What is Inventory Planning? Importance, Challenges, and 5 Best Methods of Inventory Planning for eCommerce Businesses in 2022

The ethos of the eCommerce industry is the placement of products in storage so that they can eventually be sold. There is a lot of strategic supply chain planning behind every successful eCommerce firm, especially when it comes to inventory planning and management. Inventory is the most valuable asset for eCommerce sellers. With good inventory planning, you can fulfill orders by efficiently forecasting demand and enhancing the customer buying experience.

When inventory planning is done correctly, it helps online sellers in saving money and time and streamlines their entire eCommerce supply chain. Customer expectations will be constantly met and enterprises will remain prosperous. If you struggle to plan your inventory, you need to identify the tactics and tools that will help you to improve your operations in inventory planning.

What is Inventory Planning?

Inventory is the greatest asset of an eCommerce business whether it is a retail, wholesale or manufacturing unit. If we set aside store management and human resource expenses, sellers invest a considerable amount of capital in inventory planning.

Inventory planning is the process in which an organization determines the optimal quantity of listed products with respect to time and other factors. 

It is an integral part of a company’s supply chain management strategy alongside order management, accounting, warehouse operations and customer management. 

Inventory planning is unavoidable since it allows businesses to run continuously. Having low levels of inventory can result in unfulfilled orders which ruins a brand’s reputation. On the other hand, having too much stock is detrimental to a healthy cash flow and stifles corporate growth because money held up in excess inventory cannot be spent in other parts of the company. It entails anticipating demand and determining how much inventory to order and when to order it. This allows businesses to meet demand while also lowering costs.

In other words, by keeping the correct amount of inventory in the right place at the right time, organizations can lower their overall storage costs, improve inventory planning and control and ensure that there is always enough stock to fulfill demand (whilst avoiding obsolete surplus stock).

WareIQ – Amazon-prime Like Logistics for Modern Brands in India

WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.

"With WareIQ, UTH is able to consolidate common inventory for all platforms and get much closer to the customer through access to WareIQ’s strong nationwide network of fulfilment centres, and last mile & hyper-local courier partners. We are excited about being able to offer same day delivery in several pin codes due to WareIQ."
- Samit Mehta, Founder, UTH Beverages

The Importance of Inventory Planning

Increases Sales

Sellers will be able to stock up on products that appeal to their target demographic, resulting in increased sales and revenue. During seasons of high demand, they will have enough inventory available to fulfill as many orders as possible.

Improves Cash Flow

Practising inventory planning ahead of time might help eCommerce sellers to avoid problems like having too much capital locked up in their inventory. They will be able to keep inventory moving while also freeing up cash to reinvest in the company.

Utilizes Storage

Holding inventory costs a lot of money and if it is a perishable product and needs special conditions and temperature then the cost instantly multiplies. So here, tiny storage space can cost more than the business receives in profits. Inventory planning takes care of inventory space and utilizes it to the best of its ability. 

Forecasts Demand

Better demand forecasting helps to make better and more informed decisions about inventory planning and revenue that will be generated in the future. Placing an order during high demand can cost more than procuring it during price slumps or discount periods.

It not only assists a seller in meeting customer demand but also in making better financial decisions that affect profit margins, cash flow, inventory allocation, warehousing, staffing and overall logistics spending.

Improves Customer Satisfaction

Customer satisfaction is the best selling point. Buyers are always choosy but they will be satisfied if the seller has the right products at the right time. People often pay more to get a better experience and quality products. They are more inclined to return to the same seller if they can count on getting the things they need and want. Satisfying these desires will help them get a positive outlook on your brand which will reflect in their feedback

Minimizes Overstocks and Stock-Outs

Inventory planning aids retailers in avoiding overstocking or understocking. It aids in the optimization of inventory storage and precise control over each item. Overstocking can hold up business capital for an extended period of time whereas understocking can disrupt the supply chain process, resulting in more expensive procurement and result in an inability to fulfill orders.

What are the Challenges of Inventory Planning?

Managing Huge Amounts of Data

When a seller runs flash sales, their sales velocity increases and they store a ton of data obtained from buyers. This data is instrumental while running campaigns, checking for follow-ups and sending personalized offers and benefits according to customers’ gender, last purchase, amount they spent previously, etc.

Managing this useful and colossal data is a challenging task and needs a good inventory management application that not only stores data but also takes care of qualified leads by marking them as future prospects.

In the absence of a cohesive view of the past, current inventory levels and any other essential sales data, sellers may find themselves floundering in the dark when it comes to making inventory-led decisions. This is why implementing a real-time inventory tracking system is non-negotiable. 

Finding Reliable Data

Real-time data is required for a smooth and efficient supply chain process. However, information is frequently not maintained in a meticulous manner, especially when it is done manually.

Even when it is kept track of, it is distributed throughout a number of different systems. This makes it challenging for merchants to consolidate all of the data to get a complete picture of their inventory.

Using a real-time inventory tracking system guarantees that sellers have reliable data as they expand into new sales channels and further develop their distribution network. There are various inventory apps available that make it simple for online retailers to keep track of their inventory.

WareIQ not only stores the seller’s inventory at their preferred domestic fulfillment sites but the seller also gets access to inventory data via a single dashboard.

That way, sellers can save the time and effort associated with updating many spreadsheets while also reducing human error.

Developing Inventory Management Software

Customers have high expectations for the speed with which their orders are processed and shipped. However, getting bogged down in planning and managing inventory can have a negative impact on supply chain efficiency.

There is no surprise that more and more modern merchants are turning to Inventory Management Software to help with their inventory planning requirements. Inventory management software can help eliminate time-consuming manual tasks while also increasing inventory accuracy.

