Inventory Planning: Finding the Right Balance for Your Business

Create an Inventory Planning Strategy

Read time: 4.5 min.

Inventory planning can feel like a guessing game. How much inventory do you need on hand? Do you have too much inventory taking up valuable warehouse real estate, or too little, causing stockouts and delayed shipping?

Inventory planning is key for a profitable distribution company. Inaccurately forecasting your inventory creates other business issues, such as too much overhead, lost revenue and limited company growth. Inventory management done right improves your cash flow and profit.

Three main strategies distributors prioritize when improving their inventory planning strategy are:

  • Preventing stockouts
  • Minimizing overstocking
  • Improving processing

Many distributors encounter stockouts, overstocking and processing issues when evaluating how to improve their inventory planning. Consider your company’s needs and how you can apply these solutions.

Prevent Stockouts

Stockouts can cost you. Consistently being out of stock can cultivate a negative reputation with your customers. If their orders are often arriving late or they can’t order from you because you are out of product, they might look for another supplier. Regaining lost customers is a difficult task and can cost you more in the long run. Serve your customers better with improved inventory management.

Solutions: Stockouts can happen for many reasons. Ensure you have an effective formula for demand forecasting. Several ways to do this are by:

  • Performing regular stock counts – routinely count inventory to maintain optimal stock numbers in your warehouse
  • Using an effective formula to determine how much to stock – apply metrics such as sales history, actual demand and average sales
  • Implementing software – inventory planning systems automate manual business processes and provide one platform for all company data
  • Following best practices on how to organize and maintain your warehouse – know (or easily be able to check) what you have in stock at any given time
  • Understanding key industry and market trends – be aware of current economic factors and trends relevant to your business

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Minimize Overstocking

Overstocking your warehouses is also costly. Maintaining more warehouse space than needed unnecessarily contributes to the company’s overhead.

For some distribution companies, too much stock can lead to wasted product. Items that have expiration dates – food, makeup or chemicals – spoil sitting on the shelf if they’re not sold and shipped chronologically. Unsold inventory is expensive and disrupts your data if doesn’t account for it. Products in your warehouses must be organized and tracked effectively.

Solutions: Reduce costs, and in some cases minimize waste, by better understanding your inventory through efficient management processes.

  • Determine an effective formula for calculating demand forecasting – understand your sales history to prevent overstocking.
  • Implement an inventory system – inventory management systems like a radio-frequency identification (RFID) inventory system, can provide real-time updates and information to maintain accurate stock counts.
  • Search for patterns in your data that highlight gaps or deficiencies – a data management system can identify patterns in overstocking, such as an inaccurate demand forecasting formula or product waste.
  • Collaborate with your team and other departments – apply insights from your data to make inventory planning and management processes more efficient.

Improve Processing

Demand forecasting isn’t always the problem. A company may be committed to performing regular stock counts, be well versed in current trends within its industry and stocking the proper amount of inventory. The culprit is warehouse logistics.

A vague procedure for inventory processing can result in employees doing the same work multiple times, costing the company more time and money. Is there a defined chain of command? If not, warehouse operations could be organized chaos.

However, these logistical problems can be improved with a number of solutions. Better and more frequent training for employees clarifies what the process is and who is in charge of what. A defined supply chain management streamlines work and processes shipments to customers. Companies on the same page are able to plan ahead, encouraging growth and finding areas to cut costs.

Solutions: Employees are vital to your organization, and they need to understand their role and how it relates to the overall structure. Companies can maximize human potential by using automation for mundane, manual tasks. Grow your company by executing:

  • Proper training and accountability – an effective employee onboarding process and periodic training reinforces a company’s operations. Well trained employees are more efficient and don’t duplicate tasks. They’re also better equipped to execute a logistics process, making the supply chain more reliable.
  • Automation of manual processes – decreases the time needed to perform regular tasks and curates data. According to Entrepreneur, research shows that one mistake is made for every 300 characters entered manually by someone doing data entry. Fixing these human errors, as well minimizing the time required to perform a task, adds up. When companies don’t perform tasks manually, business leaders spend less time managing people and focus on the future.

Inventory Management Best Practices

A few best practices to keep in mind for inventory planning:

  • Implement a demand forecasting formula to prevent stockouts and overstocking.
  • Conduct regular inventory counts and review data for patterns.
  • Automate manual processes to track orders, product age and other relevant data with inventory management software to minimize human error.
  • Collaborate across departments to cut costs and implement efficient operations
  • Stay apprised of market trends related to your business.
  • Train employees thoroughly to ensure reliable processes.

Consider a variety of data when implementing demand forecasting – stock turn, sales cycles and customer trends, historical sales data and other factors that affect your outcomes. Organizing data in one system saves time and money. Some companies may choose to use an inventory management system or another automated method of tracking the life of products before they’re shipped to a customer. Reference your data regularly and analyze it.

Another aspect to inventory planning is people. Employees, from the CEO to the worker on the warehouse floor, play an integral role in a distribution company’s operations. Good training is vital – how your employees do their job will have a direct impact on your inventory management. Periodic training seminars keep information fresh and current, and coordinating with departments across the company improves collaboration and efficiency. Holding employees accountable ensures that rules and processes are enforced.

Regardless of the specific inventory planning issue plaguing your distribution business, following defined processes will clear a path to your company’s goals.