Issue #1: The 3 Inventory Leaks Draining Your Cash Flow

The $200K You Didn't Know Was Sitting in Your Warehouse

A distributor doing $18M a year came to us with what they thought was a cash flow problem. Receivables were fine. Margins were acceptable. But the business always felt tight.

After pulling their inventory data, the answer was obvious: $220,000 in dead stock — product that hadn't moved in over 90 days — was sitting across three SKU families, financed at 8% APR on their revolving line.

They weren't losing money on sales. They were losing money to inventory they couldn't see clearly.

This is the most common cash leak in distributors doing $5M–$50M. And it almost always comes down to three things.

Leak #1: Phantom Demand in Your Forecasts

Your ERP forecast looks at historical sales. That sounds reasonable — until you realize it can't distinguish between real demand and demand distorted by your own behavior.

The classic example: you ran a promotion in Q3 last year. Sales spiked 40%. Your system logged that as baseline demand. Now it's ordering 40% more than you'll ever sell.

Operators call this demand inflation. It's insidious because it compounds — over-order this cycle, carry excess inventory, run a discount to clear it, repeat.

Fix it: Tag promotions, price exceptions, and one-time buys in your order history. Strip those events before running forecasts. Most ERP systems have a "promo exclusion" flag buried in settings that nobody turns on.

Leak #2: Safety Stock Set by Gut, Not Math

Ask most operations managers how they set safety stock levels. You'll hear: "We've always done two weeks." Or: "We bumped it up after the shortage last spring."

That's not a strategy — it's accumulated anxiety.

The right safety stock formula is simple:

Safety Stock = Z × σ_LT × √LT

Where Z is your service level factor (1.65 for 95%), σ_LT is demand standard deviation during lead time, and LT is your average lead time in the same units.

For most distributors, running this math for the first time cuts safety stock by 15–25% on stable SKUs — without touching fill rates. That's cash you're currently lending to your supplier for free.

Start with your top 20 SKUs by inventory value. The math takes an afternoon in Excel. The savings are immediate on your next purchase order cycle.

Leak #3: The Slow-Mover Tax

Every distributor has a long tail: SKUs that sell 1–3 units a month, maintained "for customer completeness." That tail has a cost that almost nobody tracks.

Here's a rough benchmark: carrying cost for slow-moving inventory typically runs 20–30% of unit cost per year. That includes financing, warehouse space, obsolescence risk, and the labor cost of managing it.

For a $500 SKU you sell twice a month, you're carrying ~$1,000 in average inventory at a cost of $200–$300/year. If your gross margin on that SKU is 22%, you need to sell roughly $1,000 in additional units just to break even on the carrying cost.

That's not a business — that's a warehouse tax.

The fix isn't always to cut SKUs. Sometimes it's to:

• Shift slow-movers to vendor-managed or consignment inventory
• Set minimum order quantities that make the economics work
• Consolidate slow-movers into a single DC instead of distributing them everywhere
• Drop-ship from supplier on demand rather than stocking

What to Do This Week

You don't need new software. Pull three reports from whatever system you're running:

1. 90-day zero-movement report — anything that hasn't sold in 90 days, ranked by on-hand value. This is your dead stock exposure.
2. Safety stock vs. actual on-hand — for your top 50 SKUs by value. Where are you 2× or more over safety stock?
3. Demand CV by SKU — coefficient of variation (std dev / mean) of weekly sales. CVs above 0.5 mean your forecast is likely unreliable.

Those three reports will show you where the money is. Most operators find $50K–$300K in addressable cash sitting in the first pass.

Coming Next Week

We'll go deep on supplier lead time variability — specifically, how to quantify the hidden cost when your supplier's "4-week lead time" is actually 3–7 weeks depending on the season, and what to do about it without destroying the relationship.

Forward this to someone who runs a warehouse. They'll thank you.

— The Supply Chain Stack