What is supply chain inventory optimization?

Inventory optimization is essentially a gigantic scale of demand and supply that companies trading goods must constantly balance. It involves strategically managing stock levels to maximize efficiency, minimize costs, and ensure customer needs are met. The goal is to have the right inventory available – not too much to result in extra storage costs in warehouses, but enough to buffer against unexpected disruptions.

Considering the many factors that could tip this scale in one direction or the other, finding the perfect balance is a challenging task. But not an impossible one.

What are the key elements of inventory optimization?

Inventory optimization is a multifaceted process that involves various players and stages. However, it can be broken down into three core areas: demand forecasting, safety stock management, and logistics. In other words, to stay efficient, businesses must anticipate future sales, determine the right stock levels, and ensure seamless distribution of goods.

Demand forecasting

This is the process of estimating future demand for a product, based on data. Even if we can’t predict the exact future, businesses can get close by combining historical sales data, customer and financial analytics, and external factors like seasonality and economic conditions.

Safety stock management

Closely tied to a product’s future sales, safety stock is an optimal inventory buffer that prevents stockouts while minimizing excess inventory, ensuring the company meets customer demand. It also acts as a cushion against supplier and production delays, demand fluctuations due to seasonal or unexpected events, and constraints during frozen horizon periods.

Logistics

A company may have sufficient stock to meet demand but not have it in the right locations. This is where logistics come into play. A well-organized flow of goods moving from production lines to various warehouses and distribution centers ensures that stock levels are strategically distributed, making inventory more efficient and accessible where it is needed most. Easy to say but hard to do, considering how complex it is to orchestrate shipment scheduling while also maximizing loads and choosing the best routes to save costs.

The challenges of traditional inventory optimization

Current inventory levels, storage capabilities, seasonal trends, good longevity, future promotional campaigns, supplier lead times and schedules – many are the factors to consider to always have the right amount of products ready to fulfill the market’s crazy demands.

Plus, even if we could make almost perfect demand predictions, another big challenge arises: having fast turnaround times to immediately act on, depending on the changing conditions. All of these factors make inventory optimization a highly intricate and demanding task, especially in the face of:

Fast-moving consumer demand

In the era of Amazon’s next-day shipping, consumers expect rapid delivery times, making it challenging for companies to predict and respond to shifting demand patterns quickly.

Increased competition

With even more players in the market, companies must find ways to stay ahead by improving their inventory management to meet customer expectations while controlling costs.

Supply chain disruptions

Unpredictable disruptions can halt the flow of goods, leading to stockouts, delays, and the need for costly contingency plans.

Technological challenges

It may sound shocking, but 67.4% of supply chain managers use Microsoft Excel to manage inventory, demonstrating how many are still relying on outdated methods instead of leveraging more efficient, automated technologies.

Inventory optimization strategies

This is an overview of some of the many strategies companies can implement to avoid the stockout and overstock nightmare.

ABC analysis

The ABC of any inventory optimization strategy is, of course, knowing your product, and this is what this method is all about. It classifies products based on their significance to the business, grouping them into three categories: A, B, and C. Category A includes the most valuable and critical items, whereas Category C consists of the least significant ones. By using this system, businesses can better manage inventory, ensuring they maintain appropriate stock levels and focus on the products that provide the greatest value to both their customers and the company.

Rulex has a long history of helping major retailers and supply chains implement this very strategy. See how easy it’s to calculate the most profitable and best-selling products in Rulex Platform in this dedicated webinar: Improving business strategy with ABC segmentation – Webinars – Rulex Community

SKU rationalization

Once a company has identified its Category C products through ABC analysis, the next step is to determine whether these SKUs (Stock Keeping Units) should be discontinued, modified, or retained in the product lineup. For example, a company might choose to keep a specific SKU because, despite its modest sales, it’s a niche product which cannot be found elsewhere, and consequently drives customer loyalty.

To streamline inventory in specific product categories, many retailers use Rulex Platform’s powerful Assortment Optimizer tool. This tool extracts and generates replacement rules from frequent itemsets, helping businesses determine how to replace items with equivalent alternatives for maximum benefit. By strategically removing products and replacing them with these alternatives, Rulex Platform helps businesses optimize their assortment, minimize revenue loss, and prevent customers from switching to competitors.

