Inventory optimization may sound like a complicated process, but essentially it revolves around 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 optimization works and why it’s essential for your business.
Why is inventory optimization important?
Inventory is one of the biggest expenses for many businesses. Too much inventory means:
- Unnecessary committed 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 to healthy operations.
The basics of inventory optimization
1. 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 sales
- B-items: 30% of your products that generate 15% of your sales
- C-items: 50% of your products that generate 5% of your turnover
This breakdown will help you determine which products deserve the most attention in your inventory management.
2. Understanding inventory costs
Total inventory costs consist of three main components:
Order costs
- Administrative costs
- Transport costs
- Entry fees
Stockholding
- Storage space
- Insurance
- Capital requirement
- Aging
Discount costs
- Missed sales
- Rush orders
- Production loss
3. Key metrics
To optimize your inventory, you need to be able to measure it. The key measurement points are:
- Stock rotation: How often your inventory is replaced per year
- Service Level: Percentage of orders that can be delivered directly from stock
- Average stock value: The average value of your inventory
- Delivery time: Time between order and delivery
From manual to automated inventory management
Traditional approach
Most companies still rely on Excel sheets for inventory management. Purchasers spend valuable hours manually analyzing sales data and inventory levels. Decisions are often made by feel, based on years of experience. While this experience is valuable, this approach leads to reactive inventory management where problems are not noticed until it is too late. When the market changes, it takes 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 are using sophisticated software for inventory optimization.
Automatic data analysis
- Real-time processing of sales figures
- Automatic detection of seasonal patterns
- Immediate signaling of deviations
Intelligent forecasting
- AI-driven demand forecasting
- Automatic adaptation to market changes
- Accurate order suggestions
Proactive inventory management
- Early warnings of impending shortages
- Automatic order suggestions
- Optimization of order sizes
Practical tips for getting started
Start collecting data
- Keep track of sales figures
- Record inventory levels
- Measure delivery times
Identify bottlenecks
- Which products are often out of stock?
- Where is stock lying around too long?
- What processes take a lot of time?
Start small
- Focus on A-items first
- Implement basic KPI’s
- Improve step by step
Common mistakes
- Too much focus on price
Large orders for discounts seem attractive, but don’t forget the additional inventory costs. - No safety stock
Don’t aim for minimum stock without considering uncertainties. - Negotiate data
Base decisions on data, not just feeling or experience.
Conclusion
Stock optimization is a continuous process of improvement. Start with the basics, measure your results and keep refining. With the right approach and tools, you can save significantly on inventory costs while improving your service levels.
Next Steps
Want to learn more about how to implement inventory optimization in your business? [Request a demo]](/demo) and find out how Innico can help you optimize your inventory processes.