Has it ever happened that you have begun the process of building a product following all the checks and balances going through the BOM, realizing that there is one raw material missing? Seconds before, you thought you had all the right quantities of inventories, but while physically verifying, you find out that there is a shortfall?
You or your procurement team have probably been in this situation before, either as a consumer or manufacturer. Are you aware that this will have a negative impact on your client loyalty and sales? This is only one scenario that you may face when you have not applied inventory optimization techniques in your organization.
So, in order to assist you in optimizing your inventory management efforts, we have created this post. Let's start by defining inventory optimization.
What exactly is Inventory Optimization?
Inventory optimization is the process of maintaining the appropriate quantity of inventory to meet demand while keeping logistical costs low and avoiding common inventory concerns such as stockouts, overstocking, and backorders.
Inventory optimization is one of the industry's best practices and strategies to follow that guarantees inventory control. It is managed efficiently by integrating tools, technology, procedures, and strategies to track inventory in real-time, forecast demand better, and optimize storage.
How do Inventory Optimization techniques benefit an SME business?
The emerging popularity of multichannel and omnichannel retailing prospects, along with the instability caused by raw material shortages, plant closures, natural catastrophes, and other circumstances, can make optimizing your production process difficult.
Fortunately, by using the correct tools, technology, and resources, businesses can strategically plan for the unforeseen while still fulfilling demand and keeping logistical costs as low as possible.
Here are 5 reasons why inventory optimization is vital for future production scheduling and development, as well as how it might help an SME business.
1. Lowers operational costs.
Storage, warehousing, and general inventory management costs are all expenses that are related to how effectively you optimize inventory.
If your company has a poor inventory flow and high carrying costs, inventory optimization may assist in determining whether things are slow-moving or fast-selling, along with which warehouse sites make the most sense to keep particular items depending on demand to decrease the time they sit on warehouse shelves.
2. Increase client satisfaction.
It is the greatest aim of most direct-to-consumer (DTC) brands to keep consumers happy. You may ensure that orders are completed quickly by optimizing inventories.
To be on the safe side, it's appealing to overstock inventory. However, by figuring out how to optimize inventory, you may become more knowledgeable about how much of each item to stock and where to put your items geographically. This allows you to satisfy demand reliably, eliminate inventory concerns, and save storage expenses.
3. Increase your delivery alternatives.
Inventory optimization can assist you in tracking [SKU](https://www.investopedia.com/terms/s/stock-keeping-unit-sku.asp#:~:text=A%20stock%2Dkeeping%20unit%20(SKU,eight%2Dor%2Dso%20characters) performance across your distribution network. This enables you to proactively distribute inventory to warehouse locations with the highest demand, ensuring that the majority of your orders may be transported swiftly and at a cheaper cost.
Because inventory levels change regularly, it's critical to consider technology and automation to manage inventory, especially if you keep the product in many locations. A good inventory allocation plan that is tech-enabled and provides useful information may have a significant influence on your shipping strategy.
4. Maintain inventory levels.
Inventory accounting, profitability, and the capacity to satisfy customer demand are all aided by identifying which SKUs are available at any given time in your warehouse or distribution center. The purpose of inventory optimization is to optimize inventory levels so that you don't start stocking up on too much or too little.
Inventory level balancing can assist increase cash flow, maximize warehouse capacity, and enable you to satisfy client demand continuously.
5. Avoid overstocking.
When you don't have the means to make better inventory selections, you end up overstocking to be safe. Overstocking, on the other hand, can result in not just increased carrying costs but also deadstock, which is caused by things that become impossible to sell owing to seasonal changes, being over their expiration date, or a decline in demand over the period.
The 7 strategies for Inventory Optimization.
Till now, you may have understood what optimizing the inventory management process means and how it benefits any business in running its daily operations.
So, let's take a look at seven critical strategies that any business of any size may use to optimize its inventory management and delivery operations. As a result, prices will be reduced, issues will be reduced, and consumers will be happy.
Let's jump right in.
1. Improve the real-time data collection procedure.
Every company must be aware of the location of inventory, the lead times for products to reach customers, and the quantities and lead times of raw materials arriving at manufacturing plants.
Organizations will be unable to accurately measure their inventory levels without this data. And will inevitably accumulate too much safety stock.
