Inventory working capital: releasing cash without hurting service

Allianz Research reports that the global cash conversion cycle lengthened by half a day to above 67 days, roughly 4 days longer than the 63 days that prevailed before 2020. The more useful finding for a CFO sits underneath that headline. Days inventory outstanding now explains almost 80% of the level of the cycle and more than 80% of its change over 2014-2025.

In other words, the argument that working capital is mainly about stretching suppliers and chasing customers is out of date. The Hackett Group's 2025 survey of the top 1,000 US listed non-financial companies shows payables recovering to 59 days while receivables and inventory days worsened slightly. Its cash conversion cycle stood at 37 days, a 4% improvement, but it estimates $1.7 trillion remains trapped in excess working capital, equal to 35% of gross working capital and 11% of aggregate revenue.

The implication for a finance leader is that the largest remaining pool of releasable cash is stock on the shelf and in transit. Payables programmes are already well worked in large companies, and supplier relationships have limits. Receivables carry a real prize, but Hackett's own data show an 18-day DSO gap between top and median performers, a process problem that sits outside the supply chain team's control.

What to do: build a one-page view that decomposes your cash conversion cycle into its three days measures against a peer median, then quantify the cash value of each day of DIO. If one day of inventory is worth several million dollars of cash, the board will treat the programme as a financial priority rather than an operational one.

Consider what this means for the way programmes are scoped. Many finance teams still open a working capital review with a payment-terms harmonisation exercise because it is contractually simple and can be announced to the board in a week. That work has its place, but it should not crowd out the harder question of why stock is where it is. A programme that takes inventory seriously will examine planning parameters, purchasing behaviour, product proliferation and the quality of the demand signal. These are cross-functional topics that a treasury team cannot resolve alone, which is why we advise a CFO to sponsor the work personally and to appoint a named leader from supply chain as co-owner.

Peers and investors are already reading these numbers. Analysts compare cash conversion cycles across a sector as a shorthand for management quality, and a company whose inventory days lag its peers will be asked why on its next results call. Having an answer that is specific, quantified and credible is itself a reason to start now.

A short word on measurement. Days inventory outstanding is simple to calculate but easily distorted by seasonality, acquisitions and changes in cost of goods. Use a consistent definition, calculate it monthly on a rolling basis and reconcile it to the ledger before presenting it to the board, so that debate focuses on what to do about the number and not on whether it is right.

The Federal Reserve's FOMC raised the target range for the federal funds rate by a quarter point to 3-3/4 to 4% on 16 September 2026. For a CFO who spent the 2010s treating inventory as nearly free to carry, the arithmetic has changed. Stock funded by revolving credit or by foregone interest income now has an explicit opportunity cost that finance can put against every pallet.

The scale is not small. According to the US Census Bureau, total business inventories reached $2,818.8 billion in August 2026, against $2,695.2 billion a year earlier. Even a modest share of that balance sitting beyond what demand requires represents a considerable financing burden across the economy, and individual companies feel it in interest expense and in covenant headroom.

There is a second-order effect that rarely appears in business cases. Higher rates raise the hurdle for holding anything speculative. Forward buys, opportunistic purchase-price-variance wins and volume-rebate purchases all look different once the financing cost is charged to the buyer's own budget. Procurement incentives that reward unit price alone should be adjusted to include the cost of money.

What to do: introduce a carrying-cost rate into purchasing and planning decisions at your current weighted cost of capital plus storage, handling and obsolescence risk. Charge it to the budget holder who made the buy. Behaviour changes quickly when the cost of excess stock appears in the buyer's own results.

A further implication concerns forecasting of cash itself. If your treasury plan assumes inventory will fall in line with sales, it probably also assumes a financing cost that no longer holds. Revisit the covenant calculations that rely on net working capital and test them against two scenarios: a modest further rate rise, and a demand shock that leaves stock higher than planned. The purpose is to establish how much headroom a programme must create, and by when, to avoid a negotiation with lenders at an inconvenient moment. A realistic target date prevents the programme becoming an open-ended efficiency exercise with no financial deadline.

Banks are also paying closer attention. Borrowing-base facilities secured on inventory depend on eligible stock, and lenders discount slow-moving or obsolete items heavily. A programme that removes aged stock can therefore increase real liquidity even where the headline balance falls less than expected, because the stock that leaves was never fully financeable in the first place.

US Census Bureau data for August 2026 show inventory-to-sales ratios lower than a year earlier in every major category. The total business ratio moved from 1.40 to 1.33, manufacturers from 1.56 to 1.48 and merchant wholesalers from 1.28 to 1.18, while retailers were almost flat at 1.37 and 1.36.

