Shocking Profit – Part 4 of 5 Excess Inventory Is the Canary in Your Coal Mine

TL;DR: Excess inventory is almost never the real problem. It’s a warning light pointing at a broken process upstream: unreliable lead times, inconsistent quality, shaky forecasts, or capacity used to build things you don’t need yet. Segmenting your business with the 9-Box shows you where the canary is singing, and the counterintuitive truth is that fixing the upstream cause usually lets inventory fall and service rise at the same time.

This is the fourth article in a five-part series on segmenting your business to drive real EBITDA and free up capacity you already own. So far we’ve met your two business “twins,” found where you give profit back, and found where you’re underpriced. This article is about learning to read a signal you’ve probably been misreading for years: the inventory piling up on your floor.

Let me start by correcting a piece of advice you’ve probably heard, because it gets pricing exactly backwards.

The usual wisdom says: find the customers who’d be happy to pay more. That’s a useless test. Nobody is happy to pay more. Not you, not me, not your best customer. If “happy” is the bar, you’ll never raise a price in your life.

Old-time coal miners carried a canary down into the shaft. The bird was small, and it had nothing to do with mining. But it breathed faster than a man, so if dangerous gas was building up, the canary stopped singing before any miner felt a thing. The bird wasn’t the point. The bird was the warning. When it went quiet, you got out, not because the canary was the problem, but because it was telling you about a problem you couldn’t see or smell on your own.

In your business, excess inventory is the canary. And almost every owner I meet has been treating the bird as the problem, trying to manage inventory down directly, when the inventory was only ever a messenger pointing somewhere else.

What is your inventory actually trying to tell you?

Here’s the mistake. When inventory climbs, the instinct is to attack the inventory: set targets, push the warehouse, lean on purchasing, write a memo about working capital. You’re trying to quiet the canary by telling it to stop singing. It doesn’t work, because the bird isn’t malfunctioning. It’s doing its job. It’s warning you.

Excess inventory is a symptom, not a disease. It’s almost always covering for a broken process somewhere upstream. Your lead times are unreliable, so your team carries extra to protect the customer. Your quality is inconsistent, so they overproduce to have enough good units. Your forecast is shaky, so they stock a little of everything just in case. None of that is laziness or waste for its own sake. Every one of those piles of stock is your people doing something reasonable to protect your customers from a system that isn’t dependable. The inventory is the scar tissue around an old wound nobody ever healed.

Which means the question is never “how do we cut inventory?” The question is “what is this inventory protecting us from, and can we fix that instead?”

When the canary is really about capacity

There’s a second thing the canary warns about, and it’s the one we’ve been tracing through this whole series: capacity.

Sometimes the excess inventory isn’t covering for unreliable lead times at all. It’s the residue of using your capacity to build things you don’t need yet. You ran the long, “efficient” batch because the changeover was a pain, so now you’re sitting on six months of a product you’ll dribble out over a year. That stock isn’t safety stock. It’s capacity you spent early, this week’s machine hours and this week’s cash, converted into product you can’t sell yet and parked on a shelf.

I worked with a consumer products maker whose runs were sized to build eight to twelve weeks of supply at a time. Felt productive. Everyone was busy, the lines were full. But that “productivity” was manufacturing a feast-or-famine cycle: a mountain of one item nobody needed yet, while customers waited on a different item still stuck in the queue. The inventory on the floor was the canary, and what it was singing about was capacity being spent in the wrong place, at the wrong time, on the wrong product.

This is the twins again. Della, your steady high-volume business, can be built ahead a little, safely, because her demand is predictable. When you apply that same build-ahead logic to Tess, your lumpy, unpredictable business, you get a pile of stock that may never move, because you were guessing, and the one thing we know about a guess on lumpy demand is that it’ll be wrong. You just don’t know how wrong.

How the grid makes the canary visible

So how do you find the canary, and read what it’s telling you? You put your inventory on the Volume by Volatility grid, the first of the two grids we use in the 9-Box.

Remember the two axes. Volume sorts your products into your A items, B items, and C items by how much they sell. Volatility sorts them by how predictable that demand is, steady as a metronome on one end, lurching all over the place on the other. Now overlay where your inventory actually sits.

