Inventory planning enables you to maintain optimal inventory levels and steady cash flow. Without it, you’ll struggle to run an efficient product business. This guide covers all you need to know about inventory planning.
What is inventory planning?
Inventory planning is the process of determining the optimal amount of inventory that should be available in stock at any one time to successfully meet customer demand. It is a key function of modern inventory management.
Many factors go into effective inventory planning, including:
- Supplier lead times
- Inventory storage costs
- Inventory turnover rate
- Seasonality and sales trends
- Understocking risks (potential lost sales and reputational damage)
- Shipping costs
What is the purpose of inventory planning?
The central purpose of inventory planning is to learn the exactly how much inventory to order, and when, to satisfy customer demand and maximise fulfilment efficiency.
Inventory purchases and storage fees have major impacts on your business’s profitability. By understanding the flow of products into and out of your warehouse, you can minimise these costs – ultimately improving your margins.
Inventory planning also helps to reduce the number of refunds and cancelled customer orders, as it increases the likelihood of having the right amount of stock to meet demand.
3 key benefits of inventory planning
Inventory planning is an important element of running a successful product business. And because it directly affects the customer experience, effective planning can mean the difference between growth and failure.
Let’s take a quick look at some of the core benefits of inventory planning.
1. Optimisation of inventory levels
Your ability to store products is limited by the space available. Inventory planning ensures you are making the most of it.
Warehouse planning is an artform of its own, with strategic thought required around what products go where. However, ensuring the right products are in the warehouse at the right time comes first.
Inventory planning involves close communication with suppliers. These relationships allow you to respond to pricing changes and maintain sufficient inventory on hand to satisfy customer demand throughout any fluctuations.
It also prevents you from ordering too much stock, which can impede your warehousing workflows and increase your storage costs.
2. Better cash flow management
Purchasing inventory when it is needed and storing it in a cost-effective manner means cash is freed up for other aspects of the business.
This is particularly important if you have a small business juggling numerous demands on cash flow. You need to manage it carefully to ensure priorities such as payroll are maintained without delays.
Inventory planning prevents too much capital from being locked-away (temporarily inaccessible) until goods are sold.
3. Satisfied customers
Good inventory planning prevents stockouts – situations in which you do not have sufficient quantity of stock-on-hand available to fulfil customer orders.
When a customer must wait longer than expected for their order, the likelihood that they will cancel and request a refund is higher. Equally, the likelihood that they will buy from you again is lower.
It hardly needs to be said that more cancelled orders and fewer repeat purchases means less revenue and slowed business growth. Accurately planning for inventory allows you to keep those promises you made to customers, improving brand reputation and profits.
- Learn more: What is Demand Planning? 2023 Guide
Inventory planning risks and challenges
A well-managed inventory planning system is extremely beneficial to your business’s day-to-day cash flow and, ultimately, its profitability.
However, there are some challenges when implementing an inventory planning system.
Some of the difficulties affecting inventory planning:
- Unreliable data: Incorrect datasets or numbers will cause major glitches in any inventory planning system. It can be difficult to ensure accuracy in all datasets when dealing with complex and multi-faceted supply chains.
- Shifting trends and demand: Inventory planning can be disrupted through unexpected changes in demand.
- Supply chain disruptions: Unexpected challenges in the supply chain – such as weather events, transportation issues, and labour shortages – can create major headaches for inventory planning.
Effective inventory planning relies on the correct amount of inventory being stored at any one time. Overstocking can create storage issues when surplus stock arrives.
Inventory planning requires working with information and data from multiple sources. This includes internal data, such as sales and inventory history, and external data, such as supplier lead times and weather forecasts. The latter can be unreliable and make accurate inventory planning difficult.
Businesses need to be agile and ready to adapt to changing market conditions to ensure inventory planning is as effective as possible.
7 steps of the inventory planning process
The inventory planning process can be broken down into seven steps:
- Data analysis
- Demand forecasting
- Supplier planning
- Safety stock calculations
- Storage space analysis
- Inventory and forecast monitoring
- Keep an eye on innovations
Let’s examine these tasks in further detail.
1. Analyse the data
Perform a deep dive into your company’s historical datasets. This will reveal trends and changes in demand over time.
These trends offer insights into what your customers want, when, and why.
Historical data can also tell you which suppliers are the most reliable and reveal any weak links in your own business systems, such as consistent dataset errors.
2. Build demand forecasts
Structure the data in a way that gives you visibility over likely customer demand over the planning period. This should provide enough of a runway to then generate accurate forecasts for supplier orders.
