Inventory optimisation is the process that enables efficient inventory management. It allows businesses to sustainably control stock and sell products despite shifts in customer demand or unexpected supply issues.
In this guide, we define inventory optimisation and offer a few actionable tips and strategies for getting it right every time. Let’s dive in.
In this inventory optimisation guide:
What is inventory optimisation?
Inventory optimisation is the continuous process of ordering and managing inventory using the most cost-efficient best practices and systems. It’s about ensuring there is always sufficient inventory available to meet customer demand while also retaining enough capital to keep the business efficiently operating and growing.
Optimal stock levels are important for the ongoing survival of any product business.
In 2021, businesses faced major supply chain challenges that resulted in understocked shelves and unhappy customers. As a result, inventory growth averaged 46% across retail segments in Q2 the following year.
Businesses went from struggling to meet demand to struggling to rid themselves of surplus stock.
Because supplier lead times and customer demand are always changing, inventory optimisation should be an ongoing process that seeks to keep up with any fluctuations.
The inventory optimisation process
“After three years of pandemic disruption and economic volatility, sharpening demand forecasts and inventory planning across industries seems both as imperative and challenging as it has ever been.”
Inventory optimisation relies on detailed data analysis, inventory management automation, and effective demand forecasting.
The inventory optimisation process looks something like this:
- Historical data for product sales and supplier lead times are analysed to determine predictable supply and demand trends.
- External circumstances that might affect future sales, such as seasonality, promotions, and social trends, are factored in.
- Inventory management policies and processes are assessed and then optimised to increase efficiency.
- Manual inventory control tasks are automated with the help of software tools and warehousing equipment.
- Inventory optimisations are perpetually tracked and regularly audited to confirm improved efficiency. New optimisations are made whenever bottlenecks surface or as new technologies become available.
As products move through the product life cycle, their journeys must be taken into consideration. If the popularity or usefulness of a product is beginning to decline, you’ll need to incorporate this into your inventory optimisation strategy.
Inventory optimisation tools
Inventory optimisation tools are essential for improving the efficiency with which your business operates. While some are simply designed to save time or cut costs, there are a few that play a critical role in collecting and analysing the data that will inform your optimisation process.
Efficiency-boosting inventory optimisation tools
Ensure your inventory policies produce the greatest results, in the shortest time, by investing in efficiency-boosting inventory optimisation tools and equipment.
Common examples of inventory optimisation hardware:
- Barcode scanners
- Mobile label printers
- Mobile receiving carts
- Pallet trucks
- Shipping label printers
- Pick-to-light LEDs
- Order picking headsets
- Order picking robots
While it may be tempting to go all out and invest in every bit of kit available on the market, this isn’t always the best strategy. You need to consider your budget, your cash flow, and the competency of your staff.
Some tools will require additional training, or even new hires to operate them, which can quickly eat away at your resources.
Inventory optimisation software
Software is at the heart of inventory optimisation.
You’ll need it to not only automate some of your more laborious manual tasks but also to ensure fast and accurate demand forecasting.
Common examples of inventory optimisation software:
- Inventory management software. A cloud-based, perpetual inventory system allows you to track and manage your products in real-time, slashing admin hours and ensuring maximum accuracy across your recorded stock levels.
- Demand forecasting software. Software that analyses your historical sales data at the product level is essential for accurate demand planning. These platforms reveal how well each SKU sells at various points throughout the year and determine the optimal quantities for reordering. They can also tell you the optimal time to place an order based on previous supplier lead times.
- Cloud-accounting software. Modern accounting software that integrates with your inventory system is essential for inventory optimisation. By connecting these two tools, you’ll be able to form a clearer understanding of the relationship between sales, cash flow, and inventory.
As with hardware, inventory optimisation software should be purchased on an as-needed basis.
There’s no point investing in a major, multi-thousand-dollar monthly subscription for ERP software if you’re only going to use one or two features.
Shop around and speak to sales representatives until you find a brand and system that best fits your needs and budget.
Inventory optimisation techniques and strategies
The inventory optimisation process involves multiple moving parts.
In simple terms, you must collect and analyse important data, set new inventory replenishment policies, and trim the fat off your existing inventory management strategies.
Let’s explore some key inventory optimisation techniques in depth.
Demand forecasting is the driving force behind inventory optimisation. It involves leveraging historical data about your products and current market trends to accurately predict future sales.
The purpose of demand forecasting is to determine the optimal amount of inventory to keep on hand for each of your stock-keeping units (SKUs). “Optimal” refers to having enough available stock to satisfy customer demand without freezing your cash flow or running out of warehouse space.
To get the best results from demand forecasts, your data must be accurately recorded. Invest in advanced inventory management software and ensure that you’re analysing data over a correct time frame.
Inventory replenishment optimisation is the process that directly follows demand forecasting. It is the practice of ensuring items are reordered from your suppliers in time to meet demand.
Once you’ve analysed the market and your sales data to determine optimal inventory levels, you must now work with suppliers and delivery teams to maintain those desired levels.
Key steps to optimise your inventory replenishment strategy:
- Research various suppliers and compare costs and delivery times.
- Negotiate supplier contracts that protect you against expected and unexpected problems that may delay orders.
- Implement optimised delivery processes to maximise receiving efficiency and minimise lead times.
- Frequently review your supplier relationships and maintain open communication across the entire supply chain.
Consider additional factors that may affect replenishment, such as parts availability, supply chain disruptions and new product launches.
Storage space optimisation
A key consideration when optimising your inventory is where and how you store it.
In the wider picture, this could mean reorganising multiple warehouses so that products that are more popular in Region A are stored closer to Region A.
