Inventory is a critical asset and a dangerous liability; Pointers for the COO to navigate inventory related decisions & actions for the unpredictable times (circa H1, 2025)
This AI generated podcast (using NotebookLM) is based on the text from the Zyom Blog, “Note for the COO: Inventory – the double-edged sword.” It highlights the criticality of effective inventory improvement initiatives, especially amidst market uncertainty. It emphasizes that while adequate inventory can be beneficial, excessive inventory quickly becomes a financial burden, particularly in channel-centric sales models where it can obscure underlying issues.
The author, Rakesh Sharma, stresses that inventory reduction is a strategic initiative, not merely a tactical task, leading to a structural capital advantage that frees up capital for growth. The article describes the “dual mandate” faced by COOs: balancing the need for sufficient stock to meet demand with the imperative to keep inventory levels low to minimize tied-up capital. Ultimately, it advocates optimizing connected operations management processes and increasing velocity of specific end-to-end Planning and Execution processes, to achieve significant capital efficiencies and a sustainable operating advantage.
The author advises caution in following sections of the podcast, since “process velocity” related points can be misunderstood in the AI-generated podcast.
from 6:00 to 6:43 from 7:32 to 7:40 from 8:08 to 8:18
Overall, the Author gives this AI-generated podcast high marks for capturing the key points, and worth a listen.
Please reach out directly through the Contact form provided at the bottom of the April 2, 2025 Zyom Blog in case of questions
The Balancing Act – Buffer to serve customer, vs trapped Capital (generated via GenAI)
Disclaimer: Google’s NotebookLM was used for creating this podcast, which is based on this Zyom blog
Effective inventory management is vital for companies operating across regions, especially during demand uncertainty. While healthy inventory levels provide an advantage, rising inventory levels can become a financial burden quickly. Channel inventory, in particular, can be misleading, masking underlying inefficiencies and costs. This article explores how COOs can increase a company’s focus and optimize inventory across the value network, enhancing efficiency and reducing risks that could undermine even well-run companies. UPDATE – don’t forget the Action section at the end.
In the Finance function “inventory,” as a default, is reported as a “Current Asset.” Ask those in Supply Operations. They’ll tell you that nothing could be farther from the truth. This is especially true in times when demand uncertainty[1] grows.
Managing inventory in companies that manufacture and ship products is a demanding exercise. It requires careful consideration of all the variables that impact demand and supply at various nodes of the value network (not just the supply network). Decisions have to be calibrated using data and inputs across functions – decisions, often based on approximations and imperfect information. And it must be done on an ongoing basis, otherwise important data or signals can slip through the cracks.
It becomes even more complex in cases where companies sell through channel partners (distributors, VARs[2], etc.).
Channel inventory, specifically Distributor inventory, is deceptive. Although, it is no longer on your company’s books, you are not off the hook for it either. Among many things, it depends on the skills of the channel partner in managing inventory and reordering, your contractual relationships, and other factors – such as inventory and ordering patterns across your value network.
If demand changes significantly, then orders for your products can swing up or down. Inventory sitting at your channel partners can also be returned in some cases (“stock rotation” for instance). This can lead to unforeseen reduction in your Revenue. Costs will also increase as you restock your channels with newer products and take receipt of older stock. In times of heightened and persistent demand uncertainty, it does not take too long before inventory is no longer an asset, but more a noose around a company’s neck.
In times of heightened and persistent demand uncertainty, it does not take too long before inventory is no longer an asset, but more a noose around a company’s neck
[1] measured by the rate of change of demand variability and demand volatility; *H1, 2025 has been a period of heightened uncertainty driven by the many sizeable tariffs directed by the US against global trading partners, “reciprocal tariffs” being the latest shell to drop in a scarred global trade-war landscape ; the impact of this on demand uncertainty (variability), already evident in many industry segments (based on direct and secondary data) is yet unfolding.
The dual-mandate of inventory, structural implications
This results in the “dual mandate” faced by the COO and team, balancing two important but opposing needs –
– Carry enough inventory, including buffers, so you fulfill customer orders as needed, as they arrive
And
– Keep Inventory levels low so you do not have too much capital (money) tied up in stock, to run your operations
Compare two companies (illustrative example) –
For example, Company “A” that is carrying $500 Million in average inventory to fulfill $1 Billion of Revenue in a quarter,
versus
Company “B” that’s carrying $300 Million in inventory to fulfill the same level of Revenue – i.e., $1 Billion in a quarter
Company B has a significant structural advantage over company A.
