When Fuller Warehouses Conceal a Weaker Operation

Introduction

It is the last week of the quarter. Faisal runs a plastics factory in Riyadh (an illustrative case, not a real client). He walks past the finished-goods warehouse and sees pallets stacked to the ceiling. Two trucks of imported resin wait outside because there is no room to unload them.

His production report says the machines ran 92% of their available hours. His bank says the overdraft is close to its limit. Faisal's first thought is the one most owners have: we are busy, so we must be growing. The numbers tell a different story.

The short answer

What is happening: Stock is growing much faster than sales, and the extra stock is cash the business has already paid out.

Why it matters: Every riyal sitting on a shelf cannot pay salaries or suppliers, and if it was borrowed, it is costing interest every month.

What to do first: Split the stock increase into price changes, planned demand and unexplained growth, then give the unexplained part an owner and a deadline.

Sales Grew 10%. Stock Grew 60%.

Faisal's finance manager puts two lines on one page. Sales rose 10%, from SAR 120 million to SAR 132 million. Inventory rose 60%, from SAR 15 million to SAR 24 million.

A clearer way to read this is days of inventory (how many days of production cost the stock on the shelves represents). Last year the stock covered about 61 days. This year it covers about 88 days. The factory now carries almost a month of extra stock, while the business grew by a tenth.

If stock had grown in line with the business, it would be about SAR 16.5 million. The other SAR 7.5 million needs an explanation. This is what an inventory growth operating failure looks like from the inside: the warehouse fills quietly, and the cash drains with it.

Not Every Rise in Stock Is a Failure

Before anyone is blamed, management should test the innocent explanations. Some stock growth is healthy, and the number alone cannot tell the two apart.

Resin prices may have risen, so the same tonnes now cost more. A large customer order may be confirmed and due next month. A deliberate buffer may protect the factory against long shipping times for imported materials.

That last point matters in Saudi Arabia. PwC's Middle East working-capital research has repeatedly found that Saudi companies run the longest cash cycle in the region. Its 2022 study put the average Saudi inventory holding period at about 125 days. Long import routes make some buffer rational. That makes the test more important, not less. A buffer is a decision, and every decision should have an owner and a size.

Following the SAR 7.5 Million

Faisal asks for one simple exercise: trace every riyal of the extra stock to the decision that created it. The result, written as a money bridge, looks like this:

Extra stock to explain: SAR 7.5 million

→ Higher resin prices: 1.5 million (a real cost change, not a failure)

→ Resin bought in bulk for a supplier discount: 2.0 million

→ Long production runs of slow-selling colours and sizes: 3.0 million

→ Goods made before a customer order was signed, which then slipped: 1.0 million

So SAR 6 million of the increase came from internal decisions, not from customer demand. Only SAR 1.5 million is explained by the market.

Every Department Hit Its Target

This is where the story turns. Faisal calls in each manager, and each one has a good answer.

The production manager is proud of 92% machine use. Longer runs mean fewer changeovers (the hours lost switching moulds and colours), so the cost per unit looks lower. The purchasing manager is proud of a 3% discount on bulk resin. The sales manager wanted stock ready so customers would never wait.

Each decision made sense on its own desk. Together, they filled the warehouse. Nobody in the room was measured on total stock, and nobody owned it.

That is the operating failure the inventory was hiding. The scorecard rewarded volume, cheap buying and busy machines. It never asked whether the goods would be sold soon. Supply-chain researchers Lee, Padmanabhan and Whang described this pattern decades ago: buying in large batches and buying ahead of price changes make orders drift away from real demand. The warehouse simply records the drift.

The Discount That Cost More Than It Saved

The purchasing decision is worth working through, because it looks like a saving. Purchasing bought SAR 2 million of extra resin to earn the 3% discount. That saved about SAR 60,000.

The resin then sat for about four months longer than usual. If the business borrows at 7% a year (an assumption for this example), the interest on SAR 2 million for four months is about SAR 47,000. Add warehouse space, handling and the risk of damage, and most of the saving is gone.

