Originally published in Manufacturer, ARB’s Manufacturing Industry newsletter.
Many businesses tie up working capital in inventory. Fortunately, there are inventory management and optimization strategies manufacturers can use to free up some of this capital and boost cash flow. Here are six strategies to consider.
1. Implement an Inventory Management System
A good inventory management system monitors and tracks inventory in real time. This allows you to evaluate inventory key performance indicators (KPIs), optimize inventory levels, and react quickly to changes in demand, supply chain disruptions or other inventory trends.
Integrate the system with your enterprise resource planning system so that it has access to sales forecasts and other critical data. This integration eliminates data silos and enables more accurate demand planning and resource allocation.
2. Monitor KPIs
KPIs are useful benchmarking tools to track and evaluate the performance of your inventory management systems and practices. They help you identify opportunities for optimizing inventory levels and improving efficiency.
Relevant metrics vary from company to company. But common examples include inventory turnover rate, days inventory outstanding, order cycle time, backorder rate, carrying cost, stockout rate, fill rate and return rate.
3. Adopt Just-in-Time (JIT) Inventory Practices
There’s more to inventory costs than just buying or manufacturing it. You also must factor in “carrying” costs, such as transportation, storage, handling, insurance, financing, obsolescence and pilferage. In some states, inventory is even subject to personal property tax. JIT reduces carrying costs and minimizes waste by ensuring that raw materials and parts aren’t received until they’re needed for production.
To be effective, JIT demands meticulous planning and solid supplier relationships. Be sure to maintain a “safety stock” of critical materials or parts to protect against sudden spikes in demand or unexpected supply chain disruptions.
4. Classify and Prioritize Inventory
When assessing your inventory needs, prioritize various parts and materials based on their value. For example, high-value items have volatile demand and long lead times from suppliers. Medium-value items include those with relatively stable demand and a wide range of uses. Finally, low-value items exhibit consistent demand and are readily available from local suppliers.
High-value items would require higher levels of safety stock and less reliance on JIT techniques, while low-value items would allow for liberal use of JIT and low levels of safety stock. For medium-value items, the manufacturer should strike a balance between the benefits of JIT and the need for safety stock.
5. Shed Excess or Obsolete Inventory
If excess or obsolete inventory is tying up your working capital and clogging your storage space, consider strategies for clearing it out. Possibilities include offering discounts to customers through promotions, bundle deals or clearance sales. You might also sell products or materials to a liquidator or scrap dealer (and write off the loss), donate inventory to charity (and claim a charitable deduction), or simply recycle or destroy them.
Be sure to investigate the reasons you’re accumulating excess or obsolete inventory. For example, if it’s caused by inaccurate sales forecasts or market changes, you should improve your forecasting practices or adjust your procurement strategies accordingly.
6. Switch Accounting Method
When inventory costs rise over time, switching from the first-in, first-out (FIFO) inventory accounting method to the last-in, first-out (LIFO) method may be advantageous. FIFO assumes that items are sold in the order they were acquired or produced, so the cost of goods sold is based on older, and presumably lower, prices. In contrast, LIFO allocates the most recent, and presumably higher, costs to the cost of sales. By increasing the cost of sales, this method reduces taxable income.
LIFO can produce tax savings when prices are rising. But keep in mind that it can increase taxes in deflationary periods. Also, LIFO requires complex computations and demands more sophisticated recordkeeping practices, so it’s more expensive to use than simpler FIFO.
Inventory Your Practices
These are just a few strategies to make your inventory management practices more cost-effective and tax-efficient. Given the high costs involved in maintaining inventory, now’s a good time to explore your options for controlling these costs.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Manufacturing Team Spotlight
Erika Gagne is a Manager at ARB who provides audit, accounting, and advisory services across diverse industries, including auto dealerships, commercial entities, financial institutions, and nonprofit organizations. With a background in financial management and compliance, Erika plays a pivotal role in client relations, creating tailored solutions that meet clients’ unique needs and regulatory requirements.
