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What are some strategies for balancing inventory carrying costs and service levels?

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Inventory carrying costs are the expenses associated with holding and maintaining inventory, such as storage, insurance, taxes, obsolescence, and opportunity costs. Service levels are the measures of customer satisfaction and fulfillment, such as fill rate, on-time delivery, and order accuracy. Balancing inventory carrying costs and service levels is a key challenge for inventory management, as it affects profitability, cash flow, and customer loyalty. In this article, we will discuss some strategies for achieving this balance, based on demand forecasting, inventory optimization, and performance measurement.

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Ahmed Hussain

Supply Chain Specialist | Expert in Import Logistics | Streamlining Carrier Release & Third-Party Logistics for…
Sharmistha Datta

2X Linkedin Top Voice | Elected Students' Council | IIM Kozhikode Co’25 | Tata Steel | VSSUT, Burla | Certified ISO…
Tom Lilburn

Supply Chain, Purchasing & Logistics Professional

1 Demand forecasting

Demand forecasting is the process of estimating the future demand for products or services, based on historical data, market trends, customer feedback, and other factors. Demand forecasting helps inventory managers to plan how much inventory to order, when to order, and where to store it, in order to meet customer expectations and avoid overstocking or understocking. A good demand forecasting system should be accurate, timely, flexible, and consistent, and should account for variability, uncertainty, and seasonality in demand patterns.

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Ahmed Hussain

Supply Chain Specialist | Expert in Import Logistics | Streamlining Carrier Release & Third-Party Logistics for Operational Excellence | Warehouse Operations
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Balancing inventory carrying costs and service levels requires a strategic approach. Implementing demand forecasting helps align stock levels with customer needs, minimizing excess inventory. Just-in-time inventory practices optimize storage costs, while technology streamlines order processing for improved service. Regular performance analysis ensures a dynamic and cost-effective balance, allowing us to meet customer demands efficiently.

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Tom Lilburn

Supply Chain, Purchasing & Logistics Professional
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Forecast the future by analysing the past. Seasonality and trends will help drive more accurate forecasts. Working closely with customers and steak-holders and communicating expectations is key.

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Yusuf Isiaka

production operative
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1. Set realistic inventory levels: Analyze historical sales data and demand patterns to accurately forecast sales. By maintaining an optimal amount of inventory, you can minimize carrying costs and ensure availability. 2. Implement just-in-time (JIT) inventory: Embrace a lean inventory management system where inventory is received only when needed. This reduces carrying costs as you hold minimal inventory. However, it requires efficient supply chain management to ensure timely delivery.

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2 Inventory optimization

Inventory optimization is the process of finding the optimal balance between inventory levels and service levels, by applying mathematical models, algorithms, and rules to inventory data. Inventory optimization helps inventory managers to determine how much inventory to keep in each location, how to allocate inventory among multiple channels, how to replenish inventory efficiently, and how to reduce inventory costs and risks. A good inventory optimization system should be scalable, adaptable, and integrated, and should consider trade-offs, constraints, and objectives in inventory decisions.

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Andre Davis

Supply Chain Professional Using Data and AI to Increase Profits, Drive Continuous Improvement and Digital Transformation
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On the basic end, you have calculations such as Economic Order Quantity (EOQ). However, as your inventory management processes mature, using more complex models should be considered. For example, Dynamic Lot Sizing, Stochastic Inventory, and Periodic Review Models.

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3 Performance measurement

Performance measurement is the process of evaluating the effectiveness and efficiency of inventory management, by using metrics, indicators, and benchmarks to track and compare inventory performance. Performance measurement helps inventory managers to identify strengths and weaknesses, to monitor progress and trends, to evaluate results and outcomes, and to improve inventory policies and practices. A good performance measurement system should be relevant, reliable, and actionable, and should align with inventory goals and strategies.

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Sharmistha Datta

2X Linkedin Top Voice | Elected Students' Council | IIM Kozhikode Co’25 | Tata Steel | VSSUT, Burla | Certified ISO QMS auditor | Certified Lean Six Sigma
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Regular reviews of inventory performance should be done based on certain metrics or KPI : 1. Inventory turnover ratio 2. Repeat purchases of various commodity 3. Monthly incoming vs consumption trend of high-cost items that contribute to 80% of inventory costs 4. Inventory carrying duration of perishable items 5. Track purchases related to import items 6. Consumption trend of decoupling inventory ( items which are kept for certain duration as running spares but might not be critical to the operations)

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4 Inventory classification

Inventory classification is the process of grouping inventory items into categories, based on their importance, value, demand, or other criteria. Inventory classification helps inventory managers to prioritize and manage inventory items differently, according to their impact on inventory carrying costs and service levels. A common inventory classification method is the ABC analysis, which assigns inventory items into three classes: A (high value, low quantity), B (medium value, medium quantity), and C (low value, high quantity). A good inventory classification system should be simple, clear, and consistent, and should reflect inventory characteristics and objectives.

