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What is inventory planning? A guide for ecommerce retailers.

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Linnworks

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Inventory Management

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Two warehouse workers looking at inventory on a laptop computer.

This article references the Linn Academy 2021 session about inventory planning in an unpredictable economy. Watch the on on-demand session here.

Inventory planning is essentially forecasting and estimating how much of a product should be ordered to efficiently execute future purchases. While it sounds simple, inventory planning can have its own set of challenges but is imperative in running a successful ecommerce business.

What is inventory planning?

In order to effectively manage inventory, there needs to be an awareness of what products need to be purchased and how much of each product. 

Proper inventory planning and management is about forecasting demand for products based on historical data trends. Once you’re able to consider these previous trends, it reduces the amount of money wasted on overstock. 

But besides avoiding having purchased too much of a product, inventory planning is important in helping to predict the amount of stock needed to avoid stock-outs and losing out on sales and customers. 

Inventory planning is really the foundation of creating an excellent consumer experience as well, as a desired product is in-stock and ready to be shipped. 

Why is inventory planning important for ecommerce?

Inventory planning is essential for a successful ecommerce business. Inventory planning could help avoid unnecessary spending on items not needed, reduce the chance of losing out on a sale, and ultimately, create a positive customer journey since they are able to get the items they want when they want it.

The amount of a certain product that has been sold in the past, could indicate how many will sell in the future. Inventory planning can help lower the amount spent on overstock. On the other side of the spectrum, it helps avoid being in the unwanted situation of a stockout, leading to missed sales and potentially missed future customers. 

Inventory planning helps a business prioritize what to order. Jill Liliedahl, Vice President of Business Development at Inventory Planner says it’s important to keep in mind profit when choosing inventory, since everything can’t 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,” she says. This could even possibly be just a few very valuable items.

Inventory planning is needed for figuring out your stockturn, which is when you get an item in stock, how quickly can you turn it around for a profit – turning an investment back into revenue. Liliedahl says consider the high stock in, the stock that was ordered that is sitting on the shelves for a long time. 

But she also points out that while we want to keep stock moving, there’s a sweet spot here. “We can actually be in danger of running stock turn too low,” she says. Having stock move too quickly might indicate you’re not sufficiently stocked, she says. The sweet spot depends on your niche, the type of product you’re selling, and the cash flow, she adds.

An important part of inventory planning is factoring in the GMROI, or Gross Margin Return On Investment. Once any costs were recovered, how much profit did the item give? Liliedahl shares her own personal experience of digging into the numbers of a popular line she was selling only to discover it was drastically underpriced, not earning enough to justify the cost of shipping and storing. 

The Challenges of Inventory Planning

Like with all aspects of business, there are some challenges that go along with inventory planning and forecasting. 

Timing is Everything

First, what is the amount of time and the best period to use for our data? 

“What customer orders 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 depend if you’re forecasting for seasonal, non-seasonal, or trendy purchases.

Seasonal: When thinking about November and December, Liliedahl says look at the previous November and December, what happened 12 months ago. 

“We don’t want to say – okay, 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.”

The other consideration is year-over-year trending, but Liliedahl suggests putting a ceiling and cap on year-over-year. For example, she says some may have seen a 50% increase from 2019 to 2020 while still running strong, but maybe bring down that increase to 20 or 30% to avoid the risk of over-stocking.  

Non-Seasonal: Non-seasonal inventory consists of items that are not impacted by weather or holidays. Liliedahl says look at the last three to six months for this, not exceeding a year and half ago and avoiding pre-pandemic times in almost every case.

Trendy: When it comes to predicting trendy item sales, Liliedahl recommends looking at days to weeks, 14 to 30 days for example. She has seen as low as three days. “Be aware you could see some really volatile recommendations or calculations from day to day,” she says.

Stockouts

Being out of stock on an item, often means missing out on a potential sale and profit if you don’t take backorders. Part of inventory planning is taking a closer look at stockout days. Liliedahl says think about it like this: when this item is available, how much are customers purchasing? If you’re not using a software to track it, she says keep an eagle eye on your top five to ten sellers. Focus on items really driving your revenue, she says.

Location, Location, Location

For those considering expanding to another location (such as opening another store or warehouse) or selling on another sales channel (say in addition to your own site adding on Amazon or eBay), you have to realize what works in one location, may perform differently in another. There are different personalities of various locations and sales channels, Liliedahl says. 

Shipping

Shipping is another challenge when it comes to inventory planning. You can plan all you’d like, but if you don’t have the stock that you need when you need it, it causes issues. Liliedahl recommends talking to vendors now, especially oversees vendors, to help share what the expected demand may be – providing them an estimate of what things look like for the next six months to give them a guide. Providing an estimate several months out, and firming it up as it gets closer, can help build a relationship and communication with a vendor, solidifying that team effort as well as ensuring items are ready for you. Another troubleshooting step for shipping is order as early as possible to mitigate delays, recommends Liliedahl. 

Improve inventory planning with Linnworks 

Linnworks inventory management software helps growing businesses track stock levels and automate re-ordering based on the known frequency and volume of sales. Using software inventory management automation like 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 seeing a big picture, and a clear picture, of how each product is performing.

Having an accurate picture of stock levels is vital in inventory planning and forecasting what is next. Accurate inventory management helps avoid both stock-outs and overstocking.

Inventory management software that grows with your business. Book a demo.

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