Fun With Numbers: Interest Rates & Inventory Carrying Costs
By Charles Fallon
August 22nd | 3 min read
This blog post examines the vital role of effective inventory controls in reducing carrying costs. Focusing on two key aspects:
Mastering Inventory Controls in an Era of Rising Interest Rates: Lessons from 5 Leading Companies
I have a client who loves a good tangent and yesterday, he steered us to a favorite grumpy old man conversation: back in our day, interest rates were just as high as today but we thought it was a pretty good deal!
And it was. But the interest rate shock is not about the level of rates but the speed with which it got there. Since March 2022 to July 2023, the Federal Reserve cranked it up a whopping 5%. That kind of speed makes it hard to adjust a company’s balance sheet accordingly.
To illustrate, let’s take a look at some data from 2022 annual reports of 5 publicly traded companies that are a part of our daily lives. Suppose these companies had to finance 100% of their inventory and therefore had to scramble to cover the additional interest payments on that inventory.
|Company||2022 Inventory (in billions)||Days of Supply||Additional Carrying Cost from a 5% rise in interest (in millions)|
|Procter & Gamble||$7.0||32||$350|
Combined, these 5 companies would have to pay $4.1 billion in additional interest charges to finance inventory.
This effect extends throughout the entire supply chain and sheds light on why inventory management has faced increased scrutiny in 2023. Companies are not only looking to master their sales and operations planning processes but inventory controls as well.
Why Inventory Controls Matter
As interest rates continue to fluctuate, businesses must proactively adapt their financial strategies. The impact of rising interest rates on inventory carrying costs cannot be ignored. By implementing effective inventory management practices and seeking expert guidance, companies can navigate the challenges posed by interest rate shocks and maintain financial resilience in dynamic market conditions.
Partnering with LIDD
LIDD continues to be the bane of many of our clients’ most seasoned bankers, earning a reputation for our dedication to eliminating flabby inventory from their supply chains. If you’re tired of being weighed down by excess stock and high interest payments, then it’s time to team up with us. Let’s work together to lower your interest payments too!