What Is Inventory Optimization: All You Need To Know

In the era of growing digital business and e-marketing, there are certain aspects retailers must always keep in mind. One is the proper implementation of inventory management in the supply chain for any business to prosper.

Now, when we talk about inventory or inventory management, there are multiple layers we must understand.

A Quick Guide To Inventory Optimization

What is Inventory Optimization?

Let’s start with an example; if you run out of your daily items like shampoo, groceries, medicines and so on, you can quickly run to the market and get them restocked. However, when it comes to a business or online retailer, efficiently refilling one’s ‘inventory’ within a short time is pretty challenging, with layers of processes to be followed.

In marketing language, inventory optimization is meeting the customer demands at minimum cost by determining the inventory levels. Due to imperfect information around inbound supply and outbound demand plans, forecasts, information lead times and actuals, retailers often have excess supplies to avoid a stock runout.

A Quick Guide To Inventory Optimization

Fundamentals of Inventory Optimization

The fundamentals of inventory optimization lie in the correct practice of inventory management. When a business deals with hundreds of products, tracking components across suppliers, inventory optimization is vital in ensuring stock on hand, production and sales. This creates a setup that allows proper inventory control where the stock is used as efficiently and effectively as possible.

Efficient management of stock forms the crux of inventory optimization. Multi-item optimization or segmenting products into smaller buckets allows for greater control over inventory while still ensuring optimal customer service. Segmentation would mean grouping the components according to velocity, size, cost, quality, etc.

It is essential to distribute the extra stock, especially high-dollar products, across locations while managing excess inventory to having optimum inventory returns. Firms should identify exactly how much inventory they need, as excessive inventory locks up working capital and brings no immediate revenue.

This would require virtual planning and help manufacturers avoid excess inventory from becoming obsolete.

Shifting focus from manual planning to order automation will also boost the efficiency of products flowing from the planning systems to order execution systems. This also helps planners save more time, focusing on more meaningful tasks, such as reviewing substantial stock order changes.

To brief it up, inventory optimization and inventory tracking system generally has five key stages to help achieve success in the ongoing process:

Purchase

This process includes the buying of raw materials to start up your inventory stocking.

Production

Using the raw materials to make products.

Holding stock

This is an essential step, as storing raw materials for an emergency is crucial before all the materials are used up to manufacture the products.

Sales

Selling the product and generating profit and revenue.

Reporting

Sales professionals and management must report sales figures to keep a tab of excess stock and revenue generated on each sale.

To understand the steps of inventory optimization, let’s get into the further details.

A Quick Guide To Inventory Optimization

What are the Main Elements of Inventory Optimization?

One of the fundamentals to keep in mind while learning about inventory optimization is for a business to know how many products to order without increasing the stock maintenance cost.

To succeed at inventory optimization, firms must follow these four elements:

Demand forecasting

For any industry, accurate demand forecasting has the highest potential for savings. It is the first guiding principle of inventory management and inventory optimization. With every product having a shelf life, it often becomes complicated for large companies to track the rising and falling demands of the product. Hence, it is crucial to have a demand forecast technique with the inventory accounting system.

For example, forecasting software can help track the daily demand patterns of the products, and as demand spikes and falls, it alerts the management. Both oversupply and undersupply of inventory can have critical business costs. So an accurate forecast of the demand cycle can save a the company’s storage costs and the risk of obsolete products.

Inventory replenishment

Stock replenishment or inventory replenishment is determining the optimal stock levels for each product so that inventory levels are enough to fulfill demand. Effective inventory replenishment involves moving stock along the supply chain to maximize order fill rates while minimizing inventory carrying costs.

Businesses must calculate reorder points (the minimum amount of stock a company can hold before placing another order) to maintain a healthy inventory count actively. Companies must focus on supply retainability to ensure proper inventory replenishment.

