We recently worked with a manufacturing company that made what seemed like a smart move: relocating production from Germany to China to reduce costs. On paper, the decision was simple—lower labor and overhead costs meant higher profits. But the reality was far more dangerous.
The scenario:
Original setup in Germany:
- Monthly production cost: €1,000,000
- Supplier payment terms: 120 days
- Inventory turnover: 3 months
- Revenue: €1,500,000 per month
New setup in China:
- Monthly production cost: €800,000 → saving €200,000 per month
- Supplier payment terms: 30 days (required by Chinese suppliers)
- Inventory turnover: 3 months
- Revenue: €1,500,000 per month
At first glance, the move appeared to improve profitability. But the accelerated payment terms in China created a massive liquidity gap.
With inventory taking 3 months to turn and customers paying on standard terms, the company now had to pay €800,000 to suppliers every month, long before cash from sales would come in. Over a single quarter, this meant €2.4 million in cash outflow that the business didn’t have.
The impact:
Soon after, the company was unable to pay suppliers and staff. Operations stalled, employees were on edge, and suppliers threatened to halt shipments. The business was facing a near-bankruptcy situation—all because the cash cycle wasn’t considered in the cost-saving decision.
The lesson:
Profitability on paper doesn’t guarantee survival. Cost reductions must be evaluated alongside cash flow, supplier terms, and the timing of customer payments. Ignoring these factors—even when saving significant amounts—can turn a “smart move” into an existential threat.
Reducing costs without considering liquidity is like trimming sails in a storm: the ship may move faster, but it can also capsize.