Inventory Optimization Guide: Unlocking Success

As expert nerds in all things logistics, the Goods team has witnessed more than our fair share of disasters caused by poor inventory optimization.

Allow us to set the scene by sharing a story from our consulting archives.

INVENTORY DISASTER CASE STUDY: ZIZI AND THE BEARS

A retailer friend of ours was just breaking into the B2C toy scene—we’ll call her Zizi (not her real name). Zizi was an ace toy seller and had diligently set up a gorgeous new ecommerce website in preparation for this exciting change. But beneath the glamorous surface of her growing business, a deadly weak spot was about to collapse.

The problem: Zizi had a nasty habit of severely overstocking her bestselling item.

It’s easy to understand why. Zizi’s dancing bear action figures had always been a steady hit with customers in the past, promising a nice revenue spike every year right before the holidays. Frankly, she didn’t see the need to run advanced analytics or use demand forecasting tools. Surely her bestselling item, the flagship of her product catalogue, would never fall completely out of favor.

You can see where this is headed, right?

Disaster struck. At the height of the dancing bear bubble, right before what would normally be the richest quarter of Zizi’s fiscal year, a local competitor launched a whirlwind advertising campaign starring a popular social media influencer. The influencer went on an anti-bear crusade, tearing the honey-loving ballerinas apart and endorsing the bestselling product of Zizi’s competitor: backflipping tigers.

The campaign worked like a charm. Because let’s face it: dancing bears cannot compete with backflipping tigers.

Suddenly, everyone in the toy trade was scrambling to stuff their shelves with tiger merch. Our friend Zizi was in hot water. Since she didn’t account for shifting fads or use analytics to manage her already inexact inventory levels, she couldn’t unload bears or source tiger stock fast enough. Customers were deserting her shop, unwanted dancers were piling up in the warehouse, and no amount of bear-positive promotional hype could undo the damage in time to save Zizi’s year.

Our bear-buried friend Zizi learned an important lesson the hard way: inventory optimization is no joke. Humbled but determined, she vowed to never again leave her inventory strategy up to guesswork and chance.

Luckily, Zizi reached out to the Goods team and got the inventory help she needed. In her honor, we wrote the following guide to all things inventory management.

Read on to learn the ins and outs of optimizing your inventory system, including:

• an explanation of what inventory optimization is—and what it should be
• skilled guidance to help you manage common challenges of inventory management
• incentives to invest in inventory optimization methods
• the latest inventory tactics and tools to wrangle inventory problems
• our own in-house techniques, designed by our expert techs at Goods

Like we told Zizi, it’s best to start with a firm knowledge base. Without further ado . . .

PART ONE: WHAT IS INVENTORY OPTIMIZATION?

Inventory optimization is the process of managing and maintaining inventory levels in an efficient, streamlined way. An optimized inventory management process should reduce a business’s operational costs, slash stock record inaccuracies, and make sure customer demand is always met.

As we learned with Zizi, it’s impossible to manage your inventory efficiently without profound understanding of your market. You’ll need to get to know external factors as well as the internal processes that shape your order fulfillment lifecycle. For most businesses—especially those in the SMB space—that means investing in analytical tools.

Thorough inventory analysis includes these research topics:

• demand forecasting
• lead times
• supply chain constraints
• carrying costs
• service level requirements

A careful and continuous overview of these subjects will help you determine the best possible inventory level for each product.

On the tech side of things, inventory optimization typically means using advanced analytics, mathematical models, and inventory management software to make data-driven decisions about reorder points, safety stock levels, order quantities, and replenishment schedules.

But it’s not enough to analyze once and call it quits—not even close. Optimization requires ongoing monitoring and adjustment to adapt to changes in demand patterns, market conditions, and supply chain dynamics.

The market is never completely still, so your numbers shouldn’t be either.

If all this sounds like information overload, don’t be discouraged. The goal of inventory optimization, of course, is to have enough inventory to fulfill customer orders, but not so much inventory that you wind up with a Zizi trainwreck. That’s because overstocking ties up capital and often incurs holding costs, neither of which are ideal for a rapidly scaling business.

By optimizing inventory levels, you’ll reduce stockouts, minimize carrying costs, improve cash flow, enhance customer satisfaction, and increase overall profitability. It’s a win-win . . . if you’re willing to put the time and effort into learning and implementing the best methods for your needs.

