November 15, 2017      3 min read

Businesses are always looking for effective ways to manage the supply-demand balance when it comes to inventory control. The primary way to do this is through what is known as inventory optimisation.

While there is some confusion as to what the term includes, inventory optimisation is integral for any business’ inventory control processes. Inventory optimisation is all about making the most of your assets. This article outlines the key features and functions of inventory optimisation.

The Fundamentals

The ultimate goal of inventory optimisation is to have just the right amount of inventory on hand to meet customer service and revenue goals, but no more than that. It is all about reducing inventories to gain the most effective supply-demand balance and make the most of your assets.

Achieving this supply-demand balance can be a difficult balancing act, and businesses tend to swing from one extreme to the other. At one point, for example, a business may have high inventory, when customer service concerns top the priority list, and at another point low inventories when business slows and the cost of holding so much inventory becomes apparent.

Take Walmart’s Inventory Deload program as an example. In 2006, Walmart’s inventory levels were growing at almost 90% of sales growth, and desperately needed to optimise inventory to rebalance the supply-demand relationship. After implementing their inventory optimisation plan, by 2007 the Walmart stores division had reversed the inventory trend, with inventory growth of just 0.7% versus a sales increase of 5.8%.

How Can Businesses Optimise Inventory Control?

One method for optimising inventory levels is by reducing forecasting errors by being proactive about sales trends. While this can be a difficult task to get right, inventory software can help you to track sales trends and patterns. This will then allow you to make predictions about which items will sell fastest and be in the highest demand.

Another factor that will contribute to accurately predicting future demand is being prepared for seasonal changes in customer needs. Being prepared for the Christmas period, for example, will help you make accurate predictions about demand and reduce forecast error. In turn, it will be easier to optimise inventory levels and improve your inventory control processes in general.

Another way to optimise inventory is by looking into a multi echelon inventory optimisation (MEIO) system. While inventory optimisation is ultimately concerned with reducing inventory levels, a MEIO system will enable a company to decide where in the supply chain certain inventories belong and how much inventory to have.

A good MEIO system will allow businesses to look at inventory levels across the entire supply chain and consider the impact inventories at any given “echelon” have on other upstream or downstream levels. This includes raw materials and component inventories through internal channels and nodes and, in some cases, all the way down to the retail shelf.

Ultimately, inventory optimisation is all about making the most out of your assets. It requires constant vigilance and an awareness of changes in demand, and should also include updating safety stock levels across all echelons.

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