Guide to Inventory Planning and Control: Importance, Steps & Tips

Learn about Inventory Planning, Inventory Control, inventory control techniques and managing your inventory more effectively with Amazon Business.

Are you a business owner? Are you struggling with inventory planning and control? We understand that inventory planning is more difficult for medium-sized to large e-commerce firms and distributors. Unexpected changes in the market might make managing your inventory much more difficult. Developing an effective inventory plan and management strategy is just as crucial as strategic sourcing for your company’s future and success, no matter how your organization’s expansion currently looks.

Let’s look at managing inventory effectively and getting the job done!

What is Inventory Planning?

Up to 80% of the cash flow of a retail organization is typically locked up in inventory, which frequently makes up the most significant portion of its assets. It is impossible to avoid inventory because it enables businesses to run continually. However, having too much inventory hinders a healthy cash flow and prevents corporate growth because the funds locked up in too much inventory cannot be used to fund other aspects of the company.

Demand forecasting is necessary in inventory planning, along with determining how much inventory to order and when. When done well, this enables businesses to meet demand while spending less.

To put it another way, firms can lower their overall cost of warehousing goods and improve their inventory allocation routes by having the right amount of inventory at the right time, in the right place.

Materials that serve a present or upcoming requirement are kept in inventory. Organizations engaged in production and manufacturing keep raw materials, finished goods, or works-in-progress to combine into new products. These are also inventory control examples. Retailers keep a supply of finished or processed goods to sell to customers directly.

The main objectives of inventory control and management include the following essential company goals:

1. 1) Customer satisfaction and service
2. 2) Supply chain effectiveness
3. 3) Cost management
4. 4) Precise projection of sales and demand

Importance of Inventory Control and Planning

Growth and profitability can be made or broken by effective inventory control and management. The importance of inventory control, management and inventory are listed below!

1. Increase Sales

Inventory planning helps with an increase in sales. Increased sales automatically translate to profit. On your balance sheet, inventory represents the money that is committed. Additionally, the more debt you have and the less cash you have, the more money is dedicated to the balance sheet. It’s straightforward: your situation improves with a lower inventory. The strength of the retailer increases with increased turn rates. The only way to generate income is by selling inventory.

2. Increased Cash Flow

Inventory planning and control are among the finest strategies to increase cash flow and profitability. Although inventory creates cash flow, buying inventory necessitates a monetary outlay that impacts the company’s cash position. This is one of the advantages of inventory control.

A rise in inventory stock will show up as a negative sum in the cash flow statement, signifying a financial outlay or that a company has bought more products than it has been able to sell. On the cash flow statement, the decrease in inventory stock would seem like a positive amount if, on the other side, it had decreased.

Holding more inventory than is necessary to meet demand and current sales projections entail using available funds to pay for the extra stock and transforming current funds into non-cash assets.

3. Maximize Storage

One of the greatest advantages of inventory control is that you can positively affect the bottom line by using well-designed storage facilities and continually improving the layout and design. The layout is influenced by how inventory is ultimately used, whether in manufacturing, production, or delivery. To minimize travel time, it’s important to arrange things that are in great demand. Here, high demand refers to a high frequency of inquiries rather than many commodities.

4. Improve Customer Satisfaction

Long before a sale is made, exceptional customer service and an incredible customer experience must be consistently provided. You may shorten lead times, save money, and ensure greater satisfaction and customer loyalty by creating more innovative policies and procedures to improve inventory control process accuracy.

The objective of inventory control is to possess what the consumer wants, when and where they want it.

Need for Inventory Planning for E-commerce

The foundation of effective online commerce is inventory planning and management. Let’s look at how you can create a great inventory plan for an E-Commerce business.

1. Avoid Overselling

One of the functions of Inventory control is avoiding overselling. It’s advisable to place further orders whenever your inventory reaches a particular level to prevent overselling or stockouts. The standard level is the bare minimum of a specific item you wish to keep on hand. For instance, you might set the usual level to three if you offer widgets.

It’s time to reorganize when there are only three widgets left. How do you gauge the rate at which certain goods sell? You must monitor the rate at which those things are selling. The velocity of sale is the rate at which a product sells over a given time frame, such as a month or a quarter. To figure it out, divide the quantity of a specific product sold over a period of time by the number of days to determine how many were sold each day.

