Inventory Optimization

by Manu K Nath

Efficient Inventory Management or Inventory Optimisation is the most important strategic process involved in a retailer or wholesale business. The term inventory management refers to the process which tracks the number of different products in the warehouse as well as in-store.

An efficient inventory management technique will help the business to avoid sale losses due to insufficient stocks, optimize capital investments by buying the right quantity of each product and reduce warehouse costs to improve revenue.

Inventory Optimisation can be divided into three steps:

1. Demand Forecasting

2. Inventory Policy

3. Replenishment

Demand Forecasting

It’s the process of analyzing the historical data to learn how different products perform in sales. Different products have different trends like daily essential products have constant sales, some seasonal products do perform well in certain intervals. From this information or trend gathered from the learning process, we predict an estimated quantity of each product of customer demand in the future.

Inventory Policy

Inventory policy is the different methods of applying different techniques to identify which products should be stocked when they should be stocked and how much they should be stocked. For determining these three, various techniques like ABC Analysis, SafetyStock, and Cycle counts are adopted.

Commonly used inventory policies:

• Perpetual Review Policies -

  It continuously monitors and updates stock levels and associated reports get updated with every sale, delivery, or breakage.

• Periodic Review Policies -

  Instead of continuously monitoring and updating stock levels, periodic review policies do the same in a period of time like once in a month or once in 6 months.

Replenishment

This is the final step of inventory optimization, in which calculating an accurate reorder point(the specific level at which your stock needs to be replenished) and optimal order quantities for different products.