Inventory planning is an important aspect of operations for many businesses. Retailers of all sizes need a ready supply of products to meet customer demand. Manufacturers need components and materials to keep production lines moving. Service-based companies need the tools of their trade.
The pandemic has made all this trickier. Customer behavior has been unpredictable and supply chain disruption has been a nightmare, with shortages of everything from couches to lumber to sex toys. The conflict in Ukraine adds fresh complications to the mix.
Businesses must continuously adjust to thrive. Global recession? Another pandemic? Alien invasion? These days, almost anything seems possible, which makes inventory planning even more crucial to weather any future disruptions.
What is inventory planning?
Inventory planning is the management of stored materials required by an organization. The goals of inventory planning are:
- To have the components, materials, or products you need ready so there are no delays in delivering products or services
- To minimize operational costs — including the cost of storage — and avoid having too much capital tied up in inventory
- To avoid being stuck with items you can’t sell or use
- To optimize operations (e.g., making it easy to retrieve products from storage)
- To keep on top of theft, damage, and loss
There are several phases in the inventory management process.
Businesses try to predict demand to decide how much inventory to order. Good forecasting models take into account factors like seasonality, economic pressures, and lead times.
Companies try to buy inventory at the best price possible, which might mean buying in bulk. Other concerns include the reliability of suppliers, the quality of their goods, their ability to ship on time, and, increasingly, their ESG (environment, social, and corporate governance) status.
You’ll also need to consider cash flow. Are your customers paying for the product before you order, or do you need to pay for a bulk order upfront, not knowing how many you will sell? Can you return items you do not sell to the manufacturer? These are important considerations in a supplier relationship.
If you’re a small business, you might store your inventory in your garage or a backroom. If you’re a bigger business — or your products are larger in size — you’ll need a warehouse or fulfillment center where you can keep inventory safe. It’s important to optimize this aspect of your operations as storage costs can make up 20%-30% of your business costs.
Businesses need to keep a record of products sold and materials and components used. It’s also important to know where everything is at any given time — on a ship, on the factory floor, in the warehouse, or in a store. This aids with predicting demand, solving shortages, and managing reorders. It also helps companies to keep a tab on thefts, breakages, and losses.
If you’re an ecommerce company, you need to get your products from storage to customers’ doorsteps. Delivering products quickly and conveniently is essential for customer satisfaction, but you need to optimize costs.
You should also facilitate easy returns — 84% of people in a consumer survey say that a good returns experience is essential to their opinion of a retailer.
Inventory planning methods
Just-in-time supply chains (JIT): Businesses that adopt this approach keep as little stock as possible, with inventory arriving at the last minute. JIT minimizes storage costs and reduces the risk of being saddled with goods you can’t sell, but it leaves little room for error.
ABC inventory analysis: According to the Pareto Principle, 80% of a business’s profits come from 20% of its inventory. If you can identify your most profitable inventory, you can allocate resources more strategically. The ABC method divides inventory into three categories:
A) High value, low quantity
B) Average value, average quantity
C) Low value, high quantity
You can better manage your time by focusing more attention on category A products, and less on categories B and C. You can also devise different management strategies for the different categories, which may be more appropriate than a blanket approach.
Dropshipping: Dropshipping is an order-fulfillment method where products are sent directly from the manufacturer to the customer. The seller, who runs the online storefront, selects and markets the goods but may never touch the products themselves. This business model sidesteps most aspects of inventory planning.
Fulfillment centers: If you need inventory storage, you can buy or lease a warehouse, or space in a warehouse. Alternatively, you can use a fulfillment center, where a third-party logistics company (3PL) manages the storage and order fulfillment.
The benefit of traditional warehousing is that you maintain full control over your inventory and it is cheaper than using a 3PL. On the flip side, using a 3PL means you don’t have to worry about hiring and training warehouse staff or fulfilling orders.
Bulk shipments: Buying in bulk can mean the cost per unit is lower, but this method requires more capital and incurs more risk and higher storage costs.
Other useful terms
- Cross-docking: Stock is loaded directly from inbound to outbound transport, eliminating the need for storage.
- Back orders: Orders and payments for items that are out of stock.
- Consignment: An arrangement where the wholesaler retains ownership of stock held by a retailer until it’s sold to customers. If the retailer doesn’t sell the goods, the wholesaler takes them back. Since the retailer doesn’t have to pay until the product is sold, they avoid having capital tied up in inventory.
Inventory Planning Systems: Case studies
Pretty Kubyane is the co-founder of Coronet Blockchain, a supply chain management solution for Africa-based hair salons. Her business mostly deals in “dry hair” products such as wigs, weaves, and extensions.
Forecasting: “Hair extension sales are driven by social media trends,” says Kubyane. “All successful salons are super social media savvy.” They also take the pulse of their own micro-market by tracking about three months of historical sales data.
Buying: Many salons struggle to maintain healthy cash flow, and manufacturers tend to insist on payment upfront. Some salons will therefore source inventory on demand, making purchases every few days, while more established salons buy in bulk twice a month.
Storing: Salons usually hold inventory on-site, though robberies can be a problem, along with some cases of staff or customer theft. Some salon owners resort to storing inventory at home.
Tracking: Salons face a number of problems with this element of inventory management.
