What sits in the warehouse is missing from your cash

Why reducing inventory is not a task for the warehouse, but a decision for management.

During the pandemic, one simple rule applied: buy whatever is available. Delivery capability was everything, and inventory meant security.

That rule has left its mark. Many warehouses today hold goods that were urgently needed back then, while other items are missing. Too much of the wrong thing, too little of the right one. Planning still carries the burden too: sales data from that period shows availability, not demand. Anyone who feeds it into their forecasts unchecked is planning on a distorted basis.

Over many years of planning inventory, valuing it and defending it in front of the board, one insight has stayed with me: inventory is the most visible result of how a company is managed.

Excess stock is the quietest cost driver on the balance sheet. It causes no complaints and no calls from management. It simply ties up money, every single day. A worked example with assumed figures: with an average inventory of 20 million euros and a cost of capital of 6 percent, financing alone costs 1.2 million euros a year. Ten percent less inventory frees up 2 million euros in liquidity. Warehouse space, handling and write-downs on slow sellers come on top.

The biggest lever does not require a new system. It requires clarity: who decides, who is accountable, how is it measured, and who sees it in time?

Inventory does not originate in the warehouse. It originates in meetings where nobody talks about it.

Valuation as an honest mirror

Inventory valuation is often seen as a mandatory exercise for the annual accounts. For me, it is the most honest instrument of inventory control, because it answers an uncomfortable question: what is this inventory actually worth today?

Goods that have not moved for months are surprisingly often still on the books at full value. That protects this year's result and burdens next year's. Clear write-down rules based on coverage and age, applied regularly, make the problem visible early, while there is still room to act.

The second step is decisive. Every write-down must trigger a decision: sell off, relocate, return or scrap. Anyone who postpones it pays again every year.

One detail gets lost in almost every inventory discussion: when the inventory value falls, the first question must be why. Is there less stock in the warehouse, or was the same stock simply valued lower? Anyone who does not separate the quantity effect from the valuation effect may end up celebrating a write-down as a success.

Reporting-date values are just as deceptive. Inventory looks excellent on the reporting date. A week later, everything is back to where it was. Nobody is acting in bad faith. The organisation does exactly what it is measured and rewarded for. Set targets on reporting-date values and you get reporting-date values. Anyone who wants real change measures average inventory over the period and takes a close look at the first and last days of each month.

The most dangerous figure in the inventory report is the one everyone nods at contentedly.

Seasonality as an excuse

Seasonal fluctuations are real. They become dangerous when they are used to explain everything. The pattern is almost always the same: stock is built up before the season, a remainder is left afterwards, and that remainder moves into the next season. After three years, the warehouse holds stock that no longer has anything to do with any season.

The cause often lies in the budget. The budget defines how much a company wants to sell in a year. When it sells it is determined by the seasonal curve, and that is exactly where the link gets lost in many companies. The annual budget is often spread evenly over twelve months or split according to the previous year's pattern, including its promotions, bottlenecks and one-off deals. The S&OP process adopts these monthly figures. Purchasing and production build up stock months before the market needs it, or keep building when the season has long since turned.

There is a second, often overlooked point. The budget is a target, not a forecast. If it is above realistic sales, the difference does not end up in the report, but in the warehouse.

The right way to derive the seasonal curve is from cleansed historical data, without promotions, bottlenecks and one-off effects. Sales validates it, and only then is it applied to the budget volume. During the year the budget remains the anchor, but the curve is checked against actual developments on a rolling basis in S&OP. And the run-down is planned just as carefully as the build-up: from when is nothing reordered, and what happens to the remainder? That keeps financial planning, liquidity forecast and flow of goods on the same curve.

Whatever is still in the warehouse after the season was not bought for the season, but for hope.

S&OP as a binding framework

Sales and operations planning is often introduced as a monthly meeting and then stays exactly that. S&OP only becomes effective as a clearly defined framework: a fixed, recurring cycle, the right stakeholders at the table and a binding decision at the end.

