What is inventory optimisation?

5 min read

What is Inventory Optimisation


  • Twitter-Icon
  • facebook-icon
  • linkedin-icon
  • atrate-icon

The first question most people ask the EazyStock team is, “What is inventory optimisation”. So we thought we’d write a blog post. Read on to get an introduction to inventory optimisation, why it’s important and what it entails.

Let’s start with a quick definition:

What is inventory optimisation?

Inventory optimisation is the art of balancing service level goals with inventory investment constraints over a large range of stock-keeping units (SKUs). This is done by forecasting demand and managing supply variables while dynamically adjusting stock rules and inventory parameters. Inventory optimisation techniques allow businesses to ensure product availability while reducing inventory costs and minimising the risk of excess stock.

Put simply; inventory optimisation ensures the right supply of inventory to meet your target service levels while tying up a minimum amount of capital. To achieve this, you need to account for the volatility of both supply and demand variables.

Don’t confuse inventory optimisation with basic inventory management. While inventory management involves ordering, managing, storing and moving inventory, inventory optimisation focuses on ordering the right products in the right quantities to meet demand – as cost-effectively as possible.


Optimising your inventory will make you more competitive

Digitalisation, globalisation and security threats are just a few macro trends affecting suppliers worldwide. In addition, consumer behaviours and habits are changing more rapidly than anyone thought possible, while new technology is making it easier than ever to source cheaper and better products from all over the world. Consequently, businesses face complex supply chains and a new threat around every corner.

To manage these turbulent times, businesses need comprehensive IT systems to automate processes and improve efficiency. Many large businesses, like Amazon, Walmart and Tesco, are already on this journey, with advanced supply chain systems that allow them to source products from all over the world and deliver in record time.

The advantages of inventory optimisation

Unfortunately, many businesses are still playing catch-up regarding system automation – especially inventory optimisation solutions. Those with enterprise resource planning (ERP) or warehouse management systems (WMS) are one step ahead, with advanced capabilities to manage their stock. But even these companies will struggle to forecast accurately or calculate optimum order quantities, safety stock levels and reorder points, often resorting to spreadsheets to carry out these tasks.

A lack of inventory optimisation solutions can substantially affect your entire business. For example, inaccurate demand forecasting can lead to stockouts and missed sales opportunities, estimated replenishment can result in capital being tied up in excess stock, and manual order processing is inefficient and resource intensive.

By optimising your inventory, you can determine exactly how much stock to order and when to order it, so you’re always able to serve your customers. You’ll consider demand variables, such as seasonality and campaigns, as well as supplier lead times and schedules. This way, you’ll always have the right products in the right warehouse to fulfil demand without tying up too much capital in inventory.

Inventory optimisation techniques

There are three key inventory optimisation techniques:

1. Demand forecasting
2. Inventory policy
3. Replenishment

Let’s discuss each in turn and link to resources that will give you more details:

1. Demand forecasting

When it comes to demand forecasting, some businesses will simply ask their sales team or copy last year’s numbers. Whilst this can work for items with steady, predictable demand, these methods can be entirely inadequate when demand gets more uncertain. Here’s why:

Every product has a lifecycle. For example, when a product is first introduced to the market, it will have no historical demand at all. Then it will likely move into a positive trend as demand constantly grows until it becomes a stable and fast-moving good. From there, demand might get more irregular and then move into a negative trend before becoming a dying and then obsolete product.


Demand forecasting product lifecycle


To ensure demand forecasting accuracy you need to track where each SKU sits in the product lifecycle.

Demand forecasting also needs to consider seasonality. It’s important to know when you’ll get seasonal peaks and troughs in demand so you don’t miss out on extra sales or be left with excess stock at the end of a season. Identifying seasonal demand is key for forecasting accuracy. For example, there’s no point in forecasting demand for a product that only sells in the summer (e.g. sunscreen) based on the previous quarter’s sales.

2. Inventory policy

The next step is to set your inventory policy, which means determining which products to stock and how much to keep of each unit.

ABC analysis is a common method of inventory classification. This is where you classify your inventory into A, B and C classes depending on their annual consumption value. You can read all about ABC analysis in our blog post. ABC analysis helps you determine which items to stock and which you can order on demand.


ABC Analysis Graph


Part of setting your inventory policy involves establishing sufficient safety stock levels. With the right amount of safety stock, you can cover sudden demand peaks, supplier disruptions or other unforeseen happenings. You can read more about safety stock calculations here.

Finally, if you have more than one warehouse, it doesn’t matter how well you optimise your inventory levels; if you store these items in the wrong locations, you’re missing a trick. Multi-location inventory optimisation is about distributing your inventory across your warehouses in the right quantities at the right times. You can then move items from regions where demand is low to those where it’s higher. Products are then available to ship to local customers as quickly and cost-effectively as possible.

3. Replenishment

Last but certainly not least is stock replenishment. This involves calculating accurate reorder points and cost-effective order quantities and turning them into actual orders.

To help optimise your purchasing activity, you should always consider:

1. Supplier reliability
Supplier lead times have a significant effect on stock availability and service levels. For example, the Chinese New Year, when many Chinese manufacturers shut down production, often causes big supply disruptions for many western distributors because they fail to account for it in their replenishment planning. Knowing the lead times and production cycles for every SKU and its supplier is critical to effective replenishment.

2. Goods in transit
When setting accurate reorder quantities, it’s not enough to simply know what you currently have in stock. For a complete overview of your stock levels, you also need to know what’s coming to your warehouse from your suppliers. This may seem obvious, but most ERPs and other systems don’t have this information available in a way that’s easy to retrieve.


The core inventory optimisation techniques are demand forecasting, inventory policies, and replenishment activities. Each aspect is crucial to guarantee you have the right stock in the right places at the right time.

While you can carry out inventory optimisation calculations in Excel and manually enter them into your ERP, if you have hundreds of SKUs, it’s almost impossible to track everything accurately manually.

EazyStock is an inventory optimisation tool that does all this for you, automating your forecasting, stocking policies and reordering processes. With EazyStock generating daily order proposals, inventory management teams can choose to approve every order or manage by exception. The result is optimised inventory management that saves time, money and resources. If you’d like to know more about EazyStock, or simply have some questions on inventory optimisation techniques, request a call with one of our experts.


5 min read

Sign up for the EazyStock Newsletter

Fresh insights     Once a month     Cancel anytime