Why is inventory optimization important?

Inventory optimization has proven to be a great tool in keeping records and the inventory flow from inside to the outside of the organization. With newer advanced technology and innovations, the business world is undoubtedly changing. More recent trends are taking place, eliminating the traditional options. Globalization, digitalization has not brought changes only in the business world, but nowadays, consumers are also well aware of the business situation, demand, etc. That is why competition is increasing where there is no alternative but accepting the change and work for the betterment.

Digitization has already started in the business operation throughout. However, transitioning the whole business process is not as easy as it seems. It requires transforming the entire process, all of the departments of the business to be optimized. These trends are affecting supply chains and companies in so many ways. It is allowing them to explore so many new things. Customers are more well oriented nowadays.

New approaches in these businesses have turned out to be a blessing. Multiple programs and software are designed to keep track of the business records from the different departments where you can not only be aware of your stock but can also predict risk, loss, turnover, etc.

For smaller companies, it is somewhat easier to convert or transform processing to a new approach. But for the bigger enterprises and organizations, it is quite challenging to bring the changes in the business and follow them thoroughly. It takes the employees to get used to the new technology as well. However, where manual tracking and recording operation takes longer to process and make decisions. But with technology and software programs, you don’t only have the records and transactions. Still, it also generates the interval of your order, predicts or analyses newer plans and techniques for you to carry the operations efficiently.

Inventory optimization can be an outstanding management tool as it detects the flow of the inventory accurately with improved organizing and enhanced visibility of the functioning. So you exactly know the amount you require to meet the demand in a particular supply order. It alerts you with the details of the supply managers, buyers, and warehouse to balance the supply and demand.

Inventory optimization is one of the most effective inventory management tools that provide you with detailed records of your stock level, inventories in hand and alert you about the supply stock to handle the orders. It focuses on utilizing the working capital held in the list.

The necessity of inventory optimization:

As I have already mentioned, in this era of modern technology and techniques, most of the companies are taking more innovative approaches to stand out. Unlike other software or programming, inventory optimization mainly focuses on the activities of the supply chain for better flow of inventory, balancing the supply and demand flow of the business to achieve service goals sooner.

Inventory optimization solutions make supply management more convenient and efficient. It allows better organization and tracking of the inventory activities eliminating mistakes, errors regarding overstocks, out of stock, shipment issues. When you can minimize errors and mistakes, you can manage well and execute plans according to the strategy. It predicts on the basis of given data and change of information where there is no chance of misleading stock level. These mistakes cost both money and time to correct and sometimes cause a massive amount of loss. Inventory optimization tools record the change you won’t fall behind because of prediction and results mismatch.

Inventory optimization allows you full control over the supply chain activities where the chance of mistake is almost zero. And when you can meet the service goals, it benefits you, gaining customer loyalty and better competitiveness in the market.

Multi-echelon inventory combines different systems and tools and models for business analysis, risk analysis, intellectual property, etc., for strategizing better planning with sourcing, inventory hold cost, etc. When Supply chain managers focus on all the details and have a better and exact situation, they can make a suitable decision that results in better inventory turnover, increasing revenue, effective working capital management, etc. This process optimizes and utilizes the material positioning, goods in inventory, order level, stocks in hand, finished right, etc.

Inventory optimization has been an effective and efficient managing tool to keep the supply chain management activities and gives a right wheel. But in the digital age, there are many challenges and factors for implementing proper inventory optimization. It leads to better financial decisions analyzing and determining risk, loss, turnover, etc. We all are well aware of the kinds of inventories that are mainly four. Inventory optimization tools focus on utilizing the types of merchandise to provide you all the details needed.

The main four types of inventories are raw materials or production inventory, WIP(work in progress) or unfinished products, Finished goods, and cycle inventory referred to as MRO(Maintenance, Repair, and overhaul). There are also multiple different kinds of lists, like packing materials or packaging, safety stock, transportation, and so many more.