Unleashed’s Advanced Inventory Manager module can help improve the accuracy and speed of your demand forecasting process.
3. Determine your preferred suppliers
When selecting suppliers, consider factors like:
- Ability to deliver by a certain time
- Quality of raw materials used
- Any known concern
It’s important to build strong relationships with your suppliers and understand the long-term benefits of working together.
Do they offer significant discounts to loyal customers? It’s possible that a supplier might charge more than another right now, but the total cost of sticking with them changes once they understand your value as a customer.
4. Consider your safety stock requirements
Safety stock is the inventory held as a buffer between forecast demand and actual demand. This is a recognised requirement for businesses with large amounts of inventory.
You can calculate the optimal safety stock levels for each SKU using the formula:
(Maximum Daily Sales x Maximum Lead Time) – (Average Daily Sales x Average Lead Time) = Safety Stock
5. Determine your warehouse requirements and capacity
Once you’ve planned the ideal inventory levels, including safety stock, consider the capacity of your warehouse.
It’s possible that, having determined your optimal stock levels, you find that there isn’t going to be enough room in your facilities for all that stock. Do you need to change the layout of your warehouse to accommodate those levels? Do you need a larger warehouse? A second or third warehouse?
It’s critical to understand these requirements as early as possible, so that you’re prepared in advance.
6. Monitor inventory plans and forecasts
Inventory planning is an evergreen process.
As you progress into the planned period, measure the accuracy of your forecasts and the effectiveness of your plan. This will allow you to make changes on the fly as required.
Monitoring and measuring inventory planning performance also helps with future planning. You’ll be able to look back at your predictions and processes, see what worked and what didn’t, and learn from your mistakes.
7. Look out for innovative solutions
New software systems, integrations, suppliers, and strategies can make a marked difference to your business’s effectiveness.
You may see a competitor using a new system or learn about a new tool that will improve the accuracy and efficiency of your planning.
Stay across all innovations and shifts in the industry landscape to make sure you’re using the most up-to-date software and tools available (and affordable) for your business.
Inventory planning in supply chain management
Inventory planning is a critical aspect of supply chain management. A properly managed supply chain means the right level of inventory is landing at the warehouse, in time to be shipped to the customer.
Multiple factors and stakeholders – many outside the direct control of the supplier – need to be considered when making orders.
For example, weather events such as flooding can knock out roads. A shortage of labour can delay the delivery of raw materials. Political disputes can make border-crossings difficult.
Some important supply chain questions to ask during inventory planning:
- Who are the stakeholders?
- Where are the weak links and bottlenecks?
- What is the impact of external factors (such as weather events)?
- What is Plan B, should something affect your lead times?
- What real-time data can you access?
Inventory planning methods & best practices
Inventory planning can be a tricky process, but there are ways to make it easier.
Let’s quickly cover three systems that can give you a kick start and take some of the stress out of the inventory planning process.
Inventory planning best-practice methods:
- Implement the ABC analysis method. If you’re feeling overwhelmed with the numerous inventory types you need to manage, the ABC method can help by classifying items into subcategories based on their value and importance.
- Focus on continuous improvement (Kaizen). This concept is all about starting something and then improving on it as more data and information comes into play. This allows you to let go of the idea of perfection and simply get the work underway.
- Measure accurately using key inventory management formulas. There are several inventory formulas relevant to inventory planning, including economic order quantity (EOQ), safety stock, and inventory turnover rate (ITR).
Inventory planning software
Inventory planning software is an automated system that enables you to plan, forecast, track, and manage your inventory with minimal risk of human error. It enables businesses to maximise productivity and inventory accuracy while also optimising stock levels and keeping costs low.
What does inventory planning software do?
Inventory planning software automates the inventory planning process by pulling on data from several aspects of the business. This includes suppliers, customer sales, and seasonal trends.
Ask these questions before investing in inventory planning software:
- What’s the initial and overall cost?
- How good is its demand forecasting?
- What do its customers say?
- How does it integrate with your existing systems?
- How easy is it to use?
What should you look for in inventory planning software?
If you’re considering investing into inventory planning software, there are certain features and products you’ll want to be aware of. You’ll also need to figure out your budget and ensure it is relative to the needs of your business.
Some key features of effective inventory planning software:
- Inventory tracking. This allows your business to track inventory from the supplier to the warehouse and on to the customer.
- Demand forecasting. This allows you to accurately order from suppliers to meet customer demand.
- Integrations with other systems. Integrations with your existing software improves the flow of information and ensures data accuracy across the whole business.
- Reporting and analytics. Inventory planning software allows you to pull data and analytics to inform other business decisions.