According to the 2019 McGrathNicol Advisory Working Capital Report achieving an improvement in working capital is not only desirable to “keep up” with competitors, it also presents an opportunity for material competitive advantage over much of the market.
Retail companies have seen an increase in their inventories and working capital. To prevent inefficient use of working capital, it is essential retail companies employ efficient and effective inventory planning.
Inventory has increased
Retail company inventory has increased by an average of 2.7 Days Inventory Outstanding (DIO) from 2018 to 2019, this has been driven up by the need to:
- Improve service levels in line with customer expectation to stay competitive
- Hold increasingly complex inventories to service customer needs
Retail companies’ average DIO (days)
Inventory increase has driven up working capital
The increase in inventory for retail companies has resulted in increased Days Working Capital (DWC), with DWC across retail companies increasing by 3.5 days from 2018 to 2019. This excess of working capital points to potential inefficiencies in the way retail companies manage their inventories.
Retail companies’ average DWC (days)
Inventory planning is essential to address rises in working capital
Proper inventory planning is essential to combat the increasing inventory levels and reduce working capital to efficient levels. A number of considerations should be made with regards to inventory planning:
- Is there effective technology and systems to support inventory planning and optimisation, and are these being used correctly?
- Are the correct processes in place to balance supply and demand, especially to manage key marketing and promotional events?
- Do the planners have the skills to undertake the roles and use key systems and tools correctly?
- Does management have visibility and KPIs to report on inventory balance and service?
How GRA can help
GRA has significant experience in optimising inventory for retail clients. These projects typically drive a significant financial return whilst increasing service levels for customers.
- 20-40% inventory investment reduction
- increased service levels ranging up to 99.9%
- 10%-15% reduction in supply chain operating costs
- the ability to fund business initiatives from operating cash flow (OCF) improvements
- improved return on capital employed (ROCE)
- a minimum 3:1 ROI (10:1 to 30:1 typical)
McGrathNicol's Working Capital Report 2019 is available here.
DIO: Days Inventory Outstanding, DIO is the number of days’ worth of purchases represented by the inventory balances at the relevant calculation date;
DWC: Days Working Capital, DWC is a relative measure of total working capital tied up in a company relative sales
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