Three Techniques for Inventory Optimization

While there is plenty of information online about tracking goods, organizing your warehouse, or implementing more efficient pick and pack processes, there’s very little about stock optimization.

Inventory optimization is becoming an increasingly popular technique for improving the efficiency of the supply chain, with many inventory managers looking to incorporate the technique into their own businesses.

Inventory control is all about managing and regulating supply, storage, and distribution of your business’s products. Inventory optimization takes this a stepfurther to ensure products are at the right location when needed in both a time and cost-efficient way. Essentially the optimization process involves making sure stock is available at all times while reducing the overall cost of storage and minimizing the risk of oversupply. Keeping the shelves stacked with too much of one item leaves less room for new developments and other popular products.

If you’re looking to start inventory optimization, we’re sharing three techniques that will help to maximize profits.

Demand forecasting

The key to controlling inventory is knowing which products do best and satisfy demand. By implementing advanced forecasting models, you can create more accurate demand forecasts, which will then, in turn, allow you to stock the right levels for each product.

It’s also worth looking into the lifecycle of each SKU to understand which stage your current stock is in. Stages will help you to determine the demand pattern for the product so that stock can be only ordered at the correct times.

In the same vein, some products you sell may only be popular in certain seasons. Seasonal demand can really take businesses by surprise when not accounted for in demand forecasts.

Any promotions or market events you – or competitors – have planned should also be taken into account to ensure stock meets demand prior, during, and after.

Finally, take a look at market trends and trends in other markets to see where demand may start to increase.

Categorize products based on business value

Value can come in different forms; monetary value in terms of profits and the qualitative value that ensures you have a better product than the competition. It’s also worth looking at profit margins and which products sell the quickest. 

When analyzing product categories, you will quickly be able to see which items are most important and least important to your business. From here, you can make more educated decisions about stock control and management. Using more advanced inventory management technology, you could even take the analysis further by segmenting products based on demand, turnover, and profitability.

Carry buffer stock

With your analysis from forecasting, paired with supplier lead times and your planned service level, you should be able to conclude how much additional stock you might need in peak periods. Sudden influxes in sales can happen for a number of reasons, but having additional stock hidden away can reduce the risk of stock out, delivery delays, and unsatisfied customers.

The final step is to fine-tune your purchasing practices – but we will leave that for another day!