Demand forecasting

We have already mentioned the importance of estimating demand to align supply with market needs. This is another strategy that major companies have implemented using Rulex Platform. For example, Rulex supported a global pharmaceutical company in accurately forecasting sales for several flagship products through an all-in-one solution, which encompassed data pre-processing, modeling, and forecasting within a single platform.

To learn more about demand forecasting and its real-life applications, read our dedicated article.

Safety stock tuning

Downstream demand forecasting is the Holy Grail of safety stock tuning. In simple terms, it’s about determining the optimal amount of inventory to maintain based on both certain and uncertain factors (e.g., confirmed orders, expected orders, item availability, ect.).

Rulex has developed a solution that does exactly that. Using a series of simulations, it analyzes whether and how often the planned stock level could be exceeded. For example, if the estimated safety stock is set at 100 apples, but 20% of simulations show demand surpassing this amount, we will face a 20% risk of stockout if we don’t set a higher safety stock.

Replenishment optimization

Once safety stock levels are set, they must be carefully monitored to ensure smooth operations. Replenishment optimization is the strategy that makes this possible by managing restocking at the right time and in the right quantities. It ensures that inventory is replenished efficiently to meet demand while minimizing costs associated with stockouts, overstocking, and storage.

To address restocking challenges, Rulex has designed the Network Optimizer. This tool balances the workload distributed over a network, determining the amount of material to move and where to move it. Keep reading to see how this works in a real-life scenario.

Transport optimization

Good logistics ensure that products are where they should be when they are most needed. To help companies achieve this goal, Rulex offers an extremely powerful Transport Optimizer. Known as, Rulex Axellerate, this generates shipment schedules that help keep costs and delays down.

With extremely rapid computation times, Rulex Axellerate can create end-to-end, long-term transportation plans in under an hour. When applied to a major logistics network, the solution reduced expedited shipments by 70%. Watch the video to see how Rulex Axellerate works.

In addition to these two vertical solutions, Rulex offers a proprietary, general-purpose solver capable of tackling virtually any optimization challenge – from work shift scheduling to dock optimization — even across multiple domains simultaneously, such as production and packaging.

Real-life success: how Rulex transformed inventory optimization

At Rulex, we’ve worked with some of the world’s largest production and supply chain leaders to revolutionize inventory management. One standout case is a Fortune 50 supply chain company seeking help to maintain optimal stock levels across multiple warehouses and sites.

Traditional planning systems left up to 20% of planning decisions to be handled manually – an inefficient, time-consuming process. Rulex stepped in with an advanced replenishment solution, automating over 90% of these previously unmanaged decisions. With its powerful optimization tasks, Rulex reduced under – and overstocking by 8%, cutting costs by $100K per day in a single market region and lightening the planner workload by an impressive 75%.

By seamlessly adapting to real-world complexities, Rulex’s replenishment solution worked as a game-changer in creating a balanced, cost-effective, and agile supply chain.

Find out more about this specific case study and others in our e-book.

The road to better inventory planning and optimization

If you sell products, knowing where your inventory is, who wants to buy it, and where it needs to go is essential to your business’s success. However, this knowledge alone may not be enough without the right, flexible solutions to act on it.

With a vast array of predictive techniques and optimization solvers, Rulex provides supply chains with a powerful advantage, enabling highly customizable solutions for smarter inventory management.

What is demand planning?

Think of demand planning as a balancing strategy, where the goal is to accurately forecast customer demand so that the right products are available at in the right place, in the right quantity, at the right time. To get there, demand planning relies on sales trends, market shifts, and lead times to keep inventory levels optimal.
Sounds complicated? It is. Supply chains are deeply interconnected, and a single miscalculation at any stage can set off a domino effect that will leave businesses scrambling or customers empty-handed.

Demand planning for inventory management

Whether literal or figurative, every product has an expiration date. Effective demand planning is necessary for knowing how much inventory to keep to meet customer needs, without the financial drain of overstocking or the lost revenue from stockouts.
Poor inventory management can have a massive financial impact: according to the global consulting company McKinsey, companies that can predict customer behavior more accurately reduce inventory levels by 20%, leading to significant reductions in inventory costs [1,2].

The importance of forecast accuracy

The value of accurate demand planning extends far beyond inventory management. Forecasting is also a strategic tool for financial planning. Critical business decisions such as pricing strategies, revenue projections, and capacity planning are directly tied to the demand management process. A precise forecast helps businesses make data-driven decisions that foster growth.

