How to Optimize Inventory Levels for Cost Savings

Inventory optimization is crucial for maintaining optimal stock levels to meet customer demand while avoiding unnecessary costs. 

In this article, we will explore everything regarding inventory level optimization, from its importance to its benefits and challenges. So, if you are ready, let’s start! 

What is Inventory Optimization? 

Inventory optimization is the process of strategic stock-level management to meet demand while minimizing additional logistics or storage costs. 

Importance of Effective Inventory Optimization 

Inventory optimization is important for several reasons. One of the most important reasons is that it helps to avoid unnecessary business spending such as storage fees. Inventory optimization also improves the business’s reputation and leads to more sales, as the risk of products being out of stock is minimized. 

The Main Elements of Inventory Optimization 

Before moving on to the benefits of inventory optimization, let’s briefly overview its main elements. 

Demand Forecasting 

The process starts with analyzing the historical data in order to estimate future demand. Demand forecasting is quite useful as it helps predict total revenue, make informed decisions, and purchase sufficient inventory. 

Inventory Replenishment 

Another element of the inventory optimization process is inventory replenishment. Inventory replenishment is the process of restocking the inventory to maintain optimal stock levels and meet the demand. 

Inventory levels 

The next element of inventory optimization is the maintenance of optimal inventory levels. It helps to maintain optimal stock to avoid unnecessary storage fees and lost sales. 

Inventory storage optimization 

The last element of inventory optimization includes inventory storage optimization. This is a process of optimizing the distribution of inventory across warehouses in a cost-effective way.

Benefits of Inventory Level Optimization 

Inventory level optimization offers a multitude of benefits, from reduced costs to improved supplier relationships. So, let’s take a look at the benefits in more detail. 

Cost Reduction and Saving Opportunities 

With proper organization and maintenance, you can forecast demand and avoid restocking when it is not necessary. Thus, you will save on storage, insurance, and process handling while minimizing spoilage risk. 

Another way optimizing inventory levels contributes to savings and reduces costs is improved cash flow. By minimizing excess inventory levels, you will have more capital to invest in other aspects of the business. 

Improved Business Reputation 

By balancing the inventory levels, you can improve your business’s reputation. 

How? Well, first of all, good organization helps you avoid stockouts. Thus, you will avoid upset or unsatisfied customers. Besides, you can minimize the risk of lost sales and generate more revenue. 

At the end of the day, by avoiding stockouts, you can showcase the professionalism of your business to customers and improve customer satisfaction. Today’s customers are not ready to wait. They will quickly find an alternative, which can lead you to lose sales. 

Improved Supplier Relationships 

One more benefit of good inventory management is improved supplier relationships. With a good strategy to manage stock levels, you can maintain a certain level of predictability and consistency. This allows for enhanced collaboration with the suppliers and helps to maintain positive buyer-supplier relationships. 

Smooth Supply Chain Operations 

Finally, inventory level optimization allows your business to maintain smooth supply chain operations. First, it will enable the use of data for improved demand forecasting. Better and more accurate forecasting leads to informed decision-making and optimal planning. All of this allows procurement teams to streamline reordering processes and avoid excess inventory or stockouts. 

Risks of not Optimizing Inventory Levels 

While inventory optimization provides you with a multitude of benefits, let’s also review a scenario if you do not optimize your inventory levels. In this case, you will face challenges ranging from increased costs to stockouts.

Increased Costs 

Without proper inventory level management, you risk facing increased costs. For instance, when the orders are placed rashly to avoid a stockout, your team may not be able to negotiate the best deal. 

Also, excess inventory requires more storage, which comes with additional storage fees. Let’s not forget that Inventory can get spoiled, and your business will simply lose the invested capital. The last one does not refer to every item but to perishable goods. 

Finally, you could be wasting money on excess inventory as it can become obsolete due to market and demand changes. 

Supply Chain Disruptions 

Without proper strategies to optimize inventory levels, your organization can face supply chain disruptions. Such disruptions lead to stockouts and lost sales. 

For instance, an item can easily get out of stock if your procurement team does not manage inventory levels. Well, in this case, when customers place an order and get the out-of-stock notification, they are going to try and find an alternative, which will lead your business to lose sales. 

