How Complexity in Inventory and Supply Chain Destroys Cash Flow… and What to Do About It

Inventory is one of the most capital-intensive parts of a business, yet it’s often managed in ways that quietly drain cash. When companies grow, add new products, expand sales channels, or customize items for specific customers, complexity increases. At first, the impact is subtle: a few more SKUs, a handful of new vendors, a couple of exceptions to the standard bill of materials. But over time, this complexity compounds… slowing processes, bloating inventory, intensifying work for the operations team, and tying up cash in areas that provide little return. If you also carry raw materials to manufacture products, the issue is compounded by the additional SKUs.

Many organizations focus on revenue growth without recognizing how operational complexity undermines profitability. Cash flow is the first place you see the symptoms. Excess stock piles up. Fulfillment times get longer. Production planning becomes reactive and chaotic. Purchasing starts ordering to cover risks created by the very complexity the business keeps adding. Eventually, the company ends up with more money sitting on warehouse shelves than in its bank account.

This article explains why complexity destroys cash flow and provides practical, actionable strategies to reduce that complexity without compromising service levels or growth.

Why Complexity Erodes Cash Flow

1. More SKUs = More Inventory Everywhere

Almost all new SKUs require safety stock (unless conditions are good for JIT delivery), forecasting effort, purchasing attention, space on shelves, and capital investment. Even slow movers require working capital to keep minimum quantities on hand. While one additional SKU may appear insignificant, increasing the assortment by 10%, 20%, or 30% rapidly inflates inventory requirements.

What makes matters worse is that slow-moving or niche items tend to require higher days of inventory, or in some cases, MONTHS of inventory because minimum order quantities are often high relative to monthly demand levels. The result is a distorted portfolio where low-volume SKUs consume a disproportionate amount of cash.

2. Unique Components Drive Up Safety Stock

Unique parts in the supply chain (special colours, one-off fittings, custom packaging, proprietary subcomponents) require dedicated stocking levels even if used in only one product. Unlike common parts, you can't redirect them to other SKUs if demand changes or drops of completely.

This forces planners to hold buffer stock for each one, multiplying the total safety stock across the network and immobilizing cash.

3. Forecast Accuracy Declines with Proliferation

Forecasting is fundamentally harder when there are too many low-volume SKUs. Demand becomes more erratic and less predictable. When forecast accuracy drops, you get overstock on slow movers and stockouts on fast movers. Both outcomes cost money either through tied-up capital or lost sales.

4. Operational Workload Increases

More SKUs mean more:

• purchase orders

• vendor relationships

• quality checks

• production instructions

• picking paths

• BOM maintenance

• system data upkeep

When teams become overloaded, human errors increase: incorrect receipts, wrong items in BOMs, delayed replenishment, inconsistent costs, and missing attributes. Errors create rework, and rework consumes cash.

5. Longer Lead Times

A complex assortment often requires sourcing from a larger number of vendors, sometimes across multiple geographies. Longer and variable lead times force companies to hold additional inventory to maintain service levels.

You end up buying earlier, buying more, and holding stock longer than necessary.

6. Transitioning SKUs and Obsolescence

Transitioning SKUs, such as updating label versions to comply with new regulations, creates disruption that often results in orphaned inventory and temporary cash flow strain.

Existing stock with the old label usually cannot be reworked economically, leaving companies with write-offs or forced discounting. At the same time, purchasing must bring in the new, compliant components, increasing on-hand inventory during the overlap period. Transitioning many SKUs at once adds more complexity and challenge for individuals to track correctly.

Production schedules may need adjustment and planners often build buffers to avoid service interruptions. These transitions add complexity to the item master, require close coordination across regulatory, procurement, and operations teams and frequently introduce errors that lead to rework. Without structured change management and tight inventory controls, regulatory-driven SKU transitions can significantly inflate working capital and contribute to obsolescence.

How to Reduce Complexity and Improve Cash Flow

Reducing complexity is not about simplifying for the sake of minimalism; it’s about designing a supply chain that is resilient, efficient, and cash-friendly. Below are structured, practical approaches that companies can apply without disrupting the customer experience.

1. Rationalize the SKU Portfolio

A disciplined SKU reduction process can unlock a surprising amount of tied-up capital. Start by categorizing products into the following groups:

• Core SKUs: High demand, high margin, strategic. These should stay.

• Supporting SKUs: Variations that provide value but have lower volumes. These may remain if they serve a defined customer segment profitably.

• Non-performing SKUs: Low sales, low margin, long lead time, high MOQ relative to demand levels or high handling cost. These are candidates for discontinuation. Unfortunately, the reality of many businesses is the reluctance to discontinue products since that discontinues the sales dollars associated with that SKU.

A structured review might include:

• 12–24 months of sales data

• gross margin analysis

• inventory turns and days on hand

• MOQ days (or months) of supply

• forecasting (demand) variability

• customer-specific items that create operational drag.

Companies often find that 20–40% of their SKUs contribute less than 5% of revenue while consuming significant working capital. Eliminating under-performing items frees cash and simplifies planning without impacting overall revenue.

