Inventory Optimization 101

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What is Inventory Optimization?

There is plenty that goes into inventory optimization for your company. It makes sense to start off by discussing what inventory optimization is, exactly. You will find many definitions of inventory optimization that may vary somewhat. However, one good definition is that it is ensuring that you have sufficient inventory to meet the service levels that you have targeted while making sure that there is minimal capital in inventory. Simply put, inventory optimization is when you maintain sufficient inventory for your company’s needs while spending as little money on inventory costs as possible. You have to account for two main factors to do this, which are supply volatility and demand volatility. 

Critical Parts of Optimizing Your Inventory

When you look into inventory optimization, you will find that there are several important components that go into this concept. The first part of optimizing your inventory is demand forecasting. Demand forecasting is predicting the future demand for a product or service so that you can more easily optimize your inventory. Demand forecasting helps you optimize your inventory because you will know when you will need more inventory for your product ahead of time. Demand forecasting helps you foresee demand surges so you can prepare in time and provide your product for your customers. 

Your inventory policy is another component of optimizing your inventory. Inventory policy is fairly straightforward in that it simply means you decide which products you are going to stock and how much you are going to keep of each product. Optimizing your inventory is easier if you have an effective inventory policy that fits your inventory needs. Your inventory policy also means that you figure out how much safety stock you have in order to handle sudden peaks in demand. Your inventory policy also involves figuring out where to store your inventory so you can get it where it needs to go. 

Stock replenishment is one more part of optimizing your inventory. This helps you figure out reorder points in addition to order quantities. Then you can turn those reorder points and order quantities into real orders. You need to have a clear idea of your supplier’s reliability, as well. One big part of this is the supplier lead time, which is the amount of time between when you submit an order to your supplier and when the order is shipped to you. It is important to know supplier lead times so you are sure you can provide your product to meet demand. 

You also have to know just how much of an item you have in transit when you make an order to your supplier. Of course, you have to know how much of the item you have in stock. However, you have to know how much you have in transit and how much of the item is currently on the way from your supplier into your warehouses. It is critical that you know this because otherwise, you will have a difficult time figuring out how much of an item you need to order from your supplier. 

Optimizing Your Inventory Benefits Your Customers

Your company benefits from inventory optimization in a number of different ways. Optimizing your inventory can assist your company with saving money on inventory costs and let your company function far more effectively, too. However, optimizing your inventory benefits your customers, as well. This is because optimizing your inventory makes it less likely you will have to deal with being out of stock and not delivering to your customers in a timely fashion, too. As a result, your customers are likely to be happier with your company and demonstrate greater customer loyalty to your company.

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