In today’s competitive climate, supply chains are seeking different avenues to reduce costs and stay profitable; one effective method is the optimization of their inventory level.
There are different strategies for optimizing your inventory levels, and we will review seven of them in this article.
What is Inventory level optimization?
Inventory level optimization is strategically managing the inventory (finished goods and raw materials), your business or supply chain holds in stock.
The goal of optimizing your inventory is to strike a balance between having enough inventory to meet your customer’s demands and reducing the excess inventory that increases the cost of your supply chain.
It involves different strategies to determine the right inventory levels for various products or components. This ensures that your capital is not tied up unnecessarily and that stockouts are minimized.
Importance of Inventory Level Optimization
Optimizing your inventory levels can lead to a lot of benefits for your business and supply chain.
1. Cost Reduction
Your supply chain may lower inventory costs by keeping the appropriate amount of stock and lowering storage, insurance, and obsolescence costs.
Costs are reduced as a result, and profitability is raised.
2. Customer Satisfaction
By keeping adequate stock levels, you can be sure that your supply chain’s products are always on hand to satisfy consumer demand.
Improved customer satisfaction and loyalty result from this.
3. Minimizing Stockouts
Optimized inventory levels guarantee clients can continually get the necessary products by preventing stockouts or shortages.
By doing this, missing sales opportunities and potential reputational damage to a company are avoided.
4. Increased Effectiveness
Your supply chain’s operations can be streamlined, handling and storage expenses can be decreased, and overall supply chain efficiency can be raised.
5. Risk mitigation
Excess inventory leads to losses as it becomes obsolete. By optimizing inventory levels, these risks can be reduced, and your risk management can be improved.
6. Supplier Relationships
You can develop better relationships with your supplier through efficient inventory management.
Consistent and predictable demand is valued by suppliers, which might result in better terms, discounts, or special treatment.
7. Effect on the environment
By reducing waste and the environmental impact of overproduction and disposal, decreasing your surplus inventory also helps with sustainability initiatives.
Strategies for the Inventory Level Optimization in Your Supply Chain
Now, there are different strategies for optimizing your inventory levels. In this section of the article, we will review seven of them.
ABC Analysis
This is one of the most common strategies for optimizing your inventory levels. With this strategy, you are categorizing your entire inventory into three groups.
Group A is for the few high-selling and valuable products that make up most of your sales… Group C is the many products with low sales that seldom have any value. Finally, group B is sort of in-between.
This strategy gives you an idea of your product types and how much sales they generate. This allows you to plan better, allocate resources, and ensure you have the right quantities in stock.
To conduct the ABC analysis,
- Gather stock and sales data for each item in your inventory.
- Based on their sales record, assign values to them that will help you categorize them into the A,B, & C categories. For more emphasis, check out this video on step-by-step ABC analysis.
- Once you have assessed the values, categorize them into one of the A,B, or C groups, where A is the most important, and C is the least important.
- Adjust your inventory levels, paying attention to your most important stocks while reducing your least important stocks.
2. Demand Forecasting
Demand forecasting is the process of adjusting your stock based on the report or analysis of future demands from customers.
With accurate demand forecasting, you can have on hand the exact number of inventory your customers need, which totally eliminates loss of sales or downtimes from loss of production.
It also helps the supply chain and inventory team properly manage the resources they have on hand.
For a more in-depth study on demand forecasting, check out our guide on demand planning and forecasting systems. We also have an article on how to overcome inaccurate demand forecasting.
3. Supply Chain KPI’s
You will need the necessary KPIs to optimize any supply chain process. Supply chain KPIs are measurements or milestones that aid in tracking the growth of your supply chain.
There are some supply chain KPIs that can applied to your inventory management when seeking to optimize it.
There are three main supply chain KPIs you want to explore with this strategy.
- Inventory turnover
- Order fill rate
- Supply chain cycle time
Inventory turnover is the time it takes your supply chain to produce, sell, and restock a particular inventory.
The order fill rate is the rate at which a customer’s orders or demands are completed 100%.
For the supply chain cycle time, it tracks the time it takes for any particular product to move through the inventory. It also tracks the speed of the product and whether it meets the customer’s expectations.
For more information on supply chain KPIs, check out our article on the topic.
4. Safety Stock Management
Safety stocks are the minimum amount of stocks your supply chain should have at any given point. The point is to help your supply chain bridge the gap whenever there is an uptick in demand.
It is one of the essential tools in your inventory level optimization. However, when you are holding too many or too few safety stocks, it becomes counterproductive.
Too many safety stocks cost your supply chain unnecessary capital, including security, insurance, and storage space.
