Inventory optimization, like most problem-solving, requires a careful process and a few steps. Of course, the easiest way to avoid backorders is to always have plenty of inventory on hand. There are ramifications to not optimizing inventory, however. By overproducing and maintaining high inventory levels, products can spoil or even deteriorate. Excess inventory not only creates costs today, but it also creates hidden costs later if you need to produce more goods to replace products that have sat on the shelf for too long.

There are different ways to calculate your optimization, which we’ll explain below, but at the core of inventory optimization are three main steps: brainstorming the factors that affect inventory, collecting your data, and analyzing it. Before we dive into each step, let’s cover some basics about backorders.

What is a backorder and what causes it?

Simply put, a backorder means that a product cannot be fulfilled or delivered because it is not in stock. This could be because demand for the product is higher than anticipated or inventory levels were too low to meet current demand.

Are backorders bad for business?

In a word, yes. We’re all customers, and none of us feel good when a product or service we want isn’t available. Not only does this hurt the current customer experience, but it also has long-term implications for your brand and customer relationships.

So… how do you reduce backlogs?

Three steps to avoid a backorder

Step 1: Brainstorm factors that affect backorders, including inventory levels

The biggest factor in preventing backorders is the level of inventory on hand. If you don’t have enough products in stock, you’ll have backorders. But inventory on hand is only one factor. You also need to be aware of all the things that affect a moving supply chain, such as inventory in transit, sales forecast, historical sales performance, and even the impact of your own suppliers.

So how do you keep your inventory levels high enough to meet customer demand, but low enough that you don’t carry excess inventory? You need to think about the factors that affect your inventory levels. Using structured problem-solving tools like CT Trees or Fishbone diagrams can set you up for success.

Step 2: Collect your data

Once you’ve established the critical factors that affect backorders, you’ll want to collect data about them. Recognize that collecting your inventory data will likely come from multiple sources and systems, and the process of requesting and preparing your data can be time-consuming. Consider how much data you need to collect.

For example, going back 5 years is probably too much, given all the changes that have occurred during that time. A few months of data might be more reasonable, so use your best judgment to capture a representative snapshot of your process. You can hire your IT department to help or leverage a powerful data unification tool, such as Minitab Connect, to access, integrate, and prepare your data for analysis. 

Step 3: Analyze your data using predictive analytics

Once your data is collected, it’s time for the fun part: analysis! Traditional business analytics and visualizations can fall short here because the most likely visualization is this: the lower the inventory on hand, the higher the backorder! Since we already know this, what we’re really looking to identify is this: is there another critical factor that stands out as a major driver of backorders? Is there an optimal inventory level that can minimize backorders, without overstocking and overproduction?

So why predictive analytics? In basic terms, imagine creating an equation with all the factors that influence backorders as predictors and backorders as the response. Just like in high school algebra, these different factors have different weights and, in turn, different levels of influence on the outcome. Here at Minitab, we’ve developed solutions specifically to help you solve these problems!

SOURCE: Minitab Blog

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