The spread between sectors matters as much as the direction. Manufacturers hold 1.48 months of sales in inventory and wholesalers 1.18. A single enterprise-wide target ignores the fact that a manufacturer carries raw materials and work in progress that a distributor never sees, and a retailer holds assortment that cannot be thinned without losing sales. Benchmarks need to be built against true peers, not the broad average.

The recent trend also carries a warning. Companies that have already trimmed the visible excess have less room to cut without touching safety stock. If your ratio has moved in line with the national figures, the next tranche of cash will be harder to find and the service risk of the easy answer, a uniform reduction, will be higher than it was two years ago.

What to do: benchmark your inventory-to-sales ratio against three to five direct peers rather than the national average, and decompose the gap by stock type: raw materials, work in progress, finished goods and spares. The gap to peer median in each category defines the realistic cash opportunity.

It is also worth separating structural from cyclical change when reading these numbers. A fall in a sector ratio may reflect lower purchasing because demand is soft, which is not the same as better inventory management. Test your own improvement the same way: if days fell because sales rose faster than stock, the gain may reverse when volumes normalise. Durable improvement shows up in lower cover for the same service level, fewer expediting events, and lower write-offs. These indicators are harder to game than a headline ratio and should be reported with it.

A practical test of a target is whether the operating teams can say how they will hit it. If a plant manager cannot explain which products will carry less cover and which supplier changes will make that safe, the target is a number on a slide. Co-develop targets with the people who will deliver them, using their lead-time and demand data.

Allianz Research found that the cash conversion cycle lengthened in Western Europe by 1.8 days, in the Middle East and Africa by 1.6 days, in Asia by 1.2 days and in South America by 1 day, but shortened in North America by 2.2 days and in Eastern Europe by 1.7 days. The divergence shows that a company's regional footprint shapes both its starting position and its exposure to tightening.

Sector variation is wider still. Twelve of 20 sectors extended their cycle, led by automotive suppliers at 4 days and paper, metals and textiles at 3 days each, while eight compressed, notably transport equipment by 6 days, computers and telecom by 4 days and energy by 3 days. Those that compressed did so deliberately, through build-to-order discipline, supplier-managed inventory or a cleaner product range.

For UK and European groups the signal is sobering. Hackett's European survey puts €1.4 trillion in excess working capital across the continent's top 1,000 companies and records 3% inventory increases. A Gulf-based business operating through longer shipping lines will recognise the Middle East and Africa figure, since extended lead times push firms toward holding more cover.

What to do: set targets for each region and business unit using local lead times and demand patterns. A group-wide DIO number hides the fact that a European plant, a Middle East distribution centre and a North American fulfilment network each sit on a different efficient frontier.

Finally, think about the Middle East and wider Gulf operating context. Lead times for imported goods are often long and customs processes uneven, so businesses hold more cover as a rational response. The answer is rarely simply to cut that cover. It is to shorten the pipeline through local consolidation, forward-deployed hubs or regional supplier development, and only then to reduce the stock that those changes make redundant. Sequencing matters because cutting cover first, before the pipeline improves, is how service damage occurs in long-lead markets.

Europe and the UK deserve a particular caution. Longer cycles in Western Europe sit alongside higher financing costs and, in some sectors, softer demand, so the temptation to cut deeply and quickly is strong. We would advise testing every reduction in a pilot region or product family for one full replenishment cycle before extending it across the group.

McKinsey's 2025 supply chain risk pulse, drawing on 100 companies, found that 82% of respondents say their supply chains are affected by new tariffs, and 45% of those affected are increasing inventories as mitigation. A vendor dataset from Deposco, a supply chain software provider, reported a 228% rise in days of inventory on hand between February and April 2025 as firms front-ran duties. That is a single vendor's view, but it illustrates the scale of the surge.

Hackett's survey records the consequences in one sector. The computer hardware and peripherals industry saw a 182% decline in cash conversion cycle performance, which Hackett attributes to overproduction and inventory build-up linked to AI-driven demand and policy uncertainty. Stock bought in a rush for protection is now stock that must be sold, written down or held at cost.

McKinsey also notes that organisations had been slowly reducing the size of their risk buffers over the past three years. That is the tension a CFO must manage. Buffers built for tariff risk are expensive, but the underlying volatility has not gone away, and releasing them wholesale could leave the company exposed to the next disruption.

What to do: separate stock held for policy risk from stock held for ordinary demand variability, and give each a named owner and a review date. Tariff buffers should carry an explicit trigger for release, such as a rule change or a duty rate falling below an agreed level, so that the decision is made once, deliberately, not drifted into.