So, inventory reduction is not an arcane, tactical task only to be initiated due to a near-term blip. Go ask your Supply Operations leader[1] to drive down inventory by x% (40%, as in the example above). And everything will be fine.
It is a critical initiative to drive down the capital requirements that gives your company a structural capital advantage. This requires careful attention to details while keeping an eagle-eye on the goal.
If you get this right, you can go much faster up the revenue and growth curve, having more freed up capital via healthy margins to allocate to smart growth (Revenue generating) initiatives.
Get it wrong, and you will not even know something is amiss for a long time. Then things can turn ugly quickly.
Get it (Inventory initiative) wrong, and you will not even know something is amiss for a long time, and then things can turn ugly quickly.
But inventory reduction, especially in channel centered selling models, is even more complex and difficult, as our experience and research shows. This is true whether you manufacture in-house or utilize outsourced manufacturing.
Status quo is often the biggest enemy.
David Cote (ex- CEO of Honeywell) articulates this well with a short story of his experiences as CFO at GE’s major appliance business, in his book – Winning Now, Winning Later (see “References” section at the end).
David’s story provides broad brush strokes on the key leadership mandate and insights gained. As a part of Zyom, we have worked closely with our customers’ cross-functional Operations team and their leadership in the trenches. We have been focused on achieving similar results in operations process optimization for our customers’ operations at physical product companies.
A key part of our customers’ successes has been our ability to collectively dive into the demanding details.
And, in almost all cases, we have come away with surprising findings as we have rolled out our end-to-end planning and execution framework and Operations Management Support (OMS) software system across product companies. Companies that were at different phases of their growth and development cycle.
We do not have inventory reduction numbers that we can share here. What is clear is that by slashing the end-to-end planning cycles by over 80%[2], we helped them achieve significant capital efficiencies – something they had not experienced before. How?
Very briefly – by achieving increased process velocity, across a focused set of end-to-end processes.
by slashing the end-to-end planning cycles by over 80%, we helped our customers achieve significant capital efficiencies – something … not experienced before. How? .. by achieving increased process velocity, across a focused set of end-to-end processes
The sustained[3]structural cost advantages that customers gained has freed up scarce capital which can now be allocated to other critical initiatives. This gives them an unprecedented operating advantage.
[1] working with Channel Sales depending on where inventory is high
[2] Based on analysis conducted and vetted by our customers
[3] Cost advantages achieved are structural (lower inventory levels to ship out the same revenue), hence recurring
Inventory levels rising ? Watch out!
Inventory (specifically, Channel inventory) is a double-edged sword. On the one hand, maintaining near-optimal channel inventory levels provides a competitive edge by ensuring fast and cost-effective order fulfillment. On the other hand, if inventory levels creep up too high, it can quickly become a noose around your neck – a heavy financial burden.
Left unchecked, rising inventory can impair your company’s financial performance in the near to middle term. This due to carrying much higher inventory levels for the amount of revenue shipped.
In case revenue growth shifts or slows down, you will be left holding the bag on ship-loads of inventory (much of which must be written down or written off).
Longer term, this will push your company into a corner, impairing your competitive standing.
As a Chief Operations Officer, you must ensure your inventory optimization initiative always bubble up to the very top. Make this a strategic initiative. Ensure ongoing support from the senior leadership. Mobilize all team members. Ensure it’s not just a tactical one-off.
See the ‘Actions’ block below. Drop us a line. We can share a picture and real-life stories around that. This can help your cross-functional team visualize how our customers and other senior operations leaders have successfully tackled this challenge, steering clear of those insidious inventory icebergs.
Actions for the COO:
How is inventory connected with process cycle time?
How will increasing process velocity help us lower the overall levels of inventory (finished goods, raw-materials and semi-finished stock, work-in-process)?
How should we go about increasing process velocity (which end-to-end processes)?
Have we received any “outsider in” perspectives on how you are making decisions in your value network (not just your supply network) and its impact on inventory? how is it leading sub-optimal inventory?
To learn more contact us here, or below. Stay tuned. As always your comments are a gift to all.