- Provenance. Authenticating inventory can be a major issue. Suppliers may claim a wig is made from human hair when it is actually synthetic or animal hair.
- Tracking in transit. Salons rely on shipping agents’ tracking systems, which can be inadequate and do not provide a full line of sight.
- Tracking in-stock inventory. Many salons shirk point of sale and inventory management software out of technophobia or to avoid the taxman.
Coronet Blockchain uses the blockchain to track inventory and authenticate products. Hair is sourced from reliable manufacturers, vetted by Coronet Blockchain, and added to a public, inalterable digital ledger. Every step the product takes along the supply chain is noted on the blockchain so that everyone can see the start-to-finish journey the product has made.
Covid: Supply chain shocks and order backlogs of three months or more have pushed some salons to use automated reordering systems and digital inventory management, to keep on top of lead times and become aware of shortages more quickly.
Strength & Stem is a flower delivery service that employs survivors of human trafficking. Co-founder Jane Smith explains how she sidesteps some of the challenges of inventory planning.
The company makes an order to the wholesaler in advance, based on an estimate. Once all the bouquet orders are in, the florists visit the wholesaler at the flower market and purchase the flowers. The blooms are then arranged and delivered to customers the same day.
This system works because Strength & Stem is still small and only offers one delivery day a week. As the business scales, Smith foresees that they may need to start buying in bulk and invest in a fridge system at their studio.
Trail running shoes
If you’re a startup in its early stages, your inventory planning method may involve a lot of improvisation.
Nick Martire is the co-founder of trail running footwear company Norda Run. “Fortunately, we’re on fire,” says Martire, “and we have more demand than we can supply. We’re primarily placing blind orders, guessing how much we need and then selling after. It’s the only way to achieve launch dates due to long lead times,” which have increased in the last couple years.
The Impact of the pandemic
The dark days of lockdowns are over, but covid continues to affect businesses. Plus, events like the Suez Canal obstruction, truck driver shortages, and the China-US trade war serve as warnings that supply chain disruption can happen at any time.
Entrepreneurs have reacted to that warning on several fronts — a survey found that 69% of businesses are improving their inventory management in reaction to the pandemic. Here are a few ways that companies have adjusted.
“The biggest impact of covid on inventory management has been the fundamental shift from Just-in-time to Just-in-case planning,” says Alex Saric, a smart procurement expert at Ivalua.
“Companies have started stockpiling inventory, especially of key materials or components.”
According to Goldman Sachs, companies’ inventory-to-sales ratios are up 5% from before the pandemic. “While this is understandable given the revenue impact of supply disruptions,” says Saric, “businesses must still work to optimize inventory to minimize the drain on working capital, particularly in today’s rising-interest-rate environment.”
Keeping on top of the data
Where companies once looked at inventory data monthly, they are now looking at it weekly. A short-term focus helps businesses pick up on inventory shortages or excesses and react quickly to changes in demand.
Supply chain auditing
Companies are examining their suppliers and their suppliers’ suppliers to identify weaknesses and better predict disruption. “Businesses must improve transparency in the supply chain to understand supply risk,” says Saric. “And they must improve collaboration with suppliers, sharing both supply and demand forecasts, working together to optimize inventory levels.”
Becoming more agile
According to Deloitte, 69% of CFOs expect to diversify their suppliers in the next three years. Securing additional suppliers or geographically diverse suppliers is one strategy. Another is to build agility into your contracts. You can include clauses that allow you to switch to alternate suppliers easily or require suppliers to prioritize you over other clients if they face shortages.
Sourcing products overseas may be cheaper, but it can make your supply chain more vulnerable to disruption. Around 10% of global supply chain execs say they have started manufacturing or sourcing inventory closer to where they’re sold. This solution is usually more costly and therefore less common than overstocking or supplier diversification.
The pandemic has left behind a labor shortage and some hefty wage growth. That makes automation an attractive solution for business owners. An Amazon-style robot-operated warehouse may be out of your league, but you can use tools that track inventory and automatically reorder items when stock is low.
Inventory planning software
There are many software solutions that can make your inventory planning slicker. Here are just a few.
- Known for: ecommerce (free for Shopify users)
- Top features: inventory purchasing, tracking inbound and outbound inventory across multiple marketplaces (e.g., Etsy, Amazon, Shopify), automated order processing
- Reviewers like: good onboarding process, great user interface, competitively priced
- Known for: best for brick-and-mortar retailers
- Top features: keep track of available stock, track sales, order stock, create customer profiles using purchase history, set up an ecommerce website and track traffic
- Reviewers like: easy to use, useful video tutorial
- Known for: AI-based, used by heavy hitters like Starbucks and Sandvik
- Top features: forecast demand, plot out “what if” scenarios, view and analyze historical data, view inventory status at different locations, monitor order fulfillment
- Reviewers like: user-friendly, good customer support
- Known for: best for 3PLs and distributors
- Top features: view inventory KPIs, forecast demand, get alerts on shortages and overstocking, monitor available stock, track vendor performance, create brief overview of the business with executive summaries
- Reviewers like: customer service team can help with unique requirements, speeds up the order process
- Known for: best for manufacturers
- Top features: order stock, fulfill orders, view stock by location, track manufacturing process, manage invoices, create detailed reports, get low-stock alerts
- Reviewers like: straightforward, affordable, lots of room for customization