In retail, stocking up on products and seeing what sticks — or worse — hoping for the best is hardly an effective strategy.
In order to generate sales and move merchandise, everything you purchase in your store must be planned in advance. You need to figure out:
- What items you’ll stock up on
- How much to order
- When you’ll sell them
- What you’ll do in case they don’t sell as planned
All of the above can be encompassed in this thing we like to call inventory planning. And this article will give you a quick guide on what it is and how to implement it.
Let’s dive in.
What is inventory planning?
Inventory planning is a process for deciding what retail products to stock and how much to order. The practice involves demand forecasting and budgeting, in which retailers factor in sales data and trends to determine the optimal inventory levels and the right timing for sales, promotions, and markdowns.
The importance of inventory planning
Done right, inventory planning enables you to run a thriving retail business. Specifically, it helps you:
Increase sales. You’ll be able to stock up on the products that resonate with your market, ultimately driving sales and revenue.
Improve cash flow. Proper planning can prevent issues like having too much capital tied up in your inventory. You can keep stock moving, and free up cash flow to reinvest in your business.
Maximize storage. It also frees up your warehouse or storage location, ensuring that you have enough space for revenue-generating merchandise.
Improve customer satisfaction. Having the right products at the right time keeps your customers happy. When people know they can reliably get the products they need and want from your business, they’re more likely to return.
When does inventory planning take place?
Inventory planning shouldn’t be a one-and-done activity. Rather, it’s a process that you implement continuously as the shopping season progresses. Inventory planning can mean different things, depending on the period of the year or season. Consider the following:
This is where most of the demand forecasting takes place. You plan ahead by analyzing sales data from comparable seasons and factoring in that information in your purchasing decisions. You also need to consider existing and future trends, along with the current state of the market to figure what items to carry for the upcoming season.
Some of the resources that would be helpful at this stage are:
Historical sales and inventory data, ideally from your POS or inventory management software.
Qualitative feedback from associates and customers. Take note of any input, requests, or concerns raised by your frequent shoppers and ask your sales associates about any notable feedback they’ve received about your products.
Inventory planning doesn’t stop at the pre-season stage. Retailers should monitor stock levels and performance during the season, and then iterate accordingly. This could mean:
Looking at top-performing items, and re-ordering extra stock if necessary. Try to evaluate early on what’s selling well so you can place orders early and capitalize on the increased demand.
Paying attention to developing trends or events, including the weather, pop culture interests, news, and more. If possible, ride these waves by carrying relevant products.
Planning sales and markdowns, for items that aren’t selling or moving quickly. Again, it’s important to make these decisions early so you don’t end up with stale merchandise.
Once the season is over, a good inventory planner will coordinate with other stakeholders (e.g., buyers, managers, etc.) to discuss the outcomes and results of the season and what the team should do to improve.
At this stage, it’s important to organize the data collected over the course of the shopping season and make sure the info is accessible for future planning.
How to do it: 5 inventory planning methods to consider
Now that we’ve discussed the benefits and fundamentals of inventory planning, let’s talk about how to actually implement it. There are a handful of inventory planning methods to consider and the right one depends on your products, inventory management system, and business processes.
Economic Order Quantity (EOQ)
Economic order quantity (EOQ) is a method used to calculate the optimal inventory quantity that you should order. It factors in product demand, unit costs, and holding costs to help you determine how much product to order.
EOQ’s objective is to help you determine the quantity of products that would allow you to meet demand — without ordering too much that it balloons your holding costs. For this method to work, you need to a solid idea of the following:
- Order costs – How much you spend per merchandise order
- Demand rate – Number of units you sell in a given time period
- Holding costs – The costs to hold or keep the product on hand
From there, use the following formula:
EOQ = square root of: [2(order costs)(demand rate)] / holding costs
Minimum order quantity (MOQ)
Minimum order quantity or MOQ is a method for determining the minimum amount of inventory that you should order at a given time. This is ideal if you want to be conservative with your ordering practices or if you’re looking to maximize your cash on hand and not spend too much capital on inventory.
There’s no set formula for MOQ, but you can determine the right minimum order quantity for your business by:
Evaluating demand. Get a handle on how much stock you need by taking into account your historical sales data, along with current trends.
