Guide to inventory optimization: Techniques and benefits

If you’ve noticed that your team is always playing catch-up with inventory management, it could be a signal of a broader operational issue. 

More often than not, poor inventory optimization can stem from a lack of clarity and control over your precise stock needs and supply chain planning. To complicate the situation further, creating an optimization strategy that scales for a large or fast-growing network can be difficult.

The good news is that resolving these obstacles is doable. With the right solutions and insights, you can implement scalable systems that use automation and analytics to see long-term growth.

Read on to find out how you can regain performance visibility, data-driven insight, and efficiency in your inventory optimization.

What is inventory optimization?

Inventory optimization is the process of strategically managing stock quantities and order timing to minimize costs, avoid overstock, and meet customer demand. Simply put, it’s how you apply purchasing data to manage your inventory as efficiently as possible.

But to optimize your inventory, you need a holistic, data-driven view of your operations. That means looking at everything from vendor contract compliance to rogue spend risk areas when building your strategy. 

Because procurement can be a profit-driving part of your organization, inventory optimization plays a core role in your ability to achieve your team’s goals. Because of this, you need to understand what yours currently looks like and why optimizing it is crucial for your organization. 

Why inventory optimization matters

Without a solid grasp of your inventory, you could find yourself scrambling to respond to industry shifts and customer demands. Spending valuable time and resources resolving these challenges might cause you to miss out on discovering innovative procurement strategies and uncovering opportunities to save money.

An optimized inventory strategy, on the other hand, builds a safety net for your operations and boosts your profit margins. With it, you can avoid letting excess inventory sit on storage shelves, experiencing siloed purchasing departments, or inconsistent reordering—all of which can cause your organization to spend more money on inventory than is necessary.

Additionally, a thorough look at your operations could reveal unexpected areas that negatively impact your working capital, including the following:

• Blind spots in inventory spending: Uncover areas where you previously had poor visibility into your inventory purchasing habits, such as tail spend

• Instances of reactive purchasing: Gain insight into any last-minute orders you’ve placed due to sudden changes in demand or inaccurate stock levels

• Order fragmentation across teams: Be aware that the way teams place orders for themselves may result in overordering, overspending, or inefficiencies

   

This is a snapshot of operational areas that could slow your cash flow. With an optimized inventory management strategy, you can resolve these challenges while gaining additional benefits. 

6 benefits of inventory optimization

The benefits of inventory optimization can impact nearly every part of your organization. These are six that you can expect to see if you employ an inventory optimization strategy: 

1. Reduced carrying costs and improved cash flow

Carrying costs or holding costs are expenses that arise due to storing inventory. The longer the stock sits unused in storage, the more expensive it is for your organization to maintain. Through inventory optimization, you can strategically decide what you order and when to minimize these costs.

2. Fewer stockouts and overordering

Inventory management means striking a balance between having sufficient stock to align with present needs, forecast procurement demand, and anticipate shortages. With historical purchasing and usage data, you can uncover trends, then use the insights to coordinate reorder schedules effectively to avoid stockouts and overordering. Pinpointing changes in this data will help you learn how you might need to adjust your inventory to align with demand.

3. Higher operational efficiency

Without proper inventory optimization, you might often run out of stock or need to place expensive last-minute orders. In either case, a lack of crucial inventory pauses operations, leading to organization-wide inefficiencies. 

A benefit of quality inventory optimization is ensuring you have the right amount of stock to support your operations all the time. This reduces the odds of workflow bottlenecks and helps you maintain smooth, steady operations. 

4. Data-driven purchasing decisions

Once you’ve organized and analyzed historical data, you’ll have a strong foundation making informed decisions about what to order, when to purchase, and which vendor to use. Additionally, you can use data to monitor supplier performance, ensuring they maintain contract compliance, deliver on time, and provide services that best match your current needs.

To get more accurate data, consider a solution that includes AI to level up your procurement. AI can instantly organize the data, remove duplicates, and fix inconsistencies.

5. Increased customer satisfaction

More control over your inventory allows you to better align your operations with your customer’s demands. Your organization’s teams get the supplies and services they need to do their jobs well, so they can keep up with what your customers want from your organization and maintain satisfaction.

6. Greater agility and supply chain resilience

Supply chain disruptions are inevitable, but an inventory optimization strategy allows you to stay agile and sidestep any industry setbacks.

For instance, say your go-to supplier or route suddenly experiences an interruption, like a closed distribution center or broken down truck. If you have supply chain resilience, you’ll have a robust network that contains secondary or tertiary options for both, so you can quickly pivot and avoid disruptions.