The right stakeholders are sales, supply chain, production, purchasing and finance, each with decision-making authority. Anyone who is only allowed to collect information lengthens the process without improving it.

In my experience, three things decide between success and idling:

• Clear accountability. There is exactly one name for every figure. Sales is responsible for sales planning, supply chain for inventory, finance for the liquidity effect. In practice, shared responsibility means that nobody feels responsible.
• Targets from the top. Company targets are set top down and communicated in a way that nobody can interpret them differently. This explicitly includes the question of who stands behind which target. Every ambiguity at this point ends up in the warehouse sooner or later.
• Communication as part of the process. Decisions from S&OP do not reach the organisation by themselves. Explaining, justifying and following them up saves you the shadow planning in Excel that undermines every shared figure.

In my view, three topics belong firmly on the agenda, and all three are surprisingly often missing.

The direction of the forecast error. Most companies measure how accurate their forecast is. Hardly any measure in which direction it misses. A sales team that systematically plans slightly too high to make sure enough stock is available creates inventory by design. As soon as this bias is visibly on the table, planning behaviour changes noticeably.

Price increases and range changes. An announced price increase triggers pull-forward effects: customers order more beforehand, and demand drops afterwards. Anyone who does not plan for this dip reads the pull-forward effect as growth and produces into the decline. It is similar with range changes: the new model arrives earlier or later than planned, the old one is still running, and in the end there is stock left over that belongs to nobody. Both can only be solved holistically. Sales, marketing, product management, supply chain and finance need a joint plan with quantities, dates and clear owners, backed by the whole team.

The finance forecast in the same cycle. The financial forecast belongs in the S&OP process, automated. If volume planning and the financial forecast come from the same data basis, management sees the effect of every plan change immediately in revenue, earnings and liquidity, and nobody calculates two truths in parallel.

Inventory is the only key figure where sales, purchasing, production and finance meet honestly.

Master data: the underestimated foundation

Every inventory decision is based on master data: replenishment lead times, safety stocks, lot sizes, minimum order quantities, supplier and plant assignments, product status. The system calculates with these values every day, whether they are right or not. An S&OP process can only plan as well as the data it stands on.

In practice, many of these values were set years ago and have not been touched since. Officially nobody is responsible, but many are allowed to write. An item that has long been phased out is still set to active and is reordered. A replenishment lead time from the crisis remains unchanged in the system and drives up safety stock. Each individual error is small. Together they create excess stock and shortages at the same time.

Master data management therefore means above all: a clear owner for every important data field, binding rules for creation and changes, a fixed review cycle and data quality indicators that are as visible in reporting as revenue and inventory. It is unspectacular work. It improves inventory quality without investing a single euro in new software.

Risk management: prepared before it is needed

Recent years have shown how quickly supply chains can break. Many companies responded with higher safety stocks. That was understandable. But these buffers were rarely reduced again once the situation had calmed down.

Effective risk management replaces blanket buffers with clear rules, and it depends on timing. A risk plan that is only activated when everyone can see the problem comes too late.

This also includes the question of how production responds to capacity problems, in both directions. In case of overload: which orders take priority, when is capacity bought in, relocated or a shift added? In case of underload: does production continue to stock to keep utilisation up, or is capacity adjusted? The second question is rarely asked openly. Producing to stock protects production's key figures in the short term and shifts the problem to the warehouse. Both scenarios need to be defined in advance, with thresholds and decision-makers.

And risk management does not end with prevention. If too much inventory has built up after all, a reduction plan is needed with concrete measures, dates and one person to whom this task is explicitly handed over. Without a clear handover, the reduction remains an intention.

When supply is short: who gets the goods?

And then there is the other side from the beginning: the shortage. Supply bottlenecks show how well a company really steers. The availability check, usually called ATP (Available to Promise) in the SAP world, decides which order gets the scarce goods. In many companies the rule is simply: first come, first served.