Inventory levels

When we talk about inventory optimization, what we mean is balancing the inventory levels. Knowing which warehouse or distribution centre has the availability of your stock keeping units (SKU) at any given point helps in the inventory accounting. Overstocking or understocking of SKUs may interfere with the inventory levels. Overstocking can lead to higher carrying costs and deadstock, where products are left unsold due to a drop in demand, expiry or seasonality.

Hence inventory optimization is required to maintain the optimum balance. A balanced inventory level always helps with the cash flow and helps a business in meeting customer demands while optimising warehousing capacity.

Inventory storage

Inventory storage helps a business store, manage, and track inventory, and it is critical to long-term retail success. While there are various ways to enhance inventory storage, three key methods are self-storage, traditional warehousing and third-party logistic (3PL) services.

Self-storage: is when a business sets up its own place to store the stock, whether at the business place, a closet or a hired space.

Traditional warehousing: involves the business sending the inventory to a warehouse from where it gets picked up for shipping. This can be in a storage unit, small warehouse, or even purchasing land and building a facility yourself.

3PL Services: Here, a business outsources its stock to inventory fulfilment experts experienced in inventory optimization. They come with resources to store your inventory and manage your shipping to maximise efficiency in the supply chain.

Inventory storage is best done when a business invests in equipment, depending on the goods in question.

A Quick Guide To Inventory Optimization

Inventory Optimization Techniques

Knowing the top inventory optimization techniques will help a business ace inventory control processes. Inventory control involves procuring, managing, storing, regulating and distributing stock as efficiently as possible. It is a critical process in the supply management cycle to meet customer demands while retaining the right amount of products at the right time and place.

Here are the six techniques to help you optimize inventory:

1. Stock auditing

Successful inventory management always needs an organised movement of stock in the supply chain, from keeping a tab on its labelling, tagging, sales, demands, etc. Cloud services are often available to suit the needs of inventory management.

This software tracks the clear details of raw material, purchased goods, the location of the products, and other information systematically, avoiding human errors. Besides, physical auditing also ensures there is no dead stock and wastage of the same.

2. Inventory budget

Creating an inventory budget helps to understand and pre-plan the amount in hand for procuring and adjusting from past purchases. The budget also helps create an inventory itinerary, which will help create a stock plan around the firm’s already existing stock. Once the budget is created and regulated, it must be communicated across teams to remain aligned with the itinerary. Performing timely audits is crucial to ensure that budget in the inventory account is spent according to the current procurement plan and that no diversion is coming this way.

3. Just-in-time inventory budget

This process helps the business keep a low inventory stock to avoid dead stock and replenish them just when needed. It helps maintain the inventory budget and holds it as low as possible by preventing overstocking the merchandise. Again, several cloud services are available to update your inventory management with the details of the product’s stock in the warehouse.

4. Tactical plans

Developing tactical plans is the secret to a successful business model. Strategic and tactical planning is required from the beginning — manufacturing the products to their sale. Planning and organising techniques at every level will help create better inventory policies for efficient inventory optimization—from understanding where to procure raw materials and how much to purchase to producing the finished goods according to the customer demands.

A Quick Guide To Inventory Optimization

Challenges to the Supply Chain Inventory Planning & Optimization

A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

1. Inconsistent tracking

A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

2. Inaccurate data

In the days of the digital boom of business and e-commerce, inventory optimization cannot solely depend on tracking the data only once a year. Data of stock must be tracked regularly for efficient stock optimization.

3. Perishable stock

Perishable and fragile stock must be given extra care and attention for its storage. Efficient loss-prevention strategies must be adopted by businesses to save on cost and avoid inventory loss with a short shelf life.

4. Complexity of supply chain

With global supply chains shifting daily, it often burdens an enterprise’s inventory planning and management operations.

5. Change in customer demands

Customer demands and behavior are constantly changing. Businesses that lack efficient demand forecasting tools may often lose their stock and leave you unable to meet the needs. Strategical and tactical plans to create and execute an inventory plan can help gauge customer demands efficiently.