Inventory optimization techniques

You can break your inventory optimization strategy into one of the following three categories to best structure your approach: 

Strategic: ABC analysis, MEIO, and JIT

You can use the following techniques to optimize inventory reorder timing and quantities. They’re tried-and-true strategies that organizations from all industries can use:

• ABC analysis: Your organization might use ABC analysis to organize inventory into three categories based on its importance to the company. “A” items are the most important, “B” items are somewhat necessary, and “C” items are the least valuable. This strategy helps you prioritize what inventory to order and when, making it a key driver of cash flow. However, it relies on past purchasing data. Without a reliable data set, this strategy is less impactful. 

• Multi-echelon inventory ordering (MEIO): Your procurement team can use this supply chain management technique to optimize inventory across multiple parts of your operations. Rather than focusing on one part of your network, MEIO encourages you to look at your ordering operations holistically to make them more efficient as a whole. It’s especially useful for purchasing across multiple locations, but it relies on insight into the unique needs of each part of your organization. 

• Just-in-time (JIT) ordering: Your team might use this inventory strategy to order stock only when absolutely necessary. By doing so, you can reduce holding costs and waste. However, for JIT ordering to work, you need accurate data for demand forecasting. 

   

Once you’ve selected the strategies you want to use, it’s time to operationalize them. 

Operational: Order management, safety stock, and replenishment

In this second category, you’ll find techniques for handling stock, coordinating backup stock, and determining reorder timing based on your needs. The following is how you could put your plan into action:

• Order management: Optimize order planning, placement, and scheduling to make the process as time and cost efficient as possible.

• Safety stock: Order only the inventory you need to meet present demand, along with a reasonable sum of backup stock.

• Replenishment: Focus on maintaining optimal inventory levels, avoiding excess stock, and meeting operational needs. 

   

As you begin to see positive outcomes from these strategies, remember that your work isn’t done. Your team needs to capture and analyze data from across your network to iterate on your strategy and continue seeing results. 

Analytical: Forecasting, tracking, and service-level optimization

Once your inventory strategy is working, you’ll need to monitor it and use real-time data to adjust your techniques as necessary. To do so, implement inventory metrics in the following areas:

• Demand forecasting: Use data to gain an accurate understanding of future demand for your inventory so you can order the right amount at the optimal time.

• Inventory tracking: Monitor the quantity of real-time inventory that’s entering your organization and the amount of stock that’s leaving to understand precise quantities and restock strategically. 

• Service-level optimization: Decide the most efficient balance between maintaining optimal service levels and driving revenue. 

   

Continuously analyzing your inventory optimization helps enable you to stay agile, evolve your business practices, and scale your operations. 

Inventory optimization at scale

If you’re revamping an existing inventory strategy or creating a new one from scratch, getting started can feel intimidating. Whether you’re managing large operations right now or need inventory optimization that can keep pace with your rapidly growing organization, follow these steps for a simple, straightforward approach to implementing your strategy:

• Audit your current purchasing patterns: Analyze your recent purchasing patterns and inventory costs to establish a solid data-driven foundation to guide your decisions.

• Spot underperforming SKUs or categories: Use robust analytics to pinpoint operational areas of improvement. 

• Set optimization goals: Identify underperforming areas and establish measurable performance objectives, such as reducing stockouts by 20% or lowering lead times.

• Apply automation where possible: Integrate your procurement systems to help find spend patterns to use when creating recurring delivery schedules.

• Create feedback loops: Establish a plan for how you’ll check on and adjust your efforts, such as conducting monthly reviews or monitoring a dashboard.

   

It’s also useful to have a reliable inventory optimization solution to inform and help you deploy your strategy. The right solutions, or combination of integrated solutions, can help with everything from diligent inventory tracking to automating routine tasks so you can focus on optimizing inventory management rather than just keeping it running. This helps your team to hit its goals and bolsters your bottom line. 

Simplifying inventory optimization

It’s easy for inventory optimization to feel uncontrollable, especially if you’re trying to manage organization-wide operations. But with the help of real-time data and automation, you can transform an unstructured inventory setup into a cohesive, reliable strategy to drive profit and organizational growth. 

As you build your strategy, there are a couple of key factors to keep in mind: 

• Make sure the solution you choose seamlessly integrates into your existing systems. If your tools don’t talk to each other, it’s more likely that the process will have errors and discrepancies that could undercut your efforts to optimize inventory. 

• Find a solution that prioritizes a data-driven approach. That way, you’ll no longer have to make your best guess for inventory optimization and can instead feel confident and secure in your choices. 

   

Is your organization ready to modernize its inventory management? Contact Amazon Business today to discover how our smart business buying solution can support scalable, insight-driven purchasing.