When Cutting Inventory Backfires: A CEO’s Lesson in Customer Service

It started with a simple directive.

The CEO of a mid-sized manufacturing company reviewed the balance sheet and was alarmed at the value of inventory. Millions of dollars were tied up in raw materials, work-in-progress, and finished goods. “Cut it by 20%,” he told the operations team. “We need to free up cash.”

The order was carried out swiftly. Purchase orders were reduced, safety stock targets were lowered despite the fact that safety stock equations said otherwise, and inventory reviews focused solely on minimizing carrying costs. Within months, the warehouses looked leaner. On paper, the financial statements showed a stronger cash position. The CEO was satisfied… at least initially.

But soon, the cracks began to show.

Production managers couldn’t find the components they needed to complete customer orders. Sales teams started to deal with late shipments and stockouts. Customer complaints increased, and long-term buyers quietly began exploring competitors who could deliver consistently. The short-term boost in cash flow came at the expense of long-term customer trust and employee turnover.

By the end of the year, the company had indeed reduced inventory, but at a heavy cost: lost revenue, strained relationships, and damaged service levels.

The Hidden Trade-Offs of Inventory Reduction

The CEO’s decision is a classic example of viewing inventory only as a cost. While inventory does tie up working capital, it also serves as a buffer between uncertain demand and variable supply. Reducing inventory without considering demand patterns, supplier reliability, and customer service expectations exposes the organization to serious risks.

Key trade-offs include:

• Cash vs. Service: Reducing stock frees up capital but increases the chance of stockouts.

• Efficiency vs. Flexibility: Leaner operations may look efficient but leave little room for unexpected demand spikes or supplier delays.

• Short-Term Gain vs. Long-Term Relationships: Customers care more about reliable delivery than a supplier’s balance sheet.

Smarter Ways to Reduce Inventory Risk

Instead of blunt cuts, operations teams can take targeted actions to reduce inventory value without sacrificing service levels:

1. Work with Alternate Suppliers
   Source from vendors who can offer smaller minimum order quantities (MOQs) and shorter lead times.

2. Negotiate Flexible Agreements
   Use vendor-managed inventory (VMI) or consignment stock agreements to reduce carrying costs while ensuring availability.

3. Improve Forecasting and Demand Planning
   Base purchase decisions on data-driven forecasts that incorporate seasonality, historical volatility and market trends.

4. Differentiate Inventory by Importance
   Apply an ABC classification so critical items are always protected, while less important items can run leaner.

5. Tighten Production Scheduling
   Align production runs to confirmed demand to avoid excess work-in-progress.

6. Invest in Supply Chain Agility
   Build strong relationships with suppliers and logistics providers to ensure rapid replenishment when demand changes…if you have the leverage to do so.

Lessons for Business Leaders

1. Balance Metrics, Don’t Optimize in Isolation
   Inventory targets must align with customer service goals.

2. Use Data to Set Safety Stock
   Replace blanket reductions with calculations based on demand variability and lead times (safety stock and lead time formulas).

3. Involve Cross-Functional Teams
   Ensure finance, operations, and sales weigh in before inventory decisions are made.

4. Measure Service Level Impact
   Track fill rates, backorders, and lost sales to quantify the trade-offs.

Executive Checklist: Before Cutting Inventory, Ask…

1. How will this impact customer service levels?
   Do we know the expected effect on order fill rates and on-time delivery?

2. Which items are most critical to protect?
   Have we run an ABC classification to ensure high-priority items are covered?

3. Do we have supplier flexibility?
   Can our suppliers handle smaller MOQs, shorter lead times, or consignment arrangements?

4. What demand and lead time data are we using?
   Are we basing the decision on averages, or on variability and risk analysis?

5. Have we considered alternatives to cutting stock?
   Could process improvements, better forecasting, or improved scheduling achieve the same financial goals with less customer impact?

The Bigger Picture

Inventory management is a balancing act. Cutting too aggressively can harm service levels and revenue, while overstocking ties up cash and increases obsolescence risk. The smarter approach is to optimize inventory, not simply reduce it… striking a balance between financial efficiency and customer satisfaction.

The CEO in our story learned this lesson the hard way. For other leaders, the takeaway is clear: inventory decisions are not just about cost…they are about agility, resilience, and the customer experience.

If you’d like to discuss your inventory and forecasting challenges, feel free to contact me.