The issue was a pretty simple one as to why pressure was mounting :
- Inventory levels had been managed down slowly, but not swiftly enough to mirror the deteriorating economic climate. The decision was a simple one - to stop ordering from a key supplier for a few weeks and to run inventory down.
- A new competitor had opened in the vicinity of the main establishment in the immediate past. This had had the effect of distorting the typical inventory days for a number of product skews. The opening of this competitor was no shock, and should have been planned for.
- With a tightening economy the number of days inventory was held in various products (skews) had increased. A conscious effort was made to rebalance the inventory landscape by liquidating this slow moving stock as cost + 5% to allow capital to be freed and higher turnover inventory to be brought in.
The result was that the initially horrendous picture was not bad at all. It could have been avoided with a little forward planning.
So in a volatile economy manage inventory levels tightly. It is better to forego a little bit of margin and order more frequently than just let inventory build up - as the financing cost on the holding of slow inventory will equate to the discount given to clear out.
