A Guide to Inventory Planning in Supply Chain Management

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

As a supply chain inventory planner, your job is to ensure that your company maintains the right balance between inventory levels and operational efficiency.

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.

Whilst 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: Whilst 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 programme (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.

As you work to improve your inventory planning, it’s also worth being aware of the broader factors that can impact inventory performance — because planning doesn’t happen in a vacuum.

The Ten Factors That Impact Inventory Performance

If your inventory levels aren’t where they should be, one or more of these factors is almost certainly to blame:

1. Service levels — The higher your availability targets, the more stock you’ll need to hold. Service is often the non-negotiable starting point.
2. Forecast accuracy — Poor forecasting is one of the biggest drivers of both overstocking and stock-outs. Get this wrong and everything else suffers.
3. Supplier lead times — The longer it takes for stock to arrive, the more you need to hold as cover. Shorter lead times directly reduce inventory requirements.
4. Inventory management approach — Applying a single policy across all SKUs is a common mistake. Segmentation is essential before any real optimisation can happen.
5. Slow-moving and obsolete stock — SLOBs tie up working capital and take up space. They’re manageable, but only if you’re actually paying attention to them.
6. Ordering frequency — Large, infrequent orders tend to inflate inventory. Economic order quantity (EOQ) is a useful tool for finding the right balance.
7. Minimum order quantities — Supplier MOQs are set to suit the supplier, not you. They often force you to hold more stock than is optimal.
8. SKU range size — More SKUs means more complexity. The wider your range, the harder inventory optimisation becomes.
9. Distribution network size — Every warehouse needs safety stock. A larger network means higher overall inventory requirements.
10. Inventory management software — Outdated systems lead to bad data and slow decisions. The right software makes everything else easier.

If you want to see exactly what good inventory management looks like in practice, this short video walks you through four practical steps to assess and improve your inventory performance — from analysing your current stock health right through to selecting the software that fits your operation.

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.