There's a conversation that happens in almost every FMCG boardroom in Australia at some point during the financial year. Someone from finance points at the balance sheet and asks why there's so much cash tied up in stock. Someone from supply chain explains that it's needed to maintain service levels. Someone from sales mentions a promotion that required a build. And the conversation loops back to where it started, with everyone agreeing that inventory is too high and nobody quite agreeing on what to do about it.
This isn't a failing of any particular function. It's a symptom of how most FMCG businesses manage inventory — reactively, in silos, and without the analytical frameworks needed to make genuinely informed trade-offs between service, cost and cash.
The Australian Food and Grocery Council has identified inventory optimisation as a priority for FMCG businesses, and for good reason. End-to-end inventory in Australian FMCG supply chains regularly extends to six months or more. In a sector worth over $130 billion annually, that represents an enormous volume of working capital sitting on warehouse floors and in production pipelines — capital that's costing more to carry than it has in a decade, with the RBA cash rate having risen sharply from its pandemic-era lows and holding at levels that make every dollar of unnecessary stock materially more expensive.
At the same time, the cost of not having stock — the stockout — is equally punishing. Research consistently shows that around half of consumers will switch products or retailers when they encounter an out-of-stock. In a market where private label is surging and brand loyalty is under pressure from value-driven consumption, losing a sale at shelf isn't just a missed transaction. It's an invitation for the customer to discover they're perfectly happy with the alternative.
So the challenge is real on both sides: too much inventory costs money, and too little costs customers. The solution isn't to pick a side. It's to get structurally better at deciding what to hold, where to hold it, how much to hold, and why.
That's what inventory optimisation actually means. And it's harder — and more valuable — than most people think.
Why FMCG inventory is different
Before getting into the levers, it's worth understanding why inventory optimisation in FMCG is a particular kind of challenge.
Product proliferation is relentless. The number of SKUs in a typical Australian FMCG manufacturer's range has grown steadily for years, driven by retailer demands for variety, category extensions, seasonal and promotional variants, different pack sizes for different channels, and the never-ending cycle of new product development. Every new SKU adds complexity to forecasting, production scheduling, warehousing and distribution — and every SKU needs safety stock, which means every SKU adds inventory. The long tail of the range — the bottom 20 or 30 per cent of SKUs that contribute a tiny fraction of revenue — often accounts for a disproportionate share of total inventory investment and an even larger share of obsolescence write-offs.
Promotional volatility distorts demand signals. Australian FMCG is heavily promoted. When a significant portion of volume moves through promotional events — price discounts, feature displays, bundled offers — the underlying demand pattern becomes extremely lumpy. Promotional builds require inventory investment weeks or months before the event. If the promotion over-delivers, you've cleared stock but potentially cannibalised future sales. If it under-delivers, you're sitting on excess stock that may need to be worked through at reduced margin. Either way, the demand signal that planning systems see is spiky, unpredictable and difficult to forecast with precision.
Shelf life creates a hard boundary. Unlike durable goods, most FMCG products have a finite life — and more importantly, they have retailer-imposed minimum remaining shelf life requirements that are typically tighter than the actual expiry date. A product with 12 months of shelf life might need 9 months remaining to be accepted by a major retailer. That means the window for holding and distributing inventory is shorter than it appears, and the cost of getting it wrong isn't just a markdown — it's a write-off.
The Australian geography adds cost and complexity. Serving customers across a continent from a limited number of production sites and distribution centres means that lead times, transport costs and network design all influence how much inventory is needed and where. A manufacturer with a single production site in Melbourne and customers in Perth, Darwin and Far North Queensland faces fundamentally different inventory positioning challenges than one serving a compact European market.
Retail power concentrates risk. With the Australian grocery market dominated by two major retailers, the dynamics of customer service are concentrated. A single poor delivery performance week to Woolworths or Coles can have an outsized impact on scorecards, ranging decisions and commercial negotiations. This creates a natural bias toward holding more inventory than might be optimal — because the perceived cost of a stockout to a key customer feels larger than the carrying cost of excess stock.
These characteristics don't make inventory optimisation impossible. But they do mean that generic approaches — blanket safety stock reductions, one-size-fits-all inventory policies, or technology implementations without underlying process change — tend to either fail outright or deliver short-lived improvements that erode as the business drifts back to old habits.
The levers that actually matter
Effective inventory optimisation in FMCG requires pulling multiple levers simultaneously, because inventory is the output of decisions made across the entire supply chain — from product range to production scheduling to procurement to network design to demand planning. Optimising any one of these in isolation will deliver a fraction of the potential benefit. Optimising them together, as part of a coherent strategy, is where the real value lies.
Range rationalisation
This is the lever that most businesses know they should pull but find politically difficult. Every SKU in the range has an internal champion — a sales manager who promised it to a customer, a marketing manager who believes in the brand extension, a product developer who spent a year on it. But the inventory reality is unforgiving: SKUs with low and intermittent demand require disproportionate safety stock relative to their revenue contribution, generate the highest forecast error rates, create production inefficiency through short runs and frequent changeovers, and carry the highest obsolescence risk.
