{"id":6562,"date":"2026-10-13T09:00:00","date_gmt":"2026-10-13T07:00:00","guid":{"rendered":"https:\/\/www.stockm.eu\/?p=6562"},"modified":"2026-09-24T15:17:50","modified_gmt":"2026-09-24T13:17:50","slug":"working-capital-get-tied-up-in-inventory","status":"publish","type":"post","link":"https:\/\/www.stockm.eu\/en\/working-capital-get-tied-up-in-inventory\/","title":{"rendered":"Where does working capital get tied up in inventory?"},"content":{"rendered":"\n
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Working capital is rarely tied up in inventory because of one big, obvious mistake. More often, it builds up gradually through many smaller decisions: ordering quantities set to meet a supplier\u2019s minimum, safety stock that is no longer needed, products that sell more slowly than before, or inventory held in one location when it is needed somewhere else.<\/p>\n\n\n\n

While each of these actions is justifiable on its own merit, when they are combined, they can lead to an organization having greater and greater amounts of money stuck in its inventory, poor liquidity, a rising chance that its stock will be aged, and shortages of its key products.<\/p>\n\n\n\n

Managing inventory well involves recognizing the exact inventory positions within SKU locations that the money is being tied up in, determining what caused the problem, and taking the necessary steps before the inventory gets devalued further.<\/p>\n\n\n\n

Inventory can become the largest working-capital burden<\/h2>\n\n\n\n

Inventory becomes a working-capital problem when stock levels increase faster than actual demand, when replenishment parameters are not adjusted after supply conditions improve, or when products continue to be replenished even though their commercial importance is declining.<\/p>\n\n\n\n

This issue is not limited to individual companies. A 2025 net working-capital study by H&Z<\/a> covered 290 manufacturing companies in Germany, Austria, and Switzerland with annual revenue above EUR 50 million. The study reveals that inventory days have grown by 17% in all industries during the years 2019 to 2023. During this time frame, the days for collection of receivables and supplier days have not changed substantially. It suggests that the rise in working capital needs is due to cash being locked in inventory.<\/p>\n\n\n\n

The study\u2019s authors link this change to companies\u2019 efforts to protect themselves against supply-chain disruption. They also emphasise that inventory optimisation has become one of the most important levers for improving liquidity. This does not mean that inventory should be reduced equally across all categories. Businesses need to identify precisely which products and locations still protect sales and operational flow, and where capital is already tied up in excess, slow-moving, or unnecessary stock.<\/p>\n\n\n\n

This might have been caused by the influence of COVID-19 on the supply chain, where either the supply chain was stalled or there were major disruptions. Due to the shortage, companies placed more orders to cover for the supply chain disruption. However, inventory levels have clearly not returned to their pre-pandemic position. This makes it important to analyse what inventory consists of, which positions are tying up working capital, and how those positions can be managed more effectively.<\/p>\n\n\n\n

Seven areas where inventory ties up cash<\/h3>\n\n\n\n
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Cash becomes tied up in inventory not because of one major mistake, but because of recurring decisions that gradually stop reflecting actual demand and supply conditions. These patterns can be identified and managed by reviewing each product individually and in the context of its specific location.<\/p>\n<\/div>\n<\/div>\n\n\n\n

1. Demand has fallen, but replenishment still goes on<\/h4>\n\n\n\n

The item could have been a hot seller before, but not anymore. The demand may now have switched over to some other item that is a new version or an entirely new product line.<\/p>\n\n\n\n

The risk arises when replenishment continues to be based on historic consumption, particularly in min\u2013max or forecast-driven environments. Even a product that still sells occasionally can accumulate excess inventory if it is ordered in quantities that no longer reflect expected demand.<\/p>\n\n\n\n

What it looks like?<\/strong><\/td>Why cash gets tied up?<\/strong><\/td>Typical action<\/strong><\/td><\/tr>
Consumption is declining, but inventory remains stable or increases<\/td>Products are purchased faster than they are sold or used<\/td>Reduce future replenishment, review inventory levels, and assess pricing or product-discontinuation options<\/td><\/tr>
Days of inventory are increasing<\/td>Inventory takes longer to turn into revenue<\/td>Align replenishment with current rather than historic demand<\/td><\/tr>
The product remains active but sells only occasionally<\/td>The inventory level may be too high for its actual role<\/td>Apply replenishment logic appropriate for low or intermittent demand<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Slow-moving products do not necessarily need to be removed from the assortment. However, the investment in their inventory<\/a> needs to reflect their actual commercial importance and expected consumption.<\/p>\n\n\n\n

2. Inventory levels still reflect past risk<\/h4>\n\n\n\n

Inventory levels and safety stock are usually set for sound reasons. A business may need protection against long or unreliable lead times, variable demand, production disruption, or the risk of failing to fulfil an important customer order.<\/p>\n\n\n\n

The problem begins when the original reason for holding additional inventory changes, but inventory levels and safety stock remain the same.<\/p>\n\n\n\n

This can happen when:<\/p>\n\n\n\n