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From processing sales to servicing customers, retailers have a seemingly endless list of responsibilities while running their businesses. Managing inventory is at the core of many of these daily tasks. Careful inventory planning can help businesses overcome costly challenges that may affect both the customer experience and the bottom line.
Learn more about what inventory planning is and how it can help your business.
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.
Inventory planning ensures that ecommerce businesses keep appropriate levels of product in stock, and it also helps businesses prioritize what to order. Profit potential should be considered when choosing inventory, as not everything can be purchased at the same time. “I’m going with the ones that are going to drive the most profit, not just the number of units,” says Jill Liliedahl, vice president of revenue at Inventory Planner.
This approach could mean that you prioritize inventory for just a few very valuable items. Another important part of inventory planning is gross margin return on investment (GMROI), which reflects how much profit an item yields after costs are recovered.
Stock turn, a measurement determined by how quickly your products are sold and replaced, can also be assessed with inventory planning. Once you understand how quickly you can turn your inventory around for a profit, you can make smarter, more strategic inventory decisions to drive revenue. Pay close attention to the period of time that in-stock products remain unsold. There’s a delicate balance between wasting time, money and space on unsold inventory and having enough product to fulfill current and future demand.
Liliedahl recommends finding a sweet spot instead of trying to time the market. “We can actually be in danger of running stock turn too low” in some situations, she says. For instance, having stock move too quickly might indicate you’re not sufficiently stocked. The sweet spot depends on your niche, the type of product you’re selling and your cash flow, she adds.
Without proper inventory control, businesses may incur unnecessary costs and suffer from missed sales opportunities. Poorly planned inventory systems can also cause issues for customers, leading to orders being delayed or products that are out of stock. These situations risk creating a poor customer experience that could have a deleterious effect on your business.
Accurate inventory forecasting and planning can present challenges for retailers. To effectively plan for and manage inventory levels, you need to review each part of your business processes for potential challenges and opportunities to improve. Review some of the most common areas of concern for sellers.
Before reviewing historical data for trends, you need to determine what time period to analyze, as well as the length of time you’ll use.
“What customers ordered in the past will help to indicate how much inventory, how much stock, we should have on hand in the future,” says Liliedahl. The time period will change depending on whether you’re forecasting for seasonal, nonseasonal or trendy purchases.
Businesses preparing for a seasonal forecast might be tempted to establish expectations that mirror past performance, but that’s not always the best approach. “We don’t want to say, ‘OK, let’s just take last year’s numbers, copy and paste it into this year.’ We know it’s not that simple in most cases,” Liliedahl says.
Take year-over-year trending into consideration, but consider putting a ceiling and cap on such forecasts. Remember that these projections are based on the assumption that factors contributing to past trends will continue in the future — and in the same ways. Any changes in the market, including consumer perceptions or the introduction of a competing product, can cause significant changes in demand.
For example, a business may see a 50% increase from one year to the next while still running strong. However, a prudent forecast might only call for a 20-30% increase to avoid the risk of overstocking.
Products that are nonseasonal or trendy have various methods for forecasting, but the end goal remains the same. Liliedahl recommends reviewing the last three to six months for nonseasonal products, which are less likely to be affected by weather or holidays than seasonal products.
Trendy product purchases can be more difficult to predict. Liliedahl recommends looking at inventory records in much shorter windows — for example, 14 to 30 days. Due to their naturally short lifespans, trendy products should be followed closely to capitalize on their popularity while avoiding overstock as traction declines.
Because these products can have a smaller window of opportunity, it’s tempting to act quickly, but retailers should remain focused on long-term goals. Trendy products can see drastic changes in demand in a short time. “Be aware you could see some really volatile recommendations or calculations from day to day,” Liliedahl says.
If your business doesn’t accept backorders, being out of stock on an item can mean missing out on a sale. Even businesses that do offer backorders can be overlooked by shoppers looking for more convenient options. Take a closer look at stockout days, and when items are available, take note of how much customers are purchasing.
Liliedahl suggests focusing on top-producing items that are really driving your revenue. And watch for opportunities to automate. As businesses grow, manual inventory processes can become more cumbersome and increase the risk of human error. Inventory tracking software can help streamline these processes and identify top sellers, giving you the ability to prioritize your most valuable products.
Location is a significant factor for planning and managing inventory, as the location of each aspect of your business can affect the bottom line. Fulfillment processes might change from location to location, and other business elements such as competition, pricing and consumer opinion can vary, too.
What works in one location or channel might not work in all locations or sales channels, Liliedahl says. Retailers must account for this when expanding to multiple locations (opening another store or warehouse) or selling on additional sales channels (such as a marketplace).
Shipping is another challenge for inventory planning. Even the best planning can’t always overcome insufficient stock or stock not being ready when you need it. Reach out to vendors proactively, especially international vendors, to discuss what expected demand looks like. Provide them with an estimate of what the next several months could look like. Place orders as early as possible to mitigate delays, and provide updates as conditions change.
Providing this information in advance and through regular updates can help build better relationships and communication with vendors. Better relationships help everyone feel like they’re part of a team and improve the odds that stock will be ready for your business.
Global supply chains have fluctuated dramatically in recent years. Product or raw-material shortages, economic changes and inaccurate lead times can all make inventory planning a challenge. For many small businesses, certain inventory levels and deliveries might be out of their control — determined by the priorities set by manufacturers and distributors. While you can’t control everything outside your business, many retailers are mitigating disruption risks by switching to alternatives, including nearshore or local suppliers.
Clean, reliable data is essential for inventory planning. Some companies are still using manual planning processes, but they can be resource-heavy, inefficient and prone to error. Even with software and data, retailers can still struggle to assess inventory levels in real time. This is often because of limited visibility in warehouses or the challenges of tracking inventory across multiple channels.
Automated inventory management systems can help you expedite the process of collecting and analyzing this data, reducing errors and ensuring products are available when needed.
Linnworks inventory management software helps growing businesses track stock levels and automate reordering based on the known frequency and volume of sales. Using software inventory management automation such as Linnworks also frees up time to focus on other aspects of the business.
Linnworks central dashboard gives a real-time view of inventory performance based on data and insights from all sales channels. This can simplify inventory planning by enabling retailers to see the big picture — and a clear picture — of how each product is performing.
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.
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