Trust Zizi on this one: it’s worth it.

PART TWO: INVENTORY OOPSES – CHALLENGES TO OPTIMIZATION

If inventory management were easy, we wouldn’t need to optimize it.

The process of ramping up your inventory efficiency comes with more than a few obstacles. Here are five common challenges we see businesses struggle with as they try to tame their inventory demons:

1. Demand Forecasting Accuracy: One of the biggest challenges is accurately forecasting demand. Demand forecasting is complicated, no question about it. Some of the factors involved in making an accurate forecast include: seasonality, market trends, promotions, and unforeseen events. But how can you foresee the unforeseen?Great question. It’s the very conundrum demand forecasting analysis strives to answer. And for good reason, because inaccurate demand forecasts usually lead to stockouts or overstock situations, costing you precious capital, time, and labor. Not to mention annoying your customers as they await delayed or—worse—unfulfilled orders.
2. Supply Chain Uncertainty: It’s not hard to argue that the supply chain arena is more complex now than at any other point in human history. Businesses of all sizes have no choice but to face uncertainties such as:

• lead time variability
• supplier reliability
• transportation disruptions (including bad weather)
• geopolitical factors

It’s enough to make your head spin, but managing these uncertainties is crucial for maintaining optimal inventory levels and ensuring timely order fulfillment.

1. Balancing Costs and Service Levels: One of the biggest balancing acts in retail is making sure your inventory costs match your service level objectives.A common rookie mistake is to aggressively overstock bestselling items far too early, especially if you’re anticipating uncertain seasonal changes. This seems like a wise move on the surface—after all, increasing safety stock levels prevents stockouts. What’s the problem with overstocking, anyway?

Don’t forget about holding costs.

At home, too much clutter is stressful, cramping, and serves little purpose. In business, it’s all of this and worse: it’s expensive. Trends can change in a heartbeat, threatening to leave chronic overstockers with their own dancing bear disaster. This is why the Goods team recommends that when it comes to overstocking, moderation—informed by forecasting data—is your best friend.

Keep in mind that “moderation” doesn’t mean you should regularly risk letting your popular stock run dry. Reducing inventory levels too aggressively to minimize costs may lead to inopportune stockouts and heartbroken (irritated) customers.

All this is to say that finding the right balance between costs and service levels is absolutely essential for successful inventory optimization.

1. Data Accuracy and Integration: Wrangling data can be like herding cats. Inventory optimization relies heavily on intelligence from various sources, including sales records, inventory levels, supplier performance, and demand forecasts. But without a data-driven decision-making process, you’re setting yourself up for a painful bellyflop.Ensuring the accuracy, consistency, and integration of this data can be challenging, to say the least. “Challenging” can feel like “impossible” if you’re dealing with clumsy, segmented legacy systems and awkward manual processes.

It’s not enough for the data to exist—it has to be accurate. You don’t need us to tell you that poor data quality can lead to crappy decisions and inventory catastrophes that could’ve been avoided. (Sorry, Zizi; we love you.)

1. Dynamic Environment: The good old evergreen truth about the retail world is that it keeps on chugging, no matter the disruptions and changes. And those disruptions and changes are many. Shifts in consumer preferences, market conditions, competition, and supply chain dynamics all contribute to the heart-pounding tightrope walk that is our real-world business environment.

It’s no wonder that inventory optimization strategies must be flexible and adaptive to respond to these changes.

Addressing these challenges requires a sleek but mighty combination of advanced analytics, robust inventory management processes, and investment in technology solutions that can help you automate and streamline your operation.

As we say at Goods: Always run those numbers one more time. You can’t afford to cut corners when it comes to inventory management; it’s the very art of having what you need when you need it.

PART THREE: TOP REASONS TO OPTIMIZE YOUR INVENTORY NOW

You already know the dangers of sloppy inventory management. It’s time to explore the benefits. No more excuses; let’s talk incentive.