A Quick Guide To Inventory Optimization

COGS

The cost of goods sold or COGS is the cost of obtaining or manufacturing the products that a company sells over a certain period. Therefore the only costs included in the metric are those directly related to product creation, such as labour, materials, and factory overhead.

For example, an automaker’s COGS would include the material costs for the car’s parts and the labour costs used to assemble the car. The costs of transporting the vehicles to dealerships and the labour required to sell the vehicle would be removed.

The cost of goods sold formula is computed by adding the period’s purchases to the beginning inventory and subtracting the period’s ending inventory.

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

The current period’s beginning inventory is computed using the previous year’s remaining inventory. Any additional inventory bought or generated is added to the starting inventory. Unsold products are removed from the total beginning inventory and further acquisitions to calculate the cost of goods sold (COGS).

Example:

In April, a car manufacturer had a starting inventory of INR 2,50,64,900 and purchased another INR 5,37,10,500 worth of inventory. April was a profitable month, with the remaining inventory totalling INR 89,50,187 at the end of the month.

Let us now apply the formula to calculate the cost of goods sold

COGS = Rs. 2,50,64,900 + Rs. 5,37,10,500 – 89,50,187

COGS = Rs. 6,98,25,213

Therefore, the cost of goods sold (COGS) of the car manufacturer is Rs. 6,98,25,213

A Quick Guide To Inventory Optimization

Why is Inventory Optimization Important for E-commerce?

Inventory optimization deals with getting the right product at the right place and time, with the right amount of planning. In today’s hyper-competitive e-commerce market, something as critical as inventory optimization is often overlooked but plays a key role in business success. It allows a company to meet challenges for its growth and achieve the targeted goals at a minimum cost. It also helps enhance and refine inventory management policies, and budgeting and work towards a wholesome business model.

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FAQs

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, Maintenance, Repair, and Overhaul (MRO).

A 3PL inventory system increases the speed of work routines via streamlining picking, packing, shipping, and reverse logistics procedures. Hence, it enhances the efficiency and productivity of warehouse operations.

Supply Chain Inventory Optimization Software helps with real-time data across inventory levels and ensures an enhanced performance through the sales process by keeping all essential inventory components in mind.

Getting the inventory right can help any business grow or eventually die down. Mismanagement can lead to significant shrinkage, loss, and financial hardships. Inventory management covers the core principles that help companies progress without running out of stock.

What Is Inventory Optimization: All You Need To Know

A Quick Guide To Inventory Optimization

In the era of growing digital business and e-marketing, there are certain aspects retailers must always keep in mind. One is the proper implementation of inventory management in the supply chain for any business to prosper.

Now, when we talk about inventory or inventory management, there are multiple layers we must understand.

What Is Inventory Optimization: All You Need To Know

In the era of growing digital business and e-marketing, there are certain aspects retailers must always keep in mind. One is the proper implementation of inventory management in the supply chain for any business to prosper.

Now, when we talk about inventory or inventory management, there are multiple layers we must understand.

A Quick Guide To Inventory Optimization

What is Inventory Optimization?

A Quick Guide To Inventory Optimization

Let’s start with an example; if you run out of your daily items like shampoo, groceries, medicines and so on, you can quickly run to the market and get them restocked. However, when it comes to a business or online retailer, efficiently refilling one’s ‘inventory’ within a short time is pretty challenging, with layers of processes to be followed.

In marketing language, inventory optimization is meeting the customer demands at minimum cost by determining the inventory levels. Due to imperfect information around inbound supply and outbound demand plans, forecasts, information lead times and actuals, retailers often have excess supplies to avoid a stock runout.

A Quick Guide To Inventory Optimization

Fundamentals of Inventory Optimization

The fundamentals of inventory optimization lie in the correct practice of inventory management. When a business deals with hundreds of products, tracking components across suppliers, inventory optimization is vital in ensuring stock on hand, production and sales. This creates a setup that allows proper inventory control where the stock is used as efficiently and effectively as possible.

