Inventory Optimization | 4 mins read

7 Simple Inventory Optimization Techniques to Limit Costs

7 simple inventory optimization techniques to limit costs
Jin Hyun

By Jin Hyun

Whether it's keeping track of products or supervising the flow of the supply chain, inventory optimization is what keeps the business operation running smoothly to maximize profits.

For decision-makers and team members in a variety of industries, inventory control is the mechanics that keep the company's wheels turning. It ensures goods and products are accounted for and monitored whether it's keeping track of what is currently in stock, the location of items, or the replenishment strategies.

Inventory optimization takes this process a step further by helping companies minimize costs, maximize efficiency, and streamline the entire supply chain process.

Benefits of Optimized Inventory

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An optimized inventory management process can prevent everything from spoilage to theft while allowing for generous savings on storage costs. Discover the four major benefits of inventory optimization below.

  • Reduces waste and spoilage - For businesses selling products with an expiration date such as food, medicines, or cosmetics, implementing efficient inventory management processes can help keep track of these dates.
  • Lowers risk of dead stock - For businesses in the fashion or other rapidly changing industries where styles shift with the seasons, maintaining outstanding inventory management and optimization ensures that stock is sold quickly before it becomes obsolete.
  • Keeps storage costs low - By purchasing and storing only the necessary volumes of stock, businesses can cut down on storage and warehousing fees, as well as the labor and security costs associated with handling and managing the inventory.

7 Inventory Optimization Techniques

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Stock is essentially company income that has been paid for in advance. Unfortunately, that stock is dead weight until it is sold to consumers. In order to reduce the risk of overspending on inventory and optimize the supply chain, businesses should consider the following tried and tested optimization techniques-

1. Instigate par levels for products
Inventory management can be made easier by using par levels for each product. This means setting a minimum amount of product required for each stock item at any given time. This enables businesses to order more products quickly when that inventory stock falls below the par level.

2. Make FIFO the golden rule
FIFO (first-in, first-out) means a company's oldest stock (the first to arrive) is pushed out first. This method is particularly crucial for products with expiration dates such as food or medicine. FIFO functions effectively under a well-organized stock stacking system, which allows easy access to older products.

3. Cultivate good working relationships
Maintaining outstanding communication with suppliers is vital. Businesses who have cultivated, professional, friendly, and proactive relationships with their suppliers also find they can negotiate on minimum stock orders or receive flexibility on orders.

4. Create a business continuity plan
Plans change and unexpected problems arise threatening to damage a business that's poorly managed. Devising a smart contingency plan is essential to good inventory management. Before creating these plans, it's important to figure out where the business is vulnerable. Identify the key risks within the business and then implement a plan that could solve ensuing problems. Part of this contingency plan should identify the full impact of a sudden roadblock and the appropriate reactionary steps for each scenario.

Sudden changes or problems could include-

  • A sudden rise in sales and oversell of stock
  • Insufficient warehouse space to accommodate stock fluctuations
  • A cash flow shortage and a consequent stock shortage
  • Inventory miscalculations leaving a business with either too much or too little stock
  • Dead stock taking up storage space
  • The sudden discontinuation of a particular product
  • Manufacturing problems such as a lack of stock on their end

5. On point auditing
Most businesses use software or warehouse reports to keep track of stock levels. But mistakes happen and that's where regular auditing comes in. This can be done via several methods-

  • Physical inventory - counting all the stock at once such as an end of year manual stocktake
  • Spot checking - selecting a product and physically counting it to compare it to the computerized number
  • Cycle counting - checking a certain product on a rotating schedule throughout the year with a particular emphasis on more expensive items

6. Prioritize the inventory
Consider using the ABC method to prioritize stock that requires more attention. This places products in one of the following three categories.

A - High-value products that typically have fewer sales frequencies
B - Median value products with median sales frequencies
C - Cheaper products with higher sales volumes

Products in category A need regular attention owing to their significant, yet unpredictable sales impact. On the other hand, category C stock requires less management as the financial impact is smaller.

7. Predicting demand
While it is impossible to predict the future with 100% accuracy, the ability to roughly forecast what products will be in high demand and when can be a significant time and money saver for businesses. Bear these key points in mind to ensure projections are as accurate as possible-

  • Keep a close eye on market trends
  • Study sales figures during the same week over previous years
  • Explore the current years' growth rates and apply them to predictions
  • Factor in the guaranteed sales from subscriptions and contracts
  • Take into account seasonality and the economy
  • Factor in planned ad spend
  • Look at upcoming promotions and plan accordingly