Inventory Optimisation: A Guide to Minimising Risk and Waste

In 2024, the total cost of inventory distortion was around $1.7 trillion AUD, combining the business costs of running out of stock ($1.2 trillion AUD) and the consequences of overstocking ($554 billion AUD). That total cost is roughly equal to the GDP of Australia.

This goes a long way to show how important it is for businesses to have a firm grip on inventory optimisation, particularly when supply chains are becoming more volatile due to geopolitical disruptions and logistical bottlenecks.

Many businesses are struggling to implement modern, AI-driven solutions to solve inventory issues. Currently, only 23% of supply chain leaders report having a formal AI supply chain strategy in place.

In this guide, we’ll take a close look at inventory optimisation and the key benefits it brings to a business. We’re also sharing key strategies that businesses can use to turn strategy into action.

• Inventory optimisation defined 
• How inventory optimisation differs from inventory management
• What are the benefits of inventory optimisation?
• 8 inventory optimisation methods and techniques
• Inventory management by industry
• How to get inventory optimisation right
• Essential inventory optimisation metrics
• Common challenges in inventory optimisation
• Inventory optimisation best practices
• Bottom line

Inventory optimisation is a strategic approach to managing stock levels and meeting customer demands — all while minimising waste, storage costs, and the risks of stockouts or overstocking.

Many businesses are turning to advanced techniques such as data-driven forecasting. They are moving away from single-location optimisation toward a multi-echelon strategy, which is designed to help make informed decisions related to their stock.

Inventory optimisation is about balancing efficiency and cost-effectiveness. While too much inventory ties up money and increases storage costs, too little leads to lost sales and unhappy customers.

While inventory optimisation and inventory management are closely related, they serve distinct purposes within business operations.

Inventory management focuses on the day-to-day operations of stock control, including tracking inventory levels and warehouse logistics. It involves receiving, storing, and fulfilling orders to keep operations efficient.

Inventory optimisation is the process of maximising the effectiveness of inventory management. It uses data-driven techniques, demand forecasting, and automation to make sure stock levels match market demand, with the overall goal of minimising costs and waste.

Optimisation informs purchasing teams exactly how much of a stock item they need to buy and is continuously adjusted based on real-time insights, seasonal trends, and overall business objectives.

Beyond simply avoiding stockouts, inventory optimisation contributes to the long-term health of your business in several other nuanced ways.

Efficient inventory optimisation can reduce overall inventory costs by up to 10% . When you stock the right amount, you avoid losing money through lost sales (from not purchasing enough) and stock becoming obsolete (from purchasing too much). Accurate levels allow you to free up working capital reinvestment opportunities, as well as reduce holding costs from your warehouse.

There are few things more irritating for a customer than seeing a product that you want to buy constantly being out of stock. Customer satisfaction is closely tied to inventory availability. When you can consistently fulfil orders on time, you build trust and reliability that can encourage customers to come back again and again, with 72% of customers choosing to remain loyal when businesses provide fast service.

Overproduction and poor demand planning often lead to waste, particularly in the food industry, where much of what is handled is perishable. A restaurant, for example, will use a combination of inventory optimisation and sales analytics to determine its best-selling meals, and adjust inventory levels accordingly.

Just-in-time (JIT) inventory offers this exact solution. It minimises excess stock by aligning inventory levels with real-time demand.

This commitment to reducing waste can also help businesses to increase their ESG scores, which can often make them a much more attractive proposition to potential customers who share these values.

Optimised inventory management can reduce manual workload, eliminate inefficiencies, and improve decision-making. With AI automation and data-driven insights, businesses can also significantly increase productivity.

At Salesforce, we help to streamline and optimise these processes through our Agentforce platform, a holistic solution that allows agentic AI to automate key inventory tasks and flag potential issues, such as delayed shipments or discrepancies in inventory counts.

Fisher & Paykel was looking for a solution to increase the efficiency of its inventory optimisation and fulfilment. With our help, they were able to increase their key inventory metrics across the board, leading to robust and efficient operations.

Effective inventory optimisation requires a solid approach. No single method works universally – it requires a combination of multiple strategies tailored to your business needs. No two businesses are the same, so no two approaches can be identical, either.

Here is a breakdown of some of the key techniques involved.

Let’s look at each of these in a little more detail.

Accurate demand forecasting uses historical data, market trends, and predictive analytics to match inventory levels with future demand. This reduces stockouts and overstocking while improving cash flow.

This is seen as the natural evolution of inventory optimisation, driven by AI-driven analytics. Businesses will monitor external factors such as geopolitical events, economic shifts, competitor actions, and customer behaviour changes to play out scenario simulations and prepare for market shifts.

This type of analysis is used to organise KPUs into three categories, with A being high-value products, B being moderate-value, and C being low-value products. Businesses will determine which category a product will go in by working out the annual consumption value, which is found by multiplying the unit cost by the annual demand.

