Strategic inventory planning is crucial to your company’s profitability. If you have too little inventory in the warehouse, you miss out on the opportunity to maximize sales and revenue. Too much inventory, on the other hand, acts as a drag on your company’s finances, tying up working capital in unsold goods and products.

When Sales and Operations teams collide

Unfortunately, when it comes to inventory planning, there’s often a conflict between the sales and operations teams. Sales wants high levels of inventory to ensure product availability while Operations and Finance want inventory levels as low as possible to keep warehousing and logistics costs down.

When planning is done right in modern supply chain management, there’s close alignment between those two goals since it ensures the optimal inventory level to keep sales up and costs down. Here’s how you do it.

The inventory planning process

  1. Baseline your historical data.
  2. Differentiate cycle stock vs. safety stock.
  3. Verify your demand plan using analytics.
  4. Consider supplier performance and delivery.
  5. Factor in space limitations, lead times, promotions, and seasonality.
  6. Look at the entire network and plan strategically.

Baseline your demand history

Inventory planning starts with output from the demand planning system. Demand planning takes into account historical sales along with real-time orders and sales to calculate a forecast for inventory needs. It also takes into account inventory needed for special promotions or seasonal sales.

Categorize cycle stock vs. safety stock

Next, you need to break your inventory needs into two major categories: cycle stock and safety stock. 

  • Cycle stock is the amount of inventory needed on hand for typical demand during a given period. Cycle stock must be replaced in a regular cadence as your business sells its products.
  • Safety stock is the amount of inventory carried as a cushion to cover unexpected demand or late supplier shipments. 

Verify your demand plan

Although you start the planning process with output from the demand plan, it’s not a one-and-done exercise. You have to regularly update your plans for cycle and safety stock based on market information about current sales and orders. 

That’s why it’s important to use a demand planning system in combination with your inventory planning. Demand planning tools analyze real-time sales and order data to identify future directions in customer demand at the stock-keeping unit (SKU) level for input to update your plan.

Consider supplier performance

In ordering products for replenishment, your process needs to take into account supplier performance and delivery. Late supplier shipments undermine the goal of inventory planning. The same goes true for inferior products, as they stack up in the warehouse when no one buys them. So be sure to select only those suppliers who can reliably meet your quality and delivery requirements.

Evaluate warehouse space and other factors

Not to be overlooked are any warehouse space limitations you might have. To avoid a warehouse space crunch, you must have up-to-the-minute visibility into inventory levels and then factor in replenishment lead times into your plan.  If it looks like you’re going to need extra inventory for promotions or peak season demand, consider contracting with a third-party warehouse for more storage space. 

Plan your entire network strategically

If you have more than one warehouse, your inventory planning strategy requires a network approach. You have to consider where to place your inventory to best serve your markets and your customers. 

Here you should consider a system such as Deposco’s order management and DOM software which provides a big-picture view of inventory across all stocking locations in your distribution network for strategic planning and placement of goods.

Obstacles to effective inventory planning

To be successful with both sales and costs, you have to avoid some commonplace hurdles including: 

Lack of visibility into sales

You must stay on top of current sales and buying trends to avoid overstocks or understocks when ordering. Because demand can change suddenly — think back to the pandemic, for example — 100% visibility into sales will make your inventory planning responsive to shifts in the marketplace.

Lack of visibility into inventory

Along with demand visibility, you need real-time visibility into the inventory at each warehouse in your network. Without the latest knowledge of what you have on hand, you’re likely to overreact or underreact to news about demand shifts.

Poor collaboration

Departmental collaboration in planning also requires everyone in your organization to be on the same page. That’s especially important when it comes to the Sales and Operations teams collaborating on promotions or marketing campaigns. A single set of reliable numbers must be used and shared for collaborative inventory planning on stocking goals.

Manual inventory planning

Finally, one of the biggest challenges is the complexity of setting stock levels for dozens or even hundreds of individual products. Given the number of SKUs that have to be managed, planning manually with spreadsheets is virtually impossible. 

All of these will lead to higher costs. Your solution is to use an end-to-end supply chain planning and fulfillment software system to automate the entire inventory planning process.

Integrated planning and fulfillment automation

An integrated planning and fulfillment automation system streamlines the planning process for efficiency when dealing with multiple SKUs while also reducing manual errors. 

The system also provides a centralized database for shared decision-making. This gives a “single source of truth” throughout the whole organization for collaborating on inventory plans.

Keep in mind that any inventory planning system has to provide complete and real-time visibility into stock levels and movements across all warehouses in the distribution network. 

Because other pertinent information needed for planning (such as sales and orders/forecasts) is often stored in other software applications, your inventory planning system should run on a cloud-based warehouse management system (WMS) that integrates with other business systems including:

Cloud-based planning and fulfillment systems offer an advantage over on-premise systems in that they can provide decision-makers with remote access to inventory data, facilitating flexible working conditions. 

Your software partner should also offer continuous support so your company can adapt to changing business needs.

Align inventory goals and warehousing efficiency

When done right, strategic inventory planning aligns sales and operations to bring about efficient warehouse management that ensures product availability with lower costs. 

Choosing the right WMS software fosters companywide collaboration. This leads to smart decision-making regarding replenishment orders and stock holdings to improve both the top and bottom lines of your business.