Rebalancing Inventory and Service Level Expectations in a Pandemic

If net working capital is tight during the COVID19 crisis, consider re-thinking your inventory and service level balance.  Amazon is. 

Expectations, priorities and capabilities change as our environment changes.  The impact of COVID19, is having an unprecedented impact on businesses and our everyday lives.   Most items on Amazon are currently not being promised in 1 day, 2 days or even 3 days.  Many delivery dates are weeks out into the future. 

Amazon ingrained itself and became a need in millions of people’s homes through quick delivery of everyday items.  Despite this significant change in their delivery promise, we are still using their service.  Consumer expectations adjust in changed markets, just as business capabilities need to adapt to the changed conditions. 

Businesses are experiencing a variety of impacts.  Some businesses have been shut down for weeks (maybe months) on end.  Others are still open but seeing a drastic decrease in volume, revenue, and cash reserves.  One of my clients has more business than usual, but the mix has shifted significantly as a result of the crisis.  Another client has been working through disruptions in the supply chain for months due to China’s initial shut down. 

Whatever business you are in, it is likely you have been impacted as a result of the pandemic.  When things change, we need to re-evaluate our previously made sound decisions to ensure they are still valid in the current situation. 

For many businesses right now, net working capital (cash) is extremely tight.  Inventory utilizes a fair amount of capital to ensure products are in stock at specific service levels to meet customer needs.  In the current situation, business’ ability to invest capital into inventory is limited, but also consumer expectations are different.  For example, consumers have faced empty toilet paper shelves for weeks now –  consumers have become conditioned to COVID19 impacting the availability of product. 

I do not recommend just reducing your inventory drastically overnight across the board.  What I do recommend is looking at your inventory decisions.  Do you have varied service level targets depending on the inventory type?  Your most profitable SKUs should be in stock at a higher rate than your least profitable products.  Are you reorder points and reorder quantities optimized to meet your service levels without holding excess inventory? 

Inventory optimization is extremely mathematical, and small adjustment can have a significant impact on working capital. 

Please reach out to me at stacy@supplyvelocity.com if you would like to talk about inventory optimization.