Improving the Cash Availability of Small Firms in Latin America via Better Inventory Management

Abstract

In Latin America, micro, small, and medium firms represent about 99% of businesses and more than 70% of employment, according to the Organization for Economic Cooperation and Development. Despite their number, these firms face a low survival rate: per the Small Business Administration, only 50% are still in business after five (5) years. We identified lack of cash availability as a driving force behind this high failure rate. There is an opportunity for these firms to achieve improvements in cash availability by managing their inventory better. This is relevant for these firms because they operate on a cash basis, meaning they pay for all necessities with cash and, in turn, collect all payments in cash as well. In this capstone, we present an inventory management framework that focuses on improving the cash availability for micro and small firms via better inventory management. At the start of this project, we conduct a field study analysis with three (3) firms in the city of Bucaramanga, Colombia, to better understand their operational practices. Our field study reveals that every firm indeed relies on cash for daily operations, and that these firms struggle to manage that cash effectively. As a result, we map the financial and operational performance of six (6) firms for ~17 weeks and develop a product segmentation and an inventory framework that reduces average inventory and increases inventory savings by up to ~80%, while also increasing inventory turns per segment. Additionally, we create a “business pulse dashboard” that provides weekly visibility to cash management, focusing on sales, profits, inventory, and expenses.