Inefficient Supplier Relationships Management 

Think about it: if you frequently place rush orders that also often change in quantities and delivery schedules, you automatically disrupt suppliers' processes. So, your inefficient inventory optimization has consequences not just on your supply chain but also on your relationships with the suppliers. 

Strategic Risks 

Bad inventory management can lead to strategic risks such as competitive disadvantage and damage to a business’s reputation. 

When the items are constantly out of stock, customers' dissatisfaction rate will rise, and they will start switching to alternative options. 

Another strategic risk is a competitive disadvantage, as without proper demand forecasting, you will stay behind market trends, allowing your competitors to use the growth opportunities.

How to Optimize Inventory Levels Efficiently? 

Well, it is time to dive into the practical section of this article. Let’s review a few tips and strategies on how to optimize inventory levels efficiently. 

Forecast Demand with Data Analytics 

Use the right analytics tools to gain actionable data insights into your inventory and current market trends. Up-to-date data will allow your procurement team to forecast demand and make more efficient supply decisions. 

Have Safety Stock 

Having a safety stock differs from excess inventory. Safety stock is known as “buffer stock/buffer inventory,” and it is there in case of an emergency. E.g., delays by suppliers or abrupt contract termination with the vendor. 

The formula for safety stock calculation is presented down below. 

Safety Stock = (maximum daily sales x maximum lead time) – (average daily sales x average lead time).

Another formula for safety stock calculation that takes into account both demand fluctuations and lead time is Greasley’s formula. It is presented down below. 

Safety Stock = Z × σLT × D avg.

So, essentially, safety stock is necessary to mitigate the risks of stockouts. 

Reorder on Time 

Ordering on time will save you so much hassle. First, it will prevent you from the hassle of storing excess inventory or paying additional warehouse fees. Secondly, it will allow you to always have enough inventory to meet the demand efficiently. 

The key is to calculate your perfect reorder time. The simplest formula for it is: 

ROP (Reorder Point) = Safety Stock + Demand during the lead time.

You can choose a software solution that offers an automatic reorder point system, such as Tradogram. Tradogram’s reorder point system allows one to set efficient reorder points for each item in the stock and receive notifications when quantities drop below the mentioned point. 

Conduct Regular Inventory Audits 

Regular inventory audits will allow you to track inventory efficiently. 

Audits will help you to improve demand forecasting, identify top-selling items, identify obsolete and missing inventory, and efficiently optimize stock levels to minimize additional costs. 

Inventory audits include physical inventory count, ABC analysis, cycle counting, sample-based audit, finished goods analysis, and freight cost analysis. 

Efficiently Distribute Inventory 

Multilocation inventory management can cause you lots of extra work if you do not efficiently distribute inventory across different warehouses. 

Centralized inventory management is easier, but it will result in additional logistics costs if the inventory is not stored near the destination with high demand. Storing inventory in the right places reduces shipping costs and improves delivery speed, resulting in higher customer satisfaction. 

So, create an inventory distribution plan and stick to it. You can incorporate a software solution to manage inventory in a centralized system while your inventory is physically distributed across different locations. 

Incorporate Technology Solutions for Better Management 

In order to efficiently optimize your inventory levels and management, incorporate the right software tool. A good software solution will help you mitigate risks associated with missing items, lost sales, damaged supplier relationships, rushed orders, and so on. 

Essentially, the right platform will allow you to optimize the inventory management process fully. For instance, Tradogram provides features to monitor inventory levels with potent tracking functionality. It also allows for forecasting demand with robust analytics and spending visibility. 

With Tradogram, you can set reorder points and ensure timely deliveries to always have your items in stock while avoiding excess inventory. Finally, you can easily set automated workflows to handle and manage POs and invoices. 

Optimize Inventory Management with Tradogram 

If you are looking for the best software solution to optimize inventory level management, then you are in the right place. 

Tradogram’s Web-based Inventory Management System offers all the necessary features for successful inventory level optimization. Its features range from a reorder point system to robust stock management and monitoring tools. 

‍Contact us and learn how Tradogram can help you with managing your inventory successfully.