Basic Concepts in Inventory Planning

Inventory is stored materials that serve a current or impending need. Production and manufacturing organizations hold raw materials, finished items or works-in-progress to incorporate into new goods. Retailers stock finished or processed items to sell directly to customers.

Almost every organization holds inventory. Even service organizations, such as hotels or software development companies, keep maintenance, repair and operations (MRO) stock to support the business. Examples of inventory for a non-production or non-retail company might include towels and soap, drain cleaner, light bulbs, garbage bags for cubicle bins, pens and timing belts for delivery trucks. Inventory is one of the largest assets on a company’s books.

Organizations hold inventory for several reasons. By keeping inventory, production or retail establishments can ensure they operate continuously and independently, with coverage for variations in consumer demand or stock delivery. In manufacturing, adequate inventory enables companies to be flexible in output scheduling. You can leverage bulk orders for discounts with planned inventory.

Inventory Planning

Inventory planning helps companies buy the right amount of stock and decide how often to reorder. Inventory planning helps lower the costs of keeping items in stock and helps make sure there is enough stock for making and selling items.

Inventory planning is an essential part of supply chain management. Supply chain management ensures that raw materials, work-in-progress items and finished goods move efficiently from the source or factory to the consumer.

Essentials of Good Inventory Planning

Inventory planning directly impacts the cash flow and profits of any organization. It prevents stockouts, so you can keep production running and save money on costly last-minute purchases, and it enables discounts for bulk and regular orders. Good inventory planning requires the right mix of people, process and technology.

Inventory Planning Technology:

You can use software that initiates orders to ensure you top off stock to the appropriate level and prevent overstocking. Digital planning systems provide historical data for forecasting and a view into current inventory levels. The right software can help you scale your business.

Inventory Planning Roles and Responsibilities:

Inventory planners analyse trends and provide forecasts. Ideally, inventory planners work with supplier managers, purchasing and contract management leaders, supply chain financial analysts and production and quality control stakeholders.

Inventory Planning Policies, Processes and Procedures:

Inventory policies help you govern planning activities and step-by-step inventory maintenance processes. It is essential that you define and document your inventory planning processes and communicate your policies throughout the organization and beyond, particularly to the supply chain. Your procedures can range from how you use enterprise resource planning (ERP) and other inventory software to how you store and pick items. Inventory procedures and checklists can help you guide warehouse and distribution centre staff in handling inventory.

Despite the advantages of inventory planning, many organization don’t do it. When companies don’t plan, the inventory planner or consultant often comes in like a doctor during a health emergency to deal with excess inventory or shrinking profits.

Objectives of Inventory Planning

The No. 1 aim of any business, besides making money, is customer satisfaction. In terms of inventory, if the right product in prime condition is not available at the right time, customer loyalty may suffer. Customer loyalty can affect profits because getting new customers is more costly than retaining customers, and loyal customers spend more as time goes on.

Forecasting:

Also known as inventory estimation, forecasting is a systematic process of using a marketing plan to predict future sales and, thereby, future inventory requirements. A forecasting counterpart is inventory control, the process of counting and maintaining inventory items to understand usage patterns and uphold optimum inventory levels.

Controlling Costs:

Inventory costs, or holding and storage costs, can total 20-30% of your business costs. Holding costs can include the purchase cost for items, taxes, labour to receive and place inventory, insurance, security and even stock obsolescence, which is stock that is out of demand, old or in excess. The goal of inventory planning is to reduce all these costs.

Efficient Storage:

With well-designed storage facilities and by iterating the layout and design over time, you can favorable impact the bottom line. The ultimate use of inventory, whether in manufacturing, production or fulfillment, influences layout. The key point is to arrange high-demand items to reduce travel time. In this instance, high demand equates to frequently requested rather than high numbers of items.

Advantages of Inventory Planning

Good inventory planning provides many advantages. At a high level, understanding what you have today aids with forecasting for the future.

The sooner you plan for future inventory, the sooner you reap these benefits of planning:

l Reduce or eliminate stockouts.

l Reduce or eliminate overstocks, which drain profit margin.

l Optimize stock so you can easily spot slow-moving items you need to discount.

l Rotate stock to front displays to clear obsolete or perishable items.

l Increase cash flow through inventory flow. Inventory planning is crucial for smaller businesses, which rely on fast turnover.

l Increase profits with efficient production or robust sales.

l Easily retrieve items from the warehouse or stockroom.

l Mitigate theft and abuse. Uncontrolled raw materials and goods can easily go missing.

l Eliminate redundancies, or an excess of the same object, and prevent obsolescence, or items that remain too long in inventory.

l Surmount variability in the supply chain. Supplier problems like power outages or transportation issues may delay replenishment. Good planning helps you maintain service levels, which are the reassurance levels you provide for customers that sales and production time are not lost to stockouts.

How to Develop an Inventory Plan

An inventory plan is an outline a business can follow daily. A plan helps an organization order, track and process stock. Ideally, you should follow the business goals as you create the inventory plan. Consider these questions when developing an inventory strategy:

What Is the Product Volume?

Forecasting demand is possible. For retail, use keyword research to inform Google Trends searches. Your inventory planning software should also show historical trends, or you can try Google Analytic to understand ecommerce activity trends. Based on this research, schedule orders to build up stock when you anticipate high demand. Include items for off-peak sales.

What Factors Impact Inventory?

Factors that sway demand include well-considered advertising, your competition’s price cuts and offerings, the income and context of your target market, seasonal demand, trends and customer preferences.

Is the Warehouse Efficient?

In a well-organized storage space, staff can easily place new deliveries and quickly pick items for fulfillment. The area should be large enough to accommodate extra stock when suppliers offer sales, but not so large that you have to pay rent and electric for unused space. The location of a warehouse can provide economic advantages; a warehouse located near a supplier may reduce shipping costs and allow you to receive materials before your competition. Third-party logistics companies (3PLs) can manage warehousing and fulfillment for you.

Is the Order Process Streamlined?

Look for ways to improve the connection between inventory and order management.

What Can You Automate?

POS systems and other functions reduce errors in detailed and repetitive tasks, and they free employees to focus on improving planning and processes.

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