2. Release Cash

You can improve your cash flow with inventory planning and control. One of the ways to release cash is by being innovative in your purchasing strategy. Maintain the level of the fast-moving stock and refrain from over-ordering slow-moving inventory.

Have a great inventory management system set in place. Make sure you have a single point of contact for purchasing, get stock into your system as soon as the delivery takes place, develop procedures to handle damage or wastage, etc.

3. E-Commerce is Booming

According to a recent report, 78% of customers are ready to increase their purchases online over the next year. This calls for E-commerce retailers to scale up their inventories with tremendous and flexible planning mechanisms.

4. Meet Customer Expectations

Even amid a pandemic, consumers have high expectations for E-commerce firms. According to a recent report, up to 36% of customers have claimed that online orders have disappointed them since the COVID-19 disaster. Before making a purchase, more and more customers are looking to internet evaluations, and more than 75% of them admit to doing so after having a poor shopping experience. Dealing with negative reviews is very expensive, which can be easily saved by using adequate inventory planning to prevent these issues in the first place. By providing the appropriate products, expediting order processing, and avoiding mistakes that cost a company money, time, and brand reputation, effective inventory planning can help businesses achieve their customers’ expectations.

Retailers can prevent these situations by investing in suitable E-commerce inventory planning software and knowledgeable planners.

When does Inventory Planning take place?

The inventory control process is based on the following flow:

1. Preseason

The inventory planner evaluates Stock Keeping Unit (SKU) performance from the previous years before the season starts. The planner then sketches the preseason plan to determine category levels or how much of each product type should be sold. The planner will also need crucial background information on rival businesses, such as pricing and promotions.

2. In-Season

The planner will assess the weekly product and category performance to determine if sales meet or fall short of goals. This weekly evaluation paints a picture of the company’s state through the inventory lens. The outcomes determine which underperforming products you remove from stock.

• 1) Develop Business: The planner needs to develop their business reading skills based on promotions, distribution problems, holiday promotions, or weather occurrences. Although businesses frequently oppose them, discount deals can offer a good return. The planner can study to show what kind of revenues these discounts bring in.
• 2) Promotions: Markdowns can help you move excess inventory when products aren’t selling well. You can relocate seasonal items and attract unforeseen purchases with promotions.
• 3) Reforecasting: Iterations of the predictions are based on the planner’s knowledge of weekly trends and sales patterns.
• 4) Basic Inventory: This may typically be organized separately from seasonal inventory because it is easier to forecast.

3. Post-Season

Post-Season inventory planning is based on the planners, buyers, and merchandisers financial and inventory experience. They analyze the projected and actual results for the season.

5 Factors to be Considered while Planning Inventory

Controlling the whole lifecycle of an inventory is a component of inventory planning. Mentioned below are the top 5 factors you need to consider when planning inventory:

1. Financial Factors

Inventory management can be significantly influenced by factors such as the cost of borrowing money to stock enough inventory. In this case, your finances may fluctuate depending on the economy, so keep an eye on changing interest rates to help you plan your spending. Another factor influencing inventory management is the tax costs associated with stocking inventory. This is especially important when preparing tax returns at the end of the year.

Other financial considerations include warehouse operations costs and transportation costs. Changes in these factors may necessitate changes in your inventory management processes. Fuel price fluctuations, for example, may force you to reconsider your transportation options to save money.

2. Suppliers

Suppliers can significantly influence inventory control. Planning spending and production, successful businesses require dependable suppliers. Unreliable or unpredictable suppliers can have a significant impact on inventory control. A reliable backup supplier is a good idea to avoid product shortages or manufacturing delays. Learn about vendor management systems and how to reshape procurement through our blogs.

3. Lead Time

The time it takes from when an item is ordered to when it arrives is referred to as the lead time. Because lead time varies greatly depending on the product type and the various manufacturing processes involved, changes in these factors may necessitate changes in inventory management.

Because of lower production costs, outsourcing manufacturing processes to other countries may result in longer wait times.