Know your holding costs. Determine the costs for holding a product. Storing small items in a warehouse will cost less than having to keep products in a temperature-controlled environment.
Being aware of your breakeven point. When you purchase the product, calculate how much you need to sell before you hit the breakeven point.
Figure out your MOQ. The above factors will help you figure out the minimum order quantity that’s appropriate for your products. Let’s say you’re planning to purchase a certain style of shoes.
You sold 100 units of that style last year and expect a slightly lower demand this year. You also know that you need to sell about 50 units to break even. If you’re on the conservative side, you may choose to order 50-75 units during the first week and decide to re-order based on the product’s performance.
Short for first in, first out. FIFO is a supply management method in which products that are acquired first are also sold or disposed of first. Ideal for retailers that sell perishable products, FIFO requires to keep track of the date each product was acquired and sold. Monitoring expiration dates is also a must.
For best results, structure your stock or storage room in a way that makes it easy to implement FIFO. A supermarket, for example, may arrange its freezer items so that products that were acquired first are displayed at the forefront.
Setting reorder points
A reorder point is an important tool in inventory planning, as it helps mitigate stockouts in your store. The right re-order point varies depending, the product demand, sales velocity, ordering lead time, and your safe stock.
The formula for calculating the reorder point requires two components:
- Lead time demand – the average number of units sold daily multiplied by the product’s lead time
- Safety stock – (max daily orders x max lead time) – (average daily orders x average lead time)
From there, add your lead time demand to your safety stock to determine your reorder point. You’ll use the equation:
Reorder point = lead time demand + safety stock
Just in time (JIT) method
Just in time is a strategy in which products are ordered on an “as needed basis”. This method can greatly reduce holding costs because it enables you to avoid sitting on too much stock at any given time.
However, it does require a tight control over your supply chain. In order for JIT to work, you need a swift ordering process and reliable vendors who can deliver products in a timely manner.
Inventory planning tips to maximize your success
While the specific inventory planning steps you need to take will depend on the method you choose, there are a number of general best practices you can implement to keep your inventory levels in top shape.
Conduct regular inventory counts
Inventory planning relies heavily on accurate data. You need to minimize discrepancies as much as possible, and one of the best ways to do this is to physically count your inventory on a regular basis. This ensures that the inventory levels you see in your system match what’s actually in the store.
There are typically two main methods for inventory counts. You can either do a full count (ideally once every season) or implement cycle counting, which is the practice of partially counting merchandise on a continuous basis so you can stay on top of stock levels without having to interrupt regular store operations.
Regular inventory counts keep your stock levels accurate, which ultimately leads to better data that you can use when planning your inventory.
Automate tedious inventory tasks
Make things easier on yourself and your team by automating steps in your inventory planning processes. For example, instead of manually looking up information like items sold or a product’s sell-through rate, see if your inventory management system can crunch the numbers for you.
Vend by Lightspeed, for example, can generate Product Performance Reports that automatically display these metrics.
Or, rather than using pen and paper to physically count products, you can equip yourself with a tool like Scanner which enables you to conduct inventory counts right from your phone.
Keep your team accountable
Inventory planning has many moving components, including ordering stock, receiving merchandise, selling products, and generating reports. A good way to ensure that tasks are completed on time is to promote accountability within your teams.
Catch up on a regular basis to check on performance and ensure that the right people have visibility on the data and reports they need to make inventory decisions. It’s also a good idea to keep date stamps as well as records of when actions were taken.
For example, you can set up a system that shows who ordered an item and when. This improves transparency and helps keep team accountable.
Achieving optimal inventory levels doesn’t happen by accident. You need the right inventory planning processes in place to ensure that your product quantities are always on point. Follow the tips above to improve your planning and be sure to get yourself a solid inventory management solution that can streamline your processes.
About Francesca Nicasio
Francesca Nicasio is Vend's Retail Expert and Content Strategist. She writes about trends, tips, and other cool things that enable retailers to increase sales, serve customers better, and be more awesome overall. She's also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores. Connect with her on LinkedIn, Twitter, or Google+.