Walking the tightrope of inventory optimization

March 15th, 2024 10 minute read

Ioana Neamt

Contributing Writer

March 15th, 2024 10 minute read
Robot arms on assembly lines in digital manufacturing.

Ever seen those kids in the park doing tricks on a slackline stretched between two trees? You must have wondered how on earth do they manage to keep their balance from one jump to the next and land perfectly on such a thin line. While we’re no experts in that kind of balancing act, we do know a thing or two about inventory optimization — and once you do, you can’t unsee the similarities.

You see, some of those daredevils are naturals, but most of them just fell off enough times to learn what corrections to make and exactly when. It really is the same process with inventory optimization, too. Except the faceplants are much less spectacular, and there’s software to help you avoid them.

What is inventory optimization?

Inventory optimization is a strategic approach used by businesses to ensure that the right amount of inventory is held at the right time, in the right place, to meet customer demand while minimizing costs and maximizing efficiency and profitability. It involves a careful balance between minimizing inventory costs, such as holding, ordering, and shortage costs, and maximizing service levels, such as product availability and customer satisfaction.

Why inventory optimization is important

Avoiding dead stock and stockouts helps you build trust and offer reliability, growing and nurturing your client base in the process. Because it helps keep your operational costs in check, it’s also a great way to improve your bottom line and stay on track toward your revenue goals.

In other words, inventory optimization helps you make sure you always have enough of what your customers need within arm’s reach. When done right, it can help you do the same, even during global supply chain disruptions.

Key inventory optimization concepts

Slacklining after school is fun and all, but if we are to compare it to running a serious business, it’s best we kick the analogy up a notch and go pro.

You’re now backstage in Cirque du Soleil, and the tightrope number is coming up. Let’s meet the key players”

  • Inventory level is the star of the show. It represents the number of products you currently have in stock. Too high and your cash flow suffers because they occupy valuable space and increase holding costs, too low and your customer satisfaction plummets because of delayed or canceled orders.
  • Safety stock is the understudy, the acrobat who’s just as good as the star but only gets in the spotlight when something goes wrong (or, in your business’ case, better than expected). Its role is to mitigate the risk of stocking out, ensuring the show goes on when demand spikes unexpectedly.
  • Reorder point whispers the cue for new inventory, marking the ideal time and order volume of new items to avoid any hiccups. It’s the player that always keeps their ear to the ground and constantly adjusts based on the ever-changing rhythm of customer demand.
  • Service level is the applause-o-meter or the encore-to-boo ratio, if you will. It measures how successful the last shows were, and with consistent tracking, it helps you dial in every component of your inventory management to perfection.
  • Finally, the often-overlooked carrying cost is not really a crew member, more of a necessary evil — the price of keeping the cast on standby between two shows. In the same way, the staff of a circus needs accommodation, food, and healthcare when they’re not performing, holding inventory carries storage and insurance costs, and you also need to factor in the working capital that’s tied up until you sell your products.
Wooden blocks spelling out "cost down"

Benefits and challenges in inventory optimization

Inventory optimization helps you save money by cutting unnecessary stock and improving customer service levels by always having the right products available in the right amounts when customers need them.

By keeping balanced inventory levels, you not only save floor space in your warehouse but you optimize shipping and minimize supply chain risks. The result is happier customers, healthier finances, and smoother operations.

With effective strategies in place, this constant effort can be your key to unlocking your maximum growth potential and the best possible return on investment.

Factors affecting inventory optimization

In the same way, running an acrobatics show is full of variables that can throw a spanner in your plans, your inventory management is also exposed to external factors that require quick thinking. Let’s meet the rope-wobblers that can throw you off balance:

  • Customer demand variability

Demand is a fickle friend that can throw your stock management into disarray. A spike in demand is only good news as long as you’re prepared for it, and that’s why accurate inventory forecasting is a must. It’s like having a good script writer on set, that can spin the narrative so you can make the best of unforeseen plot twists.

  • Delivery times

Simply walking on the tightrope is for amateurs — at least by Cirque du Soleil standards. In inventory optimization, the fun starts once you start juggling lead times. The higher you throw the ball, the longer it takes for it to fall back in your hands, but the more balls you juggle the more often you have to catch and throw again. Similarly, your delivery times and your customer demand will determine your reorder points and safety stock. The pros make it look easier than it is.

  • Business needs

To put on a show that people love and come back to see again, you need to periodically evaluate your goals and resource limitations. If you’re a small, nimble startup, you would want to optimize your inventory for flexibility, much like a traveling circus designs their tent for mobility. A global industry leader would prioritize capacity instead. Don’t lose sight of trends and customer needs either.

Demand forecasting documents on a desk

Demand forecasting methods for accurate inventory planning

Remember the fickle friend called demand? Taming it requires patience, lots of advanced math, and — some say — even a sprinkle of black magic. Demand forecasting certainly is a discipline of its own, but there are a few basic methods you can use without getting in over your head:

  1. Inventory planning — The easiest and likely most impactful thing you can do, is to implement inventory planning software that helps you generate forecasts and plan your inventory accordingly.
  2. Trend projections — Look at historical sales data to identify patterns and predict future trends. This method uses past sales records to establish a baseline for the future. It’s most accurate if you exclude sharp spikes and even changes attributed to seasonality.
  3. Time series analysis — This is the opposite way of looking at the same charts. Cross-check spikes and drops in your sales records with holiday calendars and other events to see if there’s a correlation. Next time something similar is on the horizon, you’ll be ready.
  4. Survey analysis — Factual data is indeed sacred, but that shouldn’t stop you from poking around for more anecdotal information. Collect feedback directly from your customers to help identify demand trends.
  5. Sales force feedback — While at it, don’t forget to ask the most qualified professionals, your own salespeople. After all, they’re the ones in the middle of the action.

