When organizations talk about improving working capital, the first place most of them look is supplier payment terms or customer collections — the finance domain. That view is correct but incomplete, because a large share of an organization's trapped capital sits not in receivables or payables, but in inventory itself.
From a financial standpoint, inventory is capital that has been converted into physical goods and generates no return until it's sold. In many manufacturing and distribution organizations, the value of dead or excess inventory is large enough that freeing up even a portion of it has a bigger impact than renegotiating payment terms with suppliers.
Excess inventory usually traces back to one of three sources: inaccurate demand forecasting that leads to over-ordering; blanket safety-stock policies applied to every item regardless of its actual importance or variability; and slow-moving or obsolete items that were never formally discontinued and still occupy warehouse space and capital.
A practical way to spot this opportunity is starting with a simple but often overlooked analysis: classifying inventory items by value and turnover speed, and pinpointing exactly what percentage of total inventory capital is locked up in low-turnover items. That number is often surprising in organizations that have never run this analysis before.
The next step is tying this analysis to a concrete decision rule: any item with turnover below a defined threshold should be reviewed in the next S&OP cycle — either sold off at a discount, have its ordering policy changed, or be formally discontinued. Without that link, the analysis stays just a report that never leads to action.
Another important point is aligning finance and supply chain teams on the target. If the supply chain team is measured purely on service-level metrics (like stockout rate), they'll have no incentive to reduce inventory — since doing so raises the risk against their own performance metric. Performance measures need to account for both dimensions — service level and working capital — at the same time.
A common mistake is cutting inventory uniformly across the whole portfolio — applying the same flat percentage reduction to every item regardless of its importance or demand variability. This approach usually creates stockouts exactly on the items with the least tolerance for them, while genuinely dead stock stays untouched.
A practical starting point is running that same value/turnover analysis quarterly and tying its results to specific item codes — not just one organization-wide number — so every review produces a concrete list of SKUs for real action (a targeted discount, a changed ordering policy, or discontinuation), rather than just a headline metric that leads to no action at all.
The best place to track this list is the same monthly S&OP cycle, not a separate finance-only project. When the decision about a dead-stock item gets made in the same meeting as demand and supply decisions, it's far more likely to actually get followed through than if it gets buried in a separate financial report.
Unlike renegotiating payment terms, optimizing working capital through the supply chain doesn't require external sign-off (like supplier agreement) — which is why it's usually faster to execute and stays more fully within the organization's own control.