Three Machines: Inventory to Cash

The Challenge

Regional distribution companies often struggle with capital efficiency. Inventory ties up cash that could fund growth, yet stockouts damage customer relationships. This article examines how the Three Machines framework can unlock working capital.

Understanding the Three Machines

The Three Machines framework identifies three distinct engines within every business:

1. Cash Machine - How efficiently does capital flow through operations?
2. Profit Machine - What margins do you generate on each transaction?
3. Growth Machine - How quickly can you scale revenue?

Most operators focus exclusively on the Growth Machine, neglecting the Cash and Profit engines that fuel sustainable expansion.

The Framework in Action

When applied to distribution, the Three Machines framework reveals hidden opportunities:

Machine	Focus Area	Typical Quick Win
Cash	Inventory turns	Right-size safety stock
Profit	Gross margin	SKU rationalization
Growth	Customer acquisition	Sales process optimization

What Good Looks Like

Distribution companies that systematically apply this framework typically see improvements in these key areas:

• Inventory Turns: Well-managed distributors achieve 8-12x turns vs. industry average of 4-6x
• Cash Conversion Cycle: Top performers operate at 15-25 days vs. 40-60 days typical
• Free Cash Flow: Improved turns and shorter cycles compound into significant cash release

Key Takeaways

The Three Machines framework works because it creates visibility into capital efficiency. Operators can’t improve what they don’t measure, and most distribution companies lack granular inventory analytics.

Start by mapping your current state across all three machines before optimizing any single dimension. Use the Three Machines Assessment to evaluate where your business stands, and explore how Operational Thinking can help you systematically improve each machine.