How do you manage inventory and stock levels in order management?

1 Know your inventory types

Inventory can be classified into different types, depending on its stage in the order fulfillment cycle. For example, raw materials are the inputs that are used to produce finished goods, work-in-progress are the goods that are partially completed, and finished goods are the products that are ready to be sold or shipped. Each type of inventory has different costs, risks, and benefits, and requires different management strategies. You should know how much inventory of each type you have, where it is located, and how fast it moves.

2 Forecast your demand

Demand forecasting is the process of estimating how much and when your customers will buy your products or services. It helps you plan your production, purchasing, and distribution activities, and avoid overstocking or understocking. Demand forecasting can be based on historical data, market trends, customer feedback, and other factors. You should use a reliable and flexible forecasting method that can adapt to changing conditions and uncertainties.

3 Set your reorder points and safety stock

Reorder points are the minimum inventory levels that trigger a replenishment order. They help you maintain optimal inventory levels and avoid stockouts. Reorder points depend on your lead time, which is the time it takes from placing an order to receiving it, and your average demand, which is the amount of inventory you sell or use in a given period. You should calculate your reorder points based on these factors and update them regularly.

Safety stock is the extra inventory that you keep as a buffer against unexpected demand spikes, supply delays, or other disruptions. It helps you prevent lost sales, customer dissatisfaction, and reputation damage. Safety stock depends on your demand variability, which is the degree of fluctuation in your demand, and your service level, which is the probability of meeting your demand without stockouts. You should determine your safety stock based on these factors and balance it with your carrying costs.

5 Review and optimize your inventory and stock levels

Reviewing and optimizing your inventory and stock levels is the process of analyzing and improving your inventory performance and efficiency. It helps you identify and eliminate inventory waste, such as excess inventory, obsolete inventory, or damaged inventory, and increase your inventory turnover, which is the ratio of sales to inventory. Reviewing and optimizing your inventory and stock levels can be done periodically or continuously, depending on your business needs and goals. You should use key performance indicators, such as inventory accuracy, fill rate, or stockout rate, to measure and improve your inventory and stock levels.