4 Inventory Management and Optimization Strategies

Brody Hall
By Brody Hall
Romi Hector
Edited by Romi Hector

Published March 25, 2022.

A businessman with a virtual screen that has icons relevant to information about inventory management

Optimization of all aspects of a business is essential for growth, including inventory management. Inventory management is the process of ordering, shipping, and receiving merchandise to ensure a constant supply of manufacturing goods and customer-ready products. A well-organized inventory system can help a business – especially a small business – improve efficiency, save on expenses, and boost profits.

There are a few key inventory-keeping strategies that can be used to optimize an inventory management system.

What Does Inventory Optimization Mean?

Inventory optimization is the process of making sure that a company has the right amount of inventory on hand to meet customer demand while minimizing excess inventory and associated costs.

In order to optimize inventory, a company must first understand how much inventory is needed to meet customer demand and then match that demand with the correct supply. Excess inventory can be costly due to the need for storage space, spoilage, and lost sales opportunities.

Inventory Management Strategies for You

To avoid any of the aforementioned issues, here are four inventory cost reduction strategies, tools, and techniques to help you out:

1. Use a Safety Stock Inventory

A safety stock inventory is a buffer of extra inventory that a company keeps on hand to ensure that it always has enough product to meet customer demand. The purpose of a safety stock inventory is to prevent shortages that can lead to lost sales and dissatisfied customers.

The aim here isn’t to purchase so much stock that you drive up warehousing costs, but to find a balance between not being understocked or overstocked.

2. Use Predictive Analytics

Predictive analytics is a form of business intelligence that uses control and tracking methods, historical data, and statistical algorithms to predict future outcomes. This can be used for inventory management in order to make more accurate predictions about future sales and stock needs. By using predictive analytics, businesses can make more informed decisions about what items to stock and when to order more inventory.

3. Employ an Automated Inventory Management System

An inventory management system can be automated through the use of software models that will keep track of the inventory levels and reorder points for each item in the inventory. This program can be set up to run periodically, such as once a day or once a week, to update the inventory levels and reorder points. The program can also be set up to send alerts when inventory levels reach a certain point so that action can be taken to reorder the item.

4. Use a Multi-Echelon Supply Chain

Multi-echelon inventory management is a system used to manage stock at different locations in order to increase efficiency and decrease waste. The system works by organizing stock into different "echelons", or levels, with each level holding a specific quantity of stock. When inventory falls below a certain level in a particular echelon, the system orders more stock from a higher echelon.