Everybody is talking about stock optimization... but what is it really?

Michaela Schattauer September 2020

Stock optimization is something that is increasingly talked about and we often get questions from companies we meet about what they can do to better optimize their stock. Therefore, we took the opportunity to talk to Ida Danielsson, Customer Success Manager at EazyStock about what stock optimization is and how to get started with it.

In simple terms, stock optimization could be explained as the art of balancing high levels of service with as low inventory levels as possible. To achieve this, three parts need to be reviewed:

  1. Demand forecasts - How much do you think you will sell moving forward?

  2. Stock strategy - What, where and how much you should optimally keep in stock. Some expensive items with low demand may not need to be stocked at all, while you may have inexpensive items with high demand in stock in larger quantities.

  3. Purchase and replenishment - When to buy and in what quantities to balance lead times, optimize transport costs, fill up containers, etc.

It may sound simple at first glance, but each of these elements has several challenges and it can quickly become quite complex. So, you must break these down into smaller parts to make it manageable, Ida says.

So how do you break these down into smaller parts to make it manageable?

Demand forecasts

To forecast demand, you need to understand where in the product life cycle the product is located. A product can, for example, go from being new to the market without any demand, to a positive trend, to becoming stable and fast-moving, to going into a negative trend and finally being difficult to sell and die. If you analyze your sales carefully and regularly,  you will be able to see where specific items are heading and adjust the demand forecast so that you don’t buy in too little of an item at a positive trend, or too much when an item is dying out.

The next step is to find out if you have any seasonal items in stock. If you base your demand forecasts on the latest quarter's sales, it can be very wrong if you have large seasonal variations. Take for example tires, you will probably not sell as many studded tires in March as they did the quarter before and vice versa regarding summer tires.

- Then you also have campaigns and sales to consider. Take, for example, Black Friday or the middle days where demand will hit the ceiling on certain products. This must of course also be considered when making your demand forecasts, Ida explains. 

Stock strategy

For stock strategy there are different methods, but common is to do an ABC analysis. It involves classifying your articles on the basis of annual value consumption and picking frequency. When you have mapped the articles into A, B and C groups, you can easily see that some items, with low value and high demand, should be stocked in fairly large quantities. An expensive item, for example a machine, that you sell 1-2 times a year, you might on the other hand buy on request when you receive an order.

In addition to this, you need a safety stock to cover unforeseen peaks in the demand and if the supplier does not live up to the lead time they promised. The safety layer also needs to be adjusted as the product moves in the lifecycle and where in the ABC array it is located.  It is possible to calculate the safety stock in slightly different ways, but so-called statistical methods are usually preferable.

Purchase and replenishment

First, you need to calculate the order points and order quantities for your products or product groups. The reorder point is WHEN to order and order quantity HOW MUCH. Optimally, a delivery will be enough for the stock levels to touch the safety stock and fill up to the level you decided in the step before, using your ABC analysis.

To keep track of the lead times and production schedules of your suppliers is crucial for planning orders. You also need to include any public holidays, when the factories are closed, in the calculations.

- The Chinese New Year is a classic weekend that can surprise many in the Western world. It is not uncommon for production to stand still for 1-2 weeks, which of course needs to be planned for, Ida points out.

To complicate everything further, you can also have minimum quantities requirements from the producer, or you may need to fill up a container. Finally, many people want to match deliveries to certain days so that you can plan extra warehouse staff to receive the transport.

Stock optimization in your ERP

It can quickly become complex if you have many items in stock. All this can be calculated manually, for example in Excel, but there is also support in Jeeves ERP for setting parameters such as safety stock, order points, etc.

- The mistake many people make is that you set these one or two times a year, and then you miss trends, seasons, changes in supplier schedules and much more that affects demand and deliveries. This leads to poor service levels or too high inventory levels, or in the worst case both, Ida adds.

Read more about inventory optimization and e-commerce at our partner Eazystock