Cash Inefficiency – Freeing Capital from the Inventory Trap:
“Millions sitting in inventory,” the CFO told me during a site visit, “but we’re still losing sales to stockouts.” I walked the warehouse with the ops team and saw it myself—pallets of slow-moving stock gathering dust while critical items were backordered. It’s a cash flow puzzle I’ve seen too often.
For private equity (PE) managers, the cash inefficiency of too much of some items and stockouts or too little of other items is a silent killer.
The Bi-Modal Inventory and Material Planning’s Fatal Flaw:
Traditional Material Requirements Planning (MRP / ERP) systems, invented and coded for planning materials for a 1970’s world of minimal variability is still the engine under the hood that’s driving materials planning in 2025 and a root cause of such cash inefficiency. Traditional MRP systems lean heavily on forecasts, assuming perfect forecast accuracy as an input into the master production schedule that tells MRP what to buy or make, how much and when to buy or make it.
In the 1970’s, forecasting error was less damaging due to a more stable, predictable environment with fewer disruptions, simpler demand patterns, longer product lifecycles and less complex products.
Here’s the fallout:
1. Bi-modal inventory: 10% of SKUs are critically low, threatening customer orders, while 30%-40% are overstocked, tying up cash.
2. Capital lockup: Excess stock consumes cash that could fund expansion or debt reduction.
3. Lost revenue: Stockouts frustrate customers and shrink top-line growth.
4. Hidden costs: Expediting, write-offs, and firefighting chip away at profitability.
Why It Undermines PE Value Creation Goals
1. Reduced ROIC: Excess inventory drags down return on invested capital.
2. EBITDA pressure: Carrying costs, lost sales, and expediting hit the bottom line.
3. Exit drag: Buyers discount companies with cash tied up in the wrong places.
The DDMRP Solution: Inventory That Works For You in a Volatile World
Demand Driven MRP (DDMRP) flips the script by aligning inventory with actual demand, not forecasts. It replaces MRP’s nervous, zero-stock obsession with dynamic buffers that adjust in real time, ensuring stock where it’s needed and slashing excess, cutting inventory while improving service levels to 98%.
Here’s the playbook:
1. Demand-driven stock: Buffers respond and "pull" to actual consumption, smoothing out bi-modal extremes.
2. Stability over nervousness: Buffers absorb variability, reducing the need for constant adjustments.
3. Lean flexibility: Excess is minimized without risking stockouts.
4. Cash liberation: Working capital shifts from warehouses and material stocks to growth initiatives.
Takeaway for PE Managers
Cash inefficiency is a choice, not a necessity. Why settle for a balance sheet weighed down by 1970's methodology and inventory that fights you instead of works for you?
How are you tackling inventory in your manufacturing company portfolio? Let’s swap ideas.