Summary: In uncertain markets, it’s natural for manufacturers to carry more inventory. When tariffs, supplier delays, rising input costs, and uneven customer demand make planning more difficult, holding extra stock can feel like the safest option.
But that protection comes at a cost. Every dollar tied up in excess raw materials, work in progress, or finished goods is a dollar that can’t be used for payroll, equipment, debt service, supplier payments, or growth.
For April 2026, Statistics Canada reported that total Canadian manufacturing inventories rose 0.5% to $125.0 billion, driven by higher inventories of goods in process and finished products.
For manufacturers, that means more cash is sitting in products that are still being made or awaiting sale. While this can help protect supply and customer orders, it can also limit financial flexibility if the inventory does not convert to sales quickly enough.
This article walks you through how stronger inventory management can help your business respond to supply chain disruption, free up working capital, and plan with greater confidence.
Know Your Numbers: Inventory Metrics That Matter
Before cutting stock, your business needs to understand where inventory is supporting operations and where it is quietly draining cash.
A few core metrics can help you see whether inventory is moving at the right pace, growing faster than sales, or costing more to hold than it should:
- Inventory Turnover Ratio: This measures how many times your business sells and replaces its inventory in a given period. Higher inventory turnover is generally a good sign, but context matters. A food manufacturer, an industrial equipment supplier, and a specialty components business will not have the same turnover profile.
- Days Inventory Outstanding (DIO): This shows how many days inventory sits before it is sold or used. Reducing DIO can improve cash flow, but only if it does not create stockouts, missed sales, or production delays. DIO and the inventory turnover ratio are inversely related (DIO is 365 divided by turnover), and both are used to evaluate supply chain efficiency and liquidity.
- Inventory-to-Sales Ratio: This shows whether inventory is growing faster than revenue. If the ratio is rising, it can signal a working capital problem, especially when sales are softening or customers are delaying orders.
- Inventory Carrying Costs: These can include warehousing, insurance, handling, financing costs, shrinkage, obsolescence, and the opportunity cost of capital. Carrying costs are commonly estimated at about 20% to 30% of inventory value annually, although the actual cost depends on the business and product mix.
The most useful insight often comes from trends. Benchmark these metrics against industry peers, but also compare them with your own historical performance. A consistent shift in inventory turnover, DIO, or the inventory-to-sales ratio can show where cash is getting stuck, and whether the issue lies in purchasing, demand forecasting, sales visibility, pricing, product mix, or customer order timing. Inventory should be reviewed with finance, operations, sales, and procurement at the same table.
ABC Analysis: Focus Where It Matters
Not all inventory items deserve the same level of attention. ABC analysis classifies inventory by value and velocity, helping your business identify which products tie up the most money and which move quickly enough to justify that investment. The method is often linked to the Pareto principle, in which 20% of items account for 80% of the total value.
A practical inventory control review often separates stock into three groups:
- A items: May represent only 10% to 20% of stock-keeping units (SKUs), but they can account for 70% to 80% of the inventory value. These items need tight controls, frequent reorder reviews, supplier monitoring, and demand forecasting.
- B items: May represent 20% to 30% of SKUs and 15% to 25% of value. They still matter, but moderate controls and periodic review are usually enough.
- C items: Often make up 50% to 70% of SKUs, but only 5% to 10% of value. For these items, simplified management, bulk ordering, or automated reorder rules may reduce transaction costs.
This approach helps your business avoid broad inventory cuts that create unnecessary operational risk. To improve working capital with the least disruption, start where the money is concentrated: the A items.
The JIT Debate: Lean vs. Resilient in a Volatile Market
Just-in-time manufacturing can be highly effective. By ordering materials close to when they are needed, businesses can reduce inventory levels, lower carrying costs, and improve cash flow.
That works well in stable supply chains. In volatile markets, it exposes the business to risk. A delayed supplier, a tariff that changes landed costs, or unexpected spikes in demand can quickly turn a lean inventory model into lost sales, downtime, and expensive rush orders.
The solution isn’t necessarily to abandon just-in-time manufacturing. A stronger approach keeps the discipline of lean manufacturing while adding resilience where it matters most.
For Canadian businesses, that means holding safety stock for critical A items, especially where supplier lead times are long or customer commitments are time-sensitive. It may also mean dual-sourcing key components, building closer supplier relationships, or negotiating better visibility into supplier capacity.
Safety stock shouldn’t be based on guesswork. A practical safety stock calculation weighs the cost of holding extra inventory against the cost of a stockout, including lost sales, production downtime, expedited freight, and reputational damage.
Your business may also consider nearshoring or domestic sourcing for critical components. The unit cost may be higher, but the total cost can be lower when shorter lead times, reduced disruption risk, and lower emergency freight costs are included.
Better demand planning also matters. Even basic statistical demand forecasting, using historical sales, order patterns, seasonality, and lead-time data, can reduce over-ordering and under-ordering compared with gut-feel purchasing.
Clean Up: 5 Ways to Manage Dead Stock, Obsolescence, and Write-Downs
Dead stock is one of the quietest working capital killers. Inventory that hasn’t moved in 12 months or longer may never sell at full margin, especially in sectors with rapid product cycles.
A quarterly dead stock review gives your business a structured way to identify slow-moving, obsolete, damaged, expired, or excess inventory before it becomes a larger financial problem. This is especially important in technology, consumer electronics, food and beverage, seasonal goods, and other categories where products can quickly lose value.
Once you know which inventory is no longer adding value to the business, the next step is to decide what to do with it and how to prevent the same problem from recurring:
- Move slow stock before it loses more value: Once dead stock is identified, options may include discounting and selling, bundling with other products, returning to suppliers where agreements allow, donating where appropriate, or writing it off.
- Build obsolescence into financial planning: Obsolescence shouldn’t be treated as a surprise. Planned product phase-outs can support sales and product refresh cycles, but they require careful forecasting. If the phaseout is misjudged, your business may be left with inventory that no longer aligns with customer demand.
- Handle inventory write-downs carefully: If inventory becomes obsolete, spoiled, damaged, or worth less than what your business paid for it, you may need to lower its recorded value. That may affect taxable income depending on the tax treatment, reduces the value of assets on the balance sheet, and changes reported profitability. Before making a write-down, your accountant should review the timing, documentation, valuation, and tax treatment.
- Use FIFO to reduce spoilage and obsolescence risk: Prevention is just as important as clean-up. First-in, first-out (FIFO) inventory rotation helps to make sure older stock is used or sold first, reducing the risk of spoilage, expiry, or value loss.
- Update reorder triggers before excess stock returns: Automatic reorder point triggers, usually managed in your ERP or inventory system, can significantly help you manage your inventory. However, these triggers should reflect current lead times, demand variability, and supplier risk rather than outdated purchasing habits.
The goal of any inventory reduction strategy is to maintain the stock that supports revenue while freeing cash from stock that is no longer adding value to the business.
Final Thoughts: Protect Supply Without Trapping Cash
The strongest inventory strategy isn’t about carrying the most stock or the least stock. It’s about carrying the right stock. When manufacturers understand what’s moving, what’s slowing down, and what’s tying up cash, they can protect customers while keeping more working capital available for payroll, equipment, debt service, and growth.
