Essential Guide to Inventory Planning (2024)

Learn Inventory Planning Models, Benefits and How to Develop a Plan That Delivers MoreEfficiencies

This article covers the advantages of inventory planning and describes inventory basics,planning systems and planning software. Get expert tips from inventory consultants PatriciaJohnson, Richard Outcalt and Darrel Whiteley.

In this article:

Inventory planningbasics
Why you need toimplement inventory planning
How to develop aninventory plan
Inventory planningsystems

Basic Concepts in Inventory Planning

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

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

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

Inventory Process Flow

The steps of inventory process flow or the lifecycle of inventory apply to retail,manufacturing, maintenance and service organizations alike.

Purchase:
Organizations buy inventory based on inventory planningresearch or, if the department or company is new, on their best estimate of what isneeded. Although excess inventory is generally undesirable, organizations may overstockwhen making their first purchases.
Store:
Organizations must store or warehouse inventory in a clean,secure area, for which they will incur holding costs to cover lighting and heating orrefrigeration. Organizations should devote time to researching and planning forconvenient stock checking and retrieval from storage.
Use:
Organizations take stock items from inventory for theirintended purpose as sales items, raw materials or repair parts.
Track:
Tracking stock as organizations retrieve or consume it isessential to maintaining production flow, cash flow and happy customers. Only bytracking what’s in stock can you know what and when to reorder.
Reorder:
You can reorder or replenish inventory automatically ormanually. Mathematical, management and strategy models help you understand the optimalstock level to maintain, as well as the number of items to order and how often to orderthem.
Forecast:
Established enterprises and newer organizations that haveexperienced a few inventory cycles can anticipate, or forecast, inventory needs andtiming. Forecasting helps to ensure you maintain optimal stock levels throughout theyear.

Inventory Planning

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

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

Essentials of Good Inventory Planning

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

Inventory Planning Technology:
You can use software that initiatesorders 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 currentinventory levels. The right software can help you scale your business.
Inventory Planning Roles and Responsibilities:
Inventory plannersanalyze trends and provide forecasts. Ideally, inventory planners work with suppliermanagers, purchasing and contract management leaders, supply chain financial analystsand production and quality control stakeholders.
Inventory Planning Policies, Processes and Procedures:
Inventorypolicies help you govern planning activities and step-by-step inventory maintenanceprocesses. It is essential that you define and document your inventory planningprocesses and communicate your policies throughout the organization and beyond,particularly to the supply chain. Your procedures can range from how you use enterpriseresource planning (ERP) and other inventory software to how you store and pick items.Inventory procedures and checklists can help you guide warehouse and distribution centerstaff in handling inventory.

Despite the advantages of inventory planning, many organizations don’t do it. Whencompaniesdon’t plan, the inventory planner or consultant often comes in like a doctor during ahealthemergency to deal with excess inventory or shrinking profits.

Darrel Whiteley is a master black belt, lean master and Kaizen expert with Firefly Consulting. “Inventoryshouldn’tjust happen to you,” he states. “If you’ve gotten to the point where youwant to plan yourinventory, you know there’s certain variables you need to know. You need to know yourleadtimes for your material suppliers. You need to know your online time for your manufacturingplant, and that needs to be a real time. Instead of assuming, use real data. Break downproducts by types. Don’t be afraid to stratify data and concentrate on those customersthatpay your bills. Don’t worry about the customer who only calls up every threeyears.”

Objectives of Inventory Planning

The No. 1 aim of any business, besides making money, is customer satisfaction. In terms ofinventory, 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 newcustomers is more costly than retaining customers, and loyal customers spend more as timegoes on.

Forecasting:
Also known as inventory estimation, forecasting is asystematic process of using a marketing plan to predict future sales and, thereby,future inventory requirements. A forecasting counterpart is inventory control, theprocess of counting and maintaining inventory items to understand usage patterns anduphold 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 foritems, taxes, labor to receive and place inventory, insurance, security and even stockobsolescence, which is stock that is out of demand, old or in excess. The goal ofinventory planning is to reduce all thesecosts.
Efficient Storage:
With well-designed storage facilities and byiterating the layout and design over time, you can favorably impact the bottom line. Theultimate 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 numbersof items. Learn more about designing storage facilities by reading “Warehouse InventoryManagement Guide: Best Practices, Case Studies and Expert Advice.”

