Inventory Optimization: Your Essential Guide

You need enough inventory to meet demand. You need to avoid too much inventory so your holding costs stay low. You need inventory optimization. Having just the right amount of stock is something most businesses strive for but how can you make that happen?

In this article, you’ll learn what inventory optimization is, its benefits and techniques to make it work. You’ll also see the challenges of getting inventory optimization right, how software can help and the best practices to achieve your ideal inventory levels.

Table of Contents

• What is Inventory Optimization?
• What Are the Main Factors of Inventory Optimization?
• The Benefits of Inventory Optimization in E-commerce and Retail
• What is Inventory Optimization Software?
• Inventory Optimization Techniques
• Inventory Optimization Challenges
• Inventory Optimization Best Practices
• How Singuli Can Help With Inventory Optimization

What is Inventory Optimization?

Inventory optimization uses best practices to balance the inventory you need to meet demand with the capital and resources required to maintain a warehouse. Ideally, your inventory will stay at a level that avoids both stockouts and overstocks, so your customers stay happy and your cost of inventory stays low.

What Are the Main Factors of Inventory Optimization?

Optimizing your inventory is easier said than done and there’s a lot to consider. Demand forecasting, inventory classification, supply chain management and inventory control systems are all important factors to look at. Let’s review each in detail:

Accurate Demand Forecasting

It’s impossible to optimize your inventory if your demand forecasting is inaccurate. If you don’t know how much you’re likely to sell, you’ll always replenish too much or too little stock. Demand forecasting done well leads to easier inventory planning.

Proper Inventory Classification and Segmentation

In the same way inaccurate demand forecasting makes inventory optimization close to impossible, not knowing what stock you have and what category it sits in does too. Proper inventory classification can be done using techniques like ABC analysis. This allows you to prioritize securing optimal levels for the most valuable stock.

💡Pro Tip: Give context to your sales history with Singuli’s ABC reporting and make it part of your wider inventory planning.

Efficient Supply Chain Management

Inventory optimization requires strong supplier relationships and backup methods to secure your supply chain. When things are going well, suppliers offer consistent lead times but when suppliers face challenges, they also face choices about which customers to support first.

Good supplier relationships put you higher on their list of priorities. Even so, a reliable network of suppliers makes it easier to react when your main supplier struggles to support you. Keeping up to date with supplier data to make inventory forecasting more accurate is easier with the right inventory optimization software.

Effective Inventory Control Systems

An effective inventory control system using modern software improves inventory optimization. You’ll know the right time to replenish your inventory so there’s enough available to fulfill orders. You’ll keep your inventory levels in a position to meet demand without incurring extra holding costs. Your storage system will help you manage customer expectations while leaving room to grow.

The Benefits of Inventory Optimization in E-commerce and Retail

Inventory optimization is crucial for running and growing e-commerce and retail businesses, but what are the specific benefits? Let’s take a look:

Avoid Stockouts and Overstocks

Inventory optimization helps you avoid stockouts and overstocks. Stockout costs and added costs of inventory can hamper your business so avoiding them needs to be a priority.

📌Get Started: Use Singuli to make sure your inventory levels are just right. With reorders on autopilot, you’ll always purchase the right quantities to the SKU level and you’ll never miss out on a potential sale.

Improved Efficiency and Productivity

When your inventory is at the right level with everything in the optimal place for picking and shipping orders to your customers, your business runs more efficiently. Productivity increases when you reduce obstacles and inventory optimization removes barriers.

Faster Shipping Options

Inventory optimization helps you know the capabilities and challenges of each part of your supply chain. This allows you to pick the right supplier for each stock keeping unit (SKU) and to make sure your stock is stored in the most convenient location for faster shipping. It’s important to use software that provides omnichannel support so you can forecast each channel with distinct models and optimize your inventory across your business.

💡Pro Tip: Use Singuli’s location-level forecasts and replenishment alerts to optimize your inventory. If you have a mixture of retail and e-commerce channels, Singuli bases your forecasts on distinct models to reflect the variations in inventory patterns.

Better Customer Experience

Keeping customers satisfied means they return and they spread the word about how good your products are to their friends and family. Inventory optimization makes sure you have enough stock to give your customers what they need when they need it, without having to overstock. They don’t have to rely on back orders, nor do they have to look elsewhere to find what they want.

Reduced Carrying Costs and Waste

Too much stock costs a lot of money and resources. You use up space storing inventory that won’t be sold for a long time, if ever. You have to pay for rent in a warehouse for something you’re not using. And you need to put measures in place to keep your products in good condition. Sometimes that’s impossible and your stock becomes dead stock, which is a complete waste. Inventory optimization reduces carrying costs and prevents waste.

