Complexities like unexpected demand shifts cloud inventory management in today’s supply chains. Learn how to use AI-powered software to elevate your processes, making your business more competitive and consistent.
What Is Inventory Optimization?
Inventory optimization is the process of managing inventory to meet customer demand efficiently while minimizing costs. With proper inventory management, your company can save on storage and handling costs and avoid stockouts or overstocking. Optimizing these processes involves evaluating and improving the forecasting, techniques, and technology involved with inventory.
Essential Elements of Inventory Management
Overall inventory management includes several key functions. Before starting an optimization project, assess current processes from multiple perspectives to identify areas for improvement.
The four most essential categories of inventory management are:
- Demand Forecasting: Using past sales data and information about external factors to predict future demand. This informs how much inventory a company should order and hold to prepare for demand in a certain time period.
- Inventory Categorization: Sorting inventory into different categories depending on sales levels. This helps businesses prioritize stocking their most popular products over those with less value.
- Safety Stock Calculations: Ensuring you have enough additional stock in case of an unexpected rise in demand, supply chain problem, or other obstacle. This empowers companies to better expect — and prepare to face — the unexpected.
- Replenishment Strategies: Employing strategies like economic order quantity (EOQ) to maintain optimal stock levels. This forces companies to take into account how much lead time orders from different suppliers require to ensure the proper inventory levels at any given time.
Proven Techniques for Effective Inventory Management
Supply chain managers employ many different strategies to handle each of the four elements of inventory management effectively. Two of the most popular inventory optimization techniques are ABC analysis and just-in-time inventory (JIT).
ABC Analysis
The ABC technique is a method of prioritizing inventory management based on value. Using this approach, companies compare the annual consumption value (ACV) for different products to sort them into lettered categories.
The smallest section, category A, contains the most important high-value items for your business to consistently stock. Category C has the largest amount of products that contribute the least individually to sales, indicating that they could be ordered on demand rather than stocked in high quantities. Category B is typically medium-sized and represents products of medium annual value between the two.
Just-in-Time Inventory (JIT)
Just-in-time, or JIT, is another of the most common inventory optimization models. It’s a strategy to minimize holding costs by receiving goods only as they are needed. A carefully designed supply chain using the principles of JIT avoids wasted time, labor, and materials, since products are only created and sent “just in time” to go out to customers.
Why Effective Inventory Management Matters
A lack of predictability and increased in-transit inventory are why inventory matters so much in today’s supply chain environment. Poor inventory management increases the chances of stockouts or overstocking, leading your company to miss out on revenue opportunities and waste money holding excess products.
Enhancing Competitiveness
Maintaining optimal inventory levels improves a company’s competitiveness, since it will be better prepared to consistently meet demand for products. With globalization complicating worldwide supply chains, while security issues threaten them, the only thing brands can be certain of is change. Meeting instability with the most efficient processes and accurate forecasts empowers your company to seize opportunities created by demand while your competitors are left steps behind.
Improving Operational Efficiency
Efficient inventory management minimizes waste and maximizes efficiency. Using cutting-edge technology, such as software leveraging AI and machine learning (ML), your company can automate repetitive tasks in forecasting, replenishment, and safety stock calculation while reducing human error.
Leveraging Technology for Inventory Optimization
Elevate efficient inventory management strategies even higher with software that supports your goals.
Inventory Management Software
Inventory optimization software, like the solutions offered by GAINS, can automate processes and improve inventory planning accuracy. Instead of using manual processes with only past sales data to make future stocking decisions, your inventory management system can take in and organize data points from several different sources and time periods for a more comprehensive view. Technology gives you a better grasp on inventory throughout your entire supply chain, so you can easily pinpoint areas of improvement that match your immediate and long-term goals.
Real-Time Data Analysis
Traditional demand forecasting uses only past sales patterns to make stocking decisions. In a more volatile modern retail environment, AI and ML help businesses make better decisions by more deeply learning patterns and analyzing real-time data. Inventory management software can help you visualize connections between data points from various sources in real time so you can ride the waves of change as they come.
Best Practices for Successful Optimization
Take a more intentional approach toward multiple aspects of your system to optimize inventory long term. Set aside time to regularly consider the people and processes at every stage, including the common roadblocks standing between daily operations and your larger business objectives.
Regular Audits and Assessments
Regularly reviewing inventory practices to ensure accuracy is essential since supply chain conditions constantly change. Use your inventory optimization software to set automated notifications for tasks such as monthly or quarterly reviews so these initiatives don’t slip through the cracks.
Training Staff in Inventory Management
The personnel handling inventory management in day-to-day operations should be well-trained to ensure efficiency and effectiveness. When implementing a new set of standardized rules, processes, or software, conducting comprehensive training will make a noticeable difference in how quickly and fully staff members embrace the change.
Continuous Improvement Strategies
Supply chain inventory optimization isn’t a one-time effort — it requires upkeep over time. As employees take on new tools and processes, use the information from regular audits to capitalize on the strengths and solve the weaknesses in your inventory plans.
Choose GAINS for Better Inventory Management
At GAINS, our inventory optimization solutions combine robust tooling with a proven step-by-step process to improve your systems in smaller increments. We know that small changes in your supply chain management strategy make huge impacts on your bottom line, both immediately and long term.
With our software and help from our experts, you can prioritize the most important changes that bring quick results. Then, additional transitioning to the tool over time will ultimately bring more accuracy and automation to your everyday processes. See how GAINS makes a difference today.
Frequently Asked Questions
Discover answers to popular questions about inventory optimization.
What Is Meant by Inventory Optimization?
Inventory optimization ensures the right products are available at the right time without overstocking. Using tools like inventory management software and techniques like ABC classification or just-in-time methods, companies can face market volatility with greater agility and adaptability.
What Are the Benefits of Optimized Inventory?
Optimized inventory reduces costs, reduces stockouts, and improves customer satisfaction. Since warehousing stagnant inventory is expensive — as are rush orders from suppliers to solve mistakes or meet unexpected shifts in demand — handling inventory with more accurate and intentional processes saves businesses money. Better demand forecasting and, in turn, better inventory level management lead to lower risks of inventory issues, which will make your brand more trustworthy to customers.