Challenges in Inventory Planning

Planning inventory and demand planning present multiple challenges, whether for retail ormanufacturing. In addition to the difficulty of anticipating future requirements and sales,assorted barriers can hamper forecasting.

In retail, the very nature of the business sometimes obscures reasoned approaches to stockorders. Patricia Johnson and Richard Outcalt are cofounders of The RetailOwners Institute®.

“Retailers love to buy,” says Outcalt. “They love the new merchandise.Their staff issaying,‘We should carry this or that.’ Everybody’s telling them,‘Oh,we have to have moremerchandise.’ Unless somebody at the top has the discipline to manage that targetedendinginventory and take markdowns quickly so that they’re sure to hit the target,they’re introuble. The pressures to buy way outweigh the pressure to control. Somebody’s got tobetough.”

What Inventory Planning Can’t Do

Although you should practice inventory planning, make sure to understand its limitations. Forexample, planning takes time and money, and you can waste both if you don’t implementtheplan well or if you abandon them for discounts because the plan doesn’t seem to returnprofits fast enough. In addition, for the plan to work, staff must follow the processes. Butthere are no guarantees that trained staff won’t leave. And although a robustinventorysystem can surface and mitigate loss, it doesn’t stop people from stealing.

Advantages of Inventory Planning

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

According to Outcalt, “if owners don’t plan inventory ahead, they should get outofretailing. Not planning is a deal-breaker. And the most important number to focus on istheir targeted ending inventory for each month of their plan.”

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

Reduce or eliminate stockouts.
Reduce or eliminate overstocks, which drain profit margin.
Optimize stock so you can easily spot slow-moving items you need to discount.
Rotate stock to front displays to clear obsolete or perishable items.
Increase cash flow through inventory flow. Inventory planning is crucial for smallerbusinesses, which rely on fast turnover.
Increase profits with efficient production or robust sales. Outcalt explains, “Inretail, the only way they make money is turning that inventory: bring it in, get rid ofit, whether online or through bricks and mortar. Inventory is the money tied up on yourbalance sheet. And the more money tied up on the balance sheet, the less cash you haveand the more debt you have. It’s simple: the lower the inventory, the better offyouare. The higher the turns, the stronger the retailer. Selling inventory is the only wayto make money.”
Easily retrieve items from the warehouse or stockroom.
Mitigate theft and abuse. Uncontrolled raw materials and goods can easily go missing.
Eliminate redundancies, or an excess of the same object, and prevent obsolescence, oritems that remain too long in inventory.
Surmount variability in the supply chain. Supplier problems like power outages ortransportation issues may delay replenishments. Good planning helps you maintain servicelevels, which are the reassurance levels you provide for customers that sales andproduction time are not lost to stockouts.

Data and Craft in Inventory Planning

No one can perfectly predict inventory for a half-year to a year in the future. To come closeto the mark requires real-time data on inventory and communication across operations,finance, merchandising and marketing. You need not only the right data but also the abilityto interpret it. Conversely, you also need to understand the nuances of your brand orproduct and the brand’s context in the larger commercial ecosystem. Your understandingofinfluences and trends will help guide decisions about discounts and promotions.

Material Requirements Planning

Material requirements planning (MRP)is used in production planning andinventory control to maintain optimally low inventory levels while guaranteeing regulardeliveries of quality resources and output. Organizations formerly conducted MRP practicesmanually on paper.

Today, companies track inventory in software. MRP includes three basic steps:

Identify your current stock, any perpetual orders, planned deliverables and stockalready committed for existing orders. Inputs for this first step include forecasts forcustomer demand, the bill of materials (BOM) for a product line and the masterproduction schedule.
Calculate additional requirements for the inventory that you think are critical,expedited or delayed.
Order the needed components. Calculations yield four types of documents: purchase ordersto suppliers; work orders and material plans for your production department; primaryreports, which include the information from the orders and secondary reports, whichinclude statistical information about orders and production.

MRP uses two key inputs: the master production schedule and the bill of materials (BOM). Amaster production schedule describes weekly staffing requirements, requiredinventory and expected rate of output of deliverables. It is the high-level guide formanagement, purchasing and production from which management creates short-term schedules andresource allocations. A BOM is a complete list of all raw materials, parts andsub-assemblies required for a finished product. Organizations may use BOMs internally, ormanufacturing associates may share them with each other. A BOM is an essential input for anMRP system.

