What is Inventory Planning? The E-commerce and Retail Guide
Inventory planning becomes slow and cumbersome if you don’t have the right systems. Whether you’re just starting an e-commerce business, have already scaled it to multiple locations (online and off), or work for a large retailer, the way you manage your inventory makes a huge difference to your costs and your bottom line.
Too much of the wrong inventory takes up space that you could use for your bestsellers and incurs a holding cost. Too few of your bestsellers means you’ll miss out on vital revenue streams. The right inventory planning system reduces costs, supports a more sustainable cash flow and creates an optimized product mix, which results in happier customers, who spend more.
Table of contents
- What is Inventory Planning?
- Inventory Planning vs Inventory Forecasting
- Why is Inventory Planning Important in E-commerce and Retail?
- Challenges of Inventory Planning
- Essential Inventory Planning Steps
- What does an Inventory Planner Do?
- Inventory Planning Best Practices
- Inventory Planning Models
- Improve Your Inventory Planning with Singuli
- Get Ahead With Your Inventory Planning
What is Inventory Planning?
Inventory planning develops the best practices for holding the ideal quantity of stock to meet the demands of sales and production capacity. Done well, inventory planning creates a more efficient supply chain and has a positive effect on cash flow and profits.
Let’s look at the inventory lifecycle in e-commerce and retail:
- Forecasting. This part of the cycle is crucial in inventory planning. The right inventory planning software can use your current inventory, industry benchmarks, marketing plans and lots of other useful data to predict future needs, which helps to maintain your ideal stock levels.
- Procurement. A company purchases inventory based on the data they have. Especially at the beginning, this can be an educated guess and sometimes retailers slightly overstock on their first orders to avoid stockouts.
- Storage. Inventory must be kept in a safe, clean area so it doesn’t reduce in quality or spoil. For example, an electronics company would take extra care to keep items in a dry location with anti-theft measures in place.
- Sales. Companies don’t usually keep inventory for vanity, it’s there to be sold.
- Tracking. This is a vital part of the inventory lifecycle. Customers aren’t happy when they can’t buy what they’re looking for. If their favorite moisturizer is out of stock, they’ll buy it elsewhere and might not come back. Tracking inventory tells you what’s in stock, what’s selling quickly and what you need to reorder.
- Reordering. Knowing when to reorder specific products isn’t always easy. You can do it manually or set up automatic systems but either way, you need to know which items to reorder and how often to order them.
Forecast demand, issue and track POs, re-order on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.
Inventory Planning vs Inventory Forecasting
Inventory forecasting takes a glimpse into the future. It asks and answers questions about predicted sales, marketing campaigns, events and any other factors that affect demand. With this information at hand, you can predict the amount of stock needed to match demand over a specified time.
Good inventory planning takes account of inventory forecasting but there are more factors to consider. It’s not simply a prediction of the future, it’s an analysis of supplier terms and conditions, current inventory levels, warehouse space, storage costs, returns and more. With a good understanding of all the data, managing and planning your inventory becomes easier and more reliable.
Why is Inventory Planning Important in E-commerce and Retail?
Poor inventory planning can be detrimental to your e-commerce or retail business and a great plan has many benefits. Let’s see what they are:
If you sell out of your customers favorite products, they’ll find them elsewhere and they may never come back. Accurate inventory planning stops this from happening.
On the other side of the stockout coin, you’ll find overstocks. Having too much stock of a particular product is bad for cash flow, takes up space and incurs a carrying cost, which could be used for better selling inventory.
If you have the inventory your customers want to buy, you’re going to sell more products. A good inventory planning system makes sure your bestsellers are always available.
Improve Cash Flow
Inventory uses up capital. If you hold onto it for too long, you won’t have enough capital to spend on new products, marketing or anything else you need. Inventory planning allows you to keep stock moving and frees up cash to reinvest in your business. In other words, good inventory flow means good cash flow.
Maximize Warehouse Storage
Not having overstocks creates space, which allows you to stock up on products your customers want more of.
Enhance the Customer Experience
Customers have different needs, but simply having the product they want to buy is a no brainer. If you have the right product at the right time, your customers will trust you to provide for their needs and will be more likely to return.