An optimization inventory system will provide the management with all the data and information that will result in better planning and improve decision making financially and strategically.

You can have multiple inventory techniques and programming available for your business. As they are pretty expensive and transforming the whole system, again and again, is not only costly but will cost you time and labor also. That is why it is essential for the supply chain manager to find out the most troubled areas and factors to get better results, eliminating the possibility of mistakes and errors.

Different business or industry use various tools; some of the bigger ones also program their own software and programming for modifying and customizing the specific condition for detailed and accurate findings for the organization:

Here in this part, I’m going to discuss some commonly used but effective techniques that businesses apply.

ABC Analysis:

ABC Analysis is one of the most popular techniques for categorizing inventories regarding multiple variables. Especially if your company has different kinds of services or products of different scales and categories, ABC analysis helps you know all the details according to distinct categories. It allows you to make a better decision as you can focus on the essential factors individually.

This analysis, as per the name it categorizes into three parts, including A, B, C.

  • You get the details about your most profit-generating products and how they affect different operations and changes.
  • You get the middle ranged value-generating products’ details in category B.
  • And last but not least, you can see which products are less liked, contributing less to the profit margin in details from the C category.

Safety Stock:

This inventory tool comes in handy in case of an excessive demand more than the expectation. In case of unusual occurrence or prediction errors, sometimes the customer demand might get higher than the anticipation. If you are not prepared for this, you won’t be able to supply to the demand ration where soon anyone will replace you. that is why the safety stock inventory tool always stocks up inventories for these kinds of emergencies. But you will have to be careful about excess inventory stockings. Otherwise, it will just be another wastage.

Reorder point:

It is a fundamental management formula that allows you to purchase and order materials balancing optimal inventory utilizing lead time. It usually remains at a higher point compared to the number of safety stock.

JIT tools:

JIT or Just-in-time can be a useful tool that matches the real-time order and sales techniques, reducing costs. When you have accurate forecasting and result in the order quantity, you can produce and provide services that prevent wasting labor, materials, and money for products.


It is also referred to as economic order quantity focuses on all the factors like production, demand, supply, rate, costing, and all the variables to minimize costing and generate enhanced profitability and utilization of the variables of the management system.

It also works on the stored units and delivered units to generate accurate and precise conditions about the details regarding production, sales, demands, etc.

Video Credit: INFORM GmbH

How Inventory Optimization Solutions work?

Inventory optimization software uses more techniques and formulas like batch inventory, minimum order quantity, perpetual inventory management, LIFO & FIFO, lean manufacturing, and so many more to count. All these tools focus on developing effective inventory plans to reduce costing and managing inventory efficiently. According to the project, these tools also generate future forecasting and alerts about the risk of taking strategical implementation.

You will face many challenges and obstacles when you start optimizing inventory and bringing changes in supply and orders. As I have already said, the variables that affect the business are not the same. In fact, different units and the department has to set their priorities in other places for better productivity and functionality of the company. The decisions you are making or the changes you are bringing are enough or can be great confusion. For example: to reduce costs, if you minimize the quality that the customers don’t like, it will definitely cause down the sales bar.

Customer service centers are a great aid where the customers give you feedback that you can apply to gain more advantage compared to other competitors in the market. How you respond to the customers, how you are resolving the issues, and balancing everything can be tricky and confusing sometimes. That is why inventory optimizations generate you with determining plans and strategies that you can work on for a better and convenient result. It eliminates the barrier between the customer and the middlemen. When you are confident about your inventory activities, have better access and visibility, you can generate better ideas, and implement them quickly.

Whether inventory optimization solutions are working for your business or not, improving the activities can be easily found. You can quickly compare the data and information, and your system will automatically show you all the frequent changes, the percentage, and everything in detail within seconds. Improved accessing and storing of the data and information for the people connected to it have accelerated the decision-making at the right time.

Recent Post