Is Your Inventory Optimization Solution Actually Leading to Profits?
The Inventory Optimization link in your chain is a critical piece to increase profit. How much inventory do you carry to meet future service goals without overstock and high carrying costs? How often should you reorder, acquisition costs like inventory carrying costs will reduce profits. Your inventory optimization solution needs to balance how much to carry, how often to reorder, demand rates, gross profits, pick quantity, supplier minimum, and business rules with a methodology (the math) that maximizes your profits while minimizing your risks.
What is the Right Amount of Inventory?
Proper inventory levels are key to ensuring the overall success of your business – too little, and you cannot meet customer demands; too much, and you are throwing money out the window. If your current Inventory Optimization solution is not allowing your business to provide consistent fill rates without overstock or out-of-stock inventory levels, you are not seeing the profits you should be. If you want to make sure that your inventory levels and profitability are where they should be, you need an inventory optimization solution that actually makes it happen.
Inventory Optimization needs accurate Demand Forecast
98% of supply chain systems are using sales forecasting methods & call it demand forecasting – Sales Forecasting is a measure of the market response; it is not a measure of market demand. The problem with sales forecasting is that simple; the most accurate sales forecast is only a measure of market response to what you had available.
Key Elements of New Inventory Optimization Software
Inventory optimization is about much more than the amount of stock available in an organization. There are several key elements that inventory optimization solutions should provide to ensure maximum profitability through optimization.
Vendor requirements vary across all channels, and your inventory optimization solution needs to take all of these requirements into consideration at the point of ordering, including:
- Minimum Unit of Measure Requirements – Some vendors have strict minimum order requirements that can include the number of ordered units, a set dollar amount, or full or partial truckloads.
- Specific Delivery Times – Vendors deliver on specific days, to specific locations, and during certain times. These requirements often result in additional carrying costs that must be addressed for maximum profitability.
Inventory optimization solutions need to include these factors, as well as the amount of items that must be sold within a given period to comply with those minimums to ensure proper inventory/profitability levels.
Most businesses order items in bulk to ensure the best deal at the time of purchase. However, saving money on the front end does not mean improved profits later on. Inventory optimization requires strict detailing and application of the carrying costs required for each product to determine the best pricing tier for your organization. Purchasing the proper amount at a good price is much more important than too much inventory at a cheap price.
Shelf Life Considerations
Carrying optimal levels of inventory means that your products move before they expire. Products that reach the end of their life cycle become waste that eats into profit margins. Understanding and applying shelf life ramifications to inventory orders will ensure less waste at the end of a product cycle to increase profits.
An effective Inventory optimization solution will focus on carrying the lowest levels of inventory across all channels that still allow your business to meet consumer demands. Your inventory optimization solution should also incorporate the actual costs of acquisition and the carrying costs associated with each product to ensure increased profits through enhanced ordering. When your organization is able to utilize enhanced ordering capabilities, your fill rate consistency improves, and stock levels are maintained at optimal levels without unnecessary overstocks or out-of-stocks. Together, these benefits result in increased profits – all through inventory optimization solutions that actually work for your organization.
Inventory Optimization – This is No Place for Excel
There are many moving data points that your inventory optimization solution should be using to deliver results. Today we bring up some of the most forgotten elements of inventory optimization:
- Vendor Minimum – Many vendors require a minimum purchase.
- Multi-tier – Vendors and Suppliers like and reward quantity purchases.
- Shelf-Life – Many products cannot sit on the shelf forever.
I have seen more than one consultant bring out an Excel spreadsheet as an inventory optimization solution. When our customers ask my thoughts about Excel based inventory optimization, I always answer their question with a question. How long do you think the Excel based result will be good for your business? Answer – only until something changes: add new products, change pricing, and/or product demand forecast change due to the market or seasonality. Any changes will impact the inventory optimization results. In other words, the inventory optimization solution someone created in Excel is accurate for a day, maybe a week and that’s not even long enough to drive any new profit. Even the best Excel workbook is not dynamic and is probably missing several of the elements we mention today. Your goal is to find what the right elements to include in your inventory optimization and then find a software solution that can support your business and achieve a good ROI.
Start Reviewing, there are Many Opportunities
If your inventory optimization solution is not providing you with increased profits and enhanced customer service while decreasing overall inventory levels, it’s time for a better solution. Data Profits provides cost effective, unparalleled inventory management solutions. If you need a fast, reliable solution, Contact Us today.
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