A comprehensive guide to mastering inventory planning for success

What is inventory planning?

Inventory planning is a process that involves calculating optimal inventory levels to meet customer demand while minimizing storage, warehouse and supply chain costs. At a (very) basic level, successful inventory planning hinges on three main things:

Forecasting demand

Demand forecasting involves analyzing historical sales data, market trends and other supply chain factors to predict future customer demand.

Calculating order quantity

This is done by sourcing, ordering or producing new products to maintain optimal inventory levels.

Maximizing warehouse space

This involves monitoring current inventory levels and comparing them to customer sales data and trends — all to ensure that enough stock is on hand, without paying for excess storage space.

Get these three elements right and you can optimize inventory levels to maximize margins while avoiding wastage, stockouts and unnecessary warehouse costs.

The main benefits of effective inventory planning

Many businesses today are dealing with supply chain volatility, unpredictable customer and supplier behavior and an ever-increasing number of stock keeping units (SKUs). All of these factors add incredible levels of complexity — making inventory control and stock management an extremely difficult, manual and time-consuming task.

Inventory planning can keep things running smoothly and help avoid stockouts, minimize overstocking and ensure the inventory levels you pay to store are optimized for customer demand. This leads to a huge number of benefits, such as…

Increased productivity

Businesses can operate more efficiently and meet customer demand more effectively, without spending hours tracking stock or crunching reorder numbers in a spreadsheet.

Lower storage costs

Stockouts and overstocks are costly, eating up around 50% — sometimes more — of a company’s gross margin. Inventory planning can help avoid overstocking and cut the storage costs that come with excess inventory.

Better cash flow

An optimized inventory means businesses can reduce the amount of working capital they have tied up in inventory  and free up cash flow for product development or growth.

Satisfied customers

This is the big one. A good inventory planning strategy means you always have the right products in stock to meet customer needs, keep them happy and keep them coming back for more.

By following these steps, businesses can ensure that they have the right amount of inventory on hand to meet customer demand, while minimizing costs and maximizing profits.

The four main types of inventory planning

Inventory planning isn’t a one size fits all process. 

There are a few different types of strategies to choose from, but the right one depends on what products you sell and how you gather, store and analyze your inventory data. 

Let’s take a closer look at four of the most common types of inventory planning 👇

1. Material requirements planning

Material requirements planning (MRP) is a digital approach to inventory planning that tracks and manages the raw materials and supplies needed for production. The MRP method is mainly used by manufacturing businesses that require a steady material supply to produce products at the right time, in the right quantity and at the right cost.

Pros of material requirements planning:

✔️ MRP eliminates excess inventory by optimizing the purchase of raw materials
✔️ MRP drives more efficient production schedules

Cons of material requirements planning:

❌ Lots of data is required to order and manage raw materials effectively
❌ Unexpected changes in demand can result in supply shortages or excess inventory

2. Just-in-time inventory planning

Just-in-time (JIT) inventory planning is a system where inventory is only ordered and received when it is needed for production or to meet customer demand. The only real goal of JIT is to reduce inventory levels to free up cash in inventory, while minimizing the risk of overstocking.

Pros of JIT inventory planning:

✔️ Reduced cost when storing inventory
✔️ Improved supply chain efficiency and reduced lead times

Cons of JIT inventory planning:

❌ Hard to implement if dealing with large numbers of suppliers
❌ Not ideal in times of volatility, especially if demand fluctuates and is difficult to predict

3. Just-in-case inventory planning

Just-in-case (JIC) inventory planning is ideal for companies that keep large inventories on hand to minimize the probability that a product will sell out of stock. If a business has difficulty predicting consumer demand or gets surges at unpredictable times, a JIC inventory strategy can cover all bases and help avoid stockouts.

Pros of JIC inventory planning:

✔️ Helps to avoid production shutdowns during times of high demand
✔️ Provides a useful stock cushion in case of emergency demand surges

Cons of JIC inventory planning:

❌ Emergency inventory leads to higher storage costs
❌ Potential for wasted inventory if demand drops

4. Economic order quantity inventory planning

Economic order quantity (EOQ) is the ideal order quantity that a company should purchase to meet demand and minimize inventory costs at the same time. The EOQ model uses data to predict and order the batch quantities of products so that the company doesn’t have to make orders too frequently, but also so there’s no excess inventory sitting on hand.

Pros of EOQ inventory planning

✔️ Cut holding, shortage costs and order costs
✔️ Less time spent dealing with product orders

Cons of EOQ inventory planning

❌ Not ideal if product demand isn’t constant and predictable

Although each inventory planning method is different, there are some tips and tricks you can use to make the strategy you choose more effective.

Techniques to maximize inventory management planning

The hardest part of inventory planning is picking the process that best fits your company’s needs. Once you have, there are some guardrails you can put into place to make the strategy more effective and accurate. Here are our top three 👇

1. ABC analysis

ABC analysis is used to prioritize a company’s inventory based on the value of each individual SKU. 

