Inventory management is a major investment for retail and e-commerce companies, which often spend considerable sums managing and fulfilling customer orders from multiple shipping points (DC, FC, manufacturer, stores, etc.). Whether this applies to you or not, your company can benefit from adopting a strategic approach to optimising inventory levels. The goal is to maximise sales and profits while improving customer service.
Many companies still base their forecasts on adding 10 percent or another arbitrary figure to last year’s performance. This can work when you are a small player in a large market and your strategy is to capture market share from competitors. However, if your product falls into a “dependent type of inventory,” this approach may not serve you well. If an item is out of stock when a customer orders, or if you cannot deliver within their expected timeframe, you have lost the sale. More critically, you may lose the customer permanently, along with their lifetime value.
When we talk about optimizing inventory, we mean finding ways to maximize sales and inventory investment without being significantly overstocked or understocked. This is achieved through a thorough evaluation of buying and merchandise allocation practices; an understanding of merchandise assortment and product characteristics (such as percentage of new or exclusive items, reorder-ability, lead time, minimum quantity, and freight); and the inventory management infrastructure in place (processes, systems, and organizational structure).
It is essential to involve all relevant departments in this evaluation, including inventory management, merchandising, customer service, fulfilment, and finance. The following six areas are critical to making your inventory management process more strategic and improving results.
1. Lost Sales from an Inventory and Financial Perspective
How do inventory managers and the finance team believe inventory can be managed differently to increase sales, and how can optimization impact both the top and bottom lines? Many companies have extensive SKU counts and assortments. Which top sellers must never be out of stock? What is the financial impact of new or exclusive items being unavailable? Which fashion-oriented products cannot be drop shipped and must be part of your inventory investment? These are ongoing considerations for inventory managers seeking to optimize sales without the risks of overstocking or understocking.
2. Factors Involved in Multiple Shipping Points
The more distribution centres and stores you operate, the more inventory is required to fill orders effectively. A second DC may require 30 percent more inventory or more; a third may require 60 percent more. This does not mean you must mirror inventory in each location. For example, some clients keep slower-moving hard goods in a single central facility, while faster-selling apparel is shipped from multiple locations. The key is to determine your tolerance for increased inventory investment.
3. Assess the Processes
Map out your current inventory processes, including seasonal planning, purchasing, forecasting, overstocks liquidation, financial control of planned sales and stock levels, and the identification of fast and slow sellers. How can these processes be streamlined? Can they become more responsive to changes in customer buying patterns? What must change to achieve optimal inventory positioning?
4. Deploy Effective Systems
In conjunction with process evaluation, assess whether your company has the right systems to plan and manage inventory profitably. Do your systems support multi-location stock allocation? Do they allow enterprise-wide access for teams beyond merchandising and inventory management? The changes you make should form the basis of a formal inventory management policy that defines responsibilities and outlines how you balance cost-effectiveness with optimized customer service to meet fluctuating demand. Covering all aspects of inventory management in a formal policy reinforces a best practices approach and a culture of continual improvement.
For a smarter way to plan and manage inventory, Intuendi offers AI-powered demand forecasting and inventory optimization tools that help you reduce stockouts, cut excess inventory, and improve profitability.
5. Assess Your Organization
Inventory is often the most significant asset on the balance sheet, yet it is frequently managed by a small team, sometimes with inadequate systems. Does your organizational structure best support the various responsibilities involved, such as inbound freight management, vendor compliance, purchasing, forecasting, and liquidation? Do you have the right professionals in place to lead this strategic initiative?
6. Avoid Holding Excessive Inventory
Fashion trends and consumer tastes can shift rapidly. Encourage your team to closely monitor stock movements and maintain only the quantities needed to meet current demand. Keep safety stock levels as low as possible while minimizing the risk of stockouts. These considerations should form part of a broader strategy that involves all stakeholders in creating an effective inventory management plan.
Conclusion
This six-step process provides a framework for renewing and improving inventory management without forcing change from the top down. When stakeholders commit to a shared vision, they are more likely to adopt new management practices that require behavioural changes. As employees see that the new approach is more effective, they will adapt to both personal and organizational changes that they might otherwise resist.
Improved coordination will help address critical issues, reinforce teamwork, and foster a willingness to learn new skills. This, in turn, enhances effectiveness and strengthens commitment to change. The resulting cycle of improved commitment, coordination, and competence builds confidence and can continue as long as the structure is supported and allowed to evolve.