On a more detailed level, this means capitalising on the available space inside your storage facility. From stackable bins for smaller parts to making use of vertical space and keeping delivery zones clear – there are hundreds of small optimisations you can make to fit more items into the same space.
Safety stock refers to the inventory you carry as a buffer in case of unexpected supply issues or demand increases. It differs from anticipation inventory, which is inventory purchased to meet expected demand spikes.
Safety stock is a critical part of any inventory optimisation strategy. It is the step that protects against stock-outs, which ultimately lead to customer dissatisfaction if left unmitigated.
The optimal level of safety stock will vary depending on each product’s rate of consumption and lead time. Your aim should be to determine the minimum amount of safety stock required to fulfil customer orders should demand or lead times exceed what you had forecasted.
The formula for calculating safety stock is:
[Maximum Daily Use × Maximum Lead Time] – [Average Daily Use × Average Lead Time] = Safety Stock
Inventory management automation
Finally, look to automate your manual inventory control processes.
Inventory management software as part of an integrated tech stack is an essential element of inventory optimisation. It gives you complete visibility and control over your stock movements, accurate stock levels that are updated in real-time, and allows you to streamline your operations.
When shopping around for inventory software, consider the unique needs of your business:
- Do you require manufacturing functions, such as BOM production and assembly kitting?
- Are painless onboarding and helpful customer support must-haves for your team?
- Can it analyse historical data and produce valuable reports?
- Does it have demand forecasting features built-in or available as an upgrade?
Speak to sales representatives to fully understand how their software will meet your business needs and help you accelerate your success.
Inventory optimisation: 5 key benefits
“Real-time connected data can revolutionise industry, it can reduce human error and allow for more informed decision making. With greater visibility into the metrics, a company can go forward.”
- Anthony Walker, Strategic Manager, LJMU, via the Manufacturer
At its core, inventory optimisation focuses on increasing efficiency across the entire business.
Let’s look at a few ways it does this.
1. Minimised operational costs
Optimising your inventory means you’ll be spending the smallest necessary amount of capital on stock management and operations.
Better space utilisation reduces storage costs. Improved warehouse layout cuts out downtime, reducing labour costs. And predictable reordering allows you to determine the most economical equipment and locations for controlling stock.
Inventory optimisation generally improves staff happiness as well: People feel better about doing a job when they don’t resent the processes involved in doing it. This results in lower employee turnover, which means less time spent on hiring and training.
2. Improved customer satisfaction
The goal of any business should be to please the customer. Without them, there is no business.
Inventory optimisation ensures that stock levels are always up to date. When a customer places an order, the risk of ordering something that, upon a physical count of the product, is unable to be fulfilled is drastically reduced.
Additionally, an optimised inventory strategy improves fulfilment times, so customers receive orders faster. And because historical demand data inform your forecasting, optimised strategies are tailor-made for meeting customer needs.
3. Reduced waste
Maintaining optimal inventory levels mitigates the risk of wastage. This is especially important in industries like Food and Beverage, where products must be sold quickly before they expire.
Inventory optimisation also means there is less waste in your operating workflows.
In manufacturing, this means finished products are not assembled unnecessarily or until all the right parts are available. In retail and wholesale, this means staff can perform their jobs efficiently without getting held up by external factors.
4. Prevents stockouts and overstocking
“Inventory carrying costs continue to rise, driven by inflationary pressures and late shipments. This means that with every day that passes, three things are happening … growing sales risk, margin pressure, and D&O.”
- Mark Baxa, CEO, CSCMP, via CNBC
By identifying optimal stock and safety stock levels, you can prevent stockouts or overstocking.
Each of these issues presents a different problem for businesses:
- Stockouts leave customers disappointed and result in missed sales and a bad reputation.
- Overstocking increases your storage costs, ties away your cash flow in unsold goods, and leads to excessive wastage.
Inventory optimisation also helps manufacturers ensure they have all the necessary parts or ingredients to produce finished products efficiently and on time.
5. Boosted fulfilment speed and order accuracy
Optimised inventory is easier to find, quicker to prepare for shipping, and readily available.
And with cloud-based inventory software it’s a lot more difficult to ship orders out incorrectly – especially when paired with a barcode scanning system.
Inventory optimisation will shorten your pick paths, so orders get picked faster. It will also streamline your fulfilment processes, minimising the time and cost required to fulfil orders.
Supply chain inventory optimisation tips
Supply chain inventory optimisation takes into consideration every process a product must pass through on its way to the customer.
That means you need to account for your suppliers’ behaviour, reliability, and systems on top of your own inventory management practices.
5 quick tips for supply chain inventory optimisation
- Lower your minimum order quantities (MOQs). Negotiate with your suppliers (or find new ones) to align your MOQ with the optimal reorder volumes you have forecasted.
- Shorten lead times. Look for out-of-the-box ways you can reduce lead times for your products. For example, using a third-party courier to collect your orders. Reduce the time it takes to prepare your orders for shipment by taking over tasks like product labelling from your suppliers.
- Track the right supply chain KPIs. Inventory metrics and KPIs are essential for understanding the success of your inventory optimisation strategies. Monitor your progress and treat it as a living, breathing project to tweak and update as you get more data.
- Clear out your obsolete stock. Slow-moving and obsolete stock are products with very low inventory turnover value. These can easily be ignored, costing your business. Take the time to get rid of excess stock to make way for new or better-selling products.
- Optimise service level based on saleability. Rather than treating every SKU the same, focus on ensuring there is always available stock for your best-selling products – even if it comes at the cost of stockouts for slow-movers. This process is known as SKU rationalisation.