A Guide to Inventory Planning
A retail business’ ability to comprehend and execute on inventory planning can make or break their growth, profitability, and ultimate success. Retailers lose $634.1 billion each year to stockouts and the average retailer overstocks by 50 percent. With inventory issues contributing so heavily to a business’ bottom line, it’s clear that those who refuse to adapt and think critically about inventory will miss opportunities, lose sales, and fall behind.
As retailers scale their businesses, it becomes increasingly difficult to manage operational workflows without dedicating resources to inventory planning. While some retailers anticipate the need for an inventory planner, for others, an inciting incident precedes the necessity. This event is commonly a result of growing too fast while launching new lines and/or categories, which can lead to consistent stock issues and missed sales opportunities that hurt revenue. For many retailers, this inability to have the right inventory, in the right place, at the right time, will lead them to think about how better to allocate their inventory and resources.
Some retailers approach inventory management with software, others, with people. A winning approach requires both. An inventory management software solution can prevent stockouts and overstocking by providing retailers with visibility and automation as well as comprehensive and historical data that makes insights easier to find and act upon. But, an inventory planner is critical when the inciting event involves not hitting goals and, more critically, not understanding how to set them in the first place. This guide will outline the challenges and benefits of inventory planning along with both the analytical and contextual components of doing it effectively.
Before a planner can begin to build out a forecast, (s)he needs to gather and analyze historical data. This presents a huge challenge for many companies as this historical data can be siloed and often lives within disparate systems. Without easy access to things like historical inventory levels and sales data, a huge amount of time is wasted simply pulling these statistics and organizing them into one place; and from there, the planner must normalize it in order to even get started.
With inventory in multiple places and businesses using different systems for things like logistics, fulfillment, accounting, point of sale, etc., it’s easy to make uninformed decisions based on disparate data. Without accurate data, it’s more likely to suffer from stock issues, and it’s difficult both to quantify missed opportunity from out-of-stocks as well as the cost of overstocking. With a potential margin drain of overstocks, you eventually must discount products to get them off the shelves. It’s both an art and a science to understand how to move through inventory without liquidating it; especially because most retailers do not want a promotional reputation.
Just like challenges arise when data is siloed, when inventory is stored in multiple locations, it can be difficult to allocate it so you have what you need, when you need it. Growing a retail business often involves fulfilling orders from multiple locations; whether they be additional warehouses, brick-and-mortar stores, or both. This can result in additional shipping costs when you need to get a product from one warehouse to another, as well as customer dissatisfaction when they have to wait longer to receive an order.
In addition to the analytics involved in effective inventory planning, there are some aspects that involve more guesswork, even for large retailers with endless budget for software and headcount. There is no magical equation for even the most experienced inventory planner to predict optimal inventory investments 6-12 months in advance. Size-level planning is another component of planning that involves making informed predictions, and is an issue exacerbated by out-of-stock issues as it’s impossible to have a complete picture of how a certain size would sell if it it’s unavailable. Since planners work cross-departmentally, it’s important to know as quickly as possible—especially during a peak sales season—if adjustments must be made to a forecast. How items are trending and when and if to discount products is a combination of guesswork and data analysis and can be difficult to coordinate across operations, finance, merchandising, and marketing departments.
The Nature of the Role
The human component of inventory planning presents yet further reasons this is the bane of existence for many retailers. The inventory planning role typically sees high turnover, which is especially difficult in a role that relies heavily on historical knowledge as well as brand and product familiarity. It’s a challenge for new planners to gain context, and this challenge is compounded by a lack of historical data. Additionally, retailers are often competitive with their planning systems and processes, so external resources aren’t easily accessible. There aren’t many forums or groups—online or otherwise—for this community, which contributes to the difficulty planners may experience when ramping up in their new role.
With so many challenges to inventory planning, it’s easy to understand the many benefits that come from doing it effectively. Investing in both the software and the people to help your business plan for and forecast demand will pay dividends in the future. The sooner you implement a proper planning system and process, the sooner you’ll begin to collect the historical data that will help guide future planning. An effective plan creates a more scalable and standardized process while reducing ad hoc and reactive work. Inventory planning reduces out-of-stocks and overstocking and enables businesses to optimize pricing and allocation, which inevitably increases profitability. When running a business is both easier and more profitable, it’s hard to dispute the obvious benefits of inventory planning.
The Science and Art of Inventory Planning
Inventory planning is both steeped in analytics and data and dependent upon unpredictable macro and micro economic trends and ever-changing shopping behaviors or patterns. In order to increase profits with accurate forecasting and planning, it’s imperative to understand—and master—both aspects of the function.
The Analytical Side of Planning
Much of an inventory planner’s job involves sourcing, normalizing, and analyzing data. An effective planner must know what data is needed, where to find it, and how to manipulate it to tell a story and reveal trends.
The Contextual Side of Planning
The contextual side of planning ranges from the micro—knowing your brand’s customers—to the macro: your brand’s competitive landscape as well as how current events might affect the market or demand for your products. Understanding trend indicators is also critical to inventory planning. A planner is often responsible for proposing discounts or promotions, which are based on some combination of data, gut instinct, and financial metrics and account for when something must be moved off the shelves.
