Posted by: Matthew Molinari | February 22, 2012

Inventory Optimization

When it comes to inventory, your business can go wrong in so many different ways that can end up costing you money. If you buy too much, it can sit on your shelf and go to waste. If you don’t buy enough, you risk losing customers when you can’t fulfill orders. That is where inventory optimization should come into play.

Optimizing inventory is not the same as managing inventory. When you manage inventory, you are simply keeping track of it. When you optimize your inventory, you are using data to make smarter decisions. There is no way to predict exactly what your demand is going to be over time so you need to determine what level allows you to run your business as efficiently as possible.

There are different ways to go about optimizing inventory levels but the best is to use software created specifically for it. The idea of optimization is to prevent any stoppages from occurring from a lack of materials while preventing unnecessary spending on inventory that sits on the shelf.

I think one of the most useful results is to track month to month levels to find items you keep in stock that you may be able to do away with. By combining monthly inventory levels with your sales mix, you should be able to find items that are sitting on your shelf (or flying off of it). The goal is to increase inventory turn over so that you can move as much product through your business as possible.

If items are sitting on your shelf for long periods of time you need to decide whether they should be kept in stock. Perhaps, they are not in high demand but the profit margin on the item makes it worth keeping them in stock for 10 months. Or maybe, it is an item that none of your competitors sell so you may increase your market share by carrying the item.

In many cases, you may find that holding certain items just doesn’t make good financial sense and that is one of the powers of having an optimized inventory.

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