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Sharmistha Datta

2X Linkedin Top Voice | Elected Students' Council | IIM Kozhikode Co’25 | Tata Steel | VSSUT, Burla | Certified ISO QMS auditor | Certified Lean Six Sigma
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Inventory can be classified on various aspects. On basis of the condition : raw materials, work in progress, finished goods, cycling inventory, maintenance repairs and operational supplies (MRO), safety stock. On the basis of consumption value and demand volume : ABC (helpful to decide the ordering quantity) On the basis of criticality : VED (vital , essential and desirable (Helpful to decide the safety stock) On the basis of ease of availability: Scarce, Difficult, Easy to procure

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5 Inventory reduction

Inventory reduction is the process of decreasing the amount of inventory held in the supply chain, by eliminating or minimizing the causes of excess inventory. Inventory reduction helps inventory managers to lower inventory carrying costs, to free up working capital, to increase inventory turnover, and to enhance operational efficiency. Some inventory reduction techniques are: lean inventory management, which focuses on eliminating waste and non-value-added activities; just-in-time inventory management, which synchronizes inventory supply with customer demand; and vendor-managed inventory, which transfers inventory ownership and responsibility to suppliers.

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Sharmistha Datta

2X Linkedin Top Voice | Elected Students' Council | IIM Kozhikode Co’25 | Tata Steel | VSSUT, Burla | Certified ISO QMS auditor | Certified Lean Six Sigma
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1. Identifying the high consuming, low cost items for annual rate contract with suppliers. 2. Encouraging indigenisation to eliminate dependency on import purchases in this volatile and uncertain times. 3. Vendor managed inventory will support the Just-in-time methodology 4. Analysing the top 20% items that contribute to 80% of inventory cost and levels. 5. Identification of alternate sourcing vendor to eliminate dependency on single vendor/ OEM. 6. Sourcing from OCM (original component manufacturer) instead of OEM which allows customisation at reduced costs.

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Mario McCoy

Government subcontracting and human services. Former retail and warehouse management.
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Focus on the top movers / top performers. Keep these products and resources local and easy to access. Utilize a special order program for products that are less common. This way, your high traffic items will be readily available, you will optimize your storage space, and your revenue will be optimized. It is easier to inventory a limited variety of products than it is to inventory a plethora of products.

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6 Inventory contingency

Inventory contingency is the process of preparing for and responding to unexpected events or situations that affect inventory availability, such as demand spikes, supply disruptions, quality issues, or natural disasters. Inventory contingency helps inventory managers to maintain or restore service levels, to mitigate inventory risks and losses, and to ensure business continuity and resilience. Some inventory contingency strategies are: safety stock, which is the extra inventory kept to buffer against demand or supply uncertainty; backup suppliers, which are the alternative sources of inventory supply in case of supplier failure; and emergency plans, which are the predefined actions and procedures to deal with inventory emergencies.

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Jose Armando Avalos Vasquez

Analista de auditoría interna
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Mediante el inventario Justo a Tiempo (JIT) se busca minimizar los niveles de inventario entregando productos justo a tiempo para su producción o venta, evitando almacenamiento excesivo. Requiere una cadena de suministro eficiente y proveedores confiables para una sincronización precisa, reduciendo costos asociados al mantenimiento de inventario. Mediante la revisión periódica de inventario se evalúan y ajustan los niveles de inventario en momentos específicos. Se analizan tendencias de demanda, ciclos estacionales y otros factores, actualizando niveles de reorden e inventarios de seguridad. Este enfoque permite una gestión dinámica, ajustando estrategias según las condiciones del mercado para equilibrar el inventario.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Nikhil Bhatia

Demand Planner @ Honeywell | Supply Chain Planning | Demand Planning | SIOP | Inventory Management | Order Forecasting | SAP APO and MM | Kinaxis Rapid Response Demand Planning | Distribution Planning
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Addition to above mentioned points, We should also need look for local suppliers & just in case or dropshipment approach wherever n whenever possible.

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What are some strategies for balancing inventory carrying costs and service levels?

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1 Demand forecasting

2 Inventory optimization

3 Performance measurement

4 Inventory classification

5 Inventory reduction

6 Inventory contingency

7 Here’s what else to consider

Inventory Management

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What are some strategies for balancing inventory carrying costs and service levels?

1

2

3

4

5

6

7

1 Demand forecasting

2 Inventory optimization

3 Performance measurement

4 Inventory classification

5 Inventory reduction

6 Inventory contingency

7 Here’s what else to consider

Inventory Management

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