purchased, when it should be purchased, and in what quantity.

Another common challenge is inventory mix. Even companies with strong sales may struggle if the wrong products are sitting in the warehouse. Stale inventory often builds slowly over time, especially when businesses do not clearly define what it identifies as stale, excess, or obsolete. Excess and obsolete inventory can remain on the books for years, quietly consuming critical warehouse space delaying the conversion to cash. In some cases, companies even have to lease additional space to store inventory they should have addressed much earlier, creating another drag on capital.

Managing Inventory Pressures

There are several practical steps business owners can take to improve inventory performance and preserve working capital including:

1. Prioritizing Cycle Count Procedures: Before a company can optimize inventory, it needs confidence in what is on hand. A disciplined cycle count program improves inventory accuracy and gives leadership a better foundation for planning as the business grows. At a minimum, companies should conduct full physical observations annually or, preferably, implement cycle count procedures that result in observation of inventories multiple times per year.
2. Establishing Internal Policies for Reviewing Excess and Obsolete Inventory: Create a clear process for identifying excess and/or obsolete stock and decide how to move it, whether through discounting, scrapping, or other disposal strategies. The goal is to free up both cash and warehouse space so those resources can be used more productively.
3. Reviewing Purchasing Policies Regularly: This includes evaluating supplier lead times, demand patterns, and approval processes. Companies that have outgrown manual processes or outdated systems may also need stronger ERP capabilities to support better visibility and decision making around inventory levels.

For companies preparing for a transaction, inventory management becomes even more important. Buyers and lenders will look closely at inventory levels, including reserves for excess and obsolete stock during due diligence. Preparing an inventory reserve policy in advance can help avoid surprises later and reduce the risk of getting penalized for stale inventory. That front-end work can also give management a clearer view of the true value of the business before entering a deal process.

Technology can play a major role in solving these problems, and digital investment has proven to be a priority for optimizing inventory and driving sustained growth. According to our survey, 42% of respondents note that the implementation or upgrade of their ERP system had the greatest measurable impact on their business in the past three years. Companies that have exceeded the limits of their current ERP system may benefit from a platform that provides better tracking, forecasting, and inventory optimization. Specialized advisory support can help companies build demand forecasts, analyze turnover trends, and improve purchasing decisions using data analytics and AI-enabled tools. These capabilities are especially valuable for businesses trying to balance growth with tighter working capital management.

Ultimately, inventory should be treated as a strategic asset, not just an operating necessity. Companies that know what they have, define what is stale, and align purchasing with demand are better positioned to support growth. In an environment where margins and working capital are constantly under pressure, inventory discipline is pivotal to creating meaningful growth.

Access our 2026 Manufacturing and Distribution Pulse Survey Report to explore more insights and the solutions that can help create and protect future value.