Inventory Control

Whereas inventory planning looks to the future to anticipate needs, inventory controladdresses the processes of receiving, unpacking, verifying, storing and issuing inventory.Companies use inventory control to establish restocking systems, including reorder pointsand reorder quantities.

Some establishments use ABC analysis to classify stock based on consumption value, which isthe total value of an item over a given period. A items have the highestconsumption value, and C items have the lowest value. This analysis focuses oncritical stock items.

The Inventory Planner Role

An inventory planner analyzes demand and decides when and how much new inventory to order.Suppose you are an inventory planner for a hypermarket. Your work year might flow like this:

Preseason:
Before the season begins, the inventory planner analyzesSKU performance for previous seasons. The planner also needs important background dataon competing brands, such as their promotions and pricing. The planner then sketches thepreseason plan to set category levels, or how much of each type of product should besold.
In-Season:
Each week, the planner evaluates both product andcategory performance to determine whether sales exceed or lag behind targets. Theresults influence which poorly performing products you clear from stock. This weeklyevaluation provides a picture of the state of the business through the filter ofinventory.
- Recapping the Business:
  The planner must learn to read thebusiness based on promotions, distribution issues, holiday promotions or weatherevents. Discount sales can provide a good return, although retailers oftenresist them. The planner can perform analysis to reveal the type of profitsthese discounts garner.
- Markdowns and Promotion:
  Markdowns can help you move extrainventory when items aren’t selling well. Promotions can help you attractunplanned purchases and move seasonal items. The inventory planner’s jobis tounderstand how to use these tools in the context of the business.
- Reforecast Process:
  The planner’s understanding ofsalespatterns and new trends week by week informs iterations of the forecasts.
- Evergreen or Basic Inventory:
  Basic inventory is easier topredict, and planners can usually arrange it separately from seasonal inventory.
Post-Season:
Planners, buyers and merchandisers work together toreview the anticipated and actual outcomes for the season based on financial andinventory experience.

How to Develop an Inventory Plan

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

Inventory Replenishment Models and Strategies

Good practices in inventory planning and control can help you maintain a lean inventory,something like the temperature of Goldilocks’s porridge—it’s just right,neither too much,nor too little. But finding the right level can be problematic.

For Outcalt and Johnson, an open-to-buy plan is essential for retailers.

“An open-to-buy plan is basically slang for a budget of how much maximum inventoryyou’regoing to bring in,” explains Johnson. “The other thing about controllinginventory is thatmany retailers have very seasonal sales. Sales go up, and then they go down. Retail salestypically ramp up during the holidays and then slow during January and February. The key isthat your inventory levels go up and down as well. In January, your inventory must go backdown. It’s easy to go up, but if you don’t control it to bring it back down,that’s how youend up with excess inventory. And that creates all kinds of cash flow problems.”

To Whiteley, inventory planning is simple: “Understand the voice of the customer,understandinventory transform equations, get people together to talk about it—these are aboutthe bestthings you can do. When you work in silos, you leave yourself open to demand amplification.Get everybody understanding the parameters and the math. That is the best thing you cando.”

Inventory Models

Inventory models help organizations determine the optimum amount of inventory to order.

For this purpose, companies commonly use continuous inventorycontrol. This model uses the Economic Order Quantity (EOQ) function to determinefixed orders, which are triggered when stock reaches a predetermined minimum. Largerorganizations that have constant, predictable demand or product lines often favor thismethod.

With the EOQ method, you can determine optimal order costs and discount costs for largerorders when costs are consistent over time. You can also use the EOQ model to determineproduction lot size and the work-in-progress lot size that will be available for the nextproduction stage or to hand off to the customer. The model can also show you how many orderswill be placed in a year.

EOQ Formula

By contrast, the periodic inventory controlsystem places orders after a predetermined period. With periodic ordering, you canadjust the quantities and types of stock items to reflect changes in product line anddemand. Smaller companies or those with seasonal stock may choose periodic replenishment.

Additional inventory tools andmodels include the following:

JIT (Just in Time):
A Kanban strategy popular in manufacturing andproduction, just in time aligns inventory deliveries with production schedules to orderinventory as the company uses it.
Lean Inventory:
A lean inventory approach leverages continuousimprovement methods to reduce wastes of time, materials and effort.
VMI (Vendor Managed Inventory):
The vendor, such as thesalesperson, manages inventory by replenishing stock levels when necessary.
Critical Fractile or Newsvendor Model:
Because this inventory andproduction model provides more provisions for variability in demand, users feel itreflects realistic inventory situations. The model focuses on perishable products, suchas daily newspapers. A recent alternative to critical fractile is the deep neuralnetwork method.