1. Reduce Operational Costs (Cash is King): Money does little good tied up in unnecessary warehouse messes. Optimizing your inventory management methods will get rid of those dusty heaps of overstocked, unwanted goods, which translates to more space, time, and revenue for other projects—and a happier warehouse staff.
2. Increase Customer Satisfaction (No More Meltdowns): We guarantee your customer service team hates taking phone calls that begin with these three chilling words: “Where’s my order?”Cut down on unhappy dials, bad Yelp reviews, and customer service exhaustion by optimizing your inventory. Not only will you reduce delays due to understocking, but you’ll be empowered to offer your customers accurate information as to when they can expect out-of-stock preorders to arrive at their doorstep.
3. Maximize Profitability (Minimize Stocking Mistakes): An optimized inventory process is the only way you can ensure you have the right amount of stock on hand to meet customer demand without overstocking. It’s an issue of resource efficiency—in other words, maximizing profitability by kicking dead weight product overboard.
4. Boost Overall Operational Efficiency (Logistics Self-Improvement): Efficient inventory management streamlines your supply chain operations across the board. By optimizing reorder points, safety stock levels, and replenishment schedules, you’ll also minimize the need for manual intervention. Thanks to a smoother chain of operations and better data, you may even find new opportunities to automate repetitive tasks

It’s not just a thought exercise. More time and resources will allow your team to focus on other initiatives such as product innovation, market expansion, and general process improvement . . . all of which is more fun than figuring out how to unload unusable stock.

PART FOUR: OUR TOOLS, TECHNIQUES, AND FEATURES AT GOODS

At Goods, we’ve hit the books and tackled analytics to save you the headache. Our all-in-one ecommerce logistics platform was built to optimize inventory management for scaling businesses.

We use the following techniques, and we recommend them for all inventory processes:

• Demand Forecasting: As a refresher, demand forecasting is the challenging process of estimating future demand for products based on historical data, market trends, and other relevant factors. It involves analyzing past sales patterns, consumer behavior, economic indicators, and external influences to predict future customer needs and preferences. Demand forecasting plays a crucial role in strategic decision-making for businesses, helping them to optimize inventory levels, plan production schedules, allocate resources efficiently, and develop effective marketing strategies.

Goods Feature: Demand forecasting is an essential part of the Goods platform—it just wouldn’t be an “all in one” experience without it. Thanks to its automated integration and accurate, real-time analysis of all your data sources, Goods gives you the power to anticipate changes in demand. (Which means you’ll be far less likely to find yourself in an overstock or stockout snafu.)

• Replenishment: “Inventory replenishment” simply means resupplying or restocking inventory levels to meet demand. You’ll need to determine the right amount of goods to order from your suppliers based on factors like sales forecasts, lead times, reorder points, and safety stock levels.

Goods Feature: At Goods, we know accurate, automated data and excellent communication are your best defenses against replenishment errors. Our platform provides careful and continuous monitoring of inventory levels, combined with the insights of our top-notch demand forecasting capabilities. By allowing you to closely collaborate with your suppliers directly from our Business Partners hub, Goods ensures you always have adequate stock on hand to fulfill customer orders—without drowning your warehouse team in excess inventory.

• Supply Chain Tracking: Your entire operation depends on your ability to reliably monitor goods, materials, and data through every stage of the supply chain.

Goods Feature: From raw material sourcing to final delivery to the end customer, Goods won’t let your goods out of our sight. We use a rich arsenal of tech like mobile app-friendly barcode scanning, advanced software systems, and real-time data integration to provide visibility into your entire supply chain network. This makes it much easier to keep track of inventory levels, locate shipments, optimize transportation routes, and ferret out supply chain bottlenecks. Best of all, our dynamically updating Relationship Map feature makes tracking and managing each and every step of your supply chain as easy as a single click.

• Safety Stock Management: Safety stock management is the allocation and maintenance of inventory that exceeds what is usually required to meet regular demand. Think of it as your safety net to protect you from sudden blips in demand, unexpected backorders, or holes in your supply chain.

Goods Feature: A little safety stock can go a long way. At Goods, we ensure you can determine the correct level of safety stock by offering our robust demand forecasting tools, up-to-the-second inventory monitoring (including low stock alerts), and deep insights into your supply chain dynamics.

• Reorder Point Formula: The reorder point formula is a critical tool in inventory management. It’s used to determine the best time to reorder products.

Reorder Point = (Average Demand Rate × Lead Time) + Safety Stock

Goods Feature: Goods was created to make sure you always have accurate, current insights into your order fulfillment process, because you can’t optimize your inventory without them. By connecting your outbound and inbound order flow directly to our inventory and warehouse management systems, Goods provides all the information you need to maintain ideal stock levels without a drop of sweat.