If you’re not keeping track of the stock you have, it’s much harder to know when that stock goes missing. If you know what stock should be there, you can quickly flag an item as being lost, stolen or damaged and investigate why.
Overcome Supply Chain Challenges
Inventory planning takes supply chain challenges into account. If you’re clear on the inventory you need to meet demand, you can create a buffer and/or a backup for when supply chain challenges occur.
Improve Warehouse Efficiency
A well managed warehouse is set up in a way that makes it easy for staff to retrieve inventory. You’ll need space for new items to come in and you’ll need to make sure your best-selling items are the easiest to access.
Challenges of Inventory Planning
Inventory planning offers many benefits but there’s a lot to consider. The challenges of inventory planning are difficult when you have one sales channel and they become even more complex as your business expands.
It’s important to take demand fluctuation, seasonality, multiple channels, multiple warehouses and many other variables into consideration to avoid disruption and to increase efficiency. So, what are some typical challenges?
Inventory forecasting and planning requires accurate historical data for inventory levels and sales. Often, data is stored in more than one place, making it hard to find and aggregate. A centralized database that holds your information and tracks updates solves this challenge.
💡 Pro Tip: Get a holistic view of your inventory data with Singuli’s Reporting & Analytics. Track not only inventory data, but also marketing, promotions, site traffic, historical sales and customer behavior. You’ll have all of your information in one place, ready to use in inventory forecasting and planning.
Human Error and Key-Person Risk
Technology helps, but you still need to train your staff. Not doing this can lead to human error. And losing employees (planners in this case) is always bound to happen. The person who takes their place will need historical data to pick up where they left off.
Mistakes are sometimes made, even with well-trained staff, which is why Singuli’s audit log allows users to trace when a record was changed and by whom.
Planning for Multiple Locations
When you’re selling across multiple locations, both online and in brick-and-mortar stores, you have more to consider. If you store inventory in several warehouses or distribution centers, you need to be able to track it at both an organization wide and a local level.
💡 Pro Tip: Use Singuli’s location-level forecasts and replenishment alerts to optimize your inventory. If you have a mixture of retail and e-commerce channels, Singuli bases your forecasts on distinct models to reflect the variations in inventory patterns.
Lack of Communication
Many businesses see inventory planning as something the operations team deals with. In reality, your whole organization has a role to play and every department needs to communicate with each other. R&D, procurement, production, quality control, sales and marketing all have an influence on inventory needs.
Marketing is a great example. Many inventory forecasts are thrown off by changes in marketing spend that affect performance. Singuli does the opposite. It uses marketing plans to create category level forecasts so you can understand the true requirements needed to match your growth plans.
Forecasting New Product Launches and Option Expansion
Planning for the future requires an analysis of past performance but basing your forecast on this alone causes problems. What happens when a new product is released and how do you account for new options like, for example, color or size?
In order to avoid stockouts and missed sales, you’ll need a way to predict size curves for every sized-based product in your collection. It’s also important to combine past product sales with product attributes to get accurate initial order projections and to plan reorders.
📌 Get Started: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.
Automating and Tracking Purchase Orders
The less automation involved in your inventory planning, the more opportunity there is for human error. Tracking purchase orders across multiple shipments (so-called “split shipments”) is one example of where many struggle.
Good automation improves supply chain efficiency by reducing time consuming manual work and improving accuracy. A centralized PO database like the one Singuli offers makes sure your purchase history is all in one place and all your staff can use the same system to see what’s on order.
💡 Pro Tip: Use Singuli to automate your inventory planning. Automatically sync your expected receipts with the warehouse, keep track of your landed costs and share ETA dates with your freight forwarder with Purchase Orders & Shipments.
Safety Stock Planning
Even with the best inventory planning software, forecasts aren’t always perfect. You need to take precautions in case of unexpected shipment delays or unforeseen changes in demand. Singuli manages and recommends safety level stocks at the SKU (stock keeping unit) level.
