5 Questions To Inform Working Capital Management Strategies

Inventory can reveal deeper challenges. Manufacturers can ask critical questions to reveal what’s tying up cash and improve their working capital management strategies.

Inventory has become an expensive form of comfort for some manufacturers. To protect service levels, absorb supply chain volatility, and avoid missed sales, companies carry higher levels of raw materials, work in process, and finished goods. At the same time, financing costs, logistics costs, labor constraints, and margin pressure have made excess inventory harder to justify.

A hasty reduction in inventory, however, can create new problems almost immediately, including lost sales, late orders, premium freight, overtime, and frustrated customers. The goal is to hold the right inventory in the right places while balancing customer service performance, inventory turns and working capital, and conversion costs such as overtime and expedition. Improving one area at the expense of the others rarely produces sustainable results.

For manufacturers seeking to strengthen their working capital management strategies, leadership teams can ask five questions to identify where inventory and related cash issues might be masking operating problems.

Are we holding inventory strategically or simply reacting to uncertainty?

Inventory should have a defined purpose. In many businesses, however, it grows reactively. Over time, carrying more inventory becomes the default response to several different problems.

That approach can appear diligent, but inventory should be evaluated against the risk and cost of not having it. For some high-volume, high-margin, or constrained items, holding inventory might be the right economic decision. A stockout might mean a lost sale, an expensive production scramble, or customer dissatisfaction. For other items, especially slow-moving or low-margin products, the carrying cost can outweigh the benefit.

Inventory strategy should connect to service goals, margin profiles, supply risk, and production realities. Otherwise, excess inventory ties up cash without improving service.

Deeper questions to explore

• Why is inventory being held for this product, customer, or product family?
• Where does the cost of carrying inventory exceed the likely cost of not having it?
• Which items protect sales, service, margin, or resilience, and which items mainly reflect old assumptions?

Is inventory compensating for gaps in demand planning?

Many manufacturers have a sales forecast. Fewer have a forecast that operations can use with confidence. A top-line expectation that revenue will increase by 10% or 20% might help with budgeting, but production teams need to understand which SKUs, product families, customers, and time periods will drive demand.

When sales forecasts lack specificity, operations teams often compensate with inventory without really improving customer service. A stronger process connects demand planning with the master production schedule, purchasing signals, capacity planning, and inventory targets. The forecast does not need to be perfect. It does need to be specific enough to guide decisions and identify where assumptions need to change.

Deeper questions to explore

• Is the demand forecast granular enough to support production and purchasing decisions?
• Where and how are sales teams expected to provide revenue guidance when operations needs SKU-level or product-family direction?
• Which forecast gaps are being covered by extra inventory rather than better planning?

Are supply and capacity plans aligned with demand?

Demand planning is only half of the equation. Manufacturers also need to understand whether raw materials, suppliers, equipment, factory capacity, and labor can support the demand plan. A strong sales outlook can create working capital strain if the supply side doesn’t translate into realistic production and purchasing requirements.

For example, a forecast might require materials with long lead times, specialized labor that cannot be hired quickly, or machine capacity that is already fully committed. Seasonal demand can create similar pressure.

Asking this question reveals where sales, inventory, and operations planning can help. A disciplined sales, inventory, and operations planning process gives sales and operations a shared view of expected demand, available supply, required inventory, and capacity trade-offs. Without that view, manufacturers can end up holding inventory in one area while still expediting, missing orders, or running overtime in another.

Deeper questions to explore

• Does the planning horizon extend far enough to cover the longest material, capacity, or labor constraint?
• Can the current supply base, factory footprint, machine capacity, and workforce support the demand plan?
• Where are premium freight, overtime, or emergency purchases revealing a mismatch between supply and demand?

Is excess inventory a symptom or the underlying problem?

High inventory levels can point to different issues, and the right response depends on the cause. Fast-moving items with too much inventory could require changes in order quantities, replenishment logic, or production cadence. Slow-moving, obsolete, or customer-specific items might require a disposition strategy. Inventory tied to poor forecast quality, supplier performance, inaccurate records, or outdated system parameters requires a different fix altogether.

Treating all excess inventory the same can create weak results. Some manufacturers aggressively reduce inventory near quarter-end to meet working capital goals. Weeks later, they are spending heavily on overtime, expedited freight, and recovery efforts to support customer demand. The inventory metric improved, but total business performance did not.

Effective inventory management usually requires two tracks at once. One track addresses the existing inventory already on the balance sheet. The other addresses the process conditions that generated excess in the first place.

Deeper questions to explore

• Is excess inventory concentrated in fast-moving items, slow-moving items, obsolete items, or specific product families?
• Are inventory reduction efforts addressing the source of the issue or only the visible balance?
• Which process, system, or set of behavioral factors could cause the same inventory to return?

Are teams managing inventory daily or only when targets are missed?

Aggregate metrics can alert executives to a problem, but they do not give planners enough detail to act. Inventory divided by cost of goods sold can produce a days-on-hand statistic, but that number often hides the SKUs, locations, customers, or product lines that require attention.

Inventory control needs to happen at a practical level and with visibility into:

• SKU-level days on hand
• Excess and obsolete inventory
• Shortages
• Safety stock
• Minimum and maximum settings
• Reorder points
• Planning horizons
• Service performance

Effective inventory control also requires clear ownership. Planners, materials managers, and operations leaders need goals they can influence, tools that show where action is required, and regular measurement that connects inventory outcomes with service levels.

Behavior is just as critical as reporting. In many organizations, planners hear more complaints when an item is unavailable than when too much inventory is purchased. Without balanced accountability, the safer decision is often to overbuy. A healthier model gives teams responsibility for inventory levels and service outcomes together.

Deeper questions to explore

• Are inventory goals visible at the level where purchasing, planning, and production decisions are made?
• Do planners have early warning signals for slow-moving inventory, shortages, inaccurate parameters, or demand changes?
• Are teams held accountable for both service performance and inventory discipline?

Looking beyond inventory to unlock working capital

Working capital pressure often shows up first as a financial concern, but the causes usually reach across the business. Inventory levels, service performance, conversion costs, receivables, payables, and supplier terms all reflect operating decisions made by different teams.

For manufacturers, the real opportunity is to move beyond broad inventory reductions and toward a more precise conversation. The most important questions inquire beyond how much inventory is on hand. They also explore why that inventory exists, whether it supports the right service and margin objectives, how well demand and supply are aligned, and whether teams have the visibility and accountability to manage inventory before cash becomes trapped.

Manufacturers that ask those questions can begin to release working capital without weakening the operating capabilities that customers, suppliers, and stakeholders depend on.