Top Techniques for Inventory Optimization

Inventory

If you want to maintain things running in your business, you have to keep a close eye on your inventory. 

Think about it, really.

Without proper inventory control, how could you know what's going on with your stock? How could you fulfill your customers' expectations with confidence? 

And what happens when something goes wrong in the market or your supply chain and you need a backup plan?

Yes, managing your inventory right is absolutely important.

The good news is that there are some tried and tested methods businesses can follow to improve their inventory control 

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What's Inventory Optimization?

Pretty simple

Inventory optimization is the process of making sure you are getting the right amount of products at the right time, so you are able to meet demand and not running into problems that could harm your business’s cash flow and reputation 

Inventory optimization takes into account things like demand trends, lead times, storage costs, and supplier reliability to help you make smarter stocking decisions.

Why Inventory Optimization Matters?

Do you want a quick answer?

Is how you prevent headaches. 

But really, without proper inventory optimization, you won't only be dealing with the dreaded stockout or costly overstocks; you'll also have issues handling orders on time, a team suffering from burnout, and, well…completely unsatisfied customers.

As a bonus point? 

You are also improving your financial status. Spending just the precise amount of money on your purchases and warehouse maintenance definitely helps keep cash flow levels healthy.

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Key Concepts for Inventory Optimization 

Before jumping into all the specific techniques that are going to transform your inventory management results, it's important to feel familiar with some of the most basic elements surrounding inventory optimization 

For example…

Demand forecasting

This is crucial 

One of the most common challenges businesses face when it comes to managing their inventory is a lack of knowledge about what could happen next and how these unexpected changes can affect their operations. 

Well, demand forecasting is how you solve all those questions and more. 

Using a combination of data analysis and calculations based on current trends, demand forecasting can be tremendously helpful to understand your inventory activity better.

Inventory levels 

These determine a good part of your inventory optimization strategy. 

Your goal is to keep just enough product on hand to meet demand without going overboard. You’ve got different levels to think about, like minimum stock, maximum stock, and reorder points.

Knowing these helps you plan better and restock smarter.

Lead time 

By definition, we understand lead time as the amount of time it takes from placing an order with your suppliers to when it actually arrives at your warehouse.

In theory, there's nothing more to it. 

But if your lead time takes longer than what you planned and there's no way to solve it, you could face serious consequences like not having enough stock when your customers want it. 

Safety stock

Think of safety stock as your just-in-case plan.

It’s extra inventory you keep on hand to cover surprises, like sudden spikes in demand or shipping delays. It can be a lifesaver when things don’t go according to plan.

Carrying costs

Have you ever noticed that your inventory costs are rising without an apparent reason?

Well, there's a reason.

Like the costs that come with holding inventory longer than expected.

Keeping things stored over time can cost you money.

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Inventory Optimization: Challenges 

Overstock and stockout

These are probably the most common problems managers face. 

Trying to figure out how much stock you actually need is not as simple as it might look. 

On one side, you need to have all the necessary products to keep up with your customers' demand and prepare for any unexpected problems. On the other hand, you could overdo it and end up with stock that nobody wants.

If you don't do your calculations right, you could lose money and the trust of your clients 

Inaccurate data

Okay, but how can you make the right call?

With data, that's how.

If your inventory numbers are off, even by a little,it can ruin everything .

You think you have something in stock, but surprise... you don’t.

 Keep your systems updated in real time and do regular audits. And if you're still using spreadsheets, it might be time to upgrade to a more reliable inventory system.

Long lead times

Even when you feel you have all the relevant details under control, things like waiting forever for a critical material to arrive can quickly become a source of chaos.

Sometimes it might not be the direct fault of the supplier, perhaps a natural disaster hit and nothing goes according to plan, but if you don't have a backup solution…you could risk the flow of your operations.

Change in customer demands 

Trends move faster than ever.

What your customers were craving for last week, today might be completely forgotten 

So what happens with the stock you acquired thinking it was going to be sold in a matter of hours?

Yeah, talk about disappointment 

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Six Inventory Optimization Techniques 

Demand forecasting

To prevent all of those pains we just listed above, you need more than just your current data. You need to be able to peek into the future 

And while that might sound like something you'd find in magical place, there's a very real and mathematical method to achieve it. 

At least, for your inventory. 

Working with a series of datasets, demand forecasting can be a wonderful tool to determine what's going to happen next in your industry.

Benefits:

• Fewer stockouts and overstock situations
• Smarter purchasing decisions.
• Better budgeting and planning
• Happier customers, because you always have what they need

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How to do it:

• Look at your sales history:  What sold last month? Last year around this time? Spot the patterns.

• Factor in trends: Are there seasonal spikes? Promotions coming up? Big changes in demand?

