What Is Inventory Optimization Technology?

Disruptions in supply and demand patterns are the new normal. From pandemic-fueled supply chain disruptions to demand signals from micro-influencers on TikTok becoming a critical source of demand data, the world has changed dramatically over the past few years.

In response, many organizations are investing in new tools, technologies, and systems to create more resilient supply chains and reduce vulnerabilities in a volatile global economy.

In recent years, Inventory Optimization technology has been a promising investment in enhancing the agility with which companies respond to supply and demand changes. Through Inventory Optimization, firms can increase inventory agility, reduce operational costs, and enhance the customer experience.

Inventory Optimization Explained

Inventory optimization solutions include tools, technologies, and software that help businesses with demand forecasting, purchase orders, allocations, replenishments, and markdowns.

By using Inventory Optimization strategies, organizations can get closer to having the right inventory, in the right place, at the right time. Through it, brands and retailers get better at meeting demand, reducing operational costs, and optimizing the balance between overstock (i.e., too much inventory) and stock-outs (i.e., too little inventory).

Inventory Optimization solutions have become an essential aspect for many omni-channel retailers, e-commerce stores, and DTC brands to respond to issues such as:

• Demand fluctuations
• Shipping delays
• Increased shipping costs
• Lost sales
• Warehousing shortages

Companies can reduce the costs of poor inventory management by investing in Inventory Optimization technology, such as AI-powered inventory optimization software providers.

How to Approach Inventory Optimization in Your Organization

Inventory Optimization tools aim to perfect a company’s predictive inventory management systems to reduce operational costs and ensure stock levels match consumer demand.

A successful inventory planning formula will consider current inventory levels, warehousing space, supplier lead times, forecasted demand, and seasonal trends.

The approach to Inventory Optimization can be broken down into three key areas: creating demand forecasts, inventory buys and allocations, and continuously optimizing stock levels.

Creating Demand Forecasts

Demand forecasting uses a variety of both historical as well as real-time data points to predict future demand. This data can include seasonal data, competitor sales data, economic trends, and geographical data.

Companies use demand forecasts to make strategic inventory management decisions to avoid overstocking, stockouts, and backorders. Aside from inventory, demand forecasting can be used to determine whether companies should hire more staff, rent more storage space, or expand to new markets.

Demand forecasting will look different for each business and industry. Typically, broader, shallower, and more trend-driven assortments are harder to forecast than more stable staples (e.g. a new flower dress is harder to forecast than a pen that’s been in stock for years). However, by leveraging new inventory optimization technologies, companies can use sophisticated AI and machine learning algorithms to analyze large data sets and uncover demand patterns in minutes, using a wealth of data sources previously untapped – and allowing more accurate forecasts for seasonal, trend-driven, and/or long-tail products.

While demand forecasting is never 100% accurate (the crystal ball does not exist!), innovative and advanced tools can provide more reliable, accurate insights.

Inventory Purchase Orders and Allocations

Inventory purchase orders and allocations involves submitting orders to manufacturers, moving items from warehouses to stores, and monitoring the assortment.

Inventory buys ensure that point of sale sites have enough inventory to package shipments, stock shelves, and maximize available sales opportunities. Proper inventory allocation prevents stockouts, excess inventory and markdowns, and backorders at various locations or stages of your network. While demand forecasting is an important input, it is not enough to purely rely on demand forecasts, as issues with inventory allocation can have substantial cost implications.

Determine safety stock

Also known as ‘buffer inventory,’ safety stock is the additional inventory your business should retain in case of supply chain disruptions or emergencies. To understand your safety stock quantities, companies should look at the maximum daily usage, maximum lead time, average daily usage, and average lead time to understand best and worst-case scenarios for product demand.

By increasing visibility into inventory levels, companies can easily re-allocate excess inventory to other stores that have low inventory levels of the same item.

Reorder Point Formula

One way to ensure companies properly allocate inventory is to understand minimum inventory requirements. A company’s reorder point is the amount of safety stock required plus the time it takes for new stock to arrive. Finding this reorder point will ensure that there is always enough inventory to avoid manufacturing disruptions or stockout scenarios.