2. Move Toward Common Parts and Modular Design

Commonality across the product range is one of the most effective ways to simplify inventory and reduce capital requirements.

Benefits of common parts:

• Fewer unique items to stock

• Lower safety stock across the board

• Better purchasing power and simpler vendor management

• Improved flexibility when demand shifts

Examples include:

• standardizing lids, caps or containers

• using the same circuit board or housing across multiple models

• harmonizing label formats

• aligning packaging sizes

• using the same raw material in multiple formulations where possible

Modular design enables the business to offer variety through configurable combinations rather than unique components. Customers still get choice, but the supply chain handles far fewer unique items.

3. Streamline the Bill of Materials Structure

BOMs expand as products evolve. Unless carefully maintained, BOMs can contain redundant items, legacy components or alternative items that are no longer used in practice.

A structured BOM review should look for:

• parts unique to a single product

• obsolete or duplicate items

• inconsistent units of measure

• vendor-specific parts that can be merged

• opportunities to standardize packaging

A cleaner BOM structure reduces planning complexity, improves costing accuracy, and lowers inventory investment.

4. Align Procurement with True Demand

Procurement teams often buy based on historical norms, minimum order quantities or supplier incentives. Complexity amplifies the risk of overbuying because:

• each unique component has its own MOQ and lead time

• forecasting becomes harder

• planners feel pressure to hedge against uncertainty

Introduce controls that ensure purchases are aligned with realistic consumption:

• assess your own order quantities based on demand, not on vendor suggestion

• a formal review before buying slow-moving parts

• visibility into component usage across the full assortment

• tighter integration between planning and procurement

Increasing collaboration between purchasing and demand planning reduces excess inventory while improving service reliability.

5. Consolidate Vendors Where Practical

A broad supplier base increases administrative overhead. Vendor consolidation, when executed carefully, simplifies the inbound supply chain and creates leverage for:

• better pricing

• more consistent quality

• shorter lead times

• reduced MOQs

• improved responsiveness to changes

• reduced administration

The goal is not to minimize suppliers at the expense of risk, but to reduce fragmentation where multiple vendors perform the same function with minor variations.

6. Improve Forecasting and Demand Segmentation

When complexity increases, forecasting accuracy declines. Improving forecast quality does not require advanced algorithms; it requires structural clarity.

Segment SKUs based on:

• volatility

• seasonality

• sales volume

• strategic importance

• customer dependencies

High-volume, stable SKUs benefit from traditional forecasting. Highly volatile or low-volume SKUs may require:

• make-to-order strategies

• shorter planning horizons

• customer collaboration

• tighter approval for stock replenishment

This prevents excess safety stock and lowers working capital requirements. If you have the luxury of receiving ongoing forecasts from your customers, your overall forecast will be a combination of those forecasts and traditional forecasting methods.

7. Optimize the Item Master and System Data

Operational complexity often comes from poor data quality. Inaccurate or incomplete item data forces planners to hedge with more inventory.

Clean the item master by ensuring:

• correct units of measure

• accurate lead times and MOQs

• accurate vendor data

• current costs

• proper SKU statuses

• correct replenishment methods

Data clarity enables better planning and protects cash flow.

8. Identify and Remove Hidden Variability

Variability increases inventory and often comes from areas not immediately visible:

• inconsistent production cycle times

• unreliable vendor delivery patterns

• quality rejections

• non-standard packaging sizes

• engineering/product changes introduced mid-cycle

• customer segmentation that lacks clarity

A systematic approach to reducing variability reduces the need for buffers, improves turns, and speeds up cash conversion.

9. Use a Tiered Service-Level Strategy

Not every SKU requires the same service level. A one-size-fits-all policy inflates safety stock unnecessarily.

Segment service levels based on:

• SKUs that drive revenue

• SKUs that differentiate the brand

• SKUs required for compliance

• long-tail items

• customer-specific SKUs

By assigning different service policies, companies avoid overprotecting non-core items and reallocate working capital to where it adds value.

10. Build a Governance Structure Around New SKU Introduction

Many companies allow new SKUs to enter the assortment without proper review. This is one of the main drivers of long-term inventory bloat.

Create a structured approval process that evaluates:

• financial impact

• supply chain implications

• inventory requirements

• vendor capabilities

• expected lifecycle

A robust stage-gate process prevents unnecessary complexity from entering the system in the first place.

Conclusion

Complexity accumulates quietly but has a visible impact: higher inventory, longer lead times, more effort spent on everyday activities, more human error and ultimately weaker cash flow. Reducing complexity is not about limiting the business. It is about enabling scalability, profitability, and resilience.

By rationalizing SKUs, standardizing components, strengthening procurement discipline, improving data quality, and building structure around product introduction, companies can significantly improve cash flow without sacrificing customer experience.

Simplification is one of the most powerful levers a business can pull. It frees capital, improves operational control, and strengthens the entire supply chain…but many business leaders still hesitate to pull the trigger on discontinuing SKUs.

If your working capital is rising faster than your sales (track this using Cost of Inventory as a % of Sales) or if your operations team feels stretched, complexity is likely the cause. And the sooner it is addressed, the faster your cash flow will improve.