Here’s what healthy looks like: stock concentrated on the predictable, high-volume items, the ones you can count on, turning fast. And here’s the canary singing: piles of inventory sitting in the high-volatility cells and the low-volume long tail, places where, if your processes were sound, you wouldn’t need much stock at all. When you see safety stock that dwarfs the actual swing in demand, or finished goods built for orders that are months away, or slow-moving C items sitting on hundreds of days of inventory, that’s not prudence. That’s the bird, gone quiet, telling you something upstream is wrong.

 

I’ll give you the starkest version I’ve seen. At Uniform Advantage, the custom apparel maker we’ve followed through this series, the slow-moving, high-volatility corner of the business was sitting on inventory measured not in days or weeks but in years of supply, while the company had quietly built up more than $3.7 million of stock that ultimately had to be written off. It accreted over a decade, a few hundred thousand dollars a year, small enough each year that no one ever flinched. Nobody decided to do that. The grid simply made visible what the average had been hiding: a canary that had been silent for ten years.

 

The counterintuitive part: less inventory, better service

Now here’s the idea that makes people think I’ve lost my mind. When you fix what the canary is pointing at, inventory goes down and customer service goes up, at the same time.

I can hear the objection. “Tim, that’s backwards. You can’t sell from an empty cart. If I cut inventory, my service will get worse.” I understand why it feels that way. But follow the logic. If your excess inventory is there to cover for unreliable processes, then the inventory was never actually fixing your service problem. It was an expensive bandage over it. Fix the underlying process, the planning, the lead times, the way you stock by segment, and you no longer need the bandage.

I watched this play out with a distributor of hydraulic and electronic components. When they came to us, their on-time delivery was below 65 percent, their lead times had stretched to twelve weeks, and their inventory had climbed to 27 percent of sales, so high they were borrowing at steep rates just to fund it. Every instinct said the inventory was protecting whatever service they had left. It wasn’t. We reset how they planned, setting safety stock based on each item’s actual volatility instead of one blanket rule, stocking to real demand instead of averages, and changing how they ranked what mattered. Within months, inventory fell to 21 percent of sales while on-time delivery climbed past 85 percent. Less stock. Better service. At the same time. Because the excess had never been helping service in the first place; it was a symptom of the very disease that was hurting it.

Excess inventory isn’t the price of good service. It’s usually the evidence that your service problem hasn’t been solved.

Evidence that your service problem

Make-to-order versus make-to-stock: the canary’s prescription

Once the grid shows you where the canary is singing, it also points to one of the most powerful fixes you have: deciding, segment by segment, what you should make to stock and what you should make to order.

 

The logic follows the volatility axis directly. Your predictable, high-volume items, Della’s world, are the right candidates to make to stock and replenish lean: you can count on the demand, so you keep a smart, modest buffer and turn it fast. Your lumpy, unpredictable items, Tess’s world, are often exactly the wrong things to stock, because stocking them means guessing, and guessing on volatile demand is how you build the write-off pile in the first place. Many of those items should be made to order instead. Yes, the customer may wait a little longer. But you stop tying up cash and capacity in inventory that may never move, and you stop feeding the canary.

 

This is the heart of the prescription, and it’s where article five takes us next: setting a deliberate, differentiated inventory policy for each segment instead of one blanket rule for the whole business. For now, the point is simpler. The grid doesn’t just show you the sick inventory. It tells you which items should never have been stocked the same way in the first place.

A word about your people, before you change a thing

When you lay this out and the write-off number comes into focus, there is going to be a temptation to find who’s responsible. Resist it completely.

 

Nobody built that inventory out of carelessness. Think about the food company I’ll mention briefly: a premium food maker that had been spun off from a large parent. Overnight, they lost the planning systems, the structure, and the support the parent had always provided, and within a short time their inventory had ballooned to five times its prior level. Was that the team’s failure? Of course not. The system they’d relied on was simply gone, and they did the only reasonable thing people do when the process disappears: they carried more stock to protect the customer. When we helped them rebuild the planning foundation, their excess and obsolete inventory dropped by 70 percent in five months. The people didn’t change. The system did.

 

That’s the whole lesson of the canary, really. Truth is not a stone meant to hurl at people. The inventory was never an indictment of your team. It was your team protecting your customers from a system that let them down. Fix the system, and the same people will hold exactly the right amount of stock. Blame the people, and they’ll quietly pad the numbers to protect themselves, and you’ll have taught your best early-warning system to stop singing.