Collaborative planning for Supply Chain optimization

Supply chain efficiency is a team effort, where even the best forecasts can fall short if there is poor alignment between departments.
To understand why the demand management process is not an isolated task, let’s break down the complex web of a supply chain. It all starts with suppliers delivering raw materials to manufacturing facilities, where products are produced. From there, finished goods are sent to distribution centers, awaiting shipment to retail stores or directly to customers. Unexpected disruptions at any step of the chain can throw the entire system off balance. Imagine a scenario where the sales team anticipates high demand, but procurement fails to secure enough raw materials. Or if production increases, but warehouses are already at full capacity. Even identifying which finished products drive the highest profits through an ABC analysis is crucial for knowing which goods to prioritize at the very first step of the chain.
So, how do businesses navigate these challenges and build a more resilient approach to demand forecasting? By following industry best practices.

Best practices for implementing demand planning

At its core, forecasting relies on two types of information: certain data, such as known warehouse stock, and uncertain factors, like fluctuating customer demand. Success depends on estimating these uncertainties and making informed decisions to maintain the right stock levels. Identifying an issue in your demand planning is not enough – if the software used to make predictions takes too long to adjust, your business risks missing sales opportunities and becoming trapped in operational inefficiencies.
Let’s break down the steps to mastering demand planning:

Collecting and preparing data

Strong demand planning starts with high-quality data. This involves collecting information from different sources and formats, integrating it, and cleansing it for analysis. The faster and more adaptable your system, the better.

Defining process models

Should your business prioritize aggressive stockpiling or a lean inventory approach? Determining the best strategy is rarely straightforward. The same applies to choosing the right forecasting model for each product, as not all products behave in the same way! For example, printer cartridges tend to follow a stable and predictable pattern, while high-end smartphones see sudden demand spikes and shorter life cycles.

Choosing the right software

Invest in demand planning software with advanced AI and ML algorithms, as well as other capabilities that enhance forecast accuracy, decision-making, and allow for quick adjustments. A robust platform should support real-time recalculations and generate multiple demand forecasts based on specific products, adjusting to different assumptions and probabilities.

Implementing and monitoring

Use automated workflows to test multiple forecasting models, selecting the most effective one, and check if it’s still grounded in reality by monitoring sales and new external variables. Even better if the solution can be integrated with other supply chain tools already in-use.

Demand planning software: what Rulex Platform can do

Rulex Platform is an all-in-one decision intelligence software that allows companies to seamlessly manage every aspect of demand forecasting – orchestrating data, improving and supporting decisions, and automating processes. All with the flexibility to easily integrate into the existing infrastructure, thanks to capabilities like APIs. Designed with a drag-and-drop interface, Rulex Platform allows non-technical users to mix and match the advanced technologies of its toolkit to create tailored solutions. As a plus, it also includes an integrated dashboarding and custom UI component, providing a smart way to visually interact with underlying data and solutions.
From mitigation sources planning, to replenishment optimization and simultaneous production and work shift planning, Rulex Platform is trusted by companies and supply chains worldwide in their digital transformation journey (you can explore some success stories in our Supply Chain case studies e-book). But first, let’s examine a practical example of demand planning in action.

A real-life demand planning example

Recently, a global pharmaceutical company turned to Rulex Platform to improve demand forecasting for several flagship products based on both historical sales and external variables such as temporal trends, the diffusion of seasonal viruses, and geographic information. Using AutoML, Rulex’s decision intelligence software automatically selected the best forecasting model, allowing for parallel testing of multiple strategies. The company’s domain experts could check what was going on and make adjustments at each point of the process, thanks to the inherent transparency of Rulex’s technology.
The solution delivered demand forecasts over a three-month forecasting horizon, updated dynamically to incorporate new data and ensure that the latest trends were always factored in. The results spoke for themselves: accurate forecasts (average error below 10%), smooth integration into inventory and logistics systems, and a process that helped the company make smarter decisions.

But what about demand forecasting for newly launched products with no sales history? In another real-world case, a furniture company used Rulex Platform’s advanced analytics and clustering tools to tackle this challenge. The software analyzed key attributes of new items, such as category, brand, and size, to find similarities with existing products that had sales data. By comparing these attributes, the company was able to generate an initial demand forecast, even in the absence of historical sales records.

Once you’ve perfected demand forecasting, the next step is inventory optimization – if that’s something you’re exploring, we’ve got an article on it too.

The future of demand planning

Companies investing in advanced forecasting solutions, such as AI-driven machine learning and predictive analytics, will stay ahead of market shifts, contributing to a global economic impact of $9.2 trillion by 2029 [3].