Lean Inventory Tips

To manage inventory well, you must apply continuous study and analysis. The following aresteps to optimize inventory:

Review inventory periodically and revise stocking patterns as new trends appear.Stocking practices must adapt to each item—not every item has the same demand ordelivery schedule.
Your inventory plan has to meet your unique situation. Only a detailed analysis ofindividual items in your inventory and their turnover rates can reveal the nature ofyour inventory.
Practice catalog management. In other words, understand the patterns for each categoryof item. Catalog management can be particularly important for extensive, diverseinventories. “In retail, there are precious few controllables, and onethat’s verycontrollable is inventory,” explains Outcalt. “The expert planners, whichare frequentlysmall businesses, are very astute at controlling their inventory. They plan to the pennywhat their inventory is going to be at the end of each month, and if it comes in high,they take care of it right away. Unfortunately, larger retailers—say, with 50 or100 or500 stores—no longer adhere to that discipline.”
You can’t manage inventory in a silo without input from upstream and downstreamfunctional areas. Stakeholders from each functional area must understand eachother’srequirements. As you learn about issues from team members, note possible improvementsand gather data. Also, consider self-evaluation on the effectiveness of your currentsystems or using a third-party benchmarking service. Use this information to create avision for an improved method, and then share that with the rest of the organization.

Inventory Planning KPIs

Metrics and KPIs can aid you and organization stakeholders in gauging the success of yourinventory planning people and processes. Consider implementing KPIs such as these and othersthat may be pertinent to your business:

Inventory turnover
Carrying cost of sales
Customer satisfaction levels
Daily sales or movement of inventory
Forecast accuracy
System accuracy to quantify how accurately your system reflects physical stock
Storage capacity usage
Percentage of orders delayed by stockouts

Inventory Planning Systems

ERP inventory controlsystems enhance visibility, control and analysis across all installations, from factories towarehouses, including dynamic facilities. Notable are the materials management (MM) modulesthat coordinate orders with procurement and other modules.

Although ERP systems include location management for inventory, they usually do not includewarehouse management systems (WMS) out of the box, which focus less on stock and more onwarehouse operations.

Legacy inventory systems include the CARDEX system. In this system, every bin carried aprinted bin card. Staff updated the card as inventory was added to or removed from the bin.Concurrently, staff recorded stock transactions manually in registers. In the past, theprocess of physically managing inventory included printed put away lists and pick lists thatoperators used to store or retrieve inventory. Operators recorded bin and pallet numbers inpen on each list and then passed them to data entry clerks for updating in the WMS. Theadvent of barcodes and scanners meant that printed stickers appeared on each bin. Anoperator with a handheld scanner automatically records each activity with greater efficiencyand accuracy. With the extension of radio frequency ID (RFID) tags throughout supply chains,greater visibility and accuracy should be possible.

Although every business needs a system, an enterprise platform may be too much horsepower fora small business. Some businesses start with a spreadsheet or a simple inventory app torecord barcodes. If your business is small and you are code savvy, consider creating yourown app.

Excel as an Inventory Planning Tool

Some organizations may consider using Excel to plan and track inventory. If you sell homemadepottery at your local Saturday farmers market, Excel can work. However, tracking thousandsof items is almost impossible. In addition, Excel offers no real-time insight into currentinventory or analytical capability to assist with forecasting. Finally, Excel is error-pronedue to the requirement for manual data entry.

How to Develop an Inventory System

By taking basic steps, you can create a new plan or return an existing troubled system to thepath to success. You should iterate your inventory planning and tracking policies andprocesses over time.

