How to Optimize Inventory Using Analytics-Driven Supply Chain Improvements

Inventory optimization is a critical part of an efficient supply chain. When done right, it contributes significantly to the success of any retail business. So, now more than ever, retail supply chain leaders are aiming to meet their omni-channel customer demand and gain a competitive advantage. To achieve these goals, they are focusing on enhancing their demand forecasting, allocation, and replenishment capabilities.

To deal with tens of thousands of SKUs across various channels and manage inventory successfully, retailers need AI-driven, omni-capable inventory optimization tools that can reduce costs and boost profits.

In this article, we outline how next-level AI-based profit-optimization models and analytics-driven supply chain improvements can empower retailers to upgrade their inventory management capabilities. We also share 8 effective ways they can use to optimize inventory and make their operations more responsive, efficient, and integrated.

1. Move from a service-level-driven model to a profit-optimization model

To keep up with the evolving retail landscape and boost profits, retailers have no choice but to reimagine, streamline and simplify complex inventory planning processes.

After all, it’s every retailers’ dream to have the right amount of inventory at the right place at the right time without having excessive inventory or losing sales. To achieve that, retailers need to take advantage of adaptive, smart analytics and explainable AI models. They need to move from a traditional service level approach and upgrade their inventory decisions from a judgment-driven, KPI-measured process to a financial-optimization model.

Using sophisticated models such as AI-powered profit optimization, retailers can increase stock availability, reduce inventory holding cost and don’t have to choose between profitability and customer satisfaction.

2. Embrace an omni-channel sales and inventory optimization approach

In the traditional location-dependent inventory systems, every demand could be served and fulfilled by only one specific location. And this came with various operational costs and inefficiency.

To survive and thrive in the new era of omni-channel retailing, retailers need to embed omni-channel in the overall sales and inventory optimization strategies. They should have a responsive, unified supply chain structure to fulfill the demand from the best possible location at the right time.

3. Leverage advanced analytics and create a regular test and improvement cycle

With retailers under pressure to demonstrate growth in sales and profits, they introduce new products frequently. However, there might be some product types for every retailer that should be abandoned completely. Here, SKU rationalization comes into play and becomes a key in the lifecycle of a retailer.

Retailers leveraging advanced analytical-based tools can determine these products at a company level by considering various metrics and the competition. To minimize the potential loss of market share and profits, they can pinpoint the product substitutes, examine each product’s cannibalization effect, and make the right inventory decisions such as product positioning.

4. Analyze and test a store-based variety

Variety, assortment, and inventory availability are the cornerstones of the merchandise planning process. To stay relevant, increase sales and reduce excess inventory, retailers need to review their assortment plans and measure their plans’ efficiency in financial and operational dimensions.

The good thing is that retailers establishing the right partnership models can create store-specific metrics aligned with the company strategy. They can test several scenarios using AI-based models, successfully make profit-optimal inventory decisions and increase profits.

5. Determine the minimum visual quantities

One of the most common and effective ways for retailers to optimize inventory is by making extensive analysis to determine the minimum visual quantities for a specific product or product group. This way, they can increase sales of these products in different stores by eliminating the probability of falling short of inventory. In addition, by taking advantage of continuous tests and reviews with analytical tools, they can also avoid having excessive inventory.

For example, the graphic below shows that fast seller products cause more stock holding than the optimal point in the not-so-fast seller stores due to the minimum visual constraint. (See column C – the fast area).