Efficient management of stock forms the crux of inventory optimization. Multi-item optimization or segmenting products into smaller buckets allows for greater control over inventory while still ensuring optimal customer service. Segmentation would mean grouping the components according to velocity, size, cost, quality, etc.

It is essential to distribute the extra stock, especially high-dollar products, across locations while managing excess inventory to having optimum inventory returns. Firms should identify exactly how much inventory they need, as excessive inventory locks up working capital and brings no immediate revenue.

This would require virtual planning and help manufacturers avoid excess inventory from becoming obsolete.

Shifting focus from manual planning to order automation will also boost the efficiency of products flowing from the planning systems to order execution systems. This also helps planners save more time, focusing on more meaningful tasks, such as reviewing substantial stock order changes.

To brief it up, inventory optimization and inventory tracking system generally has five key stages to help achieve success in the ongoing process:

Purchase

This process includes the buying of raw materials to start up your inventory stocking.

Production

Using the raw materials to make products.

Holding stock

This is an essential step, as storing raw materials for an emergency is crucial before all the materials are used up to manufacture the products.

Sales

Selling the product and generating profit and revenue.

Reporting

Sales professionals and management must report sales figures to keep a tab of excess stock and revenue generated on each sale.

To understand the steps of inventory optimization, let’s get into the further details.

happy asian woman inspecting inventory

What are the Main Elements of Inventory Optimization?

One of the fundamentals to keep in mind while learning about inventory optimization is for a business to know how many products to order without increasing the stock maintenance cost.

To succeed at inventory optimization, firms must follow these four elements:

Demand forecasting

For any industry, accurate demand forecasting has the highest potential for savings. It is the first guiding principle of inventory management and inventory optimization. With every product having a shelf life, it often becomes complicated for large companies to track the rising and falling demands of the product. Hence, it is crucial to have a demand forecast technique with the inventory accounting system.

For example, forecasting software can help track the daily demand patterns of the products, and as demand spikes and falls, it alerts the management. Both oversupply and undersupply of inventory can have critical business costs. So an accurate forecast of the demand cycle can save a the company’s storage costs and the risk of obsolete products.

Inventory replenishment

Stock replenishment or inventory replenishment is determining the optimal stock levels for each product so that inventory levels are enough to fulfill demand. Effective inventory replenishment involves moving stock along the supply chain to maximize order fill rates while minimizing inventory carrying costs.

Businesses must calculate reorder points (the minimum amount of stock a company can hold before placing another order) to maintain a healthy inventory count actively. Companies must focus on supply retainability to ensure proper inventory replenishment.

Inventory levels

When we talk about inventory optimization, what we mean is balancing the inventory levels. Knowing which warehouse or distribution centre has the availability of your stock keeping units (SKU) at any given point helps in the inventory accounting. Overstocking or understocking of SKUs may interfere with the inventory levels. Overstocking can lead to higher carrying costs and deadstock, where products are left unsold due to a drop in demand, expiry or seasonality.

Hence inventory optimization is required to maintain the optimum balance. A balanced inventory level always helps with the cash flow and helps a business in meeting customer demands while optimising warehousing capacity.

Inventory storage

Inventory storage helps a business store, manage, and track inventory, and it is critical to long-term retail success. While there are various ways to enhance inventory storage, three key methods are self-storage, traditional warehousing and third-party logistic (3PL) services.

Self-storage: is when a business sets up its own place to store the stock, whether at the business place, a closet or a hired space.

Traditional warehousing: involves the business sending the inventory to a warehouse from where it gets picked up for shipping. This can be in a storage unit, small warehouse, or even purchasing land and building a facility yourself.

3PL Services: Here, a business outsources its stock to inventory fulfilment experts experienced in inventory optimization. They come with resources to store your inventory and manage your shipping to maximise efficiency in the supply chain.