A disciplined range review process — one that evaluates every SKU against clear criteria including volume, margin, strategic importance, inventory intensity and forecast accuracy — is often the single highest-impact lever for reducing inventory while simultaneously reducing complexity across the supply chain. This doesn't mean eliminating innovation or customer choice. It means being honest about which SKUs are earning their place in the range and which are consuming resources without adequate return.
Network and inventory positioning
Where you hold inventory matters as much as how much you hold. The question of centralisation versus decentralisation — how much stock sits at factory, how much at regional distribution centres, how much at forward locations — has a direct and quantifiable impact on total inventory investment.
Centralising inventory reduces total safety stock (because demand variability aggregates and smooths at a central point) but increases lead time to customers and transport cost. Decentralising inventory improves responsiveness and reduces last-mile cost but requires more total stock to achieve the same service level. The optimal answer depends on product characteristics, demand patterns, customer service requirements, transport economics and network infrastructure — and it's almost certainly different for different segments of the range.
This is a strategy and network design question that requires analytical modelling, not intuition. The right answer for a high-volume, nationally distributed ambient product is different from the right answer for a short-shelf-life chilled product sold primarily through one channel in eastern seaboard markets.
Manufacturing flexibility
Production scheduling and manufacturing constraints are often the hidden drivers of excess inventory. Long production runs reduce unit cost but create large batches that take weeks to sell through. Infrequent changeovers mean products are made in big quantities at longer intervals, pushing up cycle stock. Minimum order quantities from co-manufacturers force inventory builds that exceed near-term demand.
Improving manufacturing flexibility — through faster changeovers, smaller batch sizes, better production sequencing, and more responsive scheduling — directly reduces the cycle stock component of inventory. The trade-off is typically between production efficiency (cost per unit) and inventory efficiency (total working capital). Most FMCG businesses have optimised hard for production cost and under-invested in the flexibility that would allow them to make smaller quantities more frequently. Rebalancing this trade-off often unlocks significant inventory reduction without meaningful cost penalty, particularly when the carrying cost of inventory is properly accounted for.
Demand planning and forecast accuracy
Inventory exists, in large part, to buffer against forecast error. The less accurate your forecast, the more safety stock you need to maintain a given service level. Improving forecast accuracy — even modestly — directly reduces the inventory required.
In practice, this means investing in structured demand planning processes with clear accountability, incorporating external demand signals — retailer sell-through data, promotional calendars, weather patterns, market intelligence — rather than relying solely on historical shipments, distinguishing between base demand and promotional or event-driven demand, and handling new product introductions and end-of-life transitions with dedicated planning attention rather than treating them as business-as-usual.
Advanced planning systems and statistical forecasting tools help, but they're not a substitute for strong process discipline and skilled planners. The best technology in the world won't fix a demand plan that's been overridden by optimistic sales forecasts or that doesn't accurately reflect known promotional activity.
This connects directly to planning and operations maturity. Businesses with strong Sales and Operations Planning (S&OP) or Integrated Business Planning (IBP) processes consistently carry less inventory at higher service levels than those without — because they make better, more aligned decisions about demand, supply and inventory trade-offs on a regular cadence.
Safety stock policy and segmentation
Not all SKUs should be treated the same. A high-volume, stable-demand, strategically critical product needs a very different safety stock policy than a low-volume, intermittent, long-tail SKU. Yet many FMCG businesses apply a single safety stock methodology — or worse, a flat days-of-cover target — across the entire range.
Effective safety stock policy requires segmenting the range by demand variability, volume, strategic importance and supply reliability, then applying differentiated service targets and safety stock calculations to each segment. An A-class product with consistent demand and reliable supply might warrant a 99 per cent service target with relatively modest safety stock. A C-class product with sporadic demand and long import lead times might be better managed with a lower service target, a make-to-order approach, or removal from the range altogether.
This segmentation also needs to account for supply-side variability — not just demand. If a key ingredient has unreliable supply, or a co-manufacturer has a history of late delivery, that variability needs to be reflected in the safety stock calculation. Many businesses buffer only for demand uncertainty and ignore supply uncertainty, which means their safety stock levels are structurally wrong.
Procurement and supplier management
Procurement decisions directly influence inventory levels, often in ways that aren't immediately visible. Minimum order quantities imposed by suppliers drive batch sizes above what demand requires. Long supplier lead times increase pipeline stock and require larger safety buffers. Infrequent ordering windows (monthly rather than weekly, for example) create sawtooth inventory patterns that inflate average stock levels.
Negotiating more favourable MOQs, shorter lead times, more frequent delivery windows, or consignment arrangements with key suppliers can reduce inventory without touching a single safety stock parameter. These are procurement levers, not planning levers — and they're often underutilised because procurement teams optimise for unit cost rather than total supply chain cost.
Technology as enabler, not solution
It's tempting to look at the inventory challenge and reach for a technology answer — an advanced planning system, an inventory optimisation module, an AI-driven forecasting engine. These tools have genuine value, and the planning technology landscape has improved markedly in recent years.