• Use simple forecasting tools: Many inventory or POS systems have built-in forecasting. Even Excel can help if you're just starting out.

• Keep it updated: The future changes, so this isn’t a “set it and forget it” thing. Regularly review and adapt your forecast based on real results.

ABC analysis 

Would you say that all your inventory has the same value for your business?

If that's the case, skip this one.

But, if the products in your warehouse have different values and provide with more of less benefits to your company, it might be a good idea to consider this strategy.

ABC Analysis helps you sort your products into buckets so you know where to focus your time, money, and energy.

Benefits

• Helps prioritize your most valuable stock
• Improves cash flow by managing low-impact items smarter
• Makes reordering and stock checks way more efficient

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How to do it:

• Gather your data – Pull up a list of your products along with annual sales revenue or usage for each item.

• Sort from highest to lowest – Rank them based on their contribution to total revenue or consumption.

• Categorize into A, B, and C:

• A items: Top 20% of items that make up 80% of your revenue. These need tight control, frequent reviews, and accurate forecasting.

• B items: The middle group, usually around 30% of items that account for about 15% of revenue. Moderate attention.
• C items: The bottom 50% of items that only bring in about 5% of revenue. These are low-impact, and you can afford to manage them in bulk.

• Set different strategies for each group:

• For A items, keep inventory low but reorder often.

• For B items, balance cost and control.

• For C items, automate and streamline as much as possible.

Safety stock

You can have everything planned, but surprises happen and when you have ready to purchase list of customers waiting for your products, you can't afford any risks. 

Maybe it's a supplier delay, maybe there's a spike in demand that you weren't aware of, or perhaps there's a global problem, like the COVID-19 pandemic. 

Whatever the scenario, you must be prepared.

And that's what a safety stock is for.

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Benefits 

• Prevents stockouts during unexpected demand or delays
• Keeps customers happy, and loyal.
• Buys you time when your supply chain hits a dead point.
• Adds peace of mind, you’re covered when things get a bit tricky to handle.

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How to do it:

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• Figure out your average daily usage: Think of questions like, How many units do you sell or use on a typical day?
• Know your lead time: How many days does it take from placing an order to receiving it?
• Check for possible variants: Are your sales or supplier lead times all over the place? The more unpredictable things are, the more safety stock you’ll need.

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SKU rationalization

If overstocking is a constant problem for your operations, then it might time to make a pause and ask yourself: 

Do we really need all these products?

Having too much SKUs or stock-keeping units don't only means you're using more storage space, it's also a red flag you are wasting money 

SKU rationalization is a method you can follow if you feel it's time to reduce all those unnecessary items from your inventory.

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Benefits

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• Frees up warehouse space and reduces clutter
• Cuts carrying costs on slow-moving or dead stock.
• Helps you focus on the products that actually drive sales.

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How to do it:

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• Pull a report on all your SKUs:  Look at sales volume, profitability, and how often each item is picked or reordered.
• Identify low performers:These are products that don’t sell often, don’t make much profit, or are expensive to store.
• Ask questions: Is this item redundant? Does it serve a real purpose? What would happen if we removed it?

Just-in-time inventory

Do you have a clear view of when you're going to need which products?

Well, then you could benefit from following a JIT strategy.

Basically, it's just the process of ordering an exact quantity of products right before you need them, so you don't have to deal with extra storage costs.

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Benefits 

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• Minimizes holding and storage costs
• Reduces waste from obsolete or expired products
• Keeps inventory fresh and in sync with demand
• Frees up cash by avoiding overstock

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How to do it:

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• Build strong supplier relationships: You’ll be relying on suppliers to deliver frequently and reliably.
• Track your demand levels: Use real-time sales data and forecasting techniques.
• Automate: Inventory management software can trigger orders when stock dips below a set threshold.
• Start small: Don’t JIT everything at once. Try it with a few fast-moving or predictable items and expand once you're comfortable.

Inventory automation 

Let's be real

Managing your inventory can be complicated at times. 

And doing it manually?

That's a recipe of endless hours of effort.

Counting stock, updating spreadsheets, sending reorder emails…it's a lot.

That's why inventory automation is becoming so popular these days. Suddenly, you only need to have a digital platform to take care of all the tedious work.

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Benefits 

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• Saves time
• No more human errors and all the problems that come with them 
• Keeps your stock levels accurate in real time.
• Makes scaling your operations really simple.

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How to do it:

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• Pick the right inventory management system: Look for one that fits your business size and integrates with your sales channels, suppliers, and accounting tools.
• Set up automated reorder points: The system can alert you, or even place orders for you, when stock hits a certain level.
• Automate reporting: Set up weekly or monthly reports to track stock levels.
• Work with your suppliers: Some systems allow for automated POs and order tracking, so you know exactly when new stock is arriving.

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