• Audits: Put simply, inventory audits are the assessments your business conducts to verify the accuracy of your inventory records and physical counts. They help identify errors such as stock shortages, overages, or inaccuracies that may have been caused by recording transactions, theft, shrinkage, or other ugly but common problems.

Goods Feature: Goods eliminates the middleman by automatically keeping tabs on every piece of inventory that arrives or departs your logistics sites. No need to worry about clunky manual input, cumbersome Excel spreadsheets, or—yikes—old-school paper lists. Our platform automates the entire auditing and recordkeeping process, and we’ll make sure your warehouse team is equipped with barcode scanning guns and a convenient mobile app to speed things up.

The end result of our auditing process is improved accuracy, better internal control, and lower risk of financial losses. Your overall supply chain process will be healthier, too.

• SKU optimization: Stock Keeping Unit optimization is the management of unique product identifiers (SKUs) carried by a business. Simplifying an SKU system comes with a wide array of benefits, like reducing inventory carrying costs, making procurement and replenishment easier, and decluttering a crowded warehouse.

Goods Feature: Goods streamlines inventory management by helping you give redundant or low-performing SKUs the boot. We’ll arm you up with the info you need to focus on your high-demand, profitable items. That information includes analytics of sales data, trends, and customer preferences that will make it clear which SKUs aren’t pulling their weight.

Goods can also help you make sense of an old, messy SKU system full of redundant identifiers. Don’t worry; we import external vendor-provided SKUs right alongside with your business’s unique SKUs, ensuring consistency and cleanliness throughout your product assortment.

• Just-in-Time (JIT) Inventory: Just-In-Time (JIT) inventory is a supply chain strategy in which goods are ordered and received only when you need them, not kept in large stockpiles.

Goods Feature: By seamlessly synchronizing supply with demand, the Goods platform shrinks storage costs and reduces the risk of unusable, obsolete inventory. It’s a careful, sometimes challenging dance between suppliers, manufacturers, and distributors. So we make it our priority to ensure a seamless flow of products (or components) from all sides of the supply chain.

• Automation: Repetitive, routine processing tasks should be identified and automated as fast as possible in order to free your team of ongoing slowdowns and the burden of manual data entry.Goods Feature: It’s our mantra at Goods—automate, automate, automate. Our system is designed to cut out as many time-consuming manual tasks as possible, which is why we integrate all crucial business tools into one seamless management hub. When your systems communicate directly with one another, your data will synchronize, your order pipeline will flow, and the wheels of your business will keep turning while you sleep.
• Multisite Logistics: If your inventory is scattered throughout multiple warehouses, managing it efficiently becomes even harder. It’s important for large and fast-growing businesses to choose a system that can handle complex multisite logistics needs. This involves making sure stock is allocated at the right locations, stock levels are continuously tracked and synchronized with product demand, and recordkeeping is accurate throughout your global operation.Goods Feature: We know it sounds intimidating, but most of the best-practice inventory principles apply to businesses of all sizes. It’s why we optimized the Goods platform to handle multisite logistics needs as well as those of smaller single-warehouse operations.
• Ease of Use: A complex, powerful system is great . . . if your team can actually use it. The business world moves fast, inventory moves faster, and we know you don’t have time to get a PhD in your logistics management software.

Goods Feature: We believe the best systems are also the most elegant. That’s why Goods translates incredible complexity into practical, straightforward features your whole team can use. Our crisp, intuitive UIX is easy to customize, and it allows you to manage your entire operation from one clean screen.

CONCLUSION

Take it from Zizi—just reading about inventory management can be exhausting. It’s the very reason why too many businesses ignore the warning signs of a poorly optimized inventory system until it’s too late, and they’re facing down a real financial tragedy.

But there’s no need to bite off more than you can chew.

In fact, our Goods team experts recommend picking a handful of these tips to start, exploring them piece by piece. Before long, you’ll start seeing the real-world benefits of inventory optimization and how just a few improvements can go a long way.

If this guide was helpful to you, please give a nod of neighborly thanks to Zizi. And if you have a little bear problem of your own, the Goods team is always here to help.