Inventory storage is best done when a business invests in equipment, depending on the goods in question.

happy asian woman inspecting inventory
trays of products for sorting inside a warehouse

Inventory Optimization Techniques

Knowing the top inventory optimization techniques will help a business ace inventory control processes. Inventory control involves procuring, managing, storing, regulating and distributing stock as efficiently as possible. It is a critical process in the supply management cycle to meet customer demands while retaining the right amount of products at the right time and place.

Here are the six techniques to help you optimize inventory:

1. Stock auditing

Successful inventory management always needs an organised movement of stock in the supply chain, from keeping a tab on its labelling, tagging, sales, demands, etc. Cloud services are often available to suit the needs of inventory management.

This software tracks the clear details of raw material, purchased goods, the location of the products, and other information systematically, avoiding human errors. Besides, physical auditing also ensures there is no dead stock and wastage of the same.

2. Inventory budget

Creating an inventory budget helps to understand and pre-plan the amount in hand for procuring and adjusting from past purchases. The budget also helps create an inventory itinerary, which will help create a stock plan around the firm’s already existing stock. Once the budget is created and regulated, it must be communicated across teams to remain aligned with the itinerary. Performing timely audits is crucial to ensure that budget in the inventory account is spent according to the current procurement plan and that no diversion is coming this way.

3. Just-in-time inventory budget

This process helps the business keep a low inventory stock to avoid dead stock and replenish them just when needed. It helps maintain the inventory budget and holds it as low as possible by preventing overstocking the merchandise. Again, several cloud services are available to update your inventory management with the details of the product’s stock in the warehouse.

4. Tactical plans

Developing tactical plans is the secret to a successful business model. Strategic and tactical planning is required from the beginning — manufacturing the products to their sale. Planning and organising techniques at every level will help create better inventory policies for efficient inventory optimization—from understanding where to procure raw materials and how much to purchase to producing the finished goods according to the customer demands.

Challenges to the Supply Chain Inventory Planning & Optimization

man with a clipboard checking inventory items inside a warehouse
A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

1. Inconsistent tracking

A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

2. Inaccurate data

In the days of the digital boom of business and e-commerce, inventory optimization cannot solely depend on tracking the data only once a year. Data of stock must be tracked regularly for efficient stock optimization.

3. Perishable stock

Perishable and fragile stock must be given extra care and attention for its storage. Efficient loss-prevention strategies must be adopted by businesses to save on cost and avoid inventory loss with a short shelf life.

4. Complexity of supply chain

With global supply chains shifting daily, it often burdens an enterprise’s inventory planning and management operations.

5. Change in customer demands

Customer demands and behavior are constantly changing. Businesses that lack efficient demand forecasting tools may often lose their stock and leave you unable to meet the needs. Strategical and tactical plans to create and execute an inventory plan can help gauge customer demands efficiently.
man with a clipboard checking inventory items inside a warehouse
calculating for inventory tax and expenses

COGS

The cost of goods sold or COGS is the cost of obtaining or manufacturing the products that a company sells over a certain period. Therefore the only costs included in the metric are those directly related to product creation, such as labour, materials, and factory overhead.

For example, an automaker’s COGS would include the material costs for the car’s parts and the labour costs used to assemble the car. The costs of transporting the vehicles to dealerships and the labour required to sell the vehicle would be removed.

The cost of goods sold formula is computed by adding the period’s purchases to the beginning inventory and subtracting the period’s ending inventory.

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

The current period’s beginning inventory is computed using the previous year’s remaining inventory. Any additional inventory bought or generated is added to the starting inventory. Unsold products are removed from the total beginning inventory and further acquisitions to calculate the cost of goods sold (COGS).

Example:

In April, a car manufacturer had a starting inventory of INR 2,50,64,900 and purchased another INR 5,37,10,500 worth of inventory. April was a profitable month, with the remaining inventory totalling INR 89,50,187 at the end of the month.

