Turning Inventory into Profits

Via McKinsey.    Depending on the industry, demand for parts and costs involved.

Turn Slow-Moving Inventory into Fast Profits

For industrial-services organizations, slow-moving inventory can be a drag on financial performance. Why not transform it into a profit booster?

By Paolo Baldesi, Florent Kervazo, and Hugues Lavandier via McKinsey

For many industrial companies, aftermarket services are where the money is made. To perform well, they require access to the right spare parts at the right time to meet customers’ service expectations. The result? Service organizations inevitably invest a lot of capital in inventory. But if they aren’t careful, ballooning inventory can put significant strain on cash resources and drive down return on invested capital (ROIC).

In our experience of working with the aftermarket arms of industrial OEMs, a large part of the challenge comes from the 10 to 40 percent of inventory made up of slow-moving items. These are parts that are rarely sold, but which the organization must hold in stock to meet contractual obligations or capture commercial opportunities when they arise.

Slow-moving inventory is a particularly pernicious challenge for industrial players. Complex, highly-customized products with long operating lives mean that SKUs tend to proliferate over time, as companies attempt to stock components for every version of every item of equipment they produce. And because customers operate equipment in different ways, demand for slow moving parts can be highly volatile, encouraging companies to take a “better safe than sorry” approach when it comes to setting inventory targets. .... "