Inventory optimization technologies will automatically calculate reorder points based on real-time data along with predetermined business rules to offer recommendations on when and how much to reorder.

Continuously Optimizing Stock Levels

Determining optimal stock levels is a crucial part of proper inventory management. Carrying too much or too little inventory can have additional storing and shipping costs in addition to markdowns or missed sales opportunities due to stockouts. Optimizing inventory levels can vary for different locations, seasons, and products.

Monitoring UPCs SKUs

Universal Product Codes (UPCs) and Stock Keeping Units (SKUs) help merchandisers and planners track products across supply chains and company locations. With innovative inventory planning tools, companies can leverage real-time tracking data for greater visibility and control into inventory levels. Further, managers can create individual forecasts and strategies for certain products across a variety of size, style, and color combinations.

Distribute Inventory Across Locations

Inventory planners and allocators should monitor stock levels across multiple locations to ensure that each geographical region is equipped to meet fluctuations in consumer demand – or use data-first software tools to monitor this for them. Managers can optimize shipping times and improve customer satisfaction by managing the optimal location-specific inventory.

The Benefits of Inventory Optimization

Inventory optimization platforms offer a variety of benefits and can start generating ROI in as little as four weeks.

Maximize contribution margin

The main driver behind investments in inventory optimization solutions is their potential to increase contribution margins through cost-reductions and revenue-increases.

Improved Productivity

With advanced inventory optimization tools in place, less company time and resources will be spent on inventory planning and allocations. Not only can these tools increase the speed and accuracy of decision making, they can eliminate up to 95% of time spent on manual tasks.

Minimize Stockouts

AI-powered inventory buying and allocation recommendations preemptively identify where demand may exceed on-hand inventory levels, and thus empower planners and allocators with the actions (re-orders, replenishments, transfers, etc.) to make sure that the customer finds the item they want to buy in-stock.

Minimize On-Hand Inventory and Markdowns

Inventory optimization solutions provide better control and deeper visibility into inventory levels. Next to making sure enough product is in stock, this software also ensures that not too much inventory is sitting in the wrong places. This reduces the need for unwanted markdowns.

Enhanced Customer Experience

While companies can enjoy lower costs and increased profit margins, customers can also benefit from an improved shopping experience.

Faster Fulfillment Times

When companies optimize inventory levels and shipping routes, instock rates rise both in-store and online. Customers have a higher chance of finding their exact style-size-color combination and can get their products faster after purchase, with inventory located in warehouses and DCs closest to them.

Stock Transparency

Even with the best inventory systems, some stockouts and backorders are inevitable. With faster, more reliable inventory management systems, companies can communicate with their consumers when stockouts and backorders can be fulfilled.

Customer Satisfaction

With improved inventory capabilities and faster shipping times, companies can improve their customer satisfaction and retention rates. Having sufficient inventory not only provides a better customer experience but increases cart value, further resulting in increased sales.

Scalability for Business Growth

Investments in inventory optimization technology are the beginning of a new era. By investing in these solutions now, your company can install solutions that will grow with your business.

Expand to New Markets

With advanced inventory management systems in place, companies can quickly expand to new regions or markets when the opportunity arises.

Prepare for Increases in Demand

Whether it’s increased demand from holiday sales or a trending product, your company should be prepared for potential bursts in product demand. Companies shouldn’t let their inventory capabilities prevent them from sales opportunities.

Improved Business Relationships

Organizations that can connect their inventory planning systems will improve their analytical capabilities and operational efficiencies. This can help companies determine their business partners and cement long-term business partnerships to lock in cost savings.

The Bottom Line

Inventory Optimization technology is becoming the new standard of inventory management. Through AI-powered systems, merchandisers, planners and allocators make faster, more accurate inventory planning and allocation decisions to sell more items at full price while avoiding stockouts, markdowns, and excess end-of-season inventory.

By partnering with Syrup, you can improve your operational capabilities and protect your bottom line with our advanced Inventory Optimization platform.