Our algorithm takes into account all relevant factors that influence your inventory costs to maximize profit. These include:
- Lost Sales Cost: The revenue you lose when a product is out of stock. Such costs can be significant, especially for high-demand items, and must be minimized by maintaining an optimal service level.
- Financial Carrying Cost: This represents the interest you could have earned if the funds tied up in inventory were invested elsewhere. It’s an opportunity cost that directly impacts your bottom line, making it crucial to balance inventory levels carefully.
- Physical Carrying Cost: These are the expenses associated with physically storing and handling inventory, including warehousing, utilities, insurance, and the risk of obsolescence. These costs vary by product type but generally fall between 20% and 40% of the inventory’s value.
- Stockout Penalties: In certain industries, particularly aerospace, contracts may include penalties for failing to meet delivery obligations. For example, if you cannot deliver a required part on time, you may incur a penalty, often a percentage of the item’s value.
The algorithm is implemented in our software, PeakProfit, which includes a SaaS API that allows users to make calls programmatically, as well as a user-friendly web application. You can take advantage of our web application for free with basic usage at https://optimize.sscostmodel.com/.
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