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Inventory optimization refers to the techniques used by businesses to improve their oversight, control and management of inventory size and location across their extended supply network. [1] It has been observed within operations research that "every company has the challenge of matching its supply volume to customer demand.
In business, Gross Margin Return on Inventory Investment (GMROII, also GMROI) [1] is a ratio which expresses a seller's return on each unit of currency spent on inventory.It is one way to determine how profitable the seller's inventory is, and describes the relationship between the profit earned from total sales, and the amount invested in the inventory sold.
The final step is to then forecast demand based on the data set and model created. In order to forecast demand, estimations of a chosen variable are used to determine the effects it has on demand. Regarding the estimation of the chosen variable, a regression model can be used or both qualitative and quantitative assessments can be implemented.
The average inventory is the average of inventory levels at the beginning and end of an accounting period, and COGS/day is calculated by dividing the total cost of goods sold per year by the number of days in the accounting period, generally 365 days. [3] This is equivalent to the 'average days to sell the inventory' which is calculated as: [4]
Two very popular methods are 1)- retail inventory method, and 2)- gross profit (or gross margin) method. The retail inventory method uses a cost to retail price ratio. The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory.
For instance, when the sales department records a sale, the forecast demand may be automatically shifted to meet the new demand. Inputs may also be inputted manually from forecasts that have also been calculated manually. Outputs may include amounts to be produced, staffing levels, quantity available to promise, and projected available balance.