The wider lesson is about governance of exceptions. Emergency buffers tend to become permanent because nobody is accountable for removing them, and the person who approved the original build is usually not the person who would take the blame for a stockout after release. Put an expiry date on every exceptional stock position when it is approved. At the review date the owner must either renew the position with a stated reason or release it. That simple rule prevents a temporary tariff response becoming a permanent balance-sheet burden.

Counterparties matter too. Suppliers who have shipped early to meet tariff deadlines may be willing to accept returns, stagger deliveries or convert to consignment, particularly if the alternative is a damaged relationship. Ask early. A short conversation with a key supplier can resolve in weeks what internal analysis alone would take months to address.

A single cut treats all products as equal. In practice a company's portfolio contains four distinct groups. Stable, high-volume products can run on lean cover and frequent replenishment. Stable, low-value products can be held generously because the cash involved is small. Erratic, high-value products need smart buffers placed at the right node. Erratic, low-volume products usually should be made or bought to order, or rationalised.

Segmentation by variability and value, often called ABC-XYZ analysis, is not new, but the point is how it is used. Teams too often run it as a reporting exercise and then apply the same service-level target to every class. Each segment should carry its own target fill rate, its own safety-stock method and its own review cadence, and finance should understand the cash and risk each segment represents.

The Census Bureau's data suggest why this matters. A manufacturer holds a ratio of 1.48 and a wholesaler 1.18, two businesses with entirely different inventory physics. Inside a single company the same contrast exists between a fast-moving core range and a long tail. The long tail is where stock accumulates, ageing builds and write-offs eventually land.

What to do: classify every SKU on two axes, demand variability and annual value, within the first 30 days. Set a service target by segment, not by company. Review the long tail every quarter and decide, SKU by SKU, whether to keep, make to order, or exit. This single step usually changes the conversation with sales from defence to design.

Practical analysis is less demanding than it sounds. Most companies can build a first segmentation from a twelve-month extract of sales history, current stock, unit cost and supplier lead time. Coefficient of variation of weekly demand provides the variability axis; annual consumption value provides the other. The first cut will be imperfect, and that is acceptable. A workable segmentation in four weeks that drives decisions is worth more than a perfect model delivered after two quarters. Refine it as you learn which SKUs behave differently from the statistics suggest.

Finally, avoid the temptation to over-engineer. Statistical safety-stock models are useful, but they depend on data quality that many companies lack. Where lead-time data is poor, fix that first and use simple rules of thumb in the meantime. A good decision based on a transparent rule that planners trust is better than an optimal answer from a model nobody understands.

Cash arrives at different speeds and carries different service risk. Excess and obsolete stock, items with cover far beyond any plausible demand, releases cash fastest because no customer ever misses it. Next come purchasing policy changes, such as order quantities and supplier terms. Safety-stock recalibration comes later, and structural levers such as lead-time reduction and postponement come last, delivering durable benefits over several quarters.

The prize is meaningful. Allianz calculates that each additional day of DIO translates into 1.16 days of cash conversion cycle globally, so inventory reductions carry a leverage effect on the cycle. PwC's UK Working Capital Study 2023/24 noted that the UK recorded a fall in DIO of 2 days, against a marginal global fall of 2.7%, or 1.6 days. Gains are possible but are not automatic, and past performance shows they erode if left unmanaged.

The most common reason they erode is organisational. Finance owns the cash target, supply chain owns the service target, and sales owns the forecast. When each is measured separately, the cheapest way for each function to hit its own number is to push the problem elsewhere. A single scorecard that shows days of inventory, fill rate, forecast accuracy and write-offs together removes that incentive.

What to do: run the programme in four waves over roughly 90 days: segment, release excess, recalibrate buffers, then embed the scorecard in monthly business reviews. Track cash released and service held on the same page, and agree in advance what service movement would pause the programme.

Finally, plan for the day the programme stops. Inventory gains have a half-life. Planners revert to old parameters, buyers return to old habits, and a new product launch quietly resets cover for a whole family. Embed the new policies in the planning system as parameters rather than slide decks, and make days of inventory and fill rate part of the incentive plan of the leaders who control them. Review the segmentation twice a year. The return on the programme is the cash released, but the value is in not having to repeat it.

Responsibility should also be explicit at board level. Name an executive sponsor, publish quarterly cash-released and service-held figures, and require any exception to the service pause rule to be approved by the CFO and the chief operating officer together. Shared accountability at the top is the clearest signal that the programme is about balanced performance rather than a one-off cash grab.

Our Strategy & Transformation work helps finance and supply chain teams build the SKU segmentation, lever sequencing and joint cash-and-service scorecard described here, and supports delivery through the first 90 days. We start with your own data, so targets reflect your segments, regions and service commitments rather than a generic benchmark.