First, you need to split your products into three categories:

ABC analysis: Group A

These are products that are high in value but make up a small percentage of the overall inventory. Although you don’t usually stock a lot of this SKU, it still contributes a significant portion of the company’s revenue.

ABC analysis: Group B

These are SKUs with moderate value that make up a moderate percentage of the business’ overall inventory and revenue.

ABC analysis: Group C

These are lower-value items that make up a large percentage of your overall inventory, but don’t contribute much to your bottom line.

Once items are split into these categories, it’s easier to see which products are moving the needle in your supply chain and warehouse costs. With ABC inventory analysis, the goal should be to prioritize the high-value items in Group A while also managing the low and medium-value items to ensure customer needs are met.

2. Safety stock planning

A safety stock plan is similar to an emergency plan.

It ensures you have enough inventory on hand to meet unexpected demand or supply chain disruptions by setting aside a certain amount of product. 

To calculate safety stock, you need to take a look at your entire supply chain and calculate everything from lead time to demand variability and SKU-level sales. Using this information, you can identify which products are most in demand and calculate how much safety stock is needed to prevent stockouts during busy periods or supply chain fluctuations.

3. Lead time planning

Finally, lead time planning looks at how long it takes for new inventory to be delivered to replenish stock levels. 

This technique involves a bit of math. You must calculate the lead time for each SKU and add it to the reorder point, which is the minimum amount of inventory needed to meet customer demand. By factoring in lead times, businesses can ensure that they have enough inventory on hand to meet customer demand while also cutting storage costs and avoiding stockouts. 

Now that you know what an inventory planning strategy looks like (and how to optimize it), let’s dive a little deeper into what you must consider before using one 👇

The nuts and bolts of setting up an effective inventory planning system

An effective inventory planning system will encompass a mix of accurate data, stock parameters and the right tech to keep costs down and customers happy. 

While picking the right inventory planning strategy is half the battle, there are a couple of ways you can improve the accuracy of your processes…

Crunch the numbers on what raw materials cost

Supply chain management is everything. 

One of the first steps in setting up an effective inventory planning system is understanding your raw material costs. This includes the cost of the materials themselves and hidden costs like shipping or handling fees. Look into the relationship between suppliers, raw costs and current inventory and ask yourself: 

• Is the profitability there?
• What impact do raw materials have on cash flow, and are you holding on to too much?
• Does your supplier’s lead times allow you to hold less stock, but still meet customer demand?

By knowing your raw material costs, you can accurately calculate the cost of goods sold (COGS) and set accurate prices for your products.

Think about stock levels

According to studies, reducing stockouts and overstocks can cut inventory costs by around 10%.

If you have too little stock, you risk running out of products and losing sales, but too much stock can tie up cash flow and incur unnecessary storage costs. The only way to avoid this is to set optimal stock levels based on historical sales data to ensure that you always have the right amount of stock on hand.

Instead of calculating and tracking all this manually, the right inventory planning tool can be a gamechanger here. Peak’s stock optimization software uses a mix of demand forecasting and models to recommend replenishment points and levels to ensure you have enough products at every store.

 

Our platform uses a mix of transactional, inventory and store data along with parameters like seasonality, promotions and product categories to create accurate stock optimization models. This model can then be used to order the right amount of stock and keep popular products available without wasting a ton of cash on excess inventory or warehouse costs.

Invest in the right tech to track inventory

Finally, it’s important to choose the right tools as they can make or break an inventory planning strategy. 

Technology like barcoding, point of sale (POS) systems and radio frequency identification (RFID) can help streamline inventory management processes and reduce errors. Even warehouse logistics tools and customer relationship management (CRM) systems are a good investment to store information as the accuracy of any inventory planning strategy relies on accurate and real-time data. 

As long as all your data is in one place, it’ll be easier to track inventory levels and supply chain fluctuations more accurately.

If you want to get ahead of competitors, adding AI to your inventory planning process can do just that. 

For example, Peak’s Dynamic Inventory application uses AI to create accurate demand forecasting and safety stock models that recommend reorder points and optimal inventory levels at each distribution center or store. This not only helps companies meet service levels efficiently, but it helps humans make smarter decisions based on real-time data. 

Peak combines stock levels, historical data and seasonality with recommended reorder points and lead times to alert you when inventory levels are not where they should be. You can also track products by individual SKUs to determine how much it costs to keep certain levels of stock and how to optimize reorder levels to meet service levels:

The result?

Better cash flow and less money spent on warehouse costs… but your customers are still happy! 🥳

Successful inventory planning is easy (with the right tools)

Inventory planning isn’t rocket science — but it does take some research.

You must seek out the right strategy for your company, because what suits a manufacturing firm probably won’t be the right inventory planning method for a retail store. But once you’ve picked a process and sorted out your data, inventory planning is the best way to maintain optimal stock levels and meet customer demands.

Thanks to tech and AI, companies can now build a solid inventory planning strategy without spending hours tracking sales or tinkering with a spreadsheet. Just plug in your inventory management tool, set your parameters and meet customer demand without the risk of wasted warehouse costs or overstocking.