Let us now apply the formula to calculate the cost of goods sold

COGS = Rs. 2,50,64,900 + Rs. 5,37,10,500 – 89,50,187

COGS = Rs. 6,98,25,213

Therefore, the cost of goods sold (COGS) of the car manufacturer is Rs. 6,98,25,213

A Quick Guide To Inventory Optimization

Why is Inventory Optimization Important for E-commerce?

Inventory optimization deals with getting the right product at the right place and time, with the right amount of planning. In today’s hyper-competitive e-commerce market, something as critical as inventory optimization is often overlooked but plays a key role in business success. It allows a company to meet challenges for its growth and achieve the targeted goals at a minimum cost. It also helps enhance and refine inventory management policies, and budgeting and work towards a wholesome business model.

Looking for warehousing services for your
e-commerce business?

LOCAD offers premium e-commerce fulfillment services for businesses of all sizes. Connect with our logistics and to our fulfillment expert today to reduce your shipping costs, boost your transit times, and improve overall customer satisfaction. 

Frequently Asked Questions

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, Maintenance, Repair, and Overhaul (MRO).
A 3PL inventory system increases the speed of work routines via streamlining picking, packing, shipping, and reverse logistics procedures. Hence, it enhances the efficiency and productivity of warehouse operations.
Supply Chain Inventory Optimization Software helps with real-time data across inventory levels and ensures an enhanced performance through the sales process by keeping all essential inventory components in mind.
Getting the inventory right can help any business grow or eventually die down. Mismanagement can lead to significant shrinkage, loss, and financial hardships. Inventory management covers the core principles that help companies progress without running out of stock.
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What Is Inventory Optimization: All You Need To Know

In the era of growing digital business and e-marketing, there are certain aspects retailers must always keep in mind. One is the proper implementation of inventory management in the supply chain for any business to prosper.

Now, when we talk about inventory or inventory management, there are multiple layers we must understand.

A Quick Guide To Inventory Optimization
A Quick Guide To Inventory Optimization

What is Inventory Optimization?

Let’s start with an example; if you run out of your daily items like shampoo, groceries, medicines and so on, you can quickly run to the market and get them restocked. However, when it comes to a business or online retailer, efficiently refilling one’s ‘inventory’ within a short time is pretty challenging, with layers of processes to be followed.

In marketing language, inventory optimization is meeting the customer demands at minimum cost by determining the inventory levels. Due to imperfect information around inbound supply and outbound demand plans, forecasts, information lead times and actuals, retailers often have excess supplies to avoid a stock runout.

A Quick Guide To Inventory Optimization

Fundamentals of Inventory Optimization

The fundamentals of inventory optimization lie in the correct practice of inventory management. When a business deals with hundreds of products, tracking components across suppliers, inventory optimization is vital in ensuring stock on hand, production and sales. This creates a setup that allows proper inventory control where the stock is used as efficiently and effectively as possible.

Efficient management of stock forms the crux of inventory optimization. Multi-item optimization or segmenting products into smaller buckets allows for greater control over inventory while still ensuring optimal customer service. Segmentation would mean grouping the components according to velocity, size, cost, quality, etc.

It is essential to distribute the extra stock, especially high-dollar products, across locations while managing excess inventory to having optimum inventory returns. Firms should identify exactly how much inventory they need, as excessive inventory locks up working capital and brings no immediate revenue.

This would require virtual planning and help manufacturers avoid excess inventory from becoming obsolete.

Shifting focus from manual planning to order automation will also boost the efficiency of products flowing from the planning systems to order execution systems. This also helps planners save more time, focusing on more meaningful tasks, such as reviewing substantial stock order changes.

To brief it up, inventory optimization and inventory tracking system generally has five key stages to help achieve success in the ongoing process:

Purchase

This process includes the buying of raw materials to start up your inventory stocking.

Production

Using the raw materials to make products.

Holding stock

This is an essential step, as storing raw materials for an emergency is crucial before all the materials are used up to manufacture the products.

Sales

Selling the product and generating profit and revenue.

Reporting

Sales professionals and management must report sales figures to keep a tab of excess stock and revenue generated on each sale.

