Working capital is a forecasting problem

Our view is blunt: cutting stock to a target doesn't release working capital. It borrows it, and the business pays it back in lost sales and emergency deliveries. Most excess inventory is the price of a forecast nobody trusts.

Finance sets a target to take a slice out of inventory by year end. Stock is cut across the board, a few locations run dry, complaints rise, and within two quarters the buffers are back. The cash was never the problem. The forecast was.

Some of us spent years running a global currency supply chain, which makes the lesson plain. Banknotes are inventory in its purest form. Central banks like the Reserve Bank of Australia and the Bank of England publish plenty on how notes are issued and circulated. Every note in a branch, an airport store or a vault is cash that could be earning elsewhere, and it has to be insured, moved by armoured transport and counted. Run short on a busy day and you lose the sale, often the customer. Hold too much and the cost shows up quietly on the balance sheet. Any business that carries stock has the same tension. Currency just makes it visible.

Why buffers grow

Safety stock is what you hold because you don't believe your forecast. When forecasts are unreliable, everyone in the chain adds a cushion, and the cushions stack. A branch orders extra because the last delivery was late. The region orders extra because branches keep running out. The central team orders extra because the region's numbers swing. Nobody is careless; each is rationally protecting themselves against a number they can't rely on. Researchers have studied this amplification for decades as the bullwhip effect.

That is why a stock target on its own fails. It removes the cushion without removing the reason for it, so the risk moves onto service, and when service suffers the cushions come back larger.

Illustrative example

Illustrative scenario, not drawn from any client. Picture a currency branch network: city stores, airport counters, a regional vault. In October the CFO orders note holdings cut sharply by year end, and every order is trimmed by the same proportion.

December looks good in the board pack. Then January arrives. Ski-season travellers clear out the Swiss francs at two airport counters in one weekend. A city branch runs out of yen in a school holiday nobody flagged. Emergency armoured deliveries go out at premium rates. Branch managers, burned once, quietly pad every order. By spring, holdings are above where they started, and the business has paid for the cut twice: in lost sales and in rush transport.

The holdings had been covering uncertainty nobody addressed. The busy weekends and holidays were predictable. They just weren't in the forecast.

What you'd notice

• Stock reductions hit the year-end target, then drift back within a quarter or two.
• Planners and store managers keep their own spreadsheets "just in case".
• Some locations run short while others sit on months of cover for the same product.
• Expedited deliveries are a routine budget line, not an exception.
• Known events like holidays or promotions surprise the plan every year.
• Forecasts have improved, but nobody can say when the buffers were last revisited.

Why it matters

Stock held to cover forecast error is cash doing nothing. It has to be financed, insured, counted and sometimes written off. Release it properly and it stays released, without the stock-outs that make the next cut harder to sell. For a management team or an investor, that is cash from the assets the business already has.

It also changes the conversation. Once the buffer is seen as the cost of uncertainty, the argument stops being about whose target is fair and turns to where the uncertainty comes from. As Marshall Fisher argued in What Is the Right Supply Chain for Your Product?, the supply chain has to match how predictable demand is. ASCM builds that discipline into its CPIM planning and inventory certification.

Takeaway

Excess stock is a rational response to a number people don't believe. Fix the number and the stock comes down on its own. Cut the stock without fixing the number and it comes straight back.

Examples marked illustrative are hypothetical. Third-party figures are from the sources linked.