Good inventory management, like everything else, starts with good planning. But planning isn’t just the start; it’s the very foundation of effective inventory control.
Inventory planning also happens to be an area that many companies fail to prioritise sufficiently.
In this brief guide, we’ll explain why good inventory planning is so important to the success of your business, explore the consequences of poor planning, and consider the requisites for improvement in this key inventory management activity.
The Basics of Inventory Planning
Inventory planning touches a number of supply chain components and includes all the decision-making responsibilities associated with the acquisition and deployment of inventory, which can include raw materials, work-in-progress, and finished goods.
These responsibilities extend across functions and when properly exercised, comprise supply, demand, distribution, production, purchasing and capacity planning.
Because inventory planning involves the determination of inventory quantities, timing, and alignment with production capacity and sales volume, it’s a strategic management imperative which directly impacts your company’s cash-flow and profitability.
Good inventory planning supports a number of vital business objectives including:
- Customer service and satisfaction
- Supply chain efficiency
- Control of costs
- Accurate sales and demand forecasting
The Cost of Poor Inventory Planning
If your company is not at the top of its game when it comes to inventory planning, your ability to manage inventory will suffer. In turn, operating costs will be higher than they need to be and revenue will also be impacted.
The physical impact of poor inventory planning can manifest itself in a number of ways, which include:
- Excess inventory and obsolescence
- Inventory shortages and out-of-stocks
- Frequent back-ordering
- Tension between your company and its suppliers
- Customer dissatisfaction
- Excesses and/or shortages of storage capacity
Elements of Good Inventory Planning
Good inventory planning, by its very nature, is all about creating the conditions which make it easy to manage inventory. It’s about preventing the issues described above and optimising the flow of inventory through the supply chain.
While not necessarily a straightforward activity, good inventory planning is more achievable today than it has ever been. This is largely thanks to 21st century technology, but also due to the establishment of best practices in the years since supply chain management emerged as a business concept.
Good inventory planning is based on the effective integration of processes, governance, people, and technology. Let’s take a brief look at each of those elements and how you can apply them to improve inventory-planning performance.
Technology and People
Before you can develop and implement a structure of governance for inventory planning, your company will need to assess and implement the necessary asset-mix, composed primarily of information-technology and people.
Inventory planning technology: While it is possible to use spreadsheets for inventory planning, this level of technology doesn’t offer anything like the performance of enterprise analytics solutions or even that of a low-end ERP platform. If your company is serious about making inventory-planning improvements, provision should be made for appropriate data-processing capabilities.
Inventory planning roles and responsibilities: As mentioned at the beginning of this article, inventory planning is an activity which crosses functional divides. Main actors in each function should have clearly defined roles and responsibilities. At the same time, they need to be provided with an environment enabling a collaborative approach to planning.
Companies which enjoy success with inventory planning will typically maintain a sales and operations planning program (S&OP) which fosters cross-functional communication and cooperation to keep plans aligned throughout the enterprise.
Governance and Process
There should be little need for the use of gut feeling in inventory planning. If a sound governance platform is established, comprising documented policies, processes, checks, and balances, your inventory management team should find itself equipped to proactively plan and manage the inventory dynamics within your supply chain.
Inventory planning policies: Policies should be developed, documented, and clearly communicated to all teams and individuals involved in inventory management. Where necessary, this includes vendors and supply chain partners such as 3PL logistics providers. Policies serve to provide high level governance for inventory planning, and act as a platform upon which to develop detailed step-by-step processes for all planning activities.
Inventory planning processes: As with policies, inventory planning processes should be documented and wherever possible, standardised. They should cover physical activities and those performed with the aid of planning software. Data processes should be developed to control system inputs and validate outputs.
Inventory planning metrics and KPIs: You should be able to quantify the performance of systems, processes, and people involved in inventory planning. In order to do this, you’ll need to establish a set of KPIs and metrics. Examples of good inventory planning KPIs include:
- Inventory accuracy: To measure how accurately your system inventory reflects physical stock and vice versa.
- Percentage of customer orders impacted by stock-outs
- Days sales of inventory
- Sales forecast accuracy
- Percentage of warehouse capacity utilised
Things to Consider Before Upgrading Your Inventory Planning
Simply recognising that inventory planning could be improved is an important step toward higher profitability and reduced costs in your enterprise. If you do believe it’s time to make improvements though, bear the following points in mind when embarking on an inventory planning revamp:
- Inventory planning will not directly address inventory shrinkage, so if this is a problem in your organisation, you will need to consider other measures for shrinkage reduction.
- It’s probably unrealistic to try and improve inventory planning without also addressing execution. If your inventory management in general is lax, planning improvements alone will not improve things.
- Be prepared for some pretty hefty financial investment. Good inventory planning is not cheap to achieve and it can take a while to see meaningful returns—but they will come in time.
- An initiative to improve inventory planning can entail some fairly substantial changes. Be prepared for the possibility that with all the training and mindset changes required, you may lose a few people as the journey progresses
Good Inventory Planning is Good for Everyone
Notwithstanding the time, effort, and investment involved, getting on top of the inventory planning game is one of the most important improvements your company can make in its supply chain operation.
As your improvements start to take effect, the benefits will be felt by everybody, including your management team and workforce, your logistics partners and suppliers, and perhaps most importantly, your customers.
If you’d like some assistance with inventory planning improvements, the Logistics Bureau team is ready and waiting. Why not take a look at the professional services we offer, and get in touch if you have any questions or would like to discuss how we can help.