What Does Optimising Inventory Really Mean?

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As one of your business’ biggest assets, inventory is too important to take half measures. Businesses are increasingly realising how crucial it is to prevent stock outs but at the same time, a lot of firms are facing tighter operating budgets than ever before. Many businesses talk about optimising inventory, but what does this really mean?

Having Enough Inventory in Stock

To start, optimising inventory essentially means that there is enough stock at each stage of the supply chain that your business controls to keep the operation moving. Access to inventory is critical; a retail store cannot be successful without a steady stream of product to sell. Likewise, there is no point in running a factory if there is usually insufficient inventory to keep the production line going. Not having enough inventory translates to missed sales, lower revenue and missed opportunities. Online inventory management can help you understand, from past performance data, how much stock you’re likely to need.

Running out of stock is very costly and highly disruptive, so making sure there's enough in stock is a natural starting point. But having enough inventory in stock does not go far enough – it doesn't address inventory costs, and it doesn't mean that all the inventory in a business is optimally located.

Managing Inventory Costs

Buying that first batch of inventory is usually a trying experience for a new business – founders of early stage businesses quickly discover that inventory does not come cheap! Optimising inventory means being aware of the true cost of your business’ inventory, including transportation and customs costs. Online inventory management software integrates with accounting software to help keep track of the true cost of inventory.

A lesson that often comes later is realising that inventory continues to cost your business money as time goes on. For example, a start up chocolate factory might purchase a six month supply of cocoa beans, sugar and packaging materials to take advantage of a small volume discount. On one hand, consolidating the purchase is simple and can unlock purchase price and transport savings. Unfortunately, buying six months worth of bulky inventory means that the chocolate producer needs more storage space, which means leasing a larger factory. There's also more that can go wrong – if the factory floods two months in, the business could lose four month's inventory rather than a few weeks’ worth. So optimising inventory also means making sure your business doesn't hold a lot more inventory than it really needs to.

Optimally Locating Inventory

As businesses grow, they typically expand to cover multiple locations. Even if a business has enough inventory overall, it might still struggle with stock outs if stock isn't where it needs to be within the business. Optimising inventory involves making sure that stock reaches the warehouse or department where it is needed on time.

Managing Risk

Optimising inventory also means accounting for seasonal pressures and unexpected events that have a bearing on consumer demand or the supply chain. Relying on rough averages can be perilous; if a business is truly optimising its inventory, it will be using detailed forecasts to account for risk. If a business cannot rely on its forecasting, chances are that it will revert to unreliable rules of thumb that regularly over and underestimate inventory requirements. For the most accurate forecasting possible, online inventory management software is an essential tool.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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