It can also be used in tandem with XYZ analysis, which focuses more on demand variability. Together, businesses can create a matrix that gives nine categories, with likely ordering behaviours linked to each one.

This is a classic strategy that is still used to balance ordering costs (cost per order) with holding costs (storage, insurance, depreciation). It’s a mathematical formula that helps to determine the ideal order quantity that minimises total inventory costs.

With EOQ, you can lower stock costs and prevent both shortages and excess.

Safety stock acts as a buffer inventory to prevent stockouts due to unexpected demand surges or supply chain delays. It’s a way to safeguard against uncertainties and ensure that you always have the necessary stock on high-value or fast-moving items to fulfil customer orders.

Businesses will determine when to calculate safety stock and whether it is needed by analysing historical demand fluctuations and lead time volatility.

With a reorder point (ROP) strategy, businesses will set fixed reorder levels based on demand rate and lead times. This helps to minimise the total cost for ordering and holding. It’s only really viable for moderate- to low-value stock items with a stable supply chain, as it is not an ideal model to work with when dealing with unpredictability.

With vendor-managed inventory, suppliers monitor stock levels and replenish inventory based on real-time sales data. This reduced the burden on the business.

The biggest benefit for businesses using this strategy is that they will generally suffer less from stockout issues and will enjoy better supplier coordination.

The JIT inventory method minimises storage costs by replenishing stock only when needed. This technique reduces excess inventory and optimises cash flow because you don’t have to pay for more warehouse space than you need.

To use JIT, you’ll need reliable suppliers with efficient logistics so they can quickly refill your inventory. While JIT can be risky during supply chain disruptions, it works well for businesses with predictable demand.

MEIO focuses on optimising inventory across multiple levels of the supply chain, including warehouses, distribution centres, and retail locations. Instead of managing stock at each level independently, this takes a holistic approach to reducing excess stock while ensuring availability.

This approach can reduce total inventory costs by balancing stock across locations and improving supply chain visibility for better decision-making. It will often require a considerable logistical effort to pull off seamlessly, which can be costly.

No matter which technique is being employed, Salesforce customers find it effective to use our Commerce Cloud software integrated with our Order Management service to simplify workflows directly from their CRM.

Inventory optimisation is a key business operation that should be utilised by all businesses, regardless of which industry or sector they reside in.

Retailers have the constant challenge of balancing cost with availability. They will need to be aware of the unique spikes for effective forecasting and proactive resolutions. Likewise, they will need to have a good understanding of non-seasonal periods where they can revert their approach to steadier strategies.

Manufacturers face complex supply chain challenges. They implement strategies that minimise waste, reduce costs, and improve production efficiency, with JIT and MEIO being utilised to ensure raw materials arrive exactly when needed. Integrating automated supply chain systems and predictive analytics helps improve their operations and prevent costly production delays.

The healthcare sector, unsurprisingly, must have highly reliable supply chains in place as the products in question are often used to save the lives of millions. That’s why safety stock and VMI are crucial strategies used to prevent shortages and expired products. Multi-echelon logistics are also implemented to ensure vaccines get exactly where they need to go.

Finally, consumer electronics businesses must manage high-demand product launches, rapid tech advancements, and fluctuating supply chains. Through inventory lifecycle management techniques and demand forecasting, these businesses can prevent overstocking outdated technology by phasing out older models.

Achieving a high level of inventory optimisation is a crucial operation that many businesses will need to work hard on if they are to gain the perfect balance. It involves many moving parts that are constantly changing and fluctuating, so a business cannot afford to be reactive and inflexible. Instead, they need to make sure that they remain ahead of the curve, with proactive strategies already in place.

Some of the key steps and considerations you’ll need to take include:

• Knowing what ‘optimised’ looks like: Every business is different, with unique priorities and objectives. One business might place more importance on higher service and fulfilment levels. Another might wish to reduce warehouse space and costs. Know what is important for your business specifically.
• Segment inventory: Using the ABC model is crucial. Your products have differing demand levels, lead times, costs, and supply chain routes. It is not possible to apply a one-size-fits-all model to all items in your product catalogue and remain optimal.
• Organise your data: To be successful with inventory optimisation, your data needs to remain clean and organised at all times. This will give you the most accurate picture when applying demand forecasting. Many of our customers turn to Data Cloud to achieve this.
• Continuous monitoring: Your business should conduct regular reviews of your KPIs to confirm that existing strategies remain the most suitable. If the data and KPI levels change, then you should adapt your approach accordingly.
• AI investment and training: AI can have a significant positive impact on your inventory management operations, but only if your workforce can make the most of it. Ensure that suitable investment is made to train your staff on emerging AI-driven technologies that will help to optimise their workflows, outputs, and decision-making.