Essential Inventory Planning Steps
A successful inventory planning system is broken down into three main steps: context, analysis and planning. Let’s take a look at each:
1. Gathering Context
What’s happening in and around your business? Gathering context is about reviewing your business’ data history. Include the smallest details and the larger industry landscape. Sales orders, customer information, competitor landscape and even socio political events are part of the inventory planning process.
2. Analyzing Data
You’ve gathered data, now you have to review it and see what it all means. Think about the data that’s relevant for future inventory. Are your inputs correct? Is there enough data to review? Was there a spike in sales from an event that won’t be repeated again? The right inventory planning software can help with analytics.
3. Planning Inventory
You’ve gathered context, you’ve analyzed the data, now it’s time to plan your inventory. This involves:
- Reviewing your historical sales data
- Assessing the performance of SKUs
- Setting expectations for upcoming periods based on your SKU performance
- Exploring any competitive data you can assemble, including promotions, pricing and trends
- Specifying receipt budgets by product category
- Breaking down product and category performance across relevant intervals (weekly, monthly, seasonally)
- Using performance statistics to plan markdowns and promotions
- Reforecasting periodically based on changes in performance and current events
- Organizing evergreen inventory using sales forecasts and projections
- Analyzing each season’s financial and product performance to see if targets were met
- Adjusting the strategy based on newly gathered data
What does an Inventory Planner Do?
Inventory planning isn’t a set it and forget it task. Whether you’re doing it yourself or have an inventory planner on your team, this role involves constantly implementing processes and reviewing data as the factors in your business evolve so you’re always ready to adapt. The inventory planner role is broken down into three key areas:
A major factor in pre-season planning is demand forecasting. An inventory planner considers existing and future trends, analyzes sales data from comparable seasons and reviews the current state of the market to inform your purchasing decisions.
📌 Get Started: With Singuli’s Advanced Forecasts, it’s easy to analyze historical data, market trends and customer inputs, which saves you or your inventory planner time and increases forecast accuracy.
Inventory planning in-season is all about monitoring, evaluating and adjusting. An inventory planner checks whether sales are exceeding or lagging behind targets. With this information, it’s easier to take the following actions:
Purchase replacement stock. If a particular SKU is performing better than expected and lead-times permit, an inventory planner can use the new data to assess likely sales and restock as early as possible.
Adjust to trends and events. Not every event can be planned for in advance. Changing weather, an unexpected visit from a star or political upheaval are just a few examples of unexpected activity. An inventory planner keeps an eye on these and buys more stock or reduces purchases depending on the situation.
Plan sales and promotions. Some items don’t sell as expected. If an inventory planner notices a downturn, they can prepare for sales, promotions and markdowns. A good pre-season plan makes this less of a necessity.
It’s important to understand how well a season went and how well the inventory plan coped. Planners, merchandisers, buyers and other important stakeholders get together to analyze and compile data for the next season.
Inventory Planning Best Practices
Inventory planning best practices make sure you’re consistently maintaining the ideal inventory levels for your business. The right combination of people, process and technology brings you closer to your goal.
Forecast Product Volume
Success in forecasting product volume involves reviewing historical data and understanding seasonality. Look at industry trends and relevant events alongside your own inventory data to assess what your product volume will be.
Review Factors that Might Impact Inventory
Upcoming advertising campaigns, sales promotions, seasonal demand spikes as well as a number of other internal and external factors can impact customer demand. You can’t anticipate everything but leave as little as possible to chance.
Make Sure Your Processes Are Efficient
How easy is it to accept deliveries and release stock? What happens to your purchase orders? Are they easy to track? Inventory planning best practices prioritize efficiency. If your warehouse isn’t performing at its best, what can you do to improve it?
Make sure you have space for new stock but not so much space that you’re losing money, keep your warehouse locations as close to potential delivery locations as possible and make sure communication between inventory and order management teams is streamlined.
Use the Right Key Performance Indicators (KPIs)
How are you tracking performance? KPIs make sure you’re achieving against your targets. It’s not always easy to know how well you’re doing but measuring against the following KPIs can help:
- Missed Revenue caused by stockouts
- Sales on a daily, weekly, monthly and/or seasonal basis
- Forecasting accuracy
- Current Cost of Inventory
- Forward Weeks of Supply
- Inventory movement
- Stock turnover
- Cost of sales
- Customer satisfaction
Automate Repetitive Tasks
Many tasks can be completed without manual input. It saves you and your team time and creates space to perform operations that are profitable for the business. Want to know the landed cost of a particular product? Let Singuli calculate it for you.