1) (Book) Winning Now, Winning Later: How Companies Can Succeed in the Short Term While Investing for the Long Term Author – David M. Cote
Disclaimer: Generative AI (GenAI) was used in a limited way for improving clarity of sentences only for this article. GenAI was not used for composing any of the writeups on this site (including this one), nor for any data gathering. GenAI was used to generate both the pictures in this article. At this point of time, there is no plan to use Generative AI to generate new content on this site. Readers will be informed in advance if this changes.
As 2025 begins, COOs in the physical goods industries with a global footprint, must focus on two areas – inventory and inflation, amidst global trade and other uncertainties (tariffs etc.). The shifting geopolitical landscape may severely disrupt inventory controls across extended value network (both supply & downstream channel/customer side), and inflate costs. Leaders should closely monitor inventory trends and adapt to inflationary pressures to mitigate potential impacts on margins and operational efficiency.
A note for COOs and team on Inventory & Inflation
(updated Feb 10th, 2025 with tariff changes & rollout updates; previous update Feb 2nd, 2025 with post-tariff imposition data & ADDENDUM at bottom; previous update: Jan 31st, 2025 5:10 pm US PST)
To start off the year 2025, we decided to read the tea leaves a different way – we went looking for clues on what will it look like this year that we should plan and prepare for? what needs to be brought into sharper focus – priorities revisited, big perils identified, collaborations renewed?
This note, for those that are in the physical goods industries – is about what should be top-most priority over the next 30 to 90 days that COO & team should focus and act on. And the focus should not diminish as the year wears on, and beyond.
The Gathering Dust Clouds
The year 2025 – is off to a strange start – a new administration in Washington that, on the surface, appears inclined towards policies which at a meta level, will fragment the world further – at least from a global supply network standpoint. This could potentially realign previously implicit “friendly nation” status, and most likely impact the free flow of goods adversely, increasing procurement costs in the US and inevitably beyond. This, given the tariffs directed at goods from Mexico and Canada among other countries, high on the incoming administration’s wish list (now a reality as of Feb 1st, 2025)
“Wall” of Tariffs, a bigger wall of uncertainty
A wall of worry has unsurprisingly descended on the most senior leaders of product companies with a global footprint, especially COOs and their cross-functional teams managing world-wide operations of US based companies that procure parts and finished manufactured goods from the countries targeted.
While speculations that new US administration’s tariff “statements” were a pre-emptive move to gain a strategic negotiation advantage have been negated by President Trump’s announcement yesterday (Feb 1, 2025), there is nervous optimism that the worst may still not come to pass (i.e., maybe a near-term, a quarter or two out type setback), or so some industry groups hope. [Update – Feb 10, 2025: Tariff implementation continue to be dynamic –
Understandably, anxiety levels are now running high – especially among senior Operations executives who source goods (semi-finished, or finished products) from Mexico and Canada, given the direct, damaging pressure it will put on COGS[1] of even well-run, US based product companies.
That the air in global trade circles is thick with anxiety over the impact of the disruptive changes, is a given. What is less understood is the impact of the inflationary headwinds, the inevitable tit-for-tat type tariff wars and low-trust trade environment will have on midsize companies, and even larger ones that do not have large cash buffers to tide them through.
The picture that emerges – of the damage this does to the balance sheet of (previously) “friendly” nations, many of who are already saddled with debt, does not look pretty. For potential impact numbers see “ADDENUM” below.
This is happening at a time when many industry supply chains could be carrying high levels of potentially excessive “inventory” with a foggy, near-term demand picture. All in all, January-February of 2025 (potentially H1, 2025) is a fraught time, uncertainties abound, especially about global trade and supply networks.
What’s an operations leader to do in such a time? Focus. Focus on these two items not just for now but all year long and beyond.
Focus-1: Inventory
Keep a “Hawk eye” on inventory. Inventory, no matter where it is in your value network – at suppliers, in your DC/WH[1], or at your channel partners, or some mix of these.
Inventory of parts/ raw-materials, semifinished and finished goods.
Pay particularly close attention to components/parts that suppliers may be holding for you, or may have been ordered from component suppliers – Tier 2 or Tier 1, based on the extent of outsourced manufacturing you have deployed.
