Inventory planning is the process of forecasting and estimating how much of a product should be ordered to efficiently execute future sales. This concept might sound simple, but inventory planning is essential to avoiding potential issues with sales and fulfillment and keeping customer satisfaction levels high.
Effective inventory management requires an understanding of what products should be purchased and in what quantities to maintain adequate stock levels. It’s important to forecast demand for these products based on historical trends. This approach avoids wasting money on overstock and helps predict the amount of inventory needed to avoid stockouts, lost sales and dissatisfied customers.
Advantages of Inventory Planning
Costs associated with poor inventory planning can heavily contribute to a business’ bottom line. In fact, a Business Wire study showed that retailers worldwide lose $1.75 Trillion in Revenue due to overstocking, shortages, and product returns, with the average retailer overstocking by 50%.
For ecommerce businesses and other product-based businesses, simply addressing this issue can lead to significant cost savings. Other benefits of efficient inventory planning include:
A business will have far more control and clarity around what is stored and sold, limiting the risk of employee theft and other avenues for inventory shrinkage. With accurate inventory planning and tracking procedures in place, warehouse visibility will increase as well as the accountability of staff members.
Smooth Cash Flow
Organizing inventory levels and management in line with data-driven information allows businesses to reduce costs on over-ordering, as well as losing customer rapport through under-stocking. When a business meets demand, the cash flow from sales becomes more consistent.
Enhances Demand Forecasting
Demand forecasting refers to the process of using historical data (like past sales) to predict upcoming trends and demand for your products.
Using forecasting tools, as mentioned earlier, can help you make informed decisions about future inventory needs. Forecasting helps cater to customers’ demand and fosters better financial decisions pertaining to inventory allocation, warehousing, and distribution.
Whereas inventory planning looks to the future to anticipate needs, inventory control addresses the processes of receiving, unpacking, verifying, storing and issuing inventory. Companies use inventory control to establish restocking systems, including reorder points and reorder quantities.
Some ecommerce businesses use ABC analysis to classify stock based on consumption value, which is the total value of an item over a given period. A items have the highest consumption value, and C items have the lowest value. This analysis focuses on critical stock items.
Through effective inventory planning, a company will waste less capital on ordering, storing, and managing excess stock. This will also lower associated expenses, such as labor wages, warehouse rent, and security costs, creating a higher profit margin with consistent revenue.
Enhanced Customer Satisfaction
Unforeseen product shortages can greatly affect a business’s reputation and consumer retention rates. For both brick-and-mortar shops and ecommerce businesses, running out of popular items will lead to losses in sales due to missed opportunities and disappointed consumers who will likely turn to competitor brands.
Faulty products can negatively impact the perception of your product’s quality. Establishing quality benchmarks for inventory should be part of your overall plan. By closely monitoring the products in stock, you can evaluate their quality.
Inventory planning is often done in tandem with regular quality control checks. This ensures the best quality products are shipped to your customers.
How to Develop an Inventory Plan
Once you understand the advantages and challenges associated with inventory planning, it’s time to begin developing an inventory plan.
An inventory plan is an outline to follow that helps your business order, track, and process inventory. Here are four considerations of an inventory management plan.
1. Estimating Demand
Inventory planning requires a thorough understanding of product demand. Historical sales data is a great place to start. For example, if sales data suggests that you sell 200 boxes of widgets every day, your inventory plan needs to account for this demand. This ensures you do not end up under – or overstocking inventory.
Two other factors to consider when estimating demand are scarcity and competition. If a product is hard to find or source, it might be important to have extra stock to keep up with demand fluctuations. Additionally, if running out of a product will cause your customers to switch to your competitors, the extra storage cost may be better than losing customers.
2. Creating a Replenishment Plan
A replenishment plan is necessary to keep production running smoothly. The reorder point (ROP) is a threshold that determines the time to place an order with your vendor. The reorder point is determined by the time needed for your vendors to package and deliver products and circumvent any potential supply issues.
A just-in-time inventory system works in some instances when the supply chain is steady.
A replenishment strategy should consider items that are required on a regular schedule as well as those needed less frequently. Technology aids the replenishment process as well as calculated cost impacts.
3. Tracking Inventory
The efficiency of any inventory management system is as good as its tracking mechanisms. A point of sale (POS) system catalogs inventory and records changes in real-time. Using barcode scanners reduces errors in tracking and increases efficiency.
Inventory planning should ensure that the warehouse area is large enough to accommodate any extra inventory required during peak times.
You will need to use inventory planning software in conjunction with your chosen inventory planning method to ensure you can accurately forecast your inventory needs, avoiding stockouts, overstock, and deadstock.
Inventory planning software lets you automate and optimize complex and critical inventory processes, offering you insight into when you need to purchase or transfer inventory to support sales across multiple channels.
4. Monitoring and Adapting Stock
Any inventory system needs to be monitored and adapted to meet present demand for products. Appropriate monitoring will help forecast when sales are needed to move stagnant inventory or when it is time to stock up on certain items to meet growing demand.
Inventory Management Methods
One step of inventory planning is proper inventory management. You can use a number of methods to manage your inventory. Let’s take a look at three different inventory management methods you might consider using as a part of your inventory planning processes.
Economic Order Quantity
Economic Order Quantity (EOQ) refers to the ideal amount of inventory your business should purchase to minimize your costs.
To calculate your quantity using this method, you will use the below formula:
Quantity=2(Demand x Order cost)Holding costs
This method works well for businesses where demand, ordering, and holding costs are consistent. If your business is subject to seasonality, trends or other factors that might impact that consistency, this method might not be sufficient for your use case.
ABC Analysis is a method of inventory management that requires you to rank inventory items based on demand, cost, and risk data. You will separate your inventory into classes, helping you to determine which items are most important to your business.
You can calculate ABC inventory analysis using this formula:
(Annual units sold) x (Cost per unit=Annual value per product)
ABC Analysis can help you optimize your inventory, price products appropriately, and allocate resources in a manner that best suits your business. However, ABC Analysis is not enough on its own to properly plan for your inventory needs.
Just-in-Time (JIT) Inventory
Just-in-Time (JIT) Inventory is a solution that requires you to understand the production schedules of your suppliers. In this strategy, you order inventory to arrive exactly when it is needed, reducing your storage costs.
This method requires you to engage in robust inventory forecasting and planning processes to ensure you have the right amount of stock available to meet your customers’ demand at any given time.
One downside of JIT inventory is that it can be challenging to account for supply chain disruptions using this method. A delay from one supplier can cause a breakdown of your entire process.
Though all of these methods may be valuable to your inventory planning efforts, they are not sufficient on their own as your business scales. In addition to inventory management methods such as these, you will need to implement inventory planning software to reap the benefits of proper inventory planning.
Proper replenishment and inventory planning solutions are vital to run your business effectively and efficiently. To plan for inventory needs accurately and consistently, you will need to have a plan and the right tools in place. Having a clear picture of stock levels is vital in inventory planning and helps you forecast what comes next. Accurate inventory management helps retailers avoid stockouts and overstocking.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.