Inventory ruins profits and bleeds cash.
For Apple CEO Tim Cook “Inventory is fundamentally evil.”
Supply chain has the power to turn this demon into a competitive advantage.
The infographic with 12 red flags shows where we should focus our efforts to tame the inventory beast.
Let’s break it down!
1. No ABC Product Segmentation
The Issue: Treating all inventory equally leads to misallocated resources and poor decision-making. Inventory isn’t a democracy. Without clear focus on high-impact items—those driving the most profit—both operations and financial performance suffer.
The Fix: Implement ABC classification to prioritize inventory effectively:
- A-items (high value, low volume): Closely monitor and optimize.
- B-items (moderate value, moderate volume): Balance attention and automation.
- C-items (low value, high volume): Automate and streamline.
My favorite inventory segmentation is ABC-XYZbecause it also considers demand predictability.
2. All Items Treated Equally Despite ABC Classification
The Issue: Having ABC classification but not using it in decision-making. In this red flag, the inventory segmentation is done but it is not actionable. A sad situation, in my view.
The Fix: Start using inventory segmentation to drive priorities, stocking policies, and replenishment strategies.
3. Inexistent SLAs (Service Level Agreements)
The Issue: Without clear SLAs, there are no defined expectations for suppliers. This leads to inconsistent performance, delays, and ultimately, poor service to customers. When suppliers fail to meet expectations, customers feel the impact.
The Fix: Establish SLAs with measurable KPIs to ensure both supplier reliability and customer service excellence:
- Lead Time Adherence → Prevents stockouts and keeps operations running smoothly.
- Fill Rates → Ensures suppliers consistently deliver the right quantities.
- On-Time Delivery → Guarantees availability and meets customer expectations.
4. BOMs (Bill of Materials) Incomplete or Inaccurate
The Issue: Incorrect BOMs create production delays, stockouts, and excess inventory. This is a nightmare for planning. In my experience, BOM errors are more common than they should be.
The Fix:
- Regularly audit and update BOMs to reflect actual material requirements and design changes.
- Clearly define ownership. It is very important to define who in the organization is responsible for maintaining accurate BOMs. Without accountability, BOM errors will persist.
5. No KPIs or Not Measured Consistently
The Issue: Without tracking performance, inventory issues stay hidden until it’s too late. Lines stop. Screaming workers. Firefighting begins. Planners scramble to fix what could have been prevented.
It is vital to define the right metrics, sources, calculations, and frequency.
The Fix: Establish and consistently monitor key inventory KPIs, including:
- Inventory Turns → Measures how efficiently inventory is managed.
- Fill Rate → Ensures customers get what they need, when they need it.
- Aging Stock → Identifies slow-moving inventory before it becomes obsolete.
6. KPIs Are Not Clearly Defined
The Issue: Vague, inconsistent, or conflicting KPIs lead to bad inventory decisions. It’s not uncommon for different teams—even within the same company—to define the same KPI differently. The terminology must be clearly defined.
The Fix:
- Standardize KPI definitions across teams to ensure everyone speaks the same language.
- Align KPIs with business goals so they drive the right behaviors.
- Validate that KPIs don’t compete—if one metric improves at the expense of another, this means friction instead of progress.
7. Wrong Metrics
The Issue: Measuring the wrong metrics leads to confusion, misalignment, and wasted effort. When KPIs don’t tie back to business goals, they become vanity metrics—numbers that look impressive but don’t drive real improvements in inventory performance.
The Fix: Shift the focus to actionable metrics that directly impact inventory health, such as:
- Demand Variability → Helps adjust forecasts and buffer stock accordingly.
- Safety Stock Levels → Ensures the right balance between availability and cost.
- Carrying Costs → Identifies opportunities to reduce excess inventory and free up cash.
8. Ineffective or Non-Existent S&OP (Sales & Operations Planning)
The Issue: When inventory planning operates in isolation—without alignment between demand, supply, and finance—imbalances are inevitable.
Excess stock piles up.
Critical items run out.
Working capital suffers.
The Fix: Make inventory planning an outcome of the S&OP process, ensuring:
- Demand forecasts drive supply decisions to prevent over- and under-stocking.
- Production and inventory policies align with real business needs, not just gut feeling.
- Finance is in sync to optimize working capital and profitability.
9. Poor Demand Forecasting
The Issue: Inaccurate forecasts lead to either stockouts or excess inventory—both of which hurt the business. It’s important to track WMAPE (Weighted Mean Absolute Percentage Error) and bias. In my experience, fixing bias first leads to the biggest forecasting gains.
The Fix:
- Leverage historical data to identify trends and patterns.
- Incorporate market insights to account for external demand drivers.
- Engage Sales & Marketing in a collaborative forecasting process—because they often have valuable forward-looking insights.
10. Weak Inventory Control
The Issue: Lack of proper tracking leads to shrinkage, obsolescence, and inefficiencies.
The Fix:
- Implement cycle counting
- barcode scanning
- automated inventory management systems
11. Lack of Inventory Policy
The Issue: Without clear inventory policies, decisions become inconsistent, reactive, and costly. One planner overbuys “just in case,” while another cuts stock too aggressively. No good results in either case.
The Fix: Establish structured inventory policies to drive consistency and control, including:
- Reorder Points → When to replenish stock to prevent shortages.
- Safety Stock Levels → How much buffer inventory is needed for demand variability.
- Slow-Moving & Obsolete Inventory → Clear guidelines for review, discounting, or write-offs.
12. No Root Cause Analysis
The Issue: Inventory problems keep coming back because they’re never properly diagnosed. Instead of solving the real issue, the business reacts to symptoms—leading to recurring stockouts, excess inventory, and inefficiencies.
The Fix: Stop firefighting and start fixing the root cause by using structured problem-solving methods:
- 5 Whys → Keep asking “why” until you uncover the real cause.
- Fishbone Diagram → Visually map out potential causes to find the true culprit.
Inventory impacts operations and the financials. It isn’t just about counting stock—it’s about adopting a strategic approach within the context of S&OP.
Which of these red flags have you encountered?
