Shocking Profit – Part 5 of 5 How Much Inventory Do You Really Need?

TL;DR: Most companies set one blanket inventory rule as if every item were a volatile, high-stakes A. Segmenting your business with the 9-Box lets you set policy by segment instead: run the predictable items lean, buffer the genuinely critical ones, and cut or make-to-order the long tail. The result is a wave of freed working capital and floor space that becomes real, usable capacity, with no new building required.

This is the fifth and final article in a series on segmenting your business to drive real EBITDA and free up capacity you already own. This is where the series pays off. After four articles of finding the value, we answer the question that releases the most cash of all: how much inventory do you actually need?

Let me tell you about a CEO from the book I’ll call Joseph, who ran a company called Magnum Manufacturing. Joseph’s instinct, whenever the business felt tight, was to buy his way out. More equipment. More space. More machines. He was a builder by temperament, and building felt like progress.

I see Joseph’s instinct in inventory all the time. The warehouse is full, the floor is jammed, orders are bumping into each other, and the conclusion seems obvious: we need a bigger building. So before you sign a lease or pour a slab, let me ask you the question I’d ask Joseph. Are you sure you need more space? Or are you just storing the wrong things, in the wrong amounts, because you’ve been running one inventory rule for a business that’s secretly two?

Why one inventory policy quietly bleeds you

Here’s the most common inventory mistake I find, and it’s so ordinary that it hides in plain sight. Companies set a single inventory policy and apply it to everything. One safety-stock rule. One target days-on-hand. One reorder logic, stamped across the entire catalog as if every product behaved the same way.

You already know they don’t. We spent this whole series on it. Some of your products are Della, steady, predictable, high-volume, the metronome of your business. Some are Tess, lumpy, unpredictable, small, the ones whose demand lurches. Setting one inventory rule for both is the asset-side version of the exact mistake we’ve been hunting all along: treating your twins like the same child.

And the blanket rule fails in both directions at once, which is what makes it so expensive. Set the rule conservatively enough to protect your unpredictable items, and you’ll drown your steady, predictable items in stock they never needed. Set it lean enough to keep your predictable items tight, and you’ll keep stocking out on the volatile ones your customers actually wait for. One rule cannot serve two businesses. A single inventory policy guarantees you’re simultaneously over-invested in the items you could run lean and under-invested in the ones that actually matter.

What does the right policy look like, segment by segment?

The fix is to stop setting one rule and start setting a deliberate policy for each region of the grid. When you put your products on the Volume by Volatility grid, the prescription almost writes itself. Broadly, it sorts into three moves.

Run the predictable winners lean. Your high-volume, low-volatility items, Della’s core, are the ones you can count on. Because the demand is steady, you don’t need a big buffer; you need a fast, reliable replenishment rhythm. Make them often, in smaller batches, and keep them turning. These items can carry far less inventory than a blanket rule would ever allow, and your service won’t suffer, because predictable demand is easy to cover with little stock.

Buffer the genuinely critical few. Some items are volatile and important, a customer truly needs them available, and the demand genuinely swings. These earn a real safety stock, sized to their actual variability, not to a company-wide default. This is where you deliberately invest in inventory, because here it actually buys you something. The key word is sized: the buffer matches the real swing in that item’s demand, no more.

Cut, rationalize, or make-to-order the long tail. Your low-volume, high-volatility items and the dead D items are where the cash goes to die. For these, the move is rarely “stock them properly.” It’s to question whether they should be stocked at all. Some should be discontinued. Some should carry a minimum order quantity. And many should be made to order: produced only when a customer actually wants one, so you stop tying up cash and capacity guessing at demand you were always going to guess wrong.

That last point deserves its own beat, because it’s the most powerful lever in the whole article.

Make-to-order versus make-to-stock, decided on purpose

In the last article I introduced this idea as the canary’s prescription. Here’s the full version, because for most companies this single decision, made deliberately and segment by segment, frees more cash than anything else they do.

The logic runs straight down the volatility axis. If demand is predictable, you can make to stock: hold a lean buffer, replenish on a rhythm, and ship from the shelf. If demand is unpredictable, stocking it means guessing, and a guess on lumpy demand is a guess you’ll lose. Those items want to be made to order. Yes, the customer waits a little longer. But look at what you get in return: you stop pre-spending cash and capacity on inventory that may sit for years, you stop feeding the write-off pile, and you free the floor and the machine hours for work that actually sells.

