The ultimate goal of successful retail management is to minimize the cost of inventory while maximizing customer satisfaction—and profitability.
Inventory optimization streamlines this approach by helping companies determine the right level of inventory to maintain to meet customer demand. The inventory optimization process can be broken down into three key components: demand forecasting, inventory control, and stock replenishment. Keep reading to learn more about each of these components and how they work together to optimize your inventory.
Understanding Inventory Optimization
Inventory optimization is a comprehensive system for managing and improving an organization’s inventory. The goal of the process is to ensure that the right amount of inventory is maintained at all times while maximizing profits, reducing costs, and minimizing waste.
There are a few reasons why inventory optimization is important: First, inventory control and optimization can help businesses save money by reducing the amount of inventory that they have on hand as well as the amount of money they spend on inventory. Another reason why inventory optimization is important is that it can help businesses improve their customer service by ensuring that they always have the products their customers need in stock.
Forecasting is the first step in the inventory optimization process. Forecasting involves predicting future demand for products and services based on past sales data and other relevant information. This information is used to create a demand plan, which outlines how much stock needs to be maintained to meet customer demand.
Demand planning takes into account not only predicted demand but also lead time and safety stock requirements. Lead time is the amount of time it takes for a product to go from being ordered to being delivered to the customer. Safety stock refers to the extra stock that is kept on hand in case of unexpected increases in demand or supply disruptions. Stock management systems help organizations track how much inventory they have on hand and make decisions about what needs to be ordered or produced based on current demand levels.
Inventory management is the process of managing inventory levels and ensuring that inventory is properly dispersed throughout the supply chain. This is important because it allows businesses to optimize their inventory levels and minimize the amount of inventory that is sitting idle. Without accurate inventory management, businesses may end up with too much or too little inventory in certain locations, which can lead to lost sales and increased costs.
Stock allocation is the process of allocating inventory to individual stores or warehouses. This is important because it allows businesses to ensure that they are meeting the demand for their products in each location. Without accurate stock allocation, businesses may end up with too much or too little inventory in certain locations, which can lead to lost sales and increased costs.
Successful inventory optimization is ultimately accomplished by taking into account the cost of inventory, the lead time for restocking, and the variation in demand.
The first step in the stock replenishment process is calculating the Economic Order Quantity (EOQ)—the quantity that will result in the lowest total cost for ordering and holding inventory. The EOQ takes into account both fixed costs, such as order processing and storage costs, and variable costs, such as the cost of goods sold (COGS) and shortage penalties.
Once the EOQ has been calculated, it can be used to determine how much stock should be ordered at a time. This is done by multiplying the EOQ by either the lead time or forecasted demand, depending on which one is greater. This gives you an idea of how much stock needs to be on hand at all times to meet customer demand.
However, it’s important to note that this calculation doesn’t take into account variations in demand. So if there is a lot of variability in customer orders, then you may need more or less stock than what is calculated using this method. In these cases, a simulation tool can be used to help predict how much stock should be kept on hand under different scenarios.