Keep a sharp focus on how inventories are trending at your channel partners (distributors, VAD[2]s etc.) in the case of channel centric sales model, and/or your largest direct customers, and prepare to take informed actions swiftly to right size channel inventory levels ASAP, when needed.
Keep a sharp focus on how inventories are trending at your channel partners.. your largest direct customers .. prepare to take informed actions swiftly to right size channel inventory levels ASAP
In fact, look at every nook and cranny where high value inventory may be collecting and gathering dust.
Then step back, make informed decisions based on upcoming demand, which in this environment could be much harder to pin down.
Excess inventory can severely disrupt product and technology transitions too – for example, holding back product companies from transitioning products to new hardware/software platform, to key parts, or to an entirely new industry standard. Often, such a transition comes with advantages for the product maker (lower unit costs, better performance, etc.) and their customers (lower price points for similar or better capabilities). With excessive inventory, a product company gets stuck on older versions of their products – unable to obtain the advantages of achieving a lower price point for similar or better output performance for a much longer time, or ever.
A quick point – That end of quarter demand “hockey – stick” needs to be looked at with a new lens too. Today’s hot order, which will put us well over the top end of our quarter target(s), could be a noose around our necks in a quarter or two, or soon thereafter. Change sales incentives if need be. Unusual times call for businesses to not operate “as usual”.
Mind the “inflation gap” – the gap between “newly normalized inflation rates” (macro, estimate of inflation based on ‘aggregated’ data), and what is actually happening (actual inflation rates faced by manufacturers/suppliers in the supply chain).
Yes, Chair Powell and Federal Reserve team have done a heck of a job when it comes to taming the inflation beast, but with uncertain times ahead – unpleasant realities (unanticipated sudden spike*, stubborn or higher inflation, etc.) can come to pass rather quickly.
* In light of the announced Trump Tariffs a sudden spike in inflation is all but guaranteed on some key goods imported from nearshore manufacturing partners Mexico and Canada – food, fuel, autos and electronics to name a few.
As the US and other prime-mover, free market economies, enter an uncertain phase of the business cycle (have we landed yet ? hard or soft landing, or some mix of those?), and the predictable purchasing price inflation caused by tariffs imposed on inbound goods into the US, the job of Supply operations team – planners, procurement and manufacturing – has to be redefined and skills upgraded quickly.
Monitoring impact of inflation on piece parts’ and other key input prices (labor, etc.) will not be a one off that many experienced during the pandemic, but will become a regular feature of their role. And the smartest, forward-thinking operations leaders already get it, and working on capabilities to enhance their team’s performance.
Monitoring impact of inflation on piece parts’ and other key input prices (labor, etc.) will not be a one off that many experienced during the pandemic, but will become a regular feature of their (Supply Operations – Planner, Procurement) role.
They are building better processes enabled by new digital capabilities so procurement/materials management teams are “always on” when it comes to sniffing out an imminent threat of inflation so it can be snuffed out.
Most Operations teams (Procurement, Manufacturing), already went through a bruising time as the shock of the initial lockdowns of the pandemic gave away to the shocking increase in lead times and unit cost of inputs.
This time around it could get a lot tougher. Because, we don’t yet know if we are sliding towards a slowdown or recession – mild, medium or severe – this year (next 2 to 3 quarters are key), or, are we racing down.
For when the chips are (really) down across all product companies, i.e., the downward part of the business cycle, and trading partners are not seeing eye to eye, and inflation rears its head in ugly way – there may be no place to hide.
Your COGS will get a bruising.
Your margins may get neutralized, and you may bleed into the red.
Key Questions & Question the Status Quo
These are the two things for COO and their teams to focus on this year and harness all their collective energies to stay ahead of any potential disruptions. Some key questions to prepare better:
a) What will be the impact of inventory (starting with inventory downstream in the channels/ at customers, working backwards to parts level inventory) if product uptake deviates from plan, or other changes/ events happen which dampen demand or modify it significantly? What key decisions need to be taken? When and how to minimize any adverse impact?
b) How to monitor inflation and its impact on product cost? What specific approach and actions (smart negotiation, smart sourcing among others) can companies deploy to get ahead of the curve on tariffsthat will lead toinflation in procurement costs? What tools will be needed support such actions to mute or mitigate the impact of higher prices? What’s the the best way to measure the impact on product costs (bottom-up, top-down, other) and evaluate options?