To understand the steps of inventory optimization, let’s get into the further details.

A Quick Guide To Inventory Optimization

What are the Main Elements of Inventory Optimization?

One of the fundamentals to keep in mind while learning about inventory optimization is for a business to know how many products to order without increasing the stock maintenance cost.

To succeed at inventory optimization, firms must follow these four elements:

Demand forecasting

For any industry, accurate demand forecasting has the highest potential for savings. It is the first guiding principle of inventory management and inventory optimization. With every product having a shelf life, it often becomes complicated for large companies to track the rising and falling demands of the product. Hence, it is crucial to have a demand forecast technique with the inventory accounting system.

For example, forecasting software can help track the daily demand patterns of the products, and as demand spikes and falls, it alerts the management. Both oversupply and undersupply of inventory can have critical business costs. So an accurate forecast of the demand cycle can save a the company’s storage costs and the risk of obsolete products.

Inventory replenishment

Stock replenishment or inventory replenishment is determining the optimal stock levels for each product so that inventory levels are enough to fulfill demand. Effective inventory replenishment involves moving stock along the supply chain to maximize order fill rates while minimizing inventory carrying costs.

Businesses must calculate reorder points (the minimum amount of stock a company can hold before placing another order) to maintain a healthy inventory count actively. Companies must focus on supply retainability to ensure proper inventory replenishment.

Inventory levels

When we talk about inventory optimization, what we mean is balancing the inventory levels. Knowing which warehouse or distribution centre has the availability of your stock keeping units (SKU) at any given point helps in the inventory accounting. Overstocking or understocking of SKUs may interfere with the inventory levels. Overstocking can lead to higher carrying costs and deadstock, where products are left unsold due to a drop in demand, expiry or seasonality.

Hence inventory optimization is required to maintain the optimum balance. A balanced inventory level always helps with the cash flow and helps a business in meeting customer demands while optimising warehousing capacity.

Inventory storage

Inventory storage helps a business store, manage, and track inventory, and it is critical to long-term retail success. While there are various ways to enhance inventory storage, three key methods are self-storage, traditional warehousing and third-party logistic (3PL) services.

Self-storage: is when a business sets up its own place to store the stock, whether at the business place, a closet or a hired space.

Traditional warehousing: involves the business sending the inventory to a warehouse from where it gets picked up for shipping. This can be in a storage unit, small warehouse, or even purchasing land and building a facility yourself.

3PL Services: Here, a business outsources its stock to inventory fulfilment experts experienced in inventory optimization. They come with resources to store your inventory and manage your shipping to maximise efficiency in the supply chain.

Inventory storage is best done when a business invests in equipment, depending on the goods in question.

A Quick Guide To Inventory Optimization

Inventory Optimization Techniques

Knowing the top inventory optimization techniques will help a business ace inventory control processes. Inventory control involves procuring, managing, storing, regulating and distributing stock as efficiently as possible. It is a critical process in the supply management cycle to meet customer demands while retaining the right amount of products at the right time and place.

Here are the six techniques to help you optimize inventory:

1. Stock auditing

Successful inventory management always needs an organised movement of stock in the supply chain, from keeping a tab on its labelling, tagging, sales, demands, etc. Cloud services are often available to suit the needs of inventory management.

This software tracks the clear details of raw material, purchased goods, the location of the products, and other information systematically, avoiding human errors. Besides, physical auditing also ensures there is no dead stock and wastage of the same.

2. Inventory budget

Creating an inventory budget helps to understand and pre-plan the amount in hand for procuring and adjusting from past purchases. The budget also helps create an inventory itinerary, which will help create a stock plan around the firm’s already existing stock. Once the budget is created and regulated, it must be communicated across teams to remain aligned with the itinerary. Performing timely audits is crucial to ensure that budget in the inventory account is spent according to the current procurement plan and that no diversion is coming this way.

