With inflationary pressures, an unsteady supply chain, higher cost of capital, turmoil in the banking sector and escalating geopolitical tensions, it’s a tough time to manage a business, and perhaps no one has a better understanding of that than the CFO who counts the costs of ever-increasing inventory levels.

Some of this is brought on by supply shortages but competing management priorities also contribute to the problem. The sales team may be pursuing every deal, offering the same service levels to all customers. Engineering might be constantly tinkering with product design, and plant managers might be incented to drive absorption costs down and make long production runs.

Often these decisions are made in silos and without consideration to the impact on inventory. Finance can play a critical role and there are three things CFOs can do now to help their organizations better prepare for headwinds and make more informed trade-offs between seemingly competing priorities:

• Challenge assumptions
• Clarify decision rights
• Become an activist investor

Challenge assumptions: Let’s start with service levels. Are all deals (or customers for that matter) equal? Do we need to provide the same service levels and the same commercial terms to each? We incent the sales team to chase revenue, but at what cost? This is just one example of many everyday drivers that impact inventory.

As mentioned above, other stakeholders, such as marketing, engineering, procurement, manufacturing and distribution, also have significant impact. Fortunately, there have been great advances in machine learning and artificial intelligence that can aid in scenario planning, which is useful to challenge long-held assumptions about why we must do business a certain way.

Clarify decision rights: Once you’ve used data to challenge assumptions and quantify impact, identifying who has decision rights is key. It’s likely that your organization has a well-defined approval process for capital expenditures, involving senior leaders. However, each day, throughout the organization, people make decisions that can impact the balance sheet, running up inventory levels.

The procurement manager who drives cost down by sourcing from Asia might drive up inventory due to longer lead times. Arm your team on the front lines with trade-off models so that they make the most informed decisions. A real fallacy in addressing bloated inventory is that the singularly responsible parties sit in the factory or the warehouse. No doubt they play a role, but many others across all parts of the business also contribute.

Become an activist investor: Every dollar of inventory sitting in the warehouse is equal. A dollar spent on slow-moving or obsolete inventory has the same value as a dollar spent on inventory flying off the shelves — not to mention dollars used for other priorities, such as R&D, debt repayment and new equipment.

Finance can play an active role in calling this out. Conduct regular inventory reviews and use data to challenge assumptions such as prebuilds or fulfillment requirements. Train controllers to play a more active role in the planning process. Evaluate metrics and KPIs. Are they — for example, the procurement manager who is tasked with driving costs down, but their actions might increase lead times, or the salesperson who agrees to service-level commitments to hit their quota — realizing the best outcomes? 

Finance should play an active role in helping other functions make the most informed decisions, being the investment advisor for inventory.

Even in the best of times, inventory growth can quickly get out of control. But, in this current environment, the challenges are growing, as are the financial impacts. With the rising cost of capital and inflation growth, trapped inventory consumes more precious cash at a time when other sources of cash (debt, for example) are more costly.

CFOs can play a critical role in addressing these issues. Business norms of five years ago may not work today, suggesting that old assumptions should be challenged using new ways of mining data. Take a step back to first figure out who is really on the front lines and then give them the tools they need. And, lastly, insert finance into the planning process and treat inventory investments like other investments.