Too little inventory will cause your business to lose sales and avoidable supply chain downtimes, ultimately leading to a revenue loss.
You want to find the right balance of safety stocks to help your supply chain successfully bridge inventory gaps during peak periods without swallowing up the entire profit in holding costs.
Read our article on the guidelines for optimizing safety stock for detailed strategies on creating that balance.
5. Reduce SKUs
One of the great pillars behind Apple and Tesla’s supply chain dominance is their low SKU. It allows flexibility, resilience, and efficiency throughout any supply chain.
For some of you, your supply chain is probably stocked with so many inventories that you forget some of them even exist.
The worst part of it is that many of them are not selling but taking up shelf space. Work to eliminate such products from your lineup and focus only on products that bring traffic.
Costco is another company that is big on eliminating low-selling products. It is normal for you to work into a Costco and find a product gone, never to return.
That is mainly because of two things, and it is either one of them. High costs or low selling traffic.
Reducing your SKU helps you focus your resources on the necessary inventory.
6. Reduce MOQ
Sometimes, your suppliers enforce a minimum order quantity. Typically, these are required for packaging materials such as plastic wraps, cardboard boxes, and plastic containers.
Unfortunately, this commits you to an inventory you may not have needed for a long time.
Say you need a thousand cardboard boxes yearly, but your supplier has an MOQ of 1500 or 2000. This commits you to an inventory you don’t need until next year.
Getting around the MOQ when implementing Inventory level optimization can be difficult.
What you can do to entice the supplier is to give them more items to supply.
For example, a company supplying cardboard boxes might be able to supply you with corrugated boxes if you need them.
The point is for you to find a way to take advantage of the economics of scale principle.
7. Automation
The modern supply chain is built on the back of automation. Automation helps in the tracking, ordering, and monitoring of inventory levels.
Sometimes, the problem with your inventory is a lack of accuracy and inefficiency in the reorder process.
With automation, you can eliminate these issues in one go. It helps you take care of repetitive and tedious processes like stock management.
Because automation drives accuracy and efficiency in your stock management and reorder process, it helps give you a competitive edge by ensuring there is always stock on the ground.
Factors that Impact Your Inventory Level Optimization
- Demand Variability: Deciding on the proper inventory levels can be difficult due to fluctuations in customer demands, seasonality, and shifting market trends.
- Lead Time: How quickly suppliers supply merchandise can impact optimization.
- Supplier Reliability: Suppliers must provide goods or materials in the anticipated time frames and quantities.
- Economic Order Quantity: EOQ computations assist in identifying the best order quantity to place or reduce overall inventory costs. This includes ordering and holding costs.
- Carrying Costs: The costs of storing goods, such as storage, insurance, and finance, are popularly known as carrying costs.
- Cost of Stockouts: Making judgments about inventory management can be greatly influenced by the price of stockouts, which can include missed sales, backorders, or harm to customer relationships.
- Obsolete Stocks: Inventory no longer in use or expired can cause serious financial losses.
- Technology and Analytics: By enhancing demand forecasting, supply chain visibility, and real-time decision-making, deploying cutting-edge technology and analytics tools helps improve inventory optimization.
FAQs on Inventory Level Optimization
Q1. What devices or technologies are employed for optimizing inventory levels?
You may utilize supply chain modelling, data analytics, demand forecasting tools, and inventory management software to improve inventory levels.
Q2. What challenges can you face while optimizing inventory levels?
Inaccurate demand predictions, variable lead times, seasonal demand swings, and the necessity for effective inventory tracking systems are a few potential problems.
Q3. How frequently should my supply chain assess and modify its inventory levels?
Things like lead times and trends in product demand should influence the frequency of reviews.
Many supply chains carry out evaluations frequently on a monthly or quarterly basis.
Q4. What is the distinction between safety stock and reorder point in inventory optimisation?
The reorder point is the inventory level at which a new order should be placed to replenish stock.
The safety stock is additional inventory maintained on hand as a buffer against unanticipated changes in demand or supply.
Conclusion
Inventory level optimization is an essential pillar in your supply chain, especially when it relates to improving your customer satisfaction and reducing the cost of your supply chain.
The strategies listed in this article can help you make the most of your inventory levels, giving your supply chain the pivot it needs to stay competitive.
Obinabo Tochukwu Tabansi is a supply chain mastro and writer with a decade of experience working in different facets of the supply chain. Today he is living his passion for writing on all things supply chain. His blog, Supply Chain Nuggets, is Africa’s fastest-rising supply chain blog, helping professionals, business owners, and curious minds navigate the supply chain complexities on the continent.
