Inventory management involves balancing the tradeoff of stock-outs (a customer service measure) versus inventory control (a cost-control measure). Optimization is the mathematical and computer methodology that allows the evaluation of trillions of choices for inventory levels to occur very quickly and find the most profitable inventory level for every item (or stock keeping unit, SKU) that you stock and sell. Inventory Optimization includes proven inventory management techniques and mathematical optimization algorithms to maximize your profit-return-on-inventory-investment. These methods build on the popular ABC inventory control method, but use the latest mathematical and computer technology to achieve optimal results.

Steps to Optimize Inventory

Any company that carries inventory is forecasting, whether they think so, or not. Many companies claim that they don’t forecast, but if you are stocking raw materials, work-in-process or finished goods in anticipation of fulfilling demand, you are forecasting. At Supply Velocity, we run multiple, proven forecast algorithms to see if each SKU is trending up or down, or has seasonal sales patterns. These algorithms are optimized to maximize forecast accuracy.

Profit X Inventory Level for a SKUForecasting is one aspect of optimizing inventory levels, because it looks forward to anticipated sales. The second aspect is safety stock, which protects against stock outs. Safety stock looks backwards at how well the forecasting algorithms were able to anticipate demand. Highly accurate forecasts need very little inventory. However, SKUs with high forecast error need more safety stock. Supply Velocity’s Inventory Optimizer uses forecast error, the item’s lead time and profitability to let each SKU set its optimal inventory level to maximize the overall profit-return-on-inventory-investment.