Valtrend - Butler Business Valuation

Business Valuation and Working Capital Management

Generally speaking, it is sound practice for companies to run lean.  However, there can be adverse ramifications to such a strategy.  For example, John Deere, the farm equipment manufacturer, has become a build-to-order company.  By keeping less inventory in stock, John Deere received greater pricing power and improved its cash flow.  However, as the farm economy is improving, John Deere has been caught with a shortage of equipment for its dealers.  Farmers are going elsewhere for their large equipment purchases – sometimes for the first time ever.  It appears that John Deere was too pessimistic in its projections for demand by North American farmers during the Great Recession and has recently increased production.  The lesson is that improving inventory turns must be carefully weighed against the ability to service your customers.  It is a fine line that all manufacturing companies must walk.  Getting it wrong, can lead to unintended consequences.

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