Is your demand planning strategy ready for what’s next? Get in touch today to find the right solution for your business.

Sources

[1] Harnessing the power of AI in distribution operations
[2] Autonomous supply chain planning for consumer goods companies
[3] Retail Inventory Distortion Report

Modern supply chain networks

Modern supply chains are complex networks of resources, people, and companies that are involved in the production and delivery of a product to the customer. From raw materials to the end-product and final buyer, many steps need to be orchestrated within a given time and while coordinating several stakeholders.

In today’s global market, supply chain networks can span across different countries and continents, supplying goods to a multitude of customers. It goes without saying that in such an intricate web of producers, suppliers, and couriers supply chain management is key to ensuring the journey of goods runs according to plan and customers get what they want and when they want it.

Supply chain management

People working in the sector know that managing market demand and constraints (time, human resources, infrastructures, stocks, etc.) can be extremely challenging. If one single link breaks, such as a truck breaking down or an electrical blackout in a warehouse, it affects the entire chain.

But firefighting is actually the condition in which supply chain managers work every day because, even if nothing breaks, there are always new orders or last-minute deliveries that need to be factored into the planning.

The last couple of years has been particularly difficult as global disruptions have to be managed on top of daily smaller disruptions. “Disruptions are the new normal” is what we hear from supply chain experts more and more.

First, the Covid-19 pandemic and, later, the war in Ukraine have caused serious damage to Western logistics, which had to face (and still is facing) several difficulties, from a lack of raw materials to driver shortages and rises in fuel and energy prices. In 2021 alone, supply chain disruptions increased by 88%.

Supply chains are therefore seeking solutions to increase their resilience, enabling them to react to ever-changing circumstances and allowing the continuity of operations and services. That is where supply chain optimization can lend a helping hand.

Supply chain optimization process

A successful supply chain optimization process includes three different stages and a mix of various optimization techniques.

Supply chain design:

The phase involves strategic decisions related to the supply chain’s network design, such as the location of warehouses, the choice of suppliers, and the product flows to and from suppliers and buyers.

Supply chain planning:

The purpose of this phase is to balance demand and supply by creating a well-crafted deployment plan. It includes techniques such as the combination of demand forecasting and inventory management, to best prepare for future market requirements.

Supply chain execution:

This focuses on the day-to-day roll-out of the supply chain plan. It includes activities from tracking inventory levels to executing orders, from picking goods to truck loading and sending shipments.

It’s the execution phase that deals with those everyday challenges and sudden changes we have spoken about before, which require prompt adjustments to the plan. Let’s see an example of a data-driven optimization solution designed for this specific phase.

Transport optimizer: an example of data-driven optimization

Rulex Axellerate is our in-house optimizer for supply chain transportation.

This area of logistics refers to the movement of products from one location to another, involving the orchestration of a variety of places (warehouses, distribution centers, retailer shops, final customers’ doorstep), stakeholders (planners, distribution center staff, couriers), and resources (stocks, pallets, trucks, and other transport methods).

Rulex Axellerate creates the optimum transportation plan for every single day within a required planning horizon, dealing with thousands of shipments and multiple constraints at the same time (vehicle/route limitations; distribution center opening days; available docking bays, etc.). Moreover, Rulex Axellerate can factor in new orders and disruptions, producing brand-new optimum schedules for the current and following days in minutes.

Benefits:

Better and proactive planning means that shipments can be managed more efficiently bringing a series of great benefits:

• Enhanced service levels: reducing delays increases customer satisfaction and brand reputation.
• Increased profits: advanced delivery programs reduce the risk of penalties and allow to negotiate better deals with couriers
• Improved working conditions: avoid planner burnout, by removing stressful manual planning and constant firefighting.
• Reduced fuel costs and C02 emissions: optimizing truck loads makes it possible to use fewer trucks and so less fuel. On this topic see our on-demand webinar “The logistics’ green challenge”.

Choosing the right data-driven optimization software

As we saw, data-driven optimization can be particularly helpful in offering tools for improving the management of supply chain operations. However, how do supply chains choose the software that is most suitable for their business? We have collected some best practices from the several productive discussions we had with our clients in the sector:

1. Focus on business needs

Always choose the technology that can adapt to your supply chain needs. Ask questions about the scalability and flexibility of the solution, as you need a technology that can be quickly customized to the changing circumstances of your supply chain and is able to grow together with you.