The wider picture is larger. At the same assumed rate, SAR 6 million of decision-driven stock costs about SAR 420,000 a year in interest alone. That is before any slow-moving goods have to be sold cheaply or ground back into raw material.

What Management Should Test First

Faisal's team did not start by cutting stock. They started by finding out which stock was a problem. Five tests separate a healthy build-up from a hidden failure:

1. Price or units? Split the increase into higher prices and more physical goods.

2. How old is it? List every product line by the date it last sold.

3. Is it spoken for? Match stock to confirmed orders, planned seasons and approved buffers.

4. Which decision made it? Trace each build-up to a purchase, a production run or a sales forecast.

5. What does the scorecard reward? Check whether any manager is measured on stock at all.

If most of the increase is price, confirmed orders or an approved buffer, the advice changes. The issue is then cash planning, not operating discipline.

What Faisal Decided

The decisions were plain, and each one had a name next to it.

One owner for total stock. The general manager now owns the inventory number, with a limit for raw materials and a limit for finished goods.

Production follows demand, not machine hours. Machine use is still reported, but it is no longer a target on its own. Long runs are kept for the colours and sizes that sell every week.

Bulk buys pass a simple test. Any discount above a set order size must beat the cost of holding the extra stock before it is approved.

Slow lines get a decision every week. Each one is sold, reworked, ground back into raw material or written down. None simply waits.

No production before a signed order, except for agreed standard lines.

The aim of the first 13 weeks is not to empty the warehouse. It is to stop it filling for the wrong reasons.

Where This Sits in the 3Ms Business Operating System

In the 3Ms Business Operating System, stock that grows faster than sales is a signal, not a verdict. It enters the system through the cash and working-capital review, where days of inventory are tracked against sales growth.

Diagnosis then crosses into capacity and operations, because the cause usually sits in production rules, purchasing approvals and how the sales forecast is built. The decision that follows is a change of operating rules, owned by the general manager. The result enters the weekly management rhythm, inside the same 13-week cash view used for collections and payments.

It is the same pattern behind why profitable companies still run short of cash [link to: profitable-company-cash-shortage], and why full capacity does not always mean productive capacity [link to: productive-capacity-management].

The Warehouse Is Evidence

My verdict: rising stock is rarely the problem itself. It is the place where an operating failure becomes visible. Treat the warehouse as evidence, and ask which rule produced it.

If stock is growing faster than sales in your business, a short 3Ms working-capital diagnostic is a practical place to start: 3msbusiness.com.

External sources used

· PwC Middle East, 2024 Middle East Working Capital Study (Saudi Arabia still has the longest working capital cycle in the region): https://www.pwc.com/m1/en/publications/middle-east-working-capital-study-2024.html

· PwC 2022 Middle East Working Capital Study, as reported by CTMfile (Saudi average inventory holding period about 125 days in 2021): https://ctmfile.com/story/excess-working-capital-currently-locked-up-on-middle-eastern-corporate-balance-sheets

· The Hackett Group, 2025 Working Capital Survey (inventory days worsened, linked to cautious stocking strategies): https://www.businesswire.com/news/home/20250818205819/en/The-Hackett-Group-2025-Working-Capital-Survey-Payables-Rebound-but-Receivables-and-Inventory-Lag

· Lee, Padmanabhan and Whang, "The Bullwhip Effect in Supply Chains", MIT Sloan Management Review (1997): https://shop.sloanreview.mit.edu/the-bullwhip-effect-in-supply-chains

H&Z Net Working Capital Study 2025 (inventory the main driver of rising working capital in 290 manufacturers; background only): https://hz.group/en/net-working-capital-study-2025

3Ms Business Consulting

Empowering businesses through strategic consulting solutions.

3Ms Business Operating System

mustafamma@3msbusiness.com

966553997996

© 2026. All rights reserved.