As Supply Operations and Demand-gen operations team rush from one quarter to the next, what should the cross-functional teams plan and be prepared for, so they can harness experience, data, insights and tools, including enterprise software, as needed, to:
Plan and prepare for different scenarios (cost changes/ increases, sourcing changes, changes to supply chains, etc.)
Get alerted on deviations in Inventory & Inflation (tariff driven or otherwise)
Make data-informed decisions (clean data available via collaboration is key)
Ensure that learnings from deviations can be captured for the future
Question any responses that sound like “business as usual”.
What can we do?
Reach out and build new partnerships – not just with new physical goods suppliers but with digital (and expertise based) goods suppliers.
Companies (at least in the US) need to start looking inwards within the US, to find reliable, quality manufacturing and other supply sources here – including upstream component & commodity suppliers, assuming their cost structure and business model supports it.
Near term
Start working on establishing relationships with US based manufacturers sooner than you previously thought.
In the near term (current Quarter to 3-4 quarters out), higher quality, cost-competitive US based manufacturers may see their capacity getting quickly gobbled up, as product companies turn inwards. Better to “reserve capacity” now, before you are “shut out”, or are put on a “waiting list”.
New factory capacity and capability takes a long time to come online, be vetted and ready.
And, of course, negotiate with your suppliers in the tariff impacted countries – Mexico and Canada, for now. Its surprising how adversity can create more open channels of collaboration provided these are the right partners.
Longer term
Longer term (2-4 years and beyond) – the jury is still out. However, some of these tariffs may gain wider (not just “populist“) support across policy makers and end customers, and may become sticky in some industries – especially, if it lifts up nation-specific manufacturing capabilities (in this case, lifts up American manufacturing broadly).
So, this may also be the time for longer term plans which may include:
a) vertical integration via acquisition (acquiring the right manufacturers, critical upstream supplier), and/or
b) putting down concrete near-term plans to invest in your own factories here in the US (or wherever the company’s home-base is), with the goal of pouring concrete soon, or acquiring a factory or more, if needed
c) Hone your manufacturing supplier relationship management skills which has been blunted over the past 2+ decades of outsourcing in many industries. No, not the classic sourcing (RFQ based identification of competent suppliers, etc.), but getting waist deep in the trenches with your manufacturing partners – sharing know-how and collaborating deeply on your product specific manufacturing, materials management, collaborative planning, supply chain and even factory operations management. Yes, some skills have been dulled or lost over time. Yet this short-term pain may serve many product companies well – if its used to sharpen these skills again.
These are big changes with potential for big disruptive operational impacts on product companies near-term. However, longer term their effects could be virtuous, if your product company starts planning and preparing now.
To learn more on how we, and our advisors, have specifically helped support our customers, feel free to reach out.
We can share a few specifics, real-life stories, ideas and more of what we have learned working with senior leadership, and their cross functional operations teams across this business cycle and before, across two Fortune 100 companies and smaller, dynamic product enterprises.
Or, leave a comment here That will be music for our ears, and we will respond.
ADDENDUM
New details are emerging about the tariffs and its potential impacts (including price #inflation for US buyers and #supply-shock); some numbers are stark:
A few headline numbers from Bloomberg Economics analysis:
tariffs affect trade worth about $1.3 trillion,
represent 43% of US imports and
impacts roughly 5% of US GDP.
raises the average US tariff rate from near 3% currently to 10.7%, and deal a significant supply shock to the US economy
Utilizing Federal Reserve Board model parameters (from Trump’s first term) suggest this could reduce GDP by 1.2% and add around 0.7% to core PCE (read – inflation).
new tariffs on Canada, Mexico and China will cost the average American household $1,245 in purchasing power (per year), trim GDP by 0.2%
Acknowledgement(s): All customer colleagues we have worked with over the past 15+ years. A special shout-out to the Cambium Networks cross-functional Operations team, and to the insights gained working with cross-functional teams at Samsung Electronics and 2Wire (now CommScope). Michael Dodd (formerly senior Operations executive at Leapfrog, Juniper among others, and advisor to Zyom)
Disclaimer: No Generative AI was used for composing any of the writeups here (including this one), nor for any data gathering; At this point of time, Generative AI is being used in a “limited editor/ summarizer” role only, not to generate any new content on this site. Readers will be informed in advance if this changes.
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