That sounds fair, but is rarely in the company's interest, because the time of ordering then decides the allocation, not the strategy. Orders are placed in advance, and the company's own system aggravates the shortage. This becomes particularly clear in companies with several sales companies. Each country secures its own delivery capability with its own buffers and reservations. From the national company's point of view that is sensible. In total, however, far more stock is held than the group would need for the same delivery capability, and in a shortage the countries block each other.

The real success factor often lies hidden. By which logic are orders confirmed: against available stock, against planned receipts or against allocations? How are confirmed dates rescheduled when receipts are delayed? And which background jobs run in the system at night to redistribute confirmations? Hardly anyone notices these jobs in day-to-day business. If they are set up incorrectly or do not run at all, dates are promised that cannot be kept, or goods remain reserved that have long been needed elsewhere. Set up correctly, they make exactly the difference between a commitment the customer can rely on and one they have to chase.

ATP therefore only becomes effective with clear rules. Which customers, channels or markets have priority? How are allocations distributed when the quantity is not enough? Who decides in case of conflict, across all countries? These rules need to be set before the shortage, not in the middle of it. And they need to be communicated, because nothing costs more trust than a customer who learns about their allocation in a roundabout way.

Safety stock is often just another word for a lack of trust in one's own planning.

Availability has a price

One hundred percent delivery capability sounds like customer focus. In practice, it is often the most expensive promise a company can make, because the last percentage points of availability cost a disproportionate amount of inventory.

Availability indicators therefore deserve more care than they usually get. What availability does each range really need? Where does the customer pay for immediate delivery, and where do they merely expect it because we have always offered it? And how is the indicator embedded in corporate management so that it does not work against liquidity and earnings targets?

The definition alone determines the result. Is it measured per line or per order? Against the customer's requested date or against the confirmed date? One and the same delivery performance can be 98 percent or 85 percent depending on the definition. Before a company discusses target values, it should agree on what it is actually measuring.

One lever is regularly underestimated: incentives. As long as sales is rewarded for revenue, purchasing for prices and logistics for costs, everyone optimises their own area, and inventory absorbs the contradictions.

Internal audit as a partner

Internal audit is often only considered in the process landscape once findings are on the table. These findings are similar: inventory differences are written off without clarifying the cause. Write-downs are made manually without a traceable rule. Approvals run through people who are not accountable for the consequences. Each of these findings shows where inventory is created.

If internal audit is involved from the start, it safeguards valuation rules, approvals and data quality. The process then holds up even when the people who built it move on.

Sustainability: inventory gets a second life

Finally, a look ahead. Returns, display items, goods with minor defects and discontinued models are still too often written off, sold off cheaply or disposed of. Yet this is exactly where a lever lies that many companies underestimate.

The most sustainable inventory is the one that never arises. The second most sustainable is the one that gets a second life.

Refurbishment processes professionally prepare returns and display goods. Dedicated B-stock sales and re-commerce channels turn supposed ballast back into revenue. Anyone who designs their products according to the cradle-to-cradle principle plans the return of materials and components from the outset. The one-way street of the warehouse becomes a cycle.

I have experienced first-hand what this achieves: a fully automated second-life process connected to SAP and integrated into S&OP turns returns into plannable revenue instead of write-downs.

This is not only good for the planet, but also for sustainable business success: fewer write-downs, lower disposal costs, new customer groups and arguments that carry increasing weight in ESG reporting and with customers.

As with all the other levers: it takes a holistic solution that the whole team stands behind. Anyone who looks at returns, valuation, sales channels and logistics separately gives away the cycle before it begins.

Four adjustments that work immediately

Five questions for your next inventory review

Inventory under control, results in view.

Lean inventory arises where a company decides clearly, communicates clearly and measures together. Where the greatest potential lies differs from company to company.

If you hesitated at any of the five questions, talk to us. And just as much if you cannot name anyone when asked who is responsible for your inventory as a whole. After a first conversation, both sides usually know very precisely where it is worth taking a closer look.

Frequently asked questions