Inventory Planning: Basic Concept & Benefits

Tally Solutions |Updated on: August 24, 2022

What is Inventory Planning?
Benefits of Inventory Control and Planning
How to Develop an Inventory Plan?
Conclusion

Inventory is one of the most crucial aspects of any business model. A close tab on the movement of inventory can make or break your business and that’s why entrepreneurs always emphasise on effective inventory management. While a few business owners do understand the significance and cruciality of tracking inventory on a regular basis, some fail to realise its importance making their business fall through the unseen cracks. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.

When in case of raw material inventory management function is essentially dealing with two major functions. First function deals with inventory planning and the second being inventory tracking. As inventory planners, their main job consists in analysing demand and deciding when to order and how much to order new inventories.

What is inventory planning?

Inventory planning refers to the process that any organization adopts to determine the optimal quantity as well as timing, with the sole aim of aligning such plans with the organization’s capacity to produce and make sales. Inventory planning usually affects the company in numerous ways. For example, it directly determines the cash flow of any organization and its profits margins with reference to those that have an over reliance on fast turnovers of materials and goods. Evidently, inventory planning is an important aspect of any business’s success.

Good inventory planning supports several vital business objectives including:

Customer service and satisfaction
Supply chain efficiency
Control of costs
Accurate sales and demand forecasting

Benefits of Inventory Control and Planning

Cash Flow

Inventory control and planning allows small businesses to manage their cash flow opportunities. SMEs aren’t always able to purchase large amounts of inventory, due to limited capital. By having better control of their inventory, they can know exactly how much inventory they will need and when they need it. This can free up other capital to re-invest in other areas of the business.

Business intelligence

An inventory control and planning solution allows small businesses to gain insights into the fast-selling products. This allows them to adjust their product line and to make quick and smart business decisions.

Maximize profits

By being able to make better business decisions the inevitable outcome for a small business will be an increase in profits. This is because the stock in their inventory will only be stock that’s actually selling. Other stock that doesn’t grab customer’s attention can be deemed obsolete and can be abandoned. This makes the general business practice more efficient.

Limits employee mishandling

Inventory planning and control limits the ability of employees to steal from the inventory. Often employees use items from a business’ inventory for personal use. Without inventory control, the business owner would be none-the-wiser. This practice ultimately reduces the profitability of the business. By limiting the ability of the employee to steal, the employer is reducing potential ‘hidden’ costs.

Reduce labour costs

Improved inventory planning and control techniques allow small businesses to reduce labour costs associated with inventory. These include the time spent counting stock and the transportation of stock. Employing an intelligent inventory planning and control solution can significantly reduce all these labour-intensive activities.

How to develop an inventory plan?

What is the volume of the product?

Business forecasting comes in handy while developing an inventory plan. Once you understand the demand for your product in the market, it will be much easier to devise a methodology to plan and maintain your inventory levels.

What factors impact inventory?

Factors that affect demand include well-considered advertising, your competition’s price cuts and offerings, the income and context of your target market, seasonal demand, trends and customer preferences.

Is the warehouse efficient?

To maintain an optimum level of inventory, it is crucial to manage a well-organised storage space for your goods. Your staff should be able to identify, track and place orders easily, for any new deliverables and also keep a constant tab on when the product is running out. This way you can have a balance of your demand and supply, thus reducing unnecessary overhead costs of transferring goods from one place to another.

Is the order process streamlined?

Look for ways to improve the connection between inventory and order management.

What can you automate?

Automation of different processes in a business will be of great help while devising an inventory plan, as there will be reduced errors and more accuracy in reports.

Conclusion

Earlier, the conventional way to track inventory was to use pen and paper. Over a period of time, businesses switched to spreadsheets, and most small businesses still manage their inventory in the same manner. However, as the business grows, it becomes next to impossible to continue using manual methods or spreadsheets, since a business owner will end up spending more time managing inventory rather than focus on the overall business. Also, inherently entering data by hand, is time consuming and error prone, and tends to be a repetitive task, which can easily be automated. Most importantly, an efficient inventory management in today’s day and age demands a centralized database that is accessible to multiple resources in your business, across multiple locations and updates on a real-time basis.

It needs to be noted here that inventory management software isn’t the only technology that can help a business manage its inventory and stock efficiently. It also includes mobile scanners, POS machines, barcode machines and a host of other equipment which can automate your inventory processes.