Optimizing inventory, like most problem-solving, requires a thoughtful process and a few steps. Naturally, the easiest way to prevent back orders is to always have a lot of inventory on hand. There are ramifications for not optimizing inventory, though. Overproducing and maintaining high inventory levels could allow products to spoil or even decay. Excess inventory not only creates costs today, it also generates hidden costs later if you need to produce more goods to replace products that sat on the shelf for too long.

There are different ways to calculate your optimization, but at the crux of optimizing inventory are three main steps: brainstorm the factors that affect inventory, collect your data, and analyze your data. Before we dive into each step, let’s cover a few basics about back orders.

What is a back order, and what causes it?

Put simply, a back order means that a product cannot be fulfilled or delivered because it isn’t in inventory. That may occur because the demand for the product is higher than anticipated, or inventory levels were too low to meet the current demand.

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