The Role of Inventory Planner
Before a planner can begin to think about the future, (s)he must gather and analyze historical sales data. Understanding how SKUs performed across various categories is critical to setting expectations and creating plans for upcoming seasons. Additionally, to the extent possible, planners should analyze competitive data with regards to other brands and retailers’ trends, pricing, promotions, etc. This understanding of past seasons at both a micro and macro level will provide valuable takeaways for the future.
After a planner has analyzed data and trends from previous seasons, it’s time to build a preseason plan. Using history and strategic initiatives (i.e. if a brand builds out a wedding capsule that isn’t successful, wedding attire would no longer be a strategic initiative), a planner can begin to set category level targets for various metrics.
Based on these metrics, a planner begins to work cross-functionally to set receipt budgets by category, which can be strict or tentative depending on the retailer’s business model. Also dependent on the business model is how style level plans are built.
Recapping the Business
Each week, planners should assess product and category performance to determine whether they are beating or missing expected sales plans. From this analysis, they can decide how to capitalize on what’s working and get rid of products that aren’t performing as well as planned. This weekly activity is essentially a “read” on the health of the business from an inventory (and key metrics) perspective.
Reading the business is a pivitol in-season activity that allows for planning and buying teams to rightsize stagnant inventory investments and impact future strategies. It’s crucial for a planner first to gain context around the week (s)he’s reading by considering things like the promotional cadence of the past week, any unexpected traffic trends the company experienced, a major holiday, or events like a site outage or warehouse delay. Once this information is accounted for, a planner can begin to analyze the data for compelling takeaways.
Markdowns and Promotions
Based on the weekly recap and read of the business, planners might work with merchandising and marketing to determine what products to markdown or promotions to run. These phrases typically indicate whether a price reduction is temporary (promotion) or permanent (markdown), and sometimes whether the discount is product specific or product agnostic.
These pricing distinctions help retailers better analyze their business performance and give flexibility to business operators. A promotional price is a great way to move additional units in an over-inventoried, but otherwise well-performing style, or to entice a customer to buy when (s)he otherwise would not. A markdown price is a great way to clear through seasonal inventory and to manage items out of your system. It is important to remember that while everyone dreams of selling items at full price, promotions or markdowns can often generate profitable sales.
Even the most well-informed and thoughtful plans sometimes need adjusting. It’s important that planners track weekly business performance and update forecasts for future months based on trends and knowledge of current events.
If a plan must be adjusted based on real-time targets, there are several approaches a planner can take, depending on the goal. To drive business, a planner can work with the finance team to adjust pricing and/or with the marketing team on promotions or new campaigns. To manage inventory, a planner can cut, add, or push out receipts or re-allocate inventory. While planners are always reforecasting, the scope may vary in how many weeks or months they are projecting out.
Managing Evergreen (Basic) Inventory
Evergreen inventory is often planned separately as it is more predictable than seasonal trends. Forecasting, sales, and receipt projections are done monthly and can be done during preseason or in-season.
Hindsighting entails understanding—from both a financial and product perspective—how a plan was actualized versus the original plan. This activity is a collaboration amongst planning, buying, and merchandising teams. The goal of hindsighting is to determine what targets were hit, which were missed, and how these learnings can inform the team’s strategy in hitting future targets. Once, for example, the team has finished hindsighting Q1 2017, they will begin to set targets for Q1 2018.
Predictions for the Future of Inventory Planning
When it comes to shopping, consumers have more power than ever before. They’re shaping retail buying experiences and increasingly want to the ability to buy anything, from anywhere, at any time. As we move into this consumer choice economy, planners will need to understand the competitive space and be smarter about pricing and discounts. Additionally, there will be a need to hold minimal inventory in order to have a healthier business and fit the on-demand model today’s customers want.
While the consumer choice economy is inevitable, there are also predictions for a more automated future. Many with planning experience argue that machine learning algorithms don’t understand retail problems and, therefore, could never take over the role of the inventory planner, but it’s likely systems will continue to evolve, providing for more automation and visibility to better help planners do their jobs effectively.
While inventory planning may seem daunting, it doesn’t need to be. With the right person and the right tools, it’s much easier to make informed, data-driven inventory plans. The strongest approach to effective inventory planning requires a nimble, scalable, and integrated inventory management software solution with the ability to empower an analytical, insightful planner.
A centralized operations platform like Stitch Labs gives inventory planners comprehensive visibility into their historical data so they can more easily and effectively make and communicate their decisions regarding inventory. Stitch syncs inventory across all of a retailer’s channels, making it easier to ensure inventory is in the right place at the right time. This visibility reduces out-of-stocks and overstocking, allowing for more efficient planning and optimized business decisions regarding pricing and allocation.
About Stitch Labs
Stitch Labs is a commerce operations platform that centralizes inventory, sales, purchasing, and fulfillment to give retailers greater visibility, efficiency, insight, and control across their business. With the power of Stitch’s cloud-based platform, retailers and wholesalers can more easily reduce costs, maximize profitability, and intelligently scale their omnichannel operations to meet customers needs. Stitch integrates with top eCommerce, POS, shipping, and fulfillment technologies such as Amazon, eBay, Shopify, Magento, Bigcommerce, ShipStation, Square, FBA, SPS Commerce, and DCL Logistics, as well as accounting solutions including Quickbooks, Xero, and inDinero. To learn more, visit www.stitchlabs.com or follow us on Twitter at @StitchLabs.