Every organization that is engaged in production, sale or trading of Products holds inventory in one or the other form. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.
”Inventory planning also happens to be an area that many companies fail to prioritize sufficiently.”
A retail business’ ability to understand and act on inventory planning can make or break their growth, profitability, and ultimate success. Retailers lose $634.1 billion each year to stockouts and the average retailer overstocks by 50 percent. With inventory issues contributing so heavily to a business’ bottom line, it’s clear that those who refuse to adapt and think critically about inventory will miss opportunities, lose sales, and fall behind.
As retailers scale their businesses, it becomes increasingly difficult to manage operational workflows without dedicating resources to inventory planning. While some retailers anticipate the need for an inventory planner, for others, an inciting incident precedes the necessity.Inventory planning touches a number of supply chain components and includes all the decision-making responsibilities associated with the acquisition and deployment of inventory, which can include raw materials, work-in-progress, and finished goods.
”These responsibilities extend across functions and when properly exercised, comprise supply, demand, distribution, production, purchasing and capacity planning.”
Because inventory planning involves the determination of inventory quantities, timing, and alignment with production capacity and sales volume, it’s a strategic management imperative which directly impacts your company’s cash-flow and profitability.
Good inventory planning supports a number of vital business objectives including:
- Customer service and satisfaction
- Supply chain efficiency
- Control of costs
- Accurate sales and demand forecasting
With so many challenges to inventory planning, it’s easy to understand the many benefits that come from doing it effectively. Investing in both the software and the people to help your business plan for and forecast demand will pay dividends in the future. The sooner you implement a proper planning system and process, the sooner you’ll begin to collect the historical data that will help guide future planning.
An effective plan creates a more scalable and standardized process while reducing ad hoc and reactive work. Inventory planning reduces out-of-stocks and overstocking and enables businesses to optimize pricing and allocation, which inevitably increases profitability. When running a business is both easier and more profitable, it’s hard to dispute the obvious benefits of inventory planning.
While inventory planning may seem daunting, it doesn’t need to be. With the right person and the right tools, it’s much easier to make informed, data-driven inventory plans. The strongest approach to effective inventory planning requires a nimble, scalable, and integrated inventory management software solution with the ability to empower an analytical, insightful planner.
Inventory Planning – Reasons for Maintaining a Large Inventory
Some of the advantages of having a large inventory include:
- Having the ability to quickly meet customer needs (resulting in satisfied customers).
- Having the ability to meet unexpected surges in demand (creating happy customers).
- Having a buffer against supplier problems or disruptions.
- Having a buffer against different production capabilities within your organization.
- Improved economies of scale. Buying in bulk can reduce costs.
- A larger inventory can increase delivery speed (resulting in grateful customers).
Inventory Planning – Reasons for Minimizing Inventory Levels
There are many disadvantages to having a large inventory. These include:
- Increased costs. Inventory itself has a cost, plus there is a cost to store it and maintain it in good condition. (Lower costs can make you more competitive.)
- Items may deteriorate, get soiled, decay, spoil, or be damaged. The longer an item is kept in inventory, the greater the risk. (Unusable items increase your costs.)
- Loses from inventory shrinkage (theft, items becoming lost, etc.)
- Items may become obsolete, or the market may change, such that the item is no longer needed or desired.
The disadvantages of increased inventory generally all lead to higher costs. This can result in the need to charge customers higher prices. Thus the benefits of maintaining a greater inventory are offset by higher costs. The positives vs. the higher costs must be weighed in each situation to determine the best inventory levels. That’s what inventory planning does.
Inventory Planning and Lean Manufacturing
Lean manufacturing techniques such as Kanban strive to reduce inventories to as low a level as possible. The principle is called Just in Time (JIT) delivery. Raw materials and components are not delivered until just before they are needed, and finished products are manufactured in a sufficient quantity to meet customer demand. Ideally, these two, the incoming materials and outgoing products, should balance such that there is no inventory of either incoming material or outgoing products.
In practice, low levels of inventory are still needed, and very good inventory planning is needed to ensure what is needed is available when it is needed. Properly managing inventory can make or break a business, and inventory planning is essential to 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 inventory effectively.