Increased Profitability and Revenue

Having the right amount of stock at the right time means you can offer customers what they want, when they want it. This creates more revenue as you’re not turning down business or losing customers after a bad buying experience. It also increases profit as you’re not spending money on holding costs and other expenses related to inefficient inventory.

What is Inventory Optimization Software?

Inventory optimization software is a tool made to automate many of the processes that take up time and resources in your business. Good software supports efficient processing, creates accurate demand forecasts, provides relevant reports, makes sure every channel is considered in planning and acts as a valued member of your team.

💡Pro Tip: Optimize your inventory with Singuli software that acts as a valued member of your team.

Inventory Optimization Techniques

The chances of inventory optimization working well increase when you use the right techniques for your business:

Improve Demand Forecasting With Inventory Optimization Software

With the right inventory optimization software, you can jump ahead of the retail demand planning curve and even get on top of size curves. Whether you have seasonal products that cause changes in demand, are launching new products (with no historical data) or use performance marketing to increase sales, the right software improves accuracy. Each product has its own story and inventory optimization software can help match the right model to your demand forecasting needs.

📌Get Started: Every product has its own story. However your products are growing, whenever there’s a change, Singuli’s forecasting models will identify it and adapt accordingly.

Calculate and Manage Safety Stock

Safety stock makes sure you have the right amount of surplus inventory so you can avoids stockouts and reduce overstocks. There’s more than one formula for calculating safety stock and how you manage it depends on the data available and the inventory optimization software you use. The most commonly used formula is:

$$\text{Safety stock} = \left(\text{maximum daily units sold} \atop \overset{\times} {\text{maximum lead time}}\right) - \left(\text{average daily units sold} \atop \overset{\times} {\text{average lead time}}\right)$$

📌Get Started: Optimize your inventory levels and reduce overstocks. Use Singuli to replenish the right amount of stock at the right time so your inventory costs stay low.

Automate Reorder Points

Reorder points tell you when the optimal time is to replenish your stock. To make sure you’re ordering at the right time, the right software considers your safety stock, lead times and demand. If you automate your reorder points, you create a more efficient inventory that uses less resources.

📌Get Started: Never miss a potential sale. Use Singuli to send reorder alerts straight to your inbox so you’re always ready to meet customer demand.

Account for Size Curves

Size curves cause big challenges when you’re not using the right software and you haven’t optimized your inventory. You can order the right quantity of stock for a particular product but if you have too many size XL and not enough size M, you’ll still experience stockouts and overstocks.

💡Pro Tip: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.

Allocate Inventory Across Channels

If you sell on more than one channel, your stock needs to reflect your overall demand and the individual demand of each channel. For inventory optimization to be successful, accurate omnichannel planning is crucial. Let’s say you sell on Amazon and Shopify but you get different results from each platform. Splitting your inventory evenly will create stockouts in one channel and overstocks in the other.

💡Pro Tip: Use Singuli’s real-time, channel-aware forecasting to maximize sales in every location.

Regularly Analyze Inventory Reports

To optimize your inventory, you need the right data. That means you need to analyze inventory reports and make changes when relevant. With the right inventory optimization software, you can create reports on anything you need, from inventory data to marketing and promotions to customer behavior.

💡Pro Tip: Get a holistic view of your inventory data with Singuli’s Reporting & Analytics. Track not only inventory data, but also marketing, promotions, site traffic, historical sales and customer behavior. You’ll have all of your information in one place, ready to use in inventory forecasting and planning.

Streamline the Purchase Order and Shipping Process

Making sure your purchase orders (POs) and shipping processes are streamlined is key to inventory optimization. You might need to split a PO into multiple shipments, track landed costs or audit who did what, when. With the right software, all the information you need is in one place and keeping on top of POs and shipping is easy.

📌Get Started: Track exactly who did what and when they did it with Singuli’s Purchase Orders & Shipments. Every change is linked to a user and logged automatically.

Inventory Optimization Challenges

Anything worth doing takes work and inventory optimization is no different. There are challenges to overcome when you’re optimizing your inventory but with the right advice and the best software, you will succeed.These are a few challenges to be prepared for:

Complex Data and Management Analysis

Managing inventory manually often starts well but as you add more complexities to your inventory, data becomes harder to analyze and inventory becomes harder to optimize. Trying to work out which data is relevant and which inventory planning process you need to use becomes more difficult. This is especially the case when you introduce new products.

