Silicon Valley Bank’s Failure kicked off panic in the financial markets and banking system. They had too much money tied up in long term bonds paying at low interest rates, and they didn’t have the liquidity to keep up with the depositors requests to take money out of the bank. This bank catered to venture capital backed companies in the tech space, and there were several depositors with more than $250,000 in the bank when it collapsed. Unfortunately, since the FDIC only insures to $250,000, these depositors would lose the rest. The government stepped in to assist. However, the liquidity crisis spread to Signature Bank and several others. What does all this mean and what can companies do about the liquidity crisis?
What Does All This Mean?
We are in a liquidity crisis. The increase in interest rates has increased the cost of capital. It was certainly not the only issue that caused the Silicon Valley Bank crisis as there were the normal gamut of issues when a company goes bankrupt, but it was a key factor and likely the straw that broke the camel’s back.
Interest rates are not going down anytime soon since inflation continues to rage as demand remains robust and supply is limited. Thus, products will cost more, and if you have to borrow money to purchase materials and pay employees until customers pay their invoices, you will pay more (assuming you can get a loan). Thus, proactively managing inventory and cash flow is essential.
Proactive Inventory Management
Every dollar you have in inventory is a dollar of cash flow tied up that cannot be used elsewhere. Inventory serves an important purpose to protect against variability (of both demand and supply). Since we are in volatile times, inventory can make or break success in your ability to service customers. On the other hand, if you have “too much” inventory, you are throwing money out the window, and with the high cost of capital, you might be paying a hefty interest rate for the privilege. Even if you aren’t borrowing the money, you cannot invest the funds in R&D or other ways to add value to the business.
A SIOP (Sales Inventory Operations Planning) process, also known as S&OP, can help you align demand with supply and proactively address inventory. For example, an aerospace client had a significant amount of money tied up in inventory. A certain amount of inventory was important to their success because a wide breadth of product availability was part of their unique differentiator in the marketplace which created a barrier to entry for potential competitors. However, they still had an opportunity to reduce inventory while maintaining/ improving service levels by implementing best practices in planning and inventory management.
In this situation, we aligned all sites on a common goal, highlighted the importance by putting an executive in charge of the initiative, and provided resources including process and ERP upgrade support, training and education programs, incentives, rewards, and recognition. We developed a collaborative demand plan and determined the best way to supply the volume. The sites worked together to determine how to share inventory and maximize profit. In less than a year, we were able to reduce inventory by 30-40% on the core product lines while increasing service levels to customers.
Please keep us in the loop of your situation and how we can help your organization roll out a SIOP process, reduce inventory and free up cash while improving service to customers. Learn more about how to use SIOP to succeed during volatile times in our new eBook SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. Download your complimentary copy.