But technology only works when it's deployed on top of sound processes, clean data, and clear governance. An APS that's fed inaccurate demand plans will produce optimised but wrong inventory targets. A forecasting algorithm trained on dirty historical data will replicate the errors of the past with greater confidence. A dashboard that nobody reviews or acts on is expensive wallpaper.
The sequence matters: get the processes and policies right first, then implement technology to automate, scale and sustain the improvements. Businesses that lead with technology and hope it will fix underlying process gaps almost always end up disappointed.
The S&OP connection
Inventory optimisation doesn't happen in isolation — it happens inside a governance rhythm that aligns demand, supply, inventory and financial plans on a regular cadence. That rhythm is Sales and Operations Planning, or its more mature cousin, Integrated Business Planning.
Effective S&OP creates the forum where range decisions are reviewed, demand plans are challenged and agreed, supply constraints are surfaced, inventory targets are set and monitored, and trade-offs between service, cost and cash are made explicitly rather than implicitly.
Without S&OP, inventory decisions are made by default — by whichever function shouts loudest or whichever system parameter was set three years ago and never reviewed. With S&OP, they're made by design — with visibility, accountability and a clear link to business objectives.
For FMCG and manufacturing businesses in Australia, S&OP maturity is often the single best predictor of inventory performance. Not because the process itself reduces inventory, but because it creates the discipline and alignment needed for all the other levers to work.
Measuring what matters
Inventory optimisation needs a measurement framework that goes beyond total inventory value or aggregate days of cover. Useful metrics include service level by customer and product segment (because aggregate service can mask poor performance on critical lines), forecast accuracy by SKU segment (because this drives safety stock requirements), inventory turns by category and product lifecycle stage (because a new product launch and a mature stable product should have very different turn profiles), obsolescence and write-off rates (because these are the clearest signal of inventory that shouldn't have been there), and working capital intensity relative to revenue (because this is the metric that finance and the board actually care about).
These metrics need to be reviewed regularly — monthly at minimum — and tied to accountability. Inventory performance that nobody owns doesn't improve.
How Trace Consultants can help
At Trace Consultants, we work with FMCG manufacturers and distributors across Australia and New Zealand to design and implement inventory optimisation strategies that deliver measurable reductions in working capital while maintaining or improving customer service.
We don't sell software. We bring independent supply chain expertise to the analytical, strategic and operational decisions that determine inventory performance.
Inventory diagnostic and opportunity assessment. We start by understanding where inventory sits across the end-to-end supply chain, what's driving it, and where the opportunities are. This includes segmentation analysis, safety stock benchmarking, demand variability profiling, and identification of the highest-impact levers for your specific business context.
Range complexity and rationalisation. We help businesses evaluate their product range through an inventory lens — identifying tail SKUs that consume disproportionate resources, quantifying the inventory cost of complexity, and designing range governance processes that maintain commercial flexibility while managing working capital. Our organisational design work ensures that range decisions have clear ownership and accountability.
Network and inventory positioning strategy. We model the optimal distribution of inventory across your network — how much to hold centrally versus regionally, where to position safety stock, and how to design replenishment policies that balance service and efficiency. This is core strategy and network design work, grounded in quantitative analysis of demand patterns, transport economics and service requirements.
Demand planning and S&OP process design. We design and embed planning and operations processes — from statistical forecasting to consensus demand planning to S&OP and IBP — that improve forecast accuracy and create the governance rhythm for ongoing inventory management. We build capability in your team, not dependency on ours.
Safety stock policy and parameter setting. We design segmented safety stock policies that reflect the actual demand, supply and service characteristics of your range — replacing blanket rules with evidence-based parameters that your planning systems can execute.
Procurement strategy for inventory reduction. We work with procurement teams to negotiate supplier terms — MOQs, lead times, delivery frequency, consignment arrangements — that directly reduce inventory requirements. This is often one of the fastest levers to pull, with benefits visible within a single procurement cycle.
Technology selection and implementation support. When technology investment is warranted, we help organisations select, configure and implement planning and inventory optimisation tools that fit their maturity level, data quality and operating model — ensuring the investment delivers lasting value.
Warehouse and distribution optimisation. Inventory management intersects with physical operations. We bring warehousing and distribution expertise to ensure that storage, handling and replenishment processes support rather than undermine inventory targets.
The opportunity is real
For most Australian FMCG manufacturers, the opportunity to reduce inventory by 15 to 30 per cent without compromising service is real and achievable — provided the approach is structured, holistic and sustained. That's not a small number. On a $50 million inventory base, a 20 per cent reduction releases $10 million in working capital. At current interest rates, the carrying cost saving alone is material — before you account for reduced warehousing costs, lower obsolescence, and improved cash flow.
The businesses that capture this opportunity are the ones that treat inventory as a strategic management discipline, not a warehouse problem or a finance complaint. They invest in the processes, skills and analytical frameworks that allow them to make deliberate, informed trade-offs — and they sustain those improvements through governance, measurement and continuous review.
If your business is carrying more inventory than it should, or if service performance suggests you're not carrying the right inventory in the right places, we'd welcome the conversation.
