As we close out 2021 and look to 2022 it’s clear there are increasingly tight margins for profit and error.

Consumers are demanding shorter delivery times.   Retailers are placing a greater premium on service levels.  Costs are rising, inbound and outbound logistics are troublesome and to top it all there are issues with product and raw material availability.    

Stock levels are all important – the right inventory to meet demand, buffer against unexpected disruption – all whilst still avoiding wasteful surplus.   It’s not enough to merely manage inventory, it needs optimizing.

Managing inventory focuses on the goal of delivering productivity and efficiency across all inventory operations. 

Optimizing inventory refers more specifically to profit margins and minimizing loss.  Carrying surplus inventory causes loss and waste.   It takes up space, becomes obsolete and often doesn’t sell or must be sold at reduced prices.   On the other hand, insufficient stock damages service levels and the costs come in the form of loss of potential profit and damage to the brand.

The goal of inventory optimization is to best forecast demand and maximize the financial output of the inventory for the company.

One of the greatest challenges to achieving optimization is the balancing act between “just enough” and “not enough”.   Demand forecasting has traditionally been a backward-looking practice.  But 2020 and 2021 are constantly throwing up new patterns with no historical precedent – it doesn’t matter how skilled the demand planners are, there is only so much that human analysis and prediction can manage.

Where there are hundreds or thousands of SKUs, market volatility and logistics challenges, spreadsheets alone cannot cope.   Optimization requires constant work across the familiar and traditional inventory management protocols:

  • ABC analysis: identifying the most and least popular / profitable products.
  • Demand forecasting: anticipating customer demand and predicting risks and trends. Effective demand planning requires the capability to turn complex patterns into future forecasts and plan for scenarios
  • Reorder point formula: the policies for replenishment that take into account all of the various dynamics around minimum orders, costs, delivery times / costs
  • Safety stock and inventory buffers: ensuring there is sufficient stock available in case of the unexpected
  • Service Level management: minimizing risk of stock-outs

The benefits of even small improvements to inventory optimization are realised in lowered costs, better profit margins and reduced wastage.   With the application of integrated business processes and inventory management software, these results become robust and measurable: