What happens when the company's Financial Board defines that it will reduce the need for working capital, and that for that it will be necessary to reduce inventories, without consulting the planning and operations team?
Decisions like this happen all the time, as shown in Figure 1, especially in periods when the cost of capital is higher. Often, regardless of this decision, the company does not assess the risk of losing sales in the short term, or potentially unbalancing the relationship between the cost of shortages and the cost of excess.
ILOS recently carried out a survey of large industries and heard many testimonials such as: “We have reduced inventory by half. The board took this decision because it was compromising working capital”.
Figure 1 - % of survey responses conducted by ILOS with large industries in Brazil
Source: Panorama ILOS – Supply Chain Finance 2015
In times of financial crisis and high inflation, resulting in higher interest rates and lower sales, as we are currently experiencing in Brazil, the need to reduce inventory levels increases. The challenge is how to do this without affecting product availability, which is only possible with the involvement of all areas.
The good news is that most companies have great opportunities to reduce inventories, without increasing stockouts, just by improving their sales forecasting processes, reforming their relationships with suppliers and reviewing the parameterization of the cost of shortages and cost of excess in this new scenario.
References
Panorama ILOS: Supply Chain Finance – How the Supply Chain can contribute to the financial planning of companies – 2015, available at:
<https://ilos.com.br/web/analise-de-mercado/relatorios-de-pesquisa/supply-chain-finance/>
Maria Fernanda Hijjar
https://ilos.com.brManaging Partner of ILOS, she holds a master's degree and a bachelor's degree in Production Engineering from the Federal University of Rio de Janeiro (UFRJ). With over 10 years of experience in Logistics and Supply Chain, she has worked on various projects, managing and participating in research related to the topic. She has published more than 20 articles in newspapers, magazines, periodicals and conference proceedings, and is co-author of several titles in the COPPEAD Collection published by Atlas and in the ILOS and CEL/COPPEAD Logistics Panorama Collection.