3. Just-in-time inventory budget

This process helps the business keep a low inventory stock to avoid dead stock and replenish them just when needed. It helps maintain the inventory budget and holds it as low as possible by preventing overstocking the merchandise. Again, several cloud services are available to update your inventory management with the details of the product’s stock in the warehouse.

4. Tactical plans

Developing tactical plans is the secret to a successful business model. Strategic and tactical planning is required from the beginning — manufacturing the products to their sale. Planning and organising techniques at every level will help create better inventory policies for efficient inventory optimization—from understanding where to procure raw materials and how much to purchase to producing the finished goods according to the customer demands.

A Quick Guide To Inventory Optimization

Challenges to the Supply Chain Inventory Planning & Optimization

A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

1. Inconsistent tracking

A look at the top challenges to inventory planning and optimization so that businesses know how to tackle them:

2. Inaccurate data

In the days of the digital boom of business and e-commerce, inventory optimization cannot solely depend on tracking the data only once a year. Data of stock must be tracked regularly for efficient stock optimization.

3. Perishable stock

Perishable and fragile stock must be given extra care and attention for its storage. Efficient loss-prevention strategies must be adopted by businesses to save on cost and avoid inventory loss with a short shelf life.

4. Complexity of supply chain

With global supply chains shifting daily, it often burdens an enterprise’s inventory planning and management operations.

5. Change in customer demands

Customer demands and behavior are constantly changing. Businesses that lack efficient demand forecasting tools may often lose their stock and leave you unable to meet the needs. Strategical and tactical plans to create and execute an inventory plan can help gauge customer demands efficiently.

A Quick Guide To Inventory Optimization

COGS

The cost of goods sold or COGS is the cost of obtaining or manufacturing the products that a company sells over a certain period. Therefore the only costs included in the metric are those directly related to product creation, such as labour, materials, and factory overhead.

For example, an automaker’s COGS would include the material costs for the car’s parts and the labour costs used to assemble the car. The costs of transporting the vehicles to dealerships and the labour required to sell the vehicle would be removed.

The cost of goods sold formula is computed by adding the period’s purchases to the beginning inventory and subtracting the period’s ending inventory.

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

The current period’s beginning inventory is computed using the previous year’s remaining inventory. Any additional inventory bought or generated is added to the starting inventory. Unsold products are removed from the total beginning inventory and further acquisitions to calculate the cost of goods sold (COGS).

Example:

In April, a car manufacturer had a starting inventory of INR 2,50,64,900 and purchased another INR 5,37,10,500 worth of inventory. April was a profitable month, with the remaining inventory totalling INR 89,50,187 at the end of the month.

Let us now apply the formula to calculate the cost of goods sold

COGS = Rs. 2,50,64,900 + Rs. 5,37,10,500 – 89,50,187

COGS = Rs. 6,98,25,213

Therefore, the cost of goods sold (COGS) of the car manufacturer is Rs. 6,98,25,213

A Quick Guide To Inventory Optimization

Why is Inventory Optimization Important for E-commerce?

Inventory optimization deals with getting the right product at the right place and time, with the right amount of planning. In today’s hyper-competitive e-commerce market, something as critical as inventory optimization is often overlooked but plays a key role in business success. It allows a company to meet challenges for its growth and achieve the targeted goals at a minimum cost. It also helps enhance and refine inventory management policies, and budgeting and work towards a wholesome business model.

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FAQs

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, Maintenance, Repair, and Overhaul (MRO).

A 3PL inventory system increases the speed of work routines via streamlining picking, packing, shipping, and reverse logistics procedures. Hence, it enhances the efficiency and productivity of warehouse operations.

Supply Chain Inventory Optimization Software helps with real-time data across inventory levels and ensures an enhanced performance through the sales process by keeping all essential inventory components in mind.

Getting the inventory right can help any business grow or eventually die down. Mismanagement can lead to significant shrinkage, loss, and financial hardships. Inventory management covers the core principles that help companies progress without running out of stock.

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