Inventory planning can be a daunting task. The needs of improving forecasting accuracy are more significant now than ever, as we navigate an evolving social and economic landscape.
There are many complexities to inventory planning which involve a wide range of factors, including market trends, product characteristics, supply chain lead times, carrying costs, inventory turnover, customer preferences, and routes to market. Achieving accuracy in inventory planning can be a complex and challenging task, but it is crucial for maximizing profits and minimizing waste.
Let’s explore 5 things to consider when inventory planning!
Consumption trends dictate supply needs. Although shipment and ordering patterns can be sporadic and often times unpredictable, we know that consumption sales are generally more consistent and predictable. Thus, utilizing syndicated point of sales data and leveraging a bottom up approach to forecasting is best practice for inventory planning.
Once the consumption trends are built out and understood, one can compare that to their shipment trends and attempt to find correlations between the two within different customers. It may be possible to identify consistent ordering tied to different levels of consumption, but many times this can be difficult and also risky to build an inventory plan around those assumptions.
Although the data is available, there are so many indicators that could impact sales and ordering. Within each customer, there could be a plethora of variables that could warrant a change to the order amount and frequency. What if a customer expands their inventory capacity and needs additional volume? Or what if a storm is on the horizon and forces a customer to order ahead of their normal schedule? These are just a few examples of how data can provide an understanding of inventory needs, but also be limiting at times.
Different products require different plans in inventory planning because each product has unique characteristics that impact how it is manufactured, stored, and sold. Some of these factors include:
Products can also result in spoilage or could have defects. If there is a product with a high chance of either outcome, one will need to adjust their supply and inventory plan to account for this. Considering these and other factors specific to each product is important for creating an effective inventory plan that balances the needs of the company and its customers.
While the manufacturing and supply planning side of inventory planning has its own difficulties, transporting and distributing the finished goods is also an obstacle to be aware of.
With customers and sale points located in all corners of the world, distribution strategies have evolved to support these different options. Some companies even select different routes to market for different products that they sell. Transportation times will also vary amongst different customers with different routes to market.
Some customers will have their own warehouses to store inventory, while others may be limited to their store’s capacity in holding products. These differences drive different ordering behaviors, and will impact a production schedule.Within each customer, there will be different requirements around how much inventory they prefer to keep on hand and available to sell. These differences need to be taken into account when developing an inventory plan, as they can impact how much inventory is required and how frequently it needs to be reordered.
Safety stock is important in inventory planning because it serves as a buffer against unexpected events or fluctuations in demand. By having a safety stock, a company can ensure that it has sufficient inventory to meet customer demand, even in the event of unexpected spikes or short-term disruptions in the supply chain.
Safety stock also helps to minimize the risk of stockouts, which can result in lost sales and damaged customer relationships. In addition, it provides a cushion against fluctuations in lead times, allowing the company to continue fulfilling orders even if the delivery of new inventory is delayed.
Having an adequate level of safety stock can also help to reduce the cost of expediting shipments and minimize the cost of carrying excess inventory. The key is to find the right balance, as too much safety stock can result in higher carrying costs and too little safety stock can result in stockouts and lost sales.
In summary, safety stock is a critical component of effective inventory planning, as it helps to ensure that a company has the inventory it needs to meet customer demand and minimize the risks associated with stockouts and supply chain disruptions.
Amongst all the complexities to consider from demand trends, the main goal is to achieve accuracy when planning inventory. Repercussions of inaccurate forecasting can have negative effects whether there is low inventory, or a surplus.
For products with short shelf life, having a surplus could easily result in expirations. To prevent this, companies feel pressured to sell these products at a discount, or even donate the product to reduce waste.
On the flip side, if a brand does produce enough, there is a potential to experience lost sales. Imagine if a company runs a promotion at a large retailer and all the inventory gets depleted. Not only could this brand lose out on potential sales, but also could face the potential of a consumer moving to another competitor in that space. Regardless of producing too much or too little, inaccuracies in inventory planning and forecasting will result in impacts to the brand’s bottom line.
In summary, inventory planning is a complex task that requires a deep understanding of various factors such as demand forecasting, lead time, safety stock, carrying costs, inventory turnover, and more. Data is important, but limited and can only provide a partial understanding of inventory needs. Different products have unique requirements, and routes to market can be complex and impact transportation times. Each customer also has their own capacity and preferences for inventory levels. Despite the complexities, the ultimate goal is to achieve accurate inventory planning to minimize the risks of lost sales, expirations, and other impacts to the bottom line.