What Inventory Optimisation Is For

Every business that holds stock faces the same two complaints. Sales or operations say: “We keep running out.” Finance says: “We have far too much money sitting on the shelves.” Very often both are true at the same time, for different items. One item is out of stock while another has three years of cover.

Inventory optimisation is the work of setting stock policies, item by item, so that the business gets the service it needs for the lowest total cost. It does not mean “less stock”. For some items the right answer is more stock. It means the right stock, in the right place, decided on purpose and not by habit.

What “optimal” means

A stock policy is optimal when no change to it would lower the total cost without hurting the agreed service, or raise service without a cost the business is unwilling to pay. Three ideas follow from this:

• Optimal is item-specific. A cheap, fast-moving item and an expensive, slow-moving item need completely different policies.
• Optimal depends on a service target. The target is a business decision. The maths shows its cost; it does not choose it.
• Optimal changes over time. Demand, lead times, prices and costs move, so policies need regular review.

Worked example — the same total, different problems

A building products distributor (figures invented for teaching) holds stock worth 2.4 million US dollars across 3,000 items. When it looks item by item, it finds:

• about 300 items with more than a year of stock, worth 700,000 US dollars;
• about 150 fast-moving items that ran out at least once last quarter;
• most of the remaining items reasonable, but with reorder points nobody had reviewed for years.

Cutting all stock by ten per cent would make the stock-outs worse and leave most of the excess in place. The real task is to move stock from the excess items to the items that run out, and to reset the policy for each item.