Optimising inventory levels

Inventory ties up capital and hides process problems, while too little stock is expensive too: shortages, expediting, lost orders. Optimisation means finding, for each item, the point where the sum of capital and shortage costs is minimal – not a gut-feel compromise across the whole range.

The effect is measurable: at 8 % cost of capital, every million euros of inventory freed up equals roughly €80,000 in interest per year, plus warehousing and obsolescence costs. A 15–30 % reduction quickly adds up to a six-figure annual figure.

The core is separating the expected value from the uncertainty. Base demand over the replenishment lead time is plannable – it follows from the forecast. Safety stock only covers the spread around that expected value. The better the forecast, the smaller the spread to hedge, and the lower the safety stock at the same service level.

Flat coverage ("four weeks for everything") ignores that a steadily selling A item needs far less buffer than a sporadic C item. That is exactly where the savings potential lies: stock is reduced where it is needlessly high and kept only where demand requires it.

1. Demand forecast per item: instead of past averages, seasonality, trends and demand patterns are modelled. The result is not just an expected value but also its spread.

2. Calculate safety stock: forecast spread, lead time and target service level yield the item-level buffer. Our safety-stock calculator shows how – and where the textbook formula reaches its limits.

3. Set the reorder point: reorder point = expected demand over the lead time + safety stock. When stock falls below it, a replenishment is triggered – automated, across thousands of items at once.