Key Takeaways
- Poorly optimized inventory levels lead to excess costs and reduced revenue.
- There are several inventory optimization technologies that provide greater visibility and insight into your inventory and supply chain.
- No matter the size of your business, inventory optimization tools help drive efficiency and growth.
In 2020, just-in-time delivery practices were heavily scrutinized when disrupted global supply chains left shelves empty and inventory levels thin. Three years later, high-interest rates and surging inflation has limited demand for products, leading to overstocking and increased inventory carrying costs. Amid these volatile conditions, the importance of optimizing inventories has drastically increased. Inventory management cannot be an afterthought for strategic businesses, as a poorly-optimized inventory has numerous negative impacts on your ability to meet customer demand, increase efficiency, and ultimately maximize your profitability. When inventories are overstocked, these impacts include:
- Tied-up working capital in inventory
- Higher overhead costs associated with storage space and insurance costs
- More working time and labor directed toward managing excess inventory
- Items becoming expired or obsolete, resulting in write-offs and unnecessary spend
When inventories are understocked, this leads to:
- Reduced sales and revenue
- Delayed product deliveries, which negatively impact customer satisfaction
- Customers turning to competitors when items are out of stock
- Greater spending directed towards expedited shipping and rush orders to meet demand
Whether inventories are overstocked or understocked, inefficient inventory management leads to greater costs, lower sales, and less profitability — thus limiting the growth of your business. So how do you ensure you’re managing your inventory optimally?
Inventory optimization solutions and tools help your procurement team achieve the perfect balance between carrying enough inventory to meet demand and not carrying so much inventory that you’re overspending on logistics and putting yourself at risk.
Here are four types of tools you can implement to ensure your inventory is efficient, optimized, and ready for whatever challenges your business and supply chain might face.
1. Cloud-based Inventory Management Systems
Cloud-based inventory management systems are one of the latest developments in inventory optimization, providing an easy way for businesses to track their inventory in real time. Instead of keeping stock and inventory information in Excel sheets, logbooks, and email chains, cloud computing provides all the data you need in one centralized archive.
Cloud computing systems alert users whenever any sudden changes in inventory levels occur, providing time to pivot and adjust strategies accordingly. These systems can also detect errors as they arise, reducing both the number of errors and the time spent on quality control. When data is stored in the cloud, users can be sure their information is backed up and secured.
You won’t need to maintain any servers on-site, and you’ll spend less time and energy ensuring your systems are secure and up to date, as these tasks will be handled by your supplier.
One vendor that transitioned from tracking inventory manually with spreadsheets to an inventory management system with cloud capabilities improved net income by 17% (saving over $10,000 in eliminating stockouts), reduced inventory adjustments by 10%, and increased cash flow by 40%. Those are big savings for such a relatively small investment in technology, and it illustrates why procurement must continue investing in digital transformation efforts.
2. AI Demand Forecasting
AI demand forecasting technology leverages machine learning to unveil underlying trends in data to forecast demand more accurately. With AI demand forecasting, you can create demand projections for multiple applications, including individual products, product categories, and the total demand across an entire product line.
With improved forecasts backed by the AI algorithms, you’ll receive suggestions on pricing strategies and tactics such as promotional offers that boost sales and increase turnover. It can be challenging to anticipate unpredictable fluctuations in demand and supply to prevent stockouts and inventory buildup, especially when many procurement departments continue to use lagging indicators when forecasting demand.
AI demand forecasting analyzes constraints in real time and arms users with the knowledge they need to make informed decisions on their inventory and stock — backed by data. According to a provider of AI demand forecasting, their software increases demand forecast accuracy by 5-15% and planner efficiency by 20-50%.
3. RFID Systems
Radio Frequency Identification (RFID) systems use radio wave technology to track inventory as it moves through your supply chain and warehouse. By utilizing this technology, your business can identify bottlenecks and inefficiencies in the supply chain and react to any changes as they occur. Inventory management practices that require manual counting pale in comparison to RFID systems, which automatically provide inventory counts with a high degree of accuracy, reducing labor costs and search times while allowing workers to focus on higher-level tasks.
When paired with IoT devices (hardware such as sensors, gadgets, and other machines that collect and exchange data via the internet), RFID systems improve visibility and knowledge of the conditions of your goods by looking at pressure, temperature, and vibration. With greater durability and simultaneous tag scanning that can be read without a line of sight, RFID systems have a distinct advantage over traditional barcode systems when it comes to inventory optimization.
RFID systems are far quicker than manually recording inventory by hand or using barcodes. The pen and paper method relies on an individual employee’s speed, accuracy, and effectiveness and is subject to vary from employee to employee. While the barcode method can be considerably faster, they also scan each code individually with a beam of light that requires line of sight. RFID scanners, however, can read many codes at once, streamlining your process.
4. Replenishment Software
Replenishment software analyzes the inventory levels at a given location and automatically generates purchase orders and replenishment plans. Replenishment software recommends the specific purchase orders and shipping quantities of specific products for any single location, such as a store or warehouse. At the same time, this software will ensure you’re not ordering more product than you need, as these systems take into account both your supply chain and inventory capacity. If you prefer to manually review and consider purchase orders, you can still use replenishment software as guidance in your daily activities.
Early warning replenishment signals can alert buyers when they should consider restocking items, giving you and your procurement team the foresight to prepare and meet customer demand. Some suppliers of automatic replenishment solutions report stockout reductions of up to 85%, ensuring greater than 99% of on-shelf availability for products and automating 100% of store ordering.
Where should you start?
Now that you know the advantages of optimizing your inventory solutions, the next big question is: where to start? How should you get going? Well, first you’ll need to do some digging into your own data.
Begin by assessing your current inventory management processes and identifying areas for improvement. Review your historical sales data to identify patterns in demand and supply, and conduct an analysis of current inventory levels and ordering processes. Armed with that information, you can begin identifying inventory optimization tools that will best suit your needs. By taking a data-driven approach, conducting a thorough analysis of your process to find bottlenecks, and performing due diligence on tools you could implement, you can achieve significant cost savings and improved operational efficiency.
If you already have optimization tools and are thinking of incorporating more, make sure you think about how those tools will work together or communicate, as implementing tools that don’t function seamlessly together can cause more problems than they solve.
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