Do Inventory Cycle Counts
Many businesses shut down to do one or two large inventory checks per year. This means for roughly 364 days, you’re unsure of the accuracy of your stock levels. A cycle count looks at a small group of products at a specific time.
You don’t need to disrupt business operations to do this and you can quickly identify the causes of inventory errors. You can analyze discrepancies, make stock checks more manageable and be confident that you have more accurate inventory data.
Streamline Communication Across Teams
We mentioned earlier that good inventory planning involves every team in the company, from marketing to operations. To make sure nothing gets missed, your teams need to communicate well. For example, planners need to know what events are coming up and sales teams need to know what inventory is available to sell (ATS).
Inventory Planning Models
The right inventory planning model depends on your business processes, the inventory management system you use and the products you sell. Let’s look at some models and their pros and cons:
Economic Order Quantity (EOQ)
Economic order quantity considers how much you spend per order (order costs), the number of units you sell in a season (demand rate) and how much it costs to store your products (holding costs). It’s used to calculate the ideal inventory quantity from an economic standpoint.
The EOQ calculation finds the optimal point to minimize logistic costs and optimize storage space.
EOQ = square root of:[2(order costs)(demand rate)/holding costs]
Minimum Order Quantity (MOQ)
Minimum order quantity calculates the least number of items you can purchase at a particular time. Although some retailers use MOQ, it’s mainly set up by suppliers. More expensive items often have a lower MOQ and vice versa. Companies with smaller ordering needs will need to shop around for suppliers with lower MOQs to make sure they’re not overstocking.
Reorder Points (ROP)
When is the right time to reorder? It’s a difficult question but there’s a formula to make it easier to answer. You need to know a few things to start:
- Demand. How many units do you sell daily?
- Lead time. How many days does it take for stock to get from the supplier to your warehouse?
- Safety stock. What’s the minimum stock needed to operate safely?
Firstly, you need to work out the lead time demand (the total demand between now and the expected delivery of the reorder). To do this, multiply the lead time by the demand.
Let’s say you sell five units per day (demand) and it takes 10 days for your inventory to arrive in your warehouse, your lead time demand is 50 units
Now all you need to do is add the lead time demand to your safety stock. Let’s say your safety stock level is 30. 50 + 30 = 80. Once you’re down to 80 units, you need to reorder. This is your ROP.
An important note. Make sure you’re consistent with your units. You can calculate demand by weeks but if you do, your lead time and safety stock need to use weeks too.
Reorder point = lead time demand + safety stock
Improve Your Inventory Planning with Singuli
Singuli makes inventory planning simpler and more efficient. Let’s see how you can plan inventory across channels in a few simple steps:
1. Integrate Singuli with Your E-commerce Website or Marketplace
Fully integrate Singuli with your e-commerce website and across marketplaces such as Shopify, Magento or Amazon. This is the starting point for better inventory planning.
2. Build Custom Reports
Get reports at a SKU day level with Singuli data, and a real time view of forecasts without needing complex excel models to see what’s driving revenue. Reports are tailored to suit your business.
3. Forecast Demand Spikes, New Products and Size Curves
Speed up inventory planning processes. Accurately predict demand spikes, inventory needs for new products and size curves with Singuli.
4. Create and Track Purchase Orders
Easily create and track POs from one place, with multiple users sharing the same system using Singuli’s centralized PO database.
5. Measure Performance and Repeat
Make sure your inventory planning is working with Singuli’s advanced analytics. You can make any changes you need and start the whole process again for the next season.
Get Ahead With Your Inventory Planning
Inventory planning is different for every business but whether you sell online or have an omnichannel retail business, it can help you manage your inventory in a productive and efficient manner. You know what inventory planning is, you know why it’s important and you’re able to overcome its challenges with Singuli. Now all you have to do is choose the right inventory planning model for your business and get started.
Forecast demand, issue and track POs, reorder on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.