Tiny shopping cart overflowing with boxes on sitting on a laptop

Inventory management practices to reduce costs and stockouts

Keep your cash flowing and shelves stocked with these inventory optimization best practices:

  • ABC analysis — Prioritize inventory based on value. Categorize items into A, B, and C from most to least important and valuable to your business, to ensure you stock the right items in the right quantities and in the right locations.
  • Safety stock management — Maintain a buffer of inventory to meet demand during peak periods or unexpected delays. You can calculate how much safety stock you need for each item based on your service levels, lead times, and average daily demand.
  • SKU rationalization — Reduce the number of stock-keeping units you carry. Analyze sales data, customer feedback, and production costs to decide which SKUs to keep, modify, or eliminate, and don’t get emotional when it comes time to cut.
  • Just-in-time inventory — Order and receive products just before they are needed. This reduces storage costs and ensures product freshness. This requires a streamlined procurement and stocking system, production planning, and accurate lead time calculations.

Trucks stuck in traffic.

Good practices for carrying inventory in distribution centers

Here are some things to consider in the process of inventory optimization, factors that can make or break the efficiency of your inventory management operations:

With smart design, you can maximize space utilization and efficient movement of goods within your warehouse. Pallet racking systems and other vertical storage options are your best friend, but you can further improve your system by assigning fixed locations to each item based on its historical demand and picking frequency. High-demand items should be placed closer to picking zones, while slower-moving items can be stored further away.

You should also keep first-in, first-out (FIFO) practices in mind when planning your warehouse layout if you want to prevent stock expiration and quality degradation.

  • Use proper labeling

Make sure every pallet and item is clearly labeled when receiving a shipment, so tracking, picking and packing all go as smoothly as possible. Barcodes and RFID technology make automated tracking possible, giving you real-time inventory visibility and minimizing the possibility of human error.

  • Conduct cycle counts regularly

Even with the best tracking and labeling in place, periodic cycle counting is necessary. It helps you identify discrepancies between system records and physical inventory levels, which ultimately leads to better data accuracy and prevents stockouts or overstocking.

  • Choose cross-docking for high-volume and perishable goods

If you have your high-volume items or those that have a short shelf life received and sorted at a cross-docking facility, you can significantly reduce storage time and costs.

A person holding a magnifying glass looking at bar charts

Data-backed decisions and automated processes

Optimizing your inventory management is easier with enterprise resource planning or ERP system integration. Implementing a company-wide software solution that synchronizes all your supply chain functions is like having a spotter — a pair of eyes that provides a holistic view of all your operations so you can walk safely and with confidence.

Add dedicated inventory optimization software into your stack for an extra layer of convenience, so you can automate tasks, improve forecasting, and optimize stock levels, leading to significant efficiency gains and minimizing human error. It’s a balance pole that might not give you abilities you don’t already have, but it improves your stability on the rope and minimizes the risk (and impact) of a wrong move or an external factor that you cannot control.

Final thoughts

Inventory optimization is so much more than a balancing act: it’s a complex, well-choreographed dance that keeps your business moving forward to the beat of ever-changing customer needs. To recap, by employing the strategies, best practices and technologies we highlighted, you can manage your inventory to its full potential and achieve the following:

  • Significant savings by lowering holding costs, minimizing stockouts, and optimizing warehouse space utilization
  • Higher customer satisfaction by ensuring product availability and timely deliveries
  • Better efficiency by streamlining operations and optimizing supply chain visibility
  • Improved profit margins by driving sales growth and improving your bottom line

However, supply chains are becoming increasingly complex, so no doubt, inventory optimization will rely more and more on AI and machine learning for dynamic safety stock calculations and faster and more accurate forecasting. As we move forward, IoT sensors will provide increasing amounts of accurate data enabling deeper insights into stock levels and more precise, real-time movement tracking. Meanwhile, blockchain technology will continue to enhance transparency and traceability throughout the supply chain, further improving inventory visibility and reducing fraud.

By embracing these innovative solutions, you can ensure your business stays ahead of the curve and navigates the tightrope of inventory management with grace and confidence.

Man with a clipboard standing in front of a concrete wall with green plants growing inside the wall.

Balance your inventory levels with Katana

Whether you’re a weekend slackliner or a veteran in supply chain acrobatics, Katana is your balance-pole to help keep your supply permanently aligned with demand levels, and your safety net to eliminate stockouts or overstock before they happen.

Katana provides you the end-to-end inventory insights that you need to take the guesswork out of your next order and help you maximize operational efficiency. The built-in purchase order management functionality allows you to issue orders based on precise requirements and reorder points. Get in touch with us and see for yourself what Katana can do for your business!

Ioana Neamt

Contributing Writer

With more than 10 years of copywriting experience, Ioana has a fondness for long-form writing, investigative journalism, cats, and Victorian-style mansions.

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