What We’ll Unpack in This Article (TL;DR)
Your business’ inventory strategies play a central role in your revenue, margins, and the customer experience. When inventory planning is done right, it can lead to more cash on-hand, less excessive stock, shorter cycles, and happier customers. If not, you’ll suffer from stockouts, warehouse delays, and churn risks.
You can use your inventory to influence business outcomes by:
- Understanding how your inventory strategies influence cash, profit, customers, revenue, and risk.
- Know your strengths (and deficiencies) when it comes to demand forecasts, supplier performance, and supply chain management software.
- Monitoring core KPIs.
This article is a practical playbook for aligning inventory with what your business is trying to achieve.
Whether you’re an SMB or enterprise organization, the way you manage your business’ inventory plays a central role in your revenue, margins, and the customer experience. Proper inventory strategies lead to more cash on-hand, less excessive stock, shorter cycles, and happier customers. On the other hand, when you don’t have excellent inventory practices in play, you’ll feel it in stockouts, warehouse delays, and churn risks.
This article is a practical playbook for aligning inventory with what your business is actually trying to achieve. We’ll help you understand the relationship between inventory and business goals, and share how to plan your stock so that it contributes to your objectives – whether you want to grow revenue, expand margins, or free up working capital.
How Do Inventory Strategies Influence Business Outcomes?
The relationship between your inventory strategies and business outcomes can sometimes feel like the brain game of “what came first, the chicken or the egg?” Sure – when cash is tight, margins are slim, and customers are dissatisfied, it can influence your stocking strategies. But a more effective (and profitable) tactic is to use intentional, data-backed inventory planning to drive business outcomes.
Here’s how inventory policies shape your business:
Impact on Cash & Profit
- Cash flow: Holding too much inventory ties up money in stock that could be used elsewhere, while holding too little can lead to lost sales (industry studies show that stockouts discourage customers from returning to your business in the future).
- Profit margins: Excess stock leads to high storage costs and potential loss from obsolescence/expiration. On the other hand, stockouts can lead to last-minute rush orders or expedited shipping, which eat into profits.
Impact on Customers & Revenue
- Service levels: Reliable stock means customers get what they ordered. Unreliable inventory levels lead to delays, cancellations, and a damaged brand reputation. One study of 8,000+ consumers by Descartes/SAPO Research found that customers who experience delivery failures often lose trust in retailers and change where they shop.
- Sales opportunities: Clear inventory visibility and availability ensures smooth orders, and enables preorder, upselling, and the smoother launch of new products.
Impact on Risk
- Safety stock: Certain inventory policies insulate business from risk. For example, safety stock acts as a buffer when demand spikes or suppliers are late.
- Supply disruptions: Disruptions are inevitable in the modern supply chain, with McKinsey finding that nine in ten supply chain leaders encountered supply chain challenges last year. Advanced inventory planning practices help reduce the impact of risk. For example, if you have multiple suppliers, you can avoid the fallout of tariff spikes from a certain geography.
Inventory strategy connects financial goals, customer expectations, and operational realities. A thoughtful approach is your key to moving your business in the direction you want it to go.
Translating Inventory Targets Into Business Outcomes
How exactly can you leverage inventory strategy to align stock levels with business goals? Here are steps you can use to turn revenue, margin, and customer goals into clear stocking policies and practices:
1. Start with a handful of goals
Inventory has a widespread impact on your business. Start by narrowing your focus to a few key goals you want to prioritize first (you can revisit more later). Do you want to reduce stockouts, hit launch dates, improve cost of goods sold (COGS), or boost working capital by cutting excess?
2. Audit your strengths (and your deficiencies)
Leveraging inventory strategies to achieve business goals means taking a good, hard look at your operations, and seeing where improvements can be made. Assess your business across areas such as demand forecasting abilities, tech infrastructure, supplier performance, overstock, and stockouts. Ask yourself questions like:
- Are we using advanced, AI-driven demand forecasts to accurately predict consumer demand for products?
- Are our suppliers performing as they should be? How often are they late? Do we have alternative suppliers in the case of delayed shipments or long lead times?
- Are we minimizing overstocking, while still carrying enough inventory to meet demand?
- Are we deploying the latest supply chain management software?
This can help you see where improvements in your inventory foundations (like tech or processes) can lead to seismic business shifts.
3. Segment products
Each SKU carries a different weight in your organization – classify them so you know where to focus your ordering strategies on, using methods such as ABC analysis. This process divides inventory into three categories: A Items (high value, low quantity), B Items (moderate value, moderate quantity), and C Items (low value, high quantity). Changing ordering policies on your C items might not move the needle on revenue. Instead, you might need to focus on A and B items.
4. Improve your demand forecasts
Cutting-edge demand forecasts are your greatest asset for proper inventory planning. Today’s leading tools don’t just project future demand based on past buying habits. They allow you to:
- Generate forecasts based on individual vendors and SKUs.
- Predict “zero demand,” or when an item is likely to stop selling.
- Flag unusual sales (such as a particular large one-time order) which would otherwise skew future forecasts.
- Automate “due to buy” indications, which track order intervals, and note when an order is overdue (and therefore likely below your tolerance level).
Generally, by improving your demand forecasting capabilities, you gain the visibility necessary to execute many business “wins,” such as lowering safety stock levels or reducing stockouts of high-value.
5. Monitor and adjust
Tracking and monitoring a few inventory performance metrics can help you understand if your inventory strategies are contributing to your business goals. If you use a comprehensive supply chain planning suite, these metrics might be tracked automatically. Otherwise, you can monitor them manually.
- On-hand inventory value: The value of all of the inventory your company has. This is one of the clearest indicators of how much cash is tied up in individual items, and shows the value of each SKU.
- Inventory turns: How many times stock is sold and replaced in a given period of time. Low turns typically signal capital is stuck in slow-moving products, which comes with higher carrying costs and risk of obsolescence. High turns generally indicate efficient use of working capital and better alignment between supply and demand (although it can also signal insufficient stock levels).
- Cost of goods sold (COGS): COGS indicates the total cost of producing/delivering the goods you sell, and includes direct expenses (such as packaging, shipping fees, and labor costs). Poor ordering practices can erode gross margins. For example, if you need to pay extra for rushed shipments, or you’re frequently ordering smaller orders (which can be more costly than ordering bulk).
When you’re looking to land at certain business outcomes, your inventory is one of the most significant levers you can pull. By understanding the relationship between inventory and organizational goals and improving your inventory strategies, you can unlock cash, shore up operations, and maximize profitability.
Master Strategic Inventory Planning with StockIQ
Your inventory planning practices shouldn’t make your head spin or keep you up at night. If your inventory isn’t helping you achieve your business goals, we should talk.
We’re StockIQ, a supply chain planning suite built for businesses like yours that uses advanced technologies to enhance the way you tackle strategic inventory planning. With our AI-powered forecasts, in-depth inventory analytics, supplier performance monitoring tools, and granular controls, you’ll gain in-depth visibility into your operations, from end-to-end.
Are you interested in learning how StockIQ’s demand planning software can drive strategic inventory planning? Contact us today or request a StockIQ demo.