Companies should implement a regular counting method, such as cycle counts, in which all inventory is monitored and compared to other information coming in from the supply chain to manage inventory and discover where cutbacks can be made. And to help them in this task, the businesses should choose an automation software like TranZact to automate this task and remove the possibility of any error.
2. Recognize your demand and plan ahead.
After establishing a datapoint collection system, the next step is to implement demand forecasting. Knowing what products to carry to meet market demand is the key to controlling your stock levels. It is vital to invest effort (and, if necessary, money) in developing advanced inventory forecasting algorithms that generate accurate demand projections. It is not enough to look at last year's sales results and expect them to repeat themselves this year!
Effective Forecasting should take into account the Product lifecycles, Seasonality factors, Economic and Social Trends, and many other qualitative factors. With this data, you can make smarter business decisions, enhance supply chain efficiencies, cut costs, and provide a better customer experience.
Demand forecasting might get more difficult as your company grows. That is why TranZact's demand forecasting and BI tools may assist you in tracking inventory performance over time and planning more effectively for the future.
3. Establish stock level control policies.
Inventory policies guarantee that you stock the correct commodities in the proper quantities - essential for warehouse inventory control. Make sure you have a set of "rules" in place for each SKU you sell. Inventory categorization, such as
ABC analysis will be useful here. Consider distinct service levels, safety stock levels, and reordering parameters for each category, for example.
Remember you have a policy in place for decreasing surplus stock and deleting outmoded items. While extra stock reduces stock turnover and consumes working capital, it will also eat away at your profit margins if it becomes obsolete!
Read more - Inventory Control: 6 Best Techniques To Follow
4. Establish your safety stock inventory and make contingency measures.
The layer of inventory retained to prevent stockouts and back orders when the prediction is exceeded or supply is delayed is known as safety stock, also known as buffer stock. Safety stock reduces disruptions caused by demand, supply chain, or fulfillment disruptions - all while investing the least amount of cash possible in inventory.
It's critical to have tight contingency plans that reduce the consequences of lost orders, slow-moving inventories, late delivery, manufacturer faults, and other issues.
For each SKU, you will need the following information to calculate the correct amount of safety stock:
- Maximum daily usage
- Maximum lead time
- Average daily usage
- Average lead time
Calculating and monitoring safety stock becomes easier with tools like TranZact, which keeps inventory and fulfills orders for you.
5. Use the reorder point formula.
While understanding how much minimum inventory to keep, including safety stock, is vital, you will also need to decide the best times to replenish.
Your reorder point should guarantee that surplus capital is not trapped in inventory and should account for any lead times (from your manufacturer, the time it takes your warehouse to receive and stow product, and other unforeseen delays).
Here's a basic formula for calculating reorder points:
Reorder Point (ROP) = Demand during lead time + safety stock
Though the technique is straightforward, keeping track of when to reorder each component can be time-consuming and difficult. TranZact allows you to access inventory data and configure automatic reorder points to save time and make the process more efficient.
6. Improve your warehouse's inefficiencies.
There are several strategies to reduce inventory holding expenses, whether the product is stored in-house or through a third-party (3PL).
Tighter storage systems, more efficient layouts, modern handling equipment, and stock transfers between low-demand and high-demand warehouses are all potential areas for improvement.
By utilizing space effectively, you will be able to take advantage of supplier discounts by acquiring larger amounts of merchandise at opportune times. With TranZact, you can automate your whole warehouse operation and effectively manage your inventories.
7. Use Inventory management software in your business.
Implementing inventory management software allows you to sync Inventory items and orders to see all inventory, fulfillment facilities, sales channels, and customers in one location.
Depending on the size of your business and your budget, there are various inventory optimization or management software and other options to select from that may help you simply track inventory in real-time. And TranZact is one such tool for you. It is an easy-to-use inventory management tool that helps SMEs and manufacturing businesses SMEs in streamlining their business processes, from purchasing to manufacturing, with a friendly interface.
Effective inventory management and optimization are one of the simplest methods for organizations to save money.
Simple operations like tracking, forecasting, and contingency planning can lead to significant cost savings in acquiring, keeping, and transporting stock.
It's also worth noting that all of these strategies necessitate a unified approach to data collection and interpretation, which can be greatly aided by the use of the software.