4. Product Type

The various product types in stock must be considered when managing inventory. For instance, a perishable product might have a shorter shelf life than another. Inventory control is necessary for this situation to ensure that these items are cycled according to expiration dates.

5. Management

You and any co-owners of your business are ultimately in charge of controlling the inventory. While you might have personnel managing inventory procedures, they usually won’t share the same level of ownership as you do.

Inventory Planning Methods

Nothing happens without proper planning. Here are some inventory planning methods that can help you manage your inventory effectively:

1. Economic Order Quantity (EOQ)

The best inventory quantity to order is determined using the economic order quantity (EOQ) approach. It assists you in deciding how much product you need. It considers product demand, unit costs, and holding costs.

The goal of EOQ is to assist you in determining the number of products you should order to meet demand without ordering too many and inflating your holding costs. You must have a good grasp of the following for this strategy to function:

• 1) Order costs are your average outlay for each item you order
• 2) The demand rate is the number of units you sell at a specific time.
• 3) Holding Costs are associated with storing a product in your inventory.

Next, apply the following formula:

EOQ = square root of: [2(order costs) (demand rate)] / holding costs

2. Minimum Order Quantity (MOQ)

A technique for figuring out the minimal number of goods you should order at a given time is called minimum order quantity, or MOQ.

Although there is no predetermined formula for MOQ, you can choose the appropriate minimum order quantity for your company by:

• 1) Assessing the demand. Determine how much stock you require by considering both recent trends and your historical sales data.
• 2) Be aware of the holding costs. Find out how much it will cost to store goods. It will be less expensive to store small items in a warehouse than to keep goods in a temperature-controlled setting.
• 3) Recognize your break-even point. Determine how much you will need to sell the goods before you break even when you buy them.
• 4) Establish your MOQ. You can determine the minimum order quantity suitable for your products using the criteria mentioned earlier.

3. Implementing FIFO

FIFO stands for First in, first out. FIFO is a supply chain management technique wherein goods are sold or disposed of first after being purchased first. FIFO is perfect for retailers who sell perishable goods because it requires keeping note of the dates each item was bought and sold. Keeping an eye on expiration dates is also essential. Organize your stock or storage space for maximum results so that FIFO can be used easily.

An essential element in inventory planning is the reorder point because it reduces stockouts in your store. The appropriate reorder point changes depending on the product demand, sales velocity, order lead time, and safe supply.

4. Setting Reorder Points

An essential element in inventory planning is the reorder point because it reduces stockouts in your store. The appropriate reorder point changes depending on the product demand, sales velocity, order lead time, and safe supply.

5. Just In Time Strategy

A just-in-time strategy is another method of inventory control in which products are ordered: “as needed.” Because it allows you to avoid sitting on too much stock at any given time, this method can significantly reduce holding costs.

It does, however, necessitate tight control over your supply chain. JIT requires a quick ordering process and dependable vendors who can deliver products on time.

Challenges of Inventory Planning

Planning an inventory requires integrating a wide range of diverse elements and variables. Effective planning inventories can be difficult, even for companies that just use one sales channel. This serves as an Inventory control example. Take a look at a few challenges that you may encounter while planning your inventory:

1. Disparate Data

It takes a lot of information from many different sources to prepare inventories effectively. It’s also a complex process to combine all of this data. Inventory planners will need to assemble retail reports and historical data that may be scattered across numerous legacy systems. Data from point-of-sale (POS), suppliers, accounting, fulfillment, and sales orders must be compiled by planners.

This requires a lot of effort and, if done incorrectly, could lead to inaccurate demand forecasting, which might cause overstocking, understocking, or lost chances.

2. Guesswork

Predictions are seldom simple to make. Additionally, unpredictably changing market conditions may add to the complexity of forecasting.

3. Multiple Locations

It can be challenging to distribute goods that are kept in different places. It can be tough to always know where to allocate your inventory without a sound inventory tracking system.

Additionally, storing goods in the incorrect location could mean higher transportation costs and more extended wait periods for customers’ orders to be fulfilled. Poor picking practices will lengthen travel times throughout the supply chain and reduce output.

4. The Human Factor

The entire solution is not technology. An inventory planner is ultimately in charge of inventory management planning. When someone else takes over the position, a lot of historical information needs to be shared with the new leader.