📌How Singuli can help: Connect Singuli with your data sources and process relevant reports. Singuli’s pre-built reports are perfect for most of your inventory needs, from ABC analysis to return rates and live sales velocity. You can also create custom reports with Singuli’s query panel.

Unexpected Supply Chain Disruptions

Sometimes it’s the big things like a global pandemic or a war that interrupts the supply chain. Sometimes, it’s internal disruptions or even mismanagement from your suppliers that cause problems. Whatever the reason, supply chain disruptions get in the way of inventory optimization.

📌How Singuli can help: Maintain optimum stock levels and adjust to sudden changes by using Singuli to manage multiple vendors and products with different lead times.

Unpredictable Demand

Demand is hard to calculate and many products have shorter life cycles, which means you have less time for analysis. Understanding demand fluctuations requires an understanding of everything that has an influence. Performance marketing, trends, seasonality, sudden spikes and market fluctuations are just a few factors that can make a difference.

📌How Singuli can help: Avoid unexpected changes in demand and automatically account for seasonality in your inventory forecasts with Singuli’s Advanced Forecasting tools.

Inventory Control Issues

You can control a lot but you can’t control everything. Natural disasters, extreme weather and anything else that gets in the way of controlling your inventory is a challenge for inventory optimization. You can’t predict when an earthquake or a cyclone will happen but you can prepare yourself just in case they do.

📌How Singuli can help: Plan for multiple versions of the future with Singuli’s Scenarios. Ask “what if” and get answers immediately.

Inventory Optimization Best Practices

If you follow these best practices, you’re more likely to succeed with inventory optimization:

Regularly Monitor and Analyze Inventory Levels

Changes in demand, supply chain challenges, loss, theft and many other influences can effect your inventory levels. It’s important to keep a close watch on your inventory and to analyze changes in demand, lead times and any other relevant factors. Keeping a physical check using cycle counts and comparing it to your data inputs is especially necessary if you run your own warehouse.

Define a Clear Inventory Management Strategy

Before you start optimizing your inventory, you need to have a clear inventory management strategy. Think about where you want to keep your stock, how you’re going to set safety stock levels, what software you’ll use to manage everything, who your suppliers will be and anything else related to inventory planning. Once you have a strategy in place, you can monitor it. If it’s not having the desired effect, make adjustments.

Effectively Communicate and Collaborate With Suppliers

Supplier relationships are key to optimizing inventory so making sure you know what challenges they’re facing and the plans they have is crucial. This way you can prepare and adapt. If possible, be understanding of the obstacles they’re facing — hopefully they’ll return the favor.

For example, if you’re struggling due to a supplier’s high minimum order quantity (MOQ) or excessive lead times, rather than ruling them out, communicate your issues to see if you can collaborate on a solution. Open communication leaves more room for flexibility and long-term supplier relationships.

Leverage Inventory Optimization Technology and Automation

Between demand fluctuations, supply chain disruptions, safety stock calculations, weeks of supply predictions, ABC analysis and size curve demands, trying to optimize inventory manually is almost impossible. Using inventory optimization technology and automation gives you the space and time to work on making your business succeed.

Set Out Budgets in Advance

To budget your inventory effectively, you need to consider the costs of holding stock, supplier costs, shipping costs, the costs of the products themselves, redistribution costs, staff costs and anything else directly related to your inventory. Make sure you’ve planned for this in advance and think about how it will affect your balance sheet and cash flow.

How Singuli Can Help With Inventory Optimization

Inventory optimization is crucial but how you make it work depends on your business needs. Now you know what inventory optimization is, its benefits, the challenges to making it a success and the best practices to get it right, you need to choose the right inventory optimization software. Make sure you pick a solution that can absorb all the data you throw at it and that offers back plans, reports and processes that help you grow. Make sure you choose Singuli.

Inventory Optimization FAQ

How Do You Optimize Inventory?

To successfully optimize inventory, start by gathering as much relevant data as possible, accounting for fluctuations in demand and supply chain issues and investing in the right inventory optimization software.

Why is Inventory Optimization Important?

Optimizing inventory decreases your cost of inventory at the same time as avoiding stockouts and overstocks. This way, you can give customers what they want, when they want it, without holding onto too much stock.

What are the Four Types of Inventory?

The four main types of inventory are raw materials/components, finished goods, WIP (work in progress and MRO (maintenance, repair and operations). Some businesses and academics don’t recognize MRO goods and suggest that there are only three inventory types.

What are the Three Major Inventory Management Techniques?

The three major inventory management techniques are:

1. Pull strategy
2. Push strategy
3. Just in time strategy (JIT)