Inventory management can sometimes feel like a gamble. If you have too much inventory on hand, you’re tying up cash flow in stock that isn’t moving. On the other hand, if you keep too little stock in inventory, you run the risk of frustrating your customers with stockouts.
That’s where inventory planning comes in. Inventory planning is a high-level strategic initiative that aims to optimize inventory levels and costs so that you have the right amount of inventory on hand when you need it.
Keep reading to understand the importance of inventory planning, along with techniques and methods you can use in your planning process and steps to get you started.
What is inventory planning?
Inventory planning helps retail businesses determine the optimal amount of inventory they should have on hand at any given time to meet expected demand. Inventory planning requires a holistic view of the supply chain and considers a variety of factors—such as supplier lead times, seasonality and sales trends, and inventory storage costs—to ensure there is enough stock on hand, without overspending on procurement and storage.
Inventory planning vs. inventory management
Inventory planning and inventory management are closely related but distinct concepts in supply chain management.
- Inventory management. Inventory management refers to the day-to-day activities involved in overseeing and controlling the flow of goods from suppliers to customers, such as order processing and fulfillment, stock tracking and control, and replenishment planning. Inventory management is about the execution of inventory-related tasks.
- Inventory planning. Inventory planning is a broader term encompassing the strategic decision-making process around inventory, such as setting inventory targets, managing lead times, and optimizing inventory levels for a given period or season. Inventory planning involves strategic decision-making that guides inventory management.
Benefits of inventory planning
Small ecommerce retailers may start out fulfilling orders from their homes or offices without giving much thought to inventory management. However, inventory management and planning become essential for running a successful business as retail operations grow.
Here are ways in which robust inventory planning can benefit your retail operation:
- Reduce inventory costs. Excess inventory (or overstocking) costs money. By accurately forecasting demand and ordering only the necessary inventory items, retailers can avoid overstocking and the associated carrying costs—such as storage, insurance, and obsolescence.
- Improve cash flow. Inventory is one of a retailer’s largest expenses. Excess stock ties up cash you could use for other purposes, such as investing in growth or paying down debt. Inventory planning helps businesses maintain optimal stock levels, which frees up cash for other uses.
- Reduce stockouts. Stockouts can lead to lost sales and frustrated customers. Inventory planning can help you reduce stockouts by ensuring you have sufficient inventory on hand to meet demand.
- Optimize order quantities. Inventory planning can help you optimize order quantities, reducing ordering costs. Ordering costs include the costs of placing an order, shipping the order, and receiving the order. By optimizing your order quantities, you can reduce the number of orders placed and save money.
Inventory planning methods
- Economic order quantity
- Just-in-time inventory
- Lean inventory management
- ABC analysis
- Open-to-buy plans
- Weeks of supply
Here are efficient inventory planningmethods you can use to support your planning efforts:
Economic order quantity
Economic order quantity (EOQ) is a method for determining the optimal order quantity for a product by continuously reviewing holding costs and ordering costs and ordering the quantity at which these two costs intersect. The EOQ model helps retailers optimize order quantities to minimize ordering and holding costs, while avoiding stockouts.
Just-in-time (JIT) inventory is a system that aims to minimize the amount of inventory that a company has on hand at any given time. In this system, businesses keep minimal stock on hand and order goods from suppliers “just in time” to use them. JIT inventory can be a very effective way to reduce inventory costs. However, because it relies upon a consistent and stable supply chain, it might only suit some retailers and requires careful planning and execution.
Lean inventory management
Lean inventory management is a system that relies on information technology to closely and accurately track inventory status to reduce inventory to just meet customer demand, thus cutting costs and reducing inventory waste. Lean inventory systems streamline and automate many tasks associated with inventory management and work best when the demand for your products is fairly steady and consistent.
ABC analysis is a method of classifying inventory based on value and importance to the business. It helps retailers optimize inventory by understanding which products make them the most (A-grade products) and the least (C-grade products) amount of money, with B-grade products being middle of the road. Businesses can use this system of inventory control to ensure they’re stocking enough of their highest-value inventory and to create strategies for future orders.
