Most of you must have heard of Inventory Optimization. This is the process of having a balance between capital investment objectives and service level goals. This balance is maintained over large SKUs taking care of demand and supply.
In other words, inventory optimization is usually the system of availing the correct inventory that would fulfil your service levels while using a tiny amount of capital. But, all you need is to balance or check the stability of both supply and demand for achieving this.
Inventory Optimization is also considered the advanced level of inventory management in warehouse and supply chain managers and buyers.
What is Inventory Optimization
Over the years, the world has faced many revolutions altogether like digitalization, globalization, etc. All these trends are the reason that affects the brands and the supply chains across the globe.
The thoughts, habits, and behavior of consumer behavior are changing rapidly. Due to technology and the advanced shipping process, it has become easier for the business to get cheaper products from places worldwide.
As a result, the global supply chain system gets complex, and there are chances of making mistakes from every link. Amidst all of these, those who account for the uncertainties always have an advantage in the competitive market, and thus they are prepared for facing customer demand and needs.
The more prominent brands use technologically advanced systems in their company for supply chain optimization. This procedure helps them source their products from a different place and then concisely deliver them to their customers.
But, since this procedure is also expensive, this is a dream for many small-scale businesses who operate on smaller capital and need to calculate the quantities of their order against the purchase and transportation cost.
If the business tries to manage the supply chain in rough estimates, this will create excess supply, and the customers would be dissatisfied with their service.
The market has become very competitive, and the competition rises day by day. In such a scenario, if the company fails to deliver the customer within a short time, then the customer would switch to a different brand that would provide the customer within a short time.
Elements of Inventory Optimization
Here, we shall discuss the critical elements of Inventory Optimization:
#1. Demand forecasting
Who shall previously forecast the customer demands and who can do this in numerous ways. One significant way is to look at the previous year’s demand or request flow from the sales force. But, in some cases, this method might also flop.
Season ability is another factor. Some seasonal products won’t have demand in the offseason, so forecasting demand and supply in advance is not possible. And forecasting a seasonal product based on the previous year’s chart is also a fool’s task.
#2. Inventory Policy
Inventory policy determines the amount of product that has to be stocked and also stock per unit. Another popular method is that the SKUs can be based on ABC analysis, where who shall segregate the inventory into A, B, and C and on the consumption basis.
It does not matter if you possess the exact amount of each item but if they are kept in the wrong warehouses. So, to have several warehouses instead of one or two, your inventory needs to be correctly optimized to distribute the right products in the proper warehouses in suitable locations.
It might happen that you may not have the proper demand for a specific product in one area, but the product has too much need elsewhere, it would be wiser to ship the product to a warehouse in a most demanding area.
Replenishment is another and final element. Stock replenishment is done to calculate the quantities of order received and the reorders points and then convert them into an actual business.
Inventory Optimization indicates that you should calculate exactly how much order you can handle per SKU so that your customers get their delivery on time and are satisfied. In inventory optimization, the lead time and schedules of the suppliers are to be taken into consideration.
This will help the business determine which product has to be kept in which warehouse for operating faster delivery.