The human element also applies to junior employees. Even with the best inventory software, your company won’t achieve its full potential if personnel aren’t properly taught to utilize it.

Inventory Planning Steps

Mentioned below are Inventory Planning methods mentioned in 9 steps:

1. Set Measurable Objectives

Set measurable objectives to demonstrate progress and get executive support.

2. Pick a Location

Pick a location for processing and storing merchandise. Maintain the freshness and pest-free condition of perishables. Keep additional stock organized and safe. Create a secure, cozy space with the necessary tools or supplies for unpacking, sorting, or repacking.

3. Pick a Program

Pick a program for inventory control. The software allows you to keep track of your inventory’s specifics, place immediate orders for new goods to avoid stockouts or overstocks, and acquire historical perspectives on inventory trends. Vendors provide small-business licenses in addition to enterprise-level programs.

4. Create Vendor Agreements

Together with your suppliers, create vendor agreements. They specify the shipment arrangements and the scheduled payment. These agreements might also clarify when to expect to receive a shipment after placing an order.

5. Identify the Stock Reorder Point

Identify the stock reorder point using formulae or historical trends to establish turnaround time and the ideal level for each item. Include the lead time for receiving fresh orders when choosing a restocking trigger.

6. Boost Inventory Turnover Rate

The number of times you run out of stock or replace it in a specific time frame, such as a month, quarter, or year, is known as inventory turnover. Generally speaking, you want a lot of turnovers. Low inventory turnover is okay for high-margin items; high turnover is required for inventories with a low margin. Lean inventory management, or ordering the smallest amount of still feasible goods, is one strategy for assuring high turnover.

7. Choose a Method for Disposal

Make sure to choose a method to dispose of the unsold items you can’t take back. You can eliminate excess stock in the company by offering steep discounts, making donations, or selling things.

8. Create Your Inventory Strategy

Create an inventory strategy that is a living document that employees use in the company’s everyday operations as you develop your business plan. Refresh it frequently.

9. Implement the Inventory Strategy

It is necessary to implement the inventory strategy as every manufacturing and distribution business today must have the infrastructure to facilitate in-depth analysis and reporting of all facets of inventory from the user’s perspective.

Inventory Planning Tips to Maximize Your Success

Regular analysis of your inventory plan is extremely important for the success of your business. Here are three tips to help you maximize the success of your inventory planning:

1. Conduct Regular Inventory Counts

It is vital to occasionally perform a complete inventory count in a business without good inventory records. This is typically done to coincide with the conclusion of a reporting period at the end of each month, quarter, or year. Because correct physical inventory counts require a lot of work, as the following technique will demonstrate, businesses typically cap the number of counts they perform each year. Conducting this regularly will help maximize success in your business.

2. Automate Tedious Inventory Tasks

Consumers today have high expectations for ease and want to place orders from their preferred channels by choosing the shipping or pick-up option that best suits them.

That is why automating tedious inventory tasks is necessary. Retailers must have control over what is being marketed on their channels and at what price to accurately restock and maintain stock levels to satisfy these expectations and get the product into the consumer’s hands when required. Automation is helpful in this situation. Ecommerce retailers are better able to meet these expectations thanks to automation technology.

Businesses of all sizes can benefit from using an automated inventory management system to streamline their inventory control procedures. The software handles laborious management chores for your team, preventing manual data entry. In addition to saving a significant amount of time, it is more precise, practical, and insightful than manual inventory tracking.

3. Keep Your Team Accountable

Meeting the objectives of inventory planning and control requires holding employees accountable. Everyone can generate better, more reliable work knowing their duties and expectations. You must have procedures to monitor your employees’ work because some require more oversight than others.

Your team members may be more motivated to stay on target and produce more when they know you are keeping tabs on accomplishing their objectives and tasks. Holding workers accountable also aids in their sense of responsibility development, a skill that can be applied to almost any position.

Conclusion

With proper planning, you can achieve all the success you dream of in business. Make sure to plan and establish ground rules to tackle any situation that may come your way while planning inventory control and inventory management. A great place to start is by registering with Amazon Business today!