Most companies have this backwards by default, not by decision. They make-to-stock everything, because that’s just how it’s always run, and the predictable items and the lurching ones get the same treatment. Flipping the right slice of the long tail from make-to-stock to make-to-order is often the fastest, cleanest cash release available to an owner. The question isn’t “how much of this should we keep on the shelf?” For a lot of your products, it’s “why is this on the shelf at all?”

The size of the prize

Let me show you what this is worth, because the numbers are not small.

Take Uniform Advantage, the custom apparel maker we’ve followed through the series. When we sorted their inventory by segment and set a deliberate policy for each, lean on the predictable items, real buffers on the critical few, and a hard look at the slow-moving tail, the same business that was carrying over $4 million in inventory turned out to need closer to $1.8 million to run the exact same service level. That’s more than $2 million in cash, sitting on the floor, disguised as prudence. Not lost to the business. Trapped in it, and recoverable.

And this isn’t unique to them. I write in the book about a CEO I’ll call Bob, who ran a private-equity-owned company. Bob had a discretionary spending limit of $50,000, anything above that needed sign-off. Meanwhile, without anyone deciding to, his team had quietly committed roughly $3 million in excess inventory. Think about that gap. He needed approval to spend fifty thousand dollars, while three million walked out the door in slow-moving stock that nobody had to authorize, because inventory doesn’t feel like spending. Inventory is capex in disguise. It’s cash, your cash, that you’ve decided to store as product instead of keep as money, and most of the time you never consciously decided at all.

Inventory is capex in disguise

Your next warehouse is already in the building

Here’s where we come back to Joseph and his instinct to buy more space.

When you right-size inventory segment by segment, you don’t just free cash. You free the floor.

The slow movers you stop stocking, the long tail you flip to make-to-order, the predictable items you run lean instead of piling high, all of that was taking up room, room you’ve been paying rent on, lighting, heating, insuring, and walking around for years. Clear it, and you uncover capacity you already own.

That’s the part Joseph almost missed. The new warehouse he wanted to build was already sitting inside the one he had, buried under inventory he didn’t need. The new production capacity a company thinks it has to add is often hiding under build-ahead stock and slow movers clogging the floor. You don’t always need to build. Sometimes you just need to clear, and the space you get back is accessible capacity, capacity you can use today, for free, the moment you stop storing the wrong things.

How to do this without starving the business

Now the necessary caution, because the fastest way to discredit this work is to do it carelessly and stock out on something that matters.

Don’t slash across the board. The whole point is that across-the-board is the problem. Move segment by segment. Start where the risk is lowest and the prize is clear: the dead D items and the obvious slow-moving tail, where freeing cash costs you nothing. Then work into the predictable winners, easing inventory down as you tighten the replenishment rhythm, watching service as you go. Save the volatile, critical items for last and treat them with care; those buffers exist for a reason.

And sequence the cause before the symptom. Remember the canary: if excess inventory was covering for an unreliable process, you have to shore up that process, the planning, the lead times, the make-to-order capability, as you bring the stock down, or you’ll just recreate the shortage the inventory was hiding. Done in the right order, inventory falls and service holds or improves, exactly as we saw in the last article. Done recklessly, you prove every skeptic right. Roughly right, not precisely wrong, and one segment at a time.

One last thing, and by now you know it’s coming. The inventory you’re about to right-size was built by people doing their honest best inside the system they were given. Nobody hoarded stock to spite you. They were protecting customers, hitting the blanket targets you set, and working with the tools they had. Truth is not a stone meant to hurl at people. Bring them into the work, give them a smarter policy to run, and they’ll hold exactly the right amount. That’s not a soft sentiment. It’s the only way the new levels actually stick.

Della and Tess, finally raised right

We started this series with a person standing with one foot in boiling water and one in ice, comfortable on average and quietly suffering in the particulars. We’ve spent five articles pulling that average apart, and it all comes down to one act: seeing that you don’t run one business, you run two, and committing to raise each twin as the child she actually is.

Della gets a lean, fast, predictable rhythm. Tess gets real buffers where she needs them and make-to-order where she doesn’t, and stops being forced to live by her sister’s rules. Do that, and the cash comes home, the floor opens up, and both twins finally thrive. Undiscovered value does not get mined. But you’ve spent five articles learning exactly where to dig.