Inventory is one of the most important components of any retail, e-commerce, wholesale, or manufacturing business. Calculating optimum inventory levels to meet customer demand without tying up cash flow or paying too much for storage and warehousing costs requires careful balance and management.
If you aren’t maintaining proper inventory quantities based on sales trends, customer demand, supply patterns, and other performance metrics, it can result in poor inventory performance. This can lead to missed revenue due to stockouts or investments in the wrong products, restrained cash flow due to excess stock, high overhead costs, low profits, dead stock, and other problems.
Three kinds of inventory levels
“Inventory levels” refers to the amount of stock available to your business. There are three types of inventory levels that merchants should track to ensure they are operating efficiently:
Minimum inventory levels
Minimum inventory levels are the lowest amount of stock you should have for any given SKU. If you have stock below this level before a reorder point, you are at risk of a stockout for that product, especially if demand outpaces your sales forecast or you experience supply chain disruptions that prevent you from replenishing stock levels. This can result in missed revenue from potential sales and customer dissatisfaction when you can’t meet demand.
Maximum inventory levels
Maximum inventory levels represent the highest amount of safety stock you can handle for any given SKU. If you have stock above this level, you risk reducing cash flow, incurring unnecessary storage costs, and potentially losing revenue from dead stock if certain products don’t sell.
Optimal inventory levels
Optimal inventory levels represent the correct average amount of safety stock you should have to meet customer demand while keeping storage costs low and cash flow moving.
Predicting future demand
One of the most important ways to ensure you maintain optimal inventory levels is to accurately predict future demand and sales. Each item sells at a different pace, so the goal is to calculate the right stock level for each item, which can be a challenging process if you have an extensive catalog or if there is a significant disparity between the sell rate of different items.
In addition to product differences, there are a variety of other factors that can impact forecasting accuracy, including:
Consumer behavior changes naturally throughout the year, often dictated by seasonal weather, holidays, and calendar events like the start of a school year or the beginning of a sports season.
Customer demand shifts
Customer demand can increase or decrease for a number of reasons, including price changes, perceived quality, consumer confidence, as well as changes in preferences and fashion trends.
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Changes to the economy can greatly affect future demand. Recessions, unemployment levels, inflation, national income, and other macroeconomic factors can shift where consumers will spend their money.
The effectiveness of marketing can have a significant impact on customer demand. Traditional advertising campaigns, viral exposure, seasonal promotions, and other marketing trends can impact the demand for certain products.
Demand may shift overnight thanks to an influencer’s post, which can make customer demand much more unpredictable to calculate. Merchants need a proactive demand forecasting and inventory planning process in place, or they might miss out on opportunities or invest in stock that will soon be out of style with their average customers.
Lifestyle changes can be caused by environmental, cultural, or generational factors. For example, when the Covid-19 pandemic began, home workout equipment, household products, and home improvement item sales soared due to people locking down and working from home. Or as newer generations began to focus more on sustainability, environmentally friendly products have become more popular.
Accounting for all possible factors and identifying new sales trends or patterns when forecasting customer demand for each item is essential, but it’s difficult to do manually. Markets fluctuate so quickly, and it’s nearly impossible to keep up with the myriad factors affecting customer behavior and demand for every product in your catalog without employing sound inventory management practices and using capable inventory planning software.
Understanding supply patterns and average lead times
Once you know the future demand for each item, you also need to understand your supply patterns to be able to optimize inventory levels. This includes a variety of influential factors related to manufacturing, production, and shipping.
Production lead times
Knowing how long it takes for a product to be made once your manufacturer receives a purchase order is critical to understanding supply patterns. This can help you apply the appropriate lead times to your orders.
Shipping lead times
Knowing how long a product shipment takes to arrive and any possible supply chain disruptions that need to be accounted for can help you maintain proper inventory levels and avoid potential bottlenecks.
Cumulative lead time
Cumulative lead time represents the total time it takes to receive new stock in your warehouse from the time a purchase order is placed. This can include product lead times, shipping lead times, and any additional delay factors or time needed to receive and organize product at the warehouse.
Minimum order quantities
It’s also important to consider any specific requirements your supplier may have regarding orders, such as minimum order quantities, which may alter the size and frequency of your purchase orders.
The methods and modes you use to ship can also affect supply patterns. For example, you might need to ship bulky, fragile, or specialized items with specific shipping or handling requirements, such as lithium batteries, toxic paints, or certain raw materials. In that case, you may need to alter your purchase orders to account for reduced shipping container capacity or use specialized carriers to ship those products or materials.
Multiple inventory location planning
If you use different inventory locations, including your own warehouses, physical stores, 3PL storage, Amazon FBA, or others, ensuring you have the right stock for each location can be time-consuming and complicated, so you must scale your inventory planning accordingly. Likewise, if you sell through multiple channels like Shopify, BigCommerce, Magento, Amazon, or Walmart marketplace, you need to associate the right sales channels with their inventory locations in order to accurately predict future demand and properly plan your inventory.
Multi-channel selling requires you to factor in different consumer behaviors, turnover rates, return frequencies, shipping speeds, and customer demand for each channel you use. To do this, you need access to an inventory planning tool with multi-warehouse demand forecasting and inventory planning functionality to ensure an efficient inventory purchasing and replenishment process for each location.
How inventory planning software can help
Now that we’ve seen how complicated it can be to establish optimal inventory levels across multiple SKUs, item categories, bundles, assemblies, inventory locations, and sales channels, all while accurately forecasting demand and supply patterns, it’s time to talk about solutions.
Manual data entry or simplified inventory management software may help track inventory for small retail or e-commerce businesses with a minimal catalog and a single selling channel. However, as neither manual spreadsheets nor inventory management systems are specifically designed for demand forecasting and inventory planning, you won’t be able to rely on them to do complex forecasting and inventory planning calculations for you when your business scales. That’s where dedicated inventory planning software like Inventory Planner can help. Using optimal forecasting models, Inventory Planner can perform complex demand forecasting calculations for all your SKUs, inventory locations, and sales channels. It can also automatically update forecasts based on new sales patterns and other factors, then translate them into reliable, data-led purchasing recommendations, giving you everything you need to make the right decisions for your business.
Inventory Planner gives merchants the flexibility needed to handle rapid market fluctuations without a hitch. It can provide up-to-date sales and inventory insights, detailed metrics, and accurate purchasing recommendations across SKUs, product types, departments, warehouses, and suppliers. Inventory Planner can help predict future demand, factoring in changes related to seasonality, promotions, marketing campaigns, and more. It also offers multi-warehouse inventory planning functionality, allowing merchants to make informed inventory purchasing decisions for each location without breaking a sweat.
Maintaining optimal inventory levels is complicated and challenging, especially in the ever-evolving retail market, but Inventory Planner makes it simple.