Inventory Matters! – Including overstock and excess inventory
Several months back Jim Cramer from Mad Money published a piece on the importance of inventory levels in predicting economic turnaround and stock performance. While his point is fairly obvious (ie. a lack of inventory in retail channel implies new orders are coming to manufacturers, which will drive upstream business throughout the supply chain), it is interesting to think about how a company can use tighter inventory control to have a big impact on their company’s performance and to influence the market on valuing the business.
Beyond the obvious benefits of maintaining a lean inventory (not tying up as much working capital, not incurring as much inventory depreciation, not requiring as much space to store it, etc.), knowing that Wall Street is looking at this metric as a leading indicator of performance, a company might be able to use tighter inventory control to lower its cost of capital for the business as a whole.
This illustrates the substantial opportunity to create value indirectly by implementing a more efficient solution for managing liquidation of overstock inventory or excess inventory. If a company can achieve the same or better recovery rates while improving velocity, they can more aggressively manage inventory levels at all times and increase excess inventory sales.