A few months ago, I had the immense privilege of working with the team at Iowa State University’s Center for Industrial Research and Service (CIRAS) to assess the supply chains at eight small Iowa-based manufacturers. The lessons we learned and their common threads can be of use to companies everywhere, regardless of size or industry. One of the most interesting lessons I learned is “how much inventory is the right amount?” I’ll explore that and other learnings in today’s article.
If you are in the central Iowa area, CIRAS and I are doing a procurement series that includes many of these items and includes in-person negotiation training. It’s a series of webinars from August 26th to September 11th, 2025 with the in-person training on September 4th in Cedar Rapids called “Procurement Series: Strong Supply Chains Begin with Smart Procurement.”
Supply Chain Cycle
When I assess a supply chain, it’s helpful to have a framework to structure, organize, and communicate my thoughts. This is the framework I have developed and use regularly, which has changed only slightly from when I wrote an article series on it in early 2024.
For those so inclined, links to the article series here:
Contracts to Business Planning
Demand Planning to Supply Planning
Order Generation and Fulfillment
Delivery Assurance and Performance Assessment
The graphic above is the full supply chain cycle, with internal and external dimensions included. For more details, please review the article series.
Through April and May, I conducted Supply Chain 360 assessments for eight small Iowa-based manufacturers with between 30 and 1000 employees. For confidentiality’s sake, I won’t disclose who they were, and will just share some common threads I saw with all or most of these manufacturing supply chains.
In benchmarking the eight manufacturers, here are some general trends:
- The strongest link was in order generation and fulfillment. This makes sense because this is where a Purchasing team starts – issuing purchase orders and ensuring they arrive. Even the smallest companies probably have someone issuing purchase orders to key suppliers, so it’s the first thing a team really gets good at.
- The link with the most opportunity was in business planning. Business planning is where category management and market planning live, and is the space where most supply chains show how proactive vs. reactive they are. Business planning means deciding when to strategically bid categories, and not simply running a bid whenever a supplier raises their price or otherwise reduces their value.
- Other major opportunities were in contracts and performance assessment. Contracts were mostly limited to purchase order terms and conditions, with a few contracts using supplier templates. The biggest issue with performance assessment was a lack of alignment either across the supply chain team or between the supply chain and the larger organization. It’s very hard to choose just a few metrics that matter and have everyone understand and drive toward those metrics.
- The “right” inventory level was 30% of annual spend. While I didn’t go seeking this metric when I first started these assessments, I found a strong trend where manufacturers were generally content with their inventory levels when inventory was around 30% of their annual spend. Inventory meant a combination of raw materials, work-in-progress, and finished goods. While most companies agree inventory can always be reduced, it was not causing major issues at this level.
- Supply chain maturity was generally between “Ad Hoc” and “Planning”. Doing these benchmarks helped solidify where these manufacturers are in the supply chain maturity model. In many ways, this is good news because there is so much value still to be captured.
Actions for Supply Chain Leaders
Based off these benchmarks, there are a few key actions for supply chain leaders (Note: a supply chain leader is not just the person “at the top”, it’s anyone who leads). First, determine if any of these trends resonate with you and your team. If not, congratulations! You probably have a few other supply chain challenges… (ha!). But if any of this sounds familiar, here is where I would start. Bad news: none of these are truly “quick wins”.
- Pick up to three metrics that matter and drive them. Every member of your supply chain team should be able to name the same three metrics they care about. I’ve written more on this topic previously, but in the context of this article this is what matters: get your supply chain team aligned. In addition, the supply chain team’s non-supply-chain leader (even if it’s the CEO) should be able to name the three metrics. So should the CFO and COO. In doing many assessments, I have rarely found a supply chain team to be perfectly aligned, but I have seen it happen and know it can.
- Why focus on metrics? You need your team in alignment; otherwise your supply chain is either chasing its proverbial tail or even pulling against the goals of the rest of the organization. Having a focus on the right metrics within your supply chain will really decrease costs and risks for the entire company.
- Determine and right-size your inventory. After the just-in-time approach of 2000-2020 that was rapidly and violently replaced by the make-sure-you-have-enough approach of 2020-2022 and then the hedge-your-bets-against-inflation-and-tariff approach of 2023-2025, many inventory levels are way out of whack. Chances are very good you’re sitting on inventory that hasn’t moved in two years and you may not even realize it. Do a deep dive on your inventory and get that extra stuff out the door. It’s extremely difficult to do, but consider scrapping stagnant inventory, paying your supplier’s exorbitant restocking fee, or selling items at a deep discount. The money is already spent, don’t keep spending money to stock inventory that doesn’t serve you. And have no illusions – holding inventory on hand always has a cost.
- Why right-size inventory? Inventory is cash, sitting on your shelves. As long as it’s simply sitting there, it’s not working for you. At least one of the companies I talked to had the classic problem where supply chain needed to buy more inventory and finance kept blocking new purchases with all the inventory on the shelves. It’s hard to get the right inventory on the shelf, but worth making the effort to do.
- Start managing categories. Don’t start with all of your categories, pick the big ones that really impact your business. Assign each supply chain team member a category and have them start mapping it. That means answering some basic questions, including: “Are the commodities that make up this category generally going up or down in price? How fast?”, “How important is the category to our business? How important is our business to our suppliers?”, and “How many approved suppliers do we have for this category? How many additional suppliers could we add to that list?” There are lots of ways to approach category management, but the key piece is simply starting to understand the wider market and deciding proactively when that category should be rebid or renegotiated after its initial quote.
- Why manage categories? Knowing what the larger world is doing with a category and proactively bidding it increases your leverage with suppliers. Category management can result in big savings by increasing your negotiation power and getting the conversation on your schedule. Putting a category out to competitive bid when commodity prices are lower and your team has time to focus on results is far more effective than reacting to supplier price increases as they come.
- Implement contracts. Just like with categories, don’t try to boil the ocean here. Start with your top three domestic-based suppliers and work on negotiating contracts. This can be tricky if you do not have someone experienced in negotiating contracts, as a good contract is long and nuanced. If you’re going down this path, get some help or hire someone who knows how to do it. I have a set of articles starting in September 2024 that may help called “Contract Negotiation Deep Dive” and goes through all the clauses I typically use in my contracts.
- Why implement contracts? Chances are very good you have contracts with your customers, and those customers have put some risks on you. This might include responsibility for excess or obsolete inventory (this is the biggest one that’s nowhere in PO terms and conditions), lead time requirements, quality requirements, and either holding or reducing pricing over the course of the contract. Without contracts with your suppliers, that means you are carrying all of that risk. A contract with your suppliers helps both spread that risk around and lower it for everyone because everyone is on the same page about expectations.
Hopefully these lessons are helpful and applicable to your own business. If you’d like to talk more about inventory, category management, contract negotiation, or supply chain in general, let’s chat. If you’d like to get these articles weekly straight to your inbox and never miss one, sign up for my newsletter.
My book, Transform Procurement: The Value of E-auctions is now available in ebook and paperback formats: https://www.amazon.com/dp/B0F79T6F25
