What We’ll Unpack in this Article (TL;DR)
Effective inventory planning helps businesses strike the right balance between overstocking and stockouts, which can otherwise lead to major financial losses or missed sales opportunities. While there’s no one-size-fits-all method, proven approaches can be tailored to your demand patterns, product complexity, and supply chain reliability. With the right strategy, you can optimize inventory decisions and build a more resilient, profitable operation.
Navigating inventory can feel like you’re walking a tightrope. Lean too far one way, and you’re drowning in excess stock that ties up cash and clogs your warehouse. Lean too far the other way and you’re facing stockouts, missed sales, and frustrated customers. The key to staying steady and maintaining the right balance of stock? Strong inventory planning methods that keep your supply aligned with demand.
There’s no universal “best” method. What works great for one manufacturer with a long lead time may be disastrous for a fast-moving eCommerce business. The right planning approach depends on your products, supply chain demand patterns, reality, and goals.
In this article, we’ll deep-dive into the most effective inventory planning methods, and cover how they work, where they shine, and how to choose the best methods for your business.
What Does Excellent Inventory Planning Matter?
You’re likely already familiar with inventory planning, which is the process of determining what products to stock, in what quantities, and when to replenish them. The goal? To have just the right amount of inventory to meet customer demand without overspending or overstocking. While this objective might sound simple on paper, it takes robust inventory planning methods and practices to avoid overstocking, stockouts, and keep inventory moving smoothly.
When done well, inventory planning feels almost invisible: products are on the shelves when customers want them, cash isn’t locked in slow-moving (or dead) stock, and you can accurately predict demand. But when businesses drop the ball with inventory planning or use outdated practices, the effects can be immediate and severe.
The risks of poor inventory planning include:
- Excessive carrying costs: Money gets tied up in products that sit idle. Recently, this has been a major challenge in the supply chain – wild fluctuations in supply and demand have left businesses stuck with mountains of excess inventory worth $740 billion dollars.
- Stockouts and lost sales: When customers can’t get a product, they turn to your competitors. Studies show that stockouts cost retailers nearly $1 trillion every year.
- Operational inefficiency: Rushed orders and overtime labor can lead to backlogs, delays, and extra costs.
However, the benefits of effective inventory planning are numerous and significant, and include:
- Stable supply chains: Predictable ordering cycles and strong supplier relationships.
- Optimized cash flow: With less money tied up in necessary inventory, you have more working capital for your day-to-day.
- Improved forecast accuracy: Excellent inventory planning gives your reliable data and accurate demand forecasts, which set the stage for better decision making.
Inventory planning methods are about more than keeping products in stock. They allow you to run your business profitably and predictable, no matter its size or vertical.
What Inventory Planning Methods Should You Know About?
There’s no shortage of ways to approach your stock – but a handful of proven inventory planning methods show up again and again because they consistently work well (even across industries and business sizes). The trick is to know what each one does best, where its deficits are, and when to use them.
Here are some of the most widely used inventory planning methods:
1. Just-in-Time (JIT)
JIT aims to keep as little inventory on hand as possible, with stock arriving exactly when it’s needed for production or sale. This method tends to minimize carrying costs and frees up capital that would otherwise be tied up in inventory.
- Best for: Businesses with reliable, fast suppliers, and lean operations with predictable demand.
- Strengths: Can dramatically reduce storage costs and minimizes the risk of inventory obsolescence.
- Considerations: Might not be suitable for highly vulnerable/disrupted supply chains, because it leaves little room for unexpected demand surges.
2. Economic Order Quantity (EOQ)
EOQ determines the ideal quantity of an item that you should order which both minimizes costs (what you pay to place orders) and holding costs. It’s calculated using a mathematical formula that takes into account your demand and costs to pinpoint the sweet spot between too many small orders and too few large ones.
- Best for: Products with steady, predictable demand. Also, businesses with consistent supplier lead times.
- Strengths: Can reduce total inventory-related costs and provides a clear, data-backed quantity to inform ordering decisions.
- Considerations: Because EOQ assumes demand and costs are consistent, it doesn’t account for seasonal spikes or unpredictable consumer behavior. It also requires accurate demand and cost data to be accurate.
3. Materials Requirement Planning (MPR)
MPR is a software-based planning method for manufacturers that integrates production schedules with inventory needs. It ensures the right raw materials are available for manufacturing at the right time. This system calculates what you need, when you need it, and often generates purchase and production orders automatically.
- Best for: Manufacturer with complex products and multiple components, and businesses needing precise coordination between production and procurement.
- Strengths: Reduces shortages and production delays.
- Considerations: Depends on accurate, real-time data.
4. ABC Analysis
ABC analysis sorts inventory into three categories based on value and volume:
- A items: High value, low volume products that deserve close monitoring. They account for a small percentage of your total stock, but a large portion of total value.
- B items: Moderate value, moderate quantity items that require a balanced approach. They require a balanced approach to inventory and require a medium amount of inventory control.
- C items: Low value, high quantity items that make up the majority of stock but contribute the least to overall value. They require minimal oversight and simpler replenishment strategies.
- Best for: Businesses looking to prioritize inventory control efforts. Also, environments with a wide range of product values and volumes.
- Strengths: Helps focus resources where they matter most and works well alongside other planning methods.
- Considerations: Requires periodic review as product value and demand shifts.
Pro tip: you don’t have to commit to just one inventory planning method. Many businesses see the best results by combining approaches. For example, you can use the ABC Analysis to prioritize high-value items, then apply EOQ to determine the optimal order quantity for those products.
How Can You Choose the Right Inventory Planning Method?
It’s all about finding the one that fits your products, customers, and supply chain realities.
Here are factors to keep in mind when deciding:
- Understand your demand patterns: Do you have stable demand, or frequent fluctuations? If you have unpredictable demand, consider methods that allow for flexibility, or a hybrid approach that blends forecasting with regular review cycles.
- Evaluate your supply chain reliability: If you have reliable suppliers and predictable lead times, lean methods like JIT can minimize carrying costs. However, if lead times are variable or prone to disruption, consider more conservative methods.
- Factor in product complexity: Have simple SKUs or items with straightforward replenishment? Consider a model like EQO to keep planning efficient without overcomplicating things.
- Consider your business technical and operational infrastructure: Small or growing businesses may start with simple, manual-friendly methods. Larger operations often benefit from sophisticated software-driven methods or advanced forecasting tools.
Whatever Inventory Planning Method You Choose, StockIQ is Here
When it comes to your business, the limits do not exist. But even if your product, processes, and team are locked in, your organization can struggle without the right inventory planning methods. And whatever method you choose, StockIQ is here to help you take your business to new heights.
What’s StockIQ? We’re a supply chain planning suite built for businesses like yours that uses advanced technologies to help you streamline your supply planning process, including your software and strategies.
Our user-friendly system enables you to control inventory, simplify ordering, and enhance forecasting with AI-powered tools and sophisticated machine-learning algorithms.
Are you interested in learning how StockIQ can help you (realistically) leverage the potential of artificial intelligence? Contact us today or request a StockIQ demo.