Tracking key performance indicators (KPIs) helps you measure the effectiveness of inventory optimisation strategies. Consider monitoring certain metrics to identify inefficiencies, reduce costs, and improve stock availability.

Track these four KPIs for a complete picture of your inventory.

Inventory turnover ratio measures how effectively a business sells and replenishes its stock over a given period. It’s calculated as the cost of goods sold divided by the average inventory.

A higher turnover ratio indicates that inventory moves quickly, which means you generally have lower holding costs and a lower risk of obsolescence. However, excessively high turnover may signal frequent stockouts.

Fill rate measures the percentage of customer orders that are fulfilled immediately from available stock. It’s calculated as the orders fulfilled immediately divided by the total orders, then multiplied by 100.

A high fill rate directly correlates with better customer satisfaction, reduced lost sales, and improved brand loyalty. A low fill rate usually indicates insufficient stock levels, including back orders.

Lead time is the time it takes to receive inventory after placing an order with a supplier. Cycle time is the time taken to complete one full production or inventory replenishment cycle.

Shorter lead times mean that your supply logistics (and ecommerce in general) are more agile and can respond faster to changes in demand. This can reduce the need for excessive safety stock. It requires strong relationships with reliable suppliers to keep these times low.

Maintaining accurate inventory records prevents stock discrepancies and drives efficient operations. One effective method for improving accuracy is cycle counting, an inventory optimisation process where you conduct partial inventory audits regularly rather than full, disruptive counts.

Through this method, inventory operations can gain more data points to work with when forecasting demand and developing the most appropriate inventory management strategies. Cross-checking digital inventory codes (created through radio-frequency identification (RFID) scanning) with physical stock regularly will help to identify discrepancies and errors.

While inventory optimisation offers clear advantages, it is essential to recognise that there are a lot of moving parts, and the complexities can be challenging.

Let’s look at some common roadblocks so you can create a winning mitigation strategy.

Unforeseen delays, shortages, and supply issues can quickly throw inventory levels off balance. Events such as geopolitical instability, natural disasters, or transportation bottlenecks can disrupt the supply chain and inventory allocations without much warning.

Businesses can soften these impacts by ensuring that they have a diverse range of suppliers wherever possible, ideally from different places around the globe to counter transportation issues. Using real-time inventory tracking can help identify potential issues before they become a problem. And maintaining safety stock on high-value or fast-moving stock is an excellent safeguarding strategy.

Relying on outdated systems or manually tracking inventory increases errors and can make it harder to plan your stock levels effectively.

Research shows that AI can improve inventory optimisation software by 37% and service levels by 68% . Examples of such technologies include cloud-based inventory solutions, automated tracking systems, and system compatibility.

Integrating technology systems such as enterprise research planning (ERP) and point of sale (POS) can further enhance optimisation.

Demand levels can alter at a moment’s notice. A celebrity or influencer might endorse a particular product, resulting in a surge of interest. Customer sentiment toward a product might change. Trends are constantly evolving. What’s hip one week is very quickly considered yesterday’s news the next.

There are also seasonal changes to consider. While these are easier to plan for than demand shifts, they still require careful adjustments to inventory management strategies that are in place the rest of the year.

Inventory optimisation isn’t a one-time fix. It requires continuous monitoring, adaptation, and improvement. The market and your customers are constantly evolving, so you’ll want to regularly revisit your inventory strategy to make sure everything is optimised.

Here are a few best inventory management practices that can help your business:

• Set an inventory budget: Setting a budget lets you match your stock with demand. Analyse your historical sales data to determine an adequate budget, then use ABC analysis to help prioritise your stock.
• Standardise inventory review systems: A structured review approach helps you to avoid stock discrepancies and mismatched datasets.
• Listen to customer demand: You may miss crucial insights if you don’t track your customers’ preferences and behaviours. Monitoring these demands can help you map your demand levels and improve forecast accuracy.
• Leverage cloud-based inventory management: Inventory management systems, such as cloud-based solutions, provide real-time visibility into stock levels, supply chain movements, and sales trends.
• Optimise lead times: Reduce lead times for faster restocking and less risk of stockouts or overstocking. Achieve this by improving supplier relationships and diversifying suppliers.

Inventory management and optimisation have always been a key driver of profit and customer trust. As we continue to move towards a more interconnected world, where global trading partners and worldwide suppliers become a more integral part of business operations, it’s vital that businesses don’t get stuck in the past and adapt to the emerging ways of doing things.

At Salesforce, we provide our customers with powerful inventory optimisation tools designed to help achieve many of these strategies. Our Commerce Cloud software helps businesses automate many of their retail operations. And when integrated with our Order Management service, you’ll be able to cut fulfilment costs and simplify workflows directly from your own CRM.