Obtain executive buy-in and set measurable goals and KPIs to show results.
Decide where to store and process inventory. Keep perishables fresh and free of germsand infestations. Keep other stock clean and secure. Build a safe, comfortable area withthe appropriate tools or equipment for unpacking, sorting or repacking.
Select an inventory management application. With software, you can record details ofyour inventory, order new inventory in a timely manner to prevent stockouts oroverstocks and gain historical perspective on inventory trends. Not limited toenterprise-level programs, vendors also offer small-business licenses.
Create vendor agreements with your suppliers. Vendor agreements detail the expectedpayment and shipping arrangements. These agreements can also help you understand howsoon you’ll receive a shipment after you place an order. Learn the vendor returnpolicyfor unsold items.
Determine the reorder point for stock. Use equations or look at historical patterns todetermine turnaround time and the optimum level for each item or SKU. When deciding on arestocking trigger, build in the lead time for receiving new orders.
Raise inventory turnover. Inventory turnover is the number of times you sell out orreplace stock items in a given period, such as a month, quarter or year. Generally, youwant a high turnover. High turnover is essential for inventory with a low margin; lowturnover is acceptable for high-margin items. One approach to ensuring high turnover isto practice lean inventory management—in other words, to order the least viableamountof stock. You can also focus on ordering high-demand products. Finally, negotiate withyour suppliers to get the best wholesale prices.
Decide on a process for shedding unsold inventory that you cannot return. You can ridthe business of excess stock through deep discounts or donations or by disposing of theitems.
Develop your inventory strategy alongside your business plan, and make it a livingdocument that employees use in the daily functions of the business. Update it regularly.
Execute the inventory plan. In today’s big-data, connected world, everymanufacturingand distribution company must have the infrastructure in place to support detailedanalysis and reporting from a user’s perspective of all aspects of inventory.
Retain the following data:
- Inventory status, whether in stock, on order, in transit or allocated.
- Coverage or length of time items can be sold, based on existing inventory andhistorical patterns, by item and stock location.
- Inventory available to promise, or the inventory you can quote to a customerwith a delivery date.
- Units of each item and its location in warehouses or distribution centers.
- Dollar value of items by location.
- Inventory trends and intervals, or the time between reorders.
Measure your results and report on them.
Set goals for continual improvement.

Importance of Inventory Planning

Good inventory planning can make or break growth and profitability. Some analysts say that retailers lose as much as $1 trillion to stockouts annually. However,many retailers overstock by as much as 50%.

“There is another obesity epidemic in America: that’s the over inventoried retailbusiness,”says Johnson. “A lot of retailers are reluctant to make markdowns quickly enoughbecausethey’re trying to maintain gross margin, and that’s a false pursuit because itcosts themmore to have the cash tied up in inventory that’s not selling. They’re muchbetter offmarking it down quickly. The first markdown is the cheapest—get it out of there so youcanget back whatever cash is possible and put that cash back into inventory that’s morelikelyto sell.”

Other costs of poor inventory planning include:

Customer dissatisfaction
Higher operating expenses
Excess inventory and obsolescence
Shortages and stockouts
Frequent back-ordering
Poor relationship with vendors
Excesses or shortages of storage capacity

Graduated Inventory Plan

Graduated inventory planning, or graduated replenishment, aligns order sizes and timings withproduction and sales volume. As production or sales draw down inventory, it is replaced.There is never too much or too little of any item.

Kanban Planning in Oracle Inventory

Kanban planning is another way to replenish inventory besides MRP materialrelease plans. In Kanban, each process pulls materials as needed. Kanban planning in Oracle is part of the Oracle Flow Manufacturingmodule.

How to Pick the Right Inventory Planning Software

Today, large and small organizations can enjoy the benefits of inventory planning software,with enterprise and small-business versions available. On-premise implementations may offeradded security and the confidence that comes from owning the software. However, cloud-basedofferings now provide inventory management options for diverse situations. Inventory managementsoftware should offer these key features:

Sales tracking through barcode and POS capability
Inventory location and control
Barriers to overselling stock
Management for multiple sales channels
Forecasting
Coordination between online and brick-and-mortar sales and fulfillment

Award Winning
Cloud Inventory

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NetSuite Can Help Provide Actionable Insights Into Your Inventory Planning

Properly managing inventory can make or break a business, and inventory planning is essentialto this process. Having insight into your stock at any given moment is critical to success.Decision-makers know they need the right tools in place so they can manage their inventoryeffectively. NetSuite offers a suite of native tools for tracking inventory in multiplelocations, determining reorder points and managing safety stock and cycle counts. Find theright balance between demand and supply across your entire organization with the demandplanning and distribution requirements planning features.

Learn more about how you can use NetSuite to help planand manage inventory automatically, reduce handling costs and increase cash flow.