Open to buy (OTB) is an inventory management system that helps retailers determine how much merchandise they need to purchase to meet their sales targets for a specific period. It is a budget for future inventory receipts calculated at cost and allocated to different product categories based on their contribution to total sales.
Weeks of supply
Weeks of supply (WOS) is a metric used in inventory management that represents the number of weeks your current inventory will last based on recent sales rates. It’s calculated with a simple formula:
Weeks of supply = on-hand inventory / average weekly units sold
A higher WOS indicates that a company has a larger inventory buffer, while a lower WOS suggests a company is at a higher risk of stockouts. An ideal WOS varies depending on the product, industry, and lead times. However, a general rule is having a WOS slightly higher than the average order lead time.
How to develop an inventory plan
- Forecast demand
- Consider your suppliers
- Set a replenishment plan
- Track your inventory
- Optimize your warehouse
- Monitor and adapt
If you’re ready to start the inventory planning process for your retail business, here are a few high-level steps to get you started on a successful inventory plan:
1. Forecast demand
Accurate demand forecasting is the cornerstone of accurate inventory planning. To inform your forecasting, draw upon internal factors, such as historical sales data, new product launches, and planned promotions, alongside external factors such as market trends, seasonality, and competitor promotions.
Retailers use a variety of demand forecasting methods, including market research and forecasting software, to get a clear picture.
2. Consider your suppliers
Whether you sell finished goods or manufacture your own, consider the lead time your suppliers need to deliver their products or raw materials. Understanding lead times is essential for setting reorder points and ensuring adequate stock levels. It’s also important to have contingency plans in place in case of unforeseen disruptions to your supply chain.
3. Set a replenishment plan
Two essential metrics for maintaining optimal inventory levels are reorder points and safety stock levels. Reorder points are the inventory levels at which you must place a new order to avoid stockouts. Safety stock levels are additional buffers for unexpected demand fluctuations or supply chain disruptions.
Set levels for both these metrics will be informed by demand forecasting and supplier lead times, but also consider ordering costs—the expenses associated with placing, shipping, and receiving orders—to determine optimal order quantities.
4. Track your inventory
Accurately tracking inventory levels is necessary for making informed decisions about purchasing and replenishing stock. Tracking typically involves using inventory management software, but it can also include manual methods for inventory reconciliation, such as cycle counting.
5. Optimize your warehouse
Efficient warehouse management is a practice unto itself. Still, you’ll want to find the right balance so your storage space can accommodate extra stock when needed without paying for excessive unused space. Can the organization and layout of your warehouse be improved? Known as warehouse slotting, you can reorganize and optimize the space for not only inventory storage but for order fulfillment tasks, too.
6. Monitor and adapt
Effective inventory planning is an ongoing process, and it may take a few inventory cycles to refine your inventory planning processes. Regularly monitor inventory levels, sales data, and market trends to adjust your plan as needed. Track key performance indicators (KPIs), such as percent orders delayed by stockout, storage capacity usage, inventory turnover, or carrying cost of sales, to help evaluate your planning efforts.
Inventory planning FAQ
What’s the difference between inventory management and inventory planning?
Inventory management focuses on daily operations, overseeing goods from suppliers to customers, including order processing, stock tracking, and replenishment planning. Inventory planning, a broader concept, involves strategic concerns like inventory targets, lead-time management, and inventory optimization. Inventory management executes inventory-related tasks, while inventory planning guides those actions strategically.
Why is inventory planning important?
Poor inventory planning can impact your business with lost sales, higher purchasing costs, and unhappy customers. Effective inventory planning helps businesses avoid costly stockouts, improve cash flows, and reduce inventory costs, among other benefits.
Is there software available to help with inventory planning?
Yes, many inventory tracking software programs include inventory planning tools. Inventory Planner for Shopify users is purpose-built inventory planning software designed to assist retailers across the planning process with accurate, easy-to-generate demand forecasting and analysis. Inventory Planner uses a business’s Shopify sales data to support inventory planning measures, such as setting reorder points and identifying slow-moving merchandise.