2. Value human-centric technology

Disruptive software will not do any good to your supply chain if it is not easy to understand. To achieve real empowerment of managers and planners, supply chains must opt for a technology that is user-friendly and clear to non-technical profiles, with transparent processes and results.

3. Start from top-quality data

Supply chains may have the best technology at their side, but if they feed it with low-quality master data, it will not take them anywhere, if not to fictitious stockouts, distributions, delays, and penalties. Conscious of this issue, we have empowered our clients with tools to improve data quality, including a data-driven solution, Rulex RDC, which can quickly improve the quality of master data, reaching 100% accuracy in minutes.

To know more about data-driven optimization, and to see for yourself how it can benefit your supply chain, visit our supply chain page.

Data-driven technology can help supply chains adopt green logistics by optimizing goods transportation.

As environmental concerns grow amid a general call for sustainability, an increasing number of companies are integrating green practices into their systems. The transportation sector is directly involved in environmental issues, as transport emissions are a major contributor to climate change. Alongside the energy sector and industry as a whole, transportation is in fact responsible for approximately 70% of global emissions.

Of all the different modes of transport responsible for 72% of global transport emissions, road vehicles lie at the heart of the problem. So, changing the way we use road vehicles now could have a hugely positive impact on the planet. If people begin using their cars less and governments invest more in green public transport, how can private businesses contribute to decarbonizing transport?

Taking supply chain logistics as our case study, we’ll show how new technology can make goods transport cleaner, without sacrificing efficiency and speed of service.

Better planning for greener transport

Emissions produced by supply chain transportation are linked to how far products travel and how they get there. Supply chains can really make a difference to the environment by optimizing product transportation. One way to achieve this is by optimizing truck loads to cut down the number of trucks on the road every day. This lightens supply chains’ carbon footprints by minimizing fuel consumption and CO₂ emissions.

In a nutshell, better planning leads to greener transport. But it is not as easy as some might think. People working in the field know that the world of transportation is quite unpredictable. Changes to shipments and priorities, trucks breaking down, heavy road traffic, distribution center closures, a lack of drivers, and so on…  all these small but relentless events can disrupt transportation managers’ plans, affecting green practices and the overall level of service.

How new technology makes a difference

Unpredictability, however, does not mean that an optimized transportation plan cannot be achieved. This is where new technology comes to transportation managers’ aid. Rulex Axellerate is a new, advanced TMS system which identifies the best way to aggregate loads and maximize capacities, minimizing the number of trucks needed for deliveries.

Unlike standard TMS systems, Rulex Axellerate has very short computation times, meaning that it can factor in disruptions and sudden changes. Just received a new order? In a matter of minutes, transportation managers can run a new plan that takes the new order into consideration. So, the best and greenest transportation plan is always guaranteed with Rulex Axellerate, as are substantial cost savings. Having fewer trucks on the road means that supply chains spend less money on fuel. This is particularly important now that petrol prices are skyrocketing, massively increasing transportation costs. Green practices really pay back when supply chains integrate them into their production system.

Building a better working environment

The unpredictability of the transportation and warehousing sectors can make work incredibly stressful for drivers and distribution center staff. Not surprisingly, burnout is an everyday occurrence. According to the U.S. Bureau of Statistics, the number of people quitting the sector has been steadily rising in recent years. This is where new technology like Rulex Axellerate comes in handy once again. An optimized transportation plan can indeed make the job less stressful and increase worker satisfaction.

• No one enjoys driving in traffic, especially if you have to drive for work. As we said before, an optimized transportation plan means having fewer trucks on the road every day. This improves traffic safety and makes driving less stressful for truck drivers.
 
• During peak logistics seasons, distribution centers may turn into chaotic places. New orders can come in at any time, and there may not be enough staff to load and unload trucks, so work can become physically challenging and even dangerous. By counting on a tool like Rulex Axellerate to factor in schedule changes, distribution center managers can organize work shifts better, thereby increasing workplace safety.

Joining the road to sustainability

While transport emissions are expected to grow rapidly, new technology like Rulex Axellerate helps supply chains make transport cleaner, more sustainable, and people-centric by improving the working environment and increasing worker safety. And all this can be done without sacrificing the supply chain service’s efficiency and speed, and while minimizing costs. Want to join the road to sustainability, bringing both green and social benefits to your supply chain? Check out the Rulex Axellerate page, and book a demo.