What is Inventory Planning and How Do I Do It?

Inventory planning image 4444Every company or organization that is engaged in the production, sale or trading of certain products, has inventory in one form or another. This form is determined according to the type of your business.

There are 3 inventory categories or forms:

  • Raw Materials Inventory: Refers to those items which haven’t undergone any processing yet.
  • Work-in-Process Inventory: These items are in the process of conversion but aren’t ready to be sold to consumers.
  • Finished Goods Inventory: Apparently, under this category fall those items which are ready for sale.

Regardless of your inventory type, it should undergo tracking and management to ensure the smooth workflow of your business. This is done by means of a well-thought inventory planning system which helps you avoid stockouts or overstock making sure you don’t have a budget loss.

Inventory planning can be carried out either in a manual or in an automated way. But before discussing these two points, let’s first define inventory planning proper.

Inventory planning otherwise known as stock planning is the process of deciding the optimal quantity and timing of inventory which is aimed at aligning it with sales and production capacity. In other words, with inventory planning, you determine the stocking levels throughout the supply network.

Inventory planning has a direct influence on your business’ cash flow and profit margins. This is especially the case with small businesses that have to rely on a quick turnover of goods or materials.

If you are wondering why your business needs inventory planning, here is what its poor fulfillment or complete lack can cause:

  • Excess inventory
  • Inventory shortages and stockouts
  • Periodic back-ordering
  • Tension, misunderstandings and poor communication between your company and its suppliers
  • Dissatisfied customers
  • Excess or shortage of storage capacity

To avoid these issues and not cause any harm to your bottom line, you should back up your business with high-quality and effective inventory planning.

How to Do Inventory Planning? Choosing between Manual & Automated Approaches

As already mentioned, you can do your stock planning by using either the automated or manual approach. Usually, manual planning is appropriate for small businesses as they don’t have many different kinds of stock inventory or don’t keep too much stock at hand.

Besides, small businesses functioning on tight budgets can use manual stock planning so as to save money. If you want to plan stock manually, here are a few of its advantages and drawbacks that might help you make up your mind.

Benefits of manual stock planning include:

  • Affordable: Manual planning is less expensive which makes it a good choice for small businesses.
  • Sense of Control: You get to have more control over your inventory when planning it manually – e.g., you can visually tell when it is time to reorder
  • Less Time Spent Working Things Out: When planning manually, you don’t have to spend time learning how to operate things as is the case with automated software.

The disadvantages of manual planning are:

  • Inclination to Human Error: It goes without saying that manual inventory planning relies on the actions of people which highly increases the possibility for human error. You or your team members might forget to record a transaction or might happen to count the number of goods incorrectly. Such mistakes can lead to other problems such as unnecessary additional orders (that will harm your bottom line) and overuse of storage space. Besides, inaccurate counting can cause stockouts too – you might run out of an important item when it’s most needed.
  • Laborious: Manual planning requires lots of time and effort. You have to count the inventory yourself and keep track of all the transactions after each sold item. You could be spending this time focusing on other aspects of your business. Besides, it is also hard to share stock inventory data throughout the business. There is no automated system that would let you and your colleagues access the needed information when needed.

Automated stock planning, on the other hand, is not as time-consuming. It simplifies most of the complexities of your business’ inventory planning. Below are a few reasons why you should go for the automated approach:

  • Higher Scalability: Manual stock planning doesn’t come with enough scalability for your business: doing such things as manual submission of inventory in spreadsheets, emailing and calling your employees to know the number of your inventory at hand, analyzing data from numerous locations are not scalable at all. This system will break especially when your inventory volume grows. That’s why you should pass to using automated systems in order to reach speed in the performance of the above tasks, save time and have your business become as scalable as possible.
  • Reduced Human Error: Automated stock planning software will decrease or eliminate human error and improve the accuracy of the overall workflow.
  • Better Visibility: Automated systems will allow you and your team members have all the needed stock data and records at hand.
  • Saved Time: Instead of spending hours analyzing and counting inventory manually, you can let the right software do it for you and focus on other important tasks.

Automated systems don’t come with a lot of downsides. However, there are things you should beware of when working with an inventory planning software:

  • System Crash: Automation is not perfect. Power outages and other technical issues can cause a system crash. As a result, your work might stop and you’ll have to wait a little before you can access your data again. However, the probability of this happening is quite low.
  • Decreased Physical Audits: When the software does pretty much everything related to your inventory planning for you, you stop considering it necessary to do physical inventory checks. But it’s always good to do this from time to time just to make sure things are going as they should.

As it becomes obvious from these descriptions, the best option is implementing automated software to plan stock and combine it with some manual checking and analysis. This way, you’ll ensure the highest accuracy in the management of your stock.

Tips for a Newbie Inventory Planner

As an inventory planner, you should always look for ways to improve your stock management skills and approaches to reach the best performance results for your company.

We have made a list of a few quick tips on how to take your inventory planning to the next level (besides the successful combination of the above two planning approaches):

  1. Always know the amount of inventory you need for maintaining a proper service level. Keep in mind to take into account the potential demand variables.
  2. Assemble your team and collaborate with everyone who can provide you with valuable knowledge (warehouse personnel, store personnel, e-commerce analysts, IT personnel, finance, etc.).
  3. Collect metrics in order to have a picture of inventory accuracy. This can include order fill rates, formal inventory results company-wide (shrinkage and overage), evaluation of store-level and DC accuracy of on-hand data at the SKU (stock keeping unit) level.
  4. Develop an action plan so as to understand what changes should come first and which updates are the most critical. Changes should be prioritized according to the company’s needs.
  5. Implement a sales and operations planning process. This will ensure that your forecasting process gets the right market information for more accurate decisions.
  6. Review and measure the performance of your stock inventories (ROI, stock turns, etc.).
  7. If you have obsolete inventory, it’s time to deal with it. Make a report about it, decide what to do with it and don’t let it use the space of items that are in actual demand.

Proper and high-standard inventory planning is more or less the lifeblood of your business and can impact the value you provide to the market. Don’t overlook its importance, implement all the needed technologies, increase customer satisfaction and improve your bottom line.