Inventory Optimization in Supply Chain 

Often, people mistake the term inventory optimization for inventory management. IP not only manages inventory but also amplifies it. Today, we’ll discuss inventory optimization in supply chain management; its definition, and best practices and strategies.

What is Inventory Optimization in Supply Chain? 

Inventory optimization is the method of employing top strategies for companies that want to utilize limited capital while maintaining the saleable inventory. It plays a key role in managing inventory and the elements that would manage supply and demand. However, it comprises balancing investment limitations against the company’s goals and objectives; and satisfying goals and targets across the large variety of inventory SKUs (stock-keeping units).

Inventory optimization allows you to maintain and keep business liquidity, supply chain, and warehouses. It helps your business in the following ways;

  • Knowing the amount of stock you should buy for SKU
  • Having readily available stock to satisfy orders
  • Decreasing excessive inventory that becomes outdated over time

Inventory Optimization in Supply Chain – Top Practices & Strategies 

Some of the top practices and strategies for inventory optimization in the supply chain are as follows;

Seasonality & Promotional Campaigns

It is difficult for retailers and sellers to find the seasonality of the product. For instance, the Tartan Coat has a great sale in one season, and its fashion would fade away in the next winter. The unsold inventory in the storage would increase the stock maintenance cost and save a lot of capital. That’s why demand prediction is difficult and creates hurdles in optimization.

One method to deal with unsold inventory is to launch promotional campaigns at the end of the season. It is a great strategy to manage and optimize your inventory in the retail sector.

Tracking Buyer Behavior

Sellers often wish that they could gain an insight into the minds of customers and buyers. Automated inventory management and data analytical tools are highly significant for modern retail businesses, and they offer you a key insight into the minds of customers. Behavioral and data analytics would let retailers know the selling items and the ones that won’t.

Automated Inventory Management

Automated inventory management is highly beneficial for small and medium-sized businesses and companies and it could take your business to the next level and give you a competitive edge. Manual inventory management processes would cause a lot of errors ranging from small to large and mega. For instance, it could be in the form of stuck capital, unsold inventory, poor service rating, and delays. Automation and operational up-gradation could benefit e-commerce stores, e-retailers, and traditional retail stores.


IoT (Internet of Things) is a great step for retail businesses in transformation. Tec innovation comprises smart shelving and it would lead you to make better decisions in the inventory optimization and management area. For instance, it offers you notification in real-time about sales; and alert messages when the SKU level is low or reaches the point of reordering. In short, smart technology and IOT avoid shortages and overstocking, and you should remove manual errors.

Managing Uncertain Supply & Demand

Retailers and suppliers can’t ask customers to wait for the unavailable items. In modern online stores and e-commerce businesses, the incapability of one company to offer supplies could result in the form of a competitive edge for the other. Small and medium-sized businesses and companies are on the verge of losing customers; if they don’t restock or maintain a large stock of extensive inventory.

That’s why it is significant for businesses to have a reliable supplier and vendor network and manage backup methods to buy SKUs. Therefore, you should keep the delivery pattern and lead time for suppliers, because scheduling means making products available for customers.

Product Life Cycle

When you launch a new product in the market, it creates demand in the market based on its popularity and impact. The unique and innovative factor gives the first-mover a competitive edge; its demand will keep on increasing until it reaches a stable point. Some products are evergreen and they are always in demand. For other products, their demand would start declining and reach the point of dying.

Every retailer should be aware of the product life cycle for every SKU. It is significant to know where your product is right now and where it will reach; what product items to keep and what to leave. It offers you a great competitive edge.

Inventory Policies

The inventory policy would make sure that the employees would rightly recognize the cash-generating SKUs (stock-keeping units). Your inventory policy is a form of optimization tool that would keep a keen eye on the inventory items that are significant for the company’s growth and productivity. However, ABC or XYZ Analysis is a great standard for inventory optimization. It categorizes inventory items based on their consumption level. It means the value of items consumed over time; usually, you would calculate their usage on an annual basis.

Demand Forecasting

Predicting the demand for inventory for the next sale cycle plays a significant role in inventory optimization. In order to predict demand at the optimum level, companies should maintain a proper record of sales data, or receive input from the sales force. Machine learning and analytical tools could help your business in many ways, they would analyze the historical data and predict the current sales volume.

Conclusion: Inventory Optimization in Supply Chain 

After an in-depth study of inventory optimization in supply chain; we have realized that inventory management and optimization are highly significant for businesses. If you are learning about inventory optimization, then you should keep in mind the abovementioned practices and strategies.

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