Inventory optimisation may sound like a complex process, but at its core it comes down to one simple goal: having the right products, in the right quantities, available at the right time. In this beginner’s guide, we explain how inventory optimisation works and why it is essential for your business.
Why is inventory optimisation important?
For many companies, inventory is one of the largest cost items. Too much inventory means:
- Unnecessarily tied-up capital
- Storage costs
- Risk of obsolescence or damage
- Limited flexibility
Too little inventory, on the other hand, leads to:
- Missed sales
- Dissatisfied customers
- Rush orders at higher costs
- Production downtime
Finding the right balance is therefore crucial for a healthy business operation.
The basics of inventory optimisation
ABC analysis
Not all products are equally important to your business. With an ABC analysis, you divide your inventory into three categories:
- A-items: 20% of your products that generate 80% of your revenue
- B-items: 30% of your products that generate 15% of your revenue
- C-items: 50% of your products that generate 5% of your revenue
This classification helps you determine which products deserve the most attention in your inventory management.
Understanding inventory costs
Total inventory costs consist of three main components:
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Ordering costs
- Administrative costs
- Transportation costs
- Processing costs
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Holding costs
- Storage space
- Insurance
- Capital tied up
- Obsolescence
-
Shortage costs
- Missed sales
- Rush orders
- Production loss
Key metrics
To optimise your inventory, you need to be able to measure it. The most important metrics are:
- Inventory turnover: How often your stock is replaced per year
- Service level: Percentage of orders that can be fulfilled directly from stock
- Average inventory value: The average value of your inventory
- Lead time: Time between placing an order and receiving delivery
From manual to automated inventory management
Traditional approach
Most companies still rely on Excel spreadsheets for their inventory management. Purchasing staff spend valuable hours manually analysing sales data and stock levels. Decisions are often made on instinct, based on years of experience. While that experience is valuable, this approach leads to reactive inventory management where problems are only noticed when it is too late. When the market changes, it can take weeks or even months before this is noticed and adjustments can be made. This results in missed opportunities and unnecessary costs.
Today, forward-thinking companies use advanced inventory optimisation software.
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Automatic data analysis
- Real-time processing of sales figures
- Automatic detection of seasonal patterns
- Immediate flagging of anomalies
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Intelligent forecasting
- AI-driven demand forecasting
- Automatic adaptation to market changes
- Accurate order suggestions
-
Proactive inventory management
- Early warnings for impending shortages
- Automatic order proposals
- Optimisation of order quantities
Practical tips to get started
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Start by collecting data
- Track sales figures
- Record stock levels
- Measure lead times
-
Identify bottlenecks
- Which products are frequently out of stock?
- Where is stock sitting for too long?
- Which processes take up the most time?
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Start small
- Focus on A-items first
- Implement basic KPIs
- Improve step by step
Common mistakes
- Too much focus on price
Large orders for a discount may seem attractive, but don’t forget the extra inventory costs. - No safety stock
Don’t aim for minimum inventory without accounting for uncertainties. - Ignoring data
Base decisions on data, not just instinct or experience.
Conclusion
Inventory optimisation is a continuous process of improvement. Start with the basics, measure your results, and keep refining. With the right approach and tools, you can significantly reduce inventory costs while improving your service level.
Next steps
Want to learn more about how to implement inventory optimisation in your company? Request a demo and discover how Innico can help you optimise your inventory processes.