It is common for online firms to use inventory automation to automate inventory planning processes that are time-consuming and prone to human mistakes, such as mispicks and inventory shrinkage. For the smooth running of operations, a seller needs an inventory management system.

This requires a huge one-time investment for developing an IMS and technical staff need to be employed to manage it. This becomes a hurdle for small and medium-scale sellers. They are already short on capital and have limited profit margins to compete with established eCommerce giants. Third-Party inventory planning software can help them with their requirements.

Instead of investing in their own inventory management software, working with a third-party logistics (3PL) supplier like WareIQ can save time, effort and money.

Lack of Trained Resources

The warehousing process will most likely slow down or fail if the employees are not appropriately trained. Sellers must equip personnel with knowledge of the newest procedures, data analytics, distribution metrics and technology involved in supply chain management to bring value to inventory planning.

However, investing in training and technology implementation can be costly and time-consuming. Though many online firms have team members who oversee logistics, it is commonplace for online brands at all phases of development to collaborate with a 3PL that can provide the technology, data and knowledge needed to efficiently plan and manage inventory.

Best 5 Inventory Planning Methods to Consider

Now that we’ve discussed the challenges, benefits and fundamentals of inventory planning, let’s talk about how to actually implement it. There are a handful of inventory planning methods. To consider the right one depends upon your products, business type and processes involved.

The Work in Progress Model (WIP) 

Merchants who deal in partially finished items, finished goods, or goods-in-transit should use this model. This inventory model emphasizes inventory holding, and there are three reasons for this:

  • Purchasing raw materials in bulk saves money and lowers per-unit costs.
  • It helps avoid stockouts and provides precautions against demand uncertainty.
  • It encourages holding inventory to reduce the chances of price hikes of materials and labour.

The Self-Consistent Inventory Model

Economic Order Quantity (EOQ)

The economic order quantity (EOQ) method is used to determine the best inventory quantity to order. It takes into account product demand, unit pricing and holding costs to assist sellers in figuring out how much to order. 

The goal of EOQ is to assist sellers in determining the number of products that will allow them to meet demand without overordering and inflating their holding costs. To make this strategy work, a seller should have a firm grasp on the following:

  • Order costs – Expense per merchandise order
  • Demand rate – Units sold during a particular time period
  • Holding costs – expenses involved in holding the product

The EOQ formula is :

EOQ = Square Root of [{ 2 (Order Costs) X (Remand Rate)} / Holding Costs ]

inventory planning_EOQ calculation

Minimum Order Quantity (MOQ) 

The minimum order quantity (MOQ) is a method of estimating how much inventory a seller should order at any given time. This is perfect for sellers that wish to be careful with their ordering habits or who want to maximize their cash on hand while avoiding excessive inventory spending.

There is not a set formula for MOQ, but a seller can calculate the right MOQ for their eCommerce business by:

Calculating Demand: It takes into account the seller’s historical sales data as well as current patterns to figure out how much inventory they will need. 

Being Aware of Holding Costs: Calculate the costs of storing a product. Keeping small and miniscule objects in a warehouse will be less expensive than keeping them in a climate-controlled setting.

Knowing the Breakeven Point: Calculate how many products are needed to sell to reach the breakeven point before buying the product.

Determining MOQ: The criteria listed above will assist sellers in determining the proper minimum order quantity for their products.

FIFO or LILO

First-in, First-out (FIFO) and Last-in, Last-out (LILO) are supply management methods in which products that are purchased first are also sold first orvice versa. An ideal formula for retailers who sell perishable products, FIFO requires keeping track of the purchase date of each product and dispatching inventory according to it.

The main motto of this is to monitor the expiration dates of perishable products. Structure the stock in the warehouse in such a way that makes it easy to implement FIFO or LILO.

Setting Reorder Points

Reorder points are crucial tools in inventory planning since they assist the store in avoiding stockouts. The optimal reorder point is determined by product demand, sales velocity, order lead time and safety stock levels.

Calculating the reordering point requires two components:

  • Safety Stock: (max daily orders x max lead time to get it) – (average daily orders x average lead time to get it)
  • Lead Time Demand: the average number of units sold daily x the lead time of a product 

To determine the reorder point, add lead-time demand to safety stock. Use the following formula:

Reorder Point = Safety Stock + Lead Time Demand 

Just-in-Time (JIT) Model

Just-in-time ordering is an approach in which items are ordered just when they are required. Because it allows a seller to avoid sitting on too much stock at any given moment, this strategy can help them save a lot of money on holding expenses.

It requires trustworthy supply chain management.

Sellers will need a quick ordering process and dependable vendors who can deliver products on schedule for JIT to succeed. Here, the idea is to decrease waste and increase efficiency by ordering products as per demand and never prematurely.

Conclusion: Inventory Planning with WareIQ

A retail business that makes smart inventory decisions in advance will almost certainly succeed. The main problem is that it requires monitoring bulk orders while keeping a careful watch on data and upcoming inventory trends.

Without adequate inventory planning, substantial consequences might arise, ranging from increased transportation costs to catastrophic stockouts and shipping order delays.

WareIQ can help you save money on inventory planning. WareIQ provides the tools, experience and support you need to make smarter business decisions and grow your organization faster, from inventory planning to real-time inventory management.

inventory planning_WareIQ

Be a part of our sophisticated Warehousing Management System by partnering with WareIQ while maintaining control and visibility over your multi-location inventory across the nation and supply chain. With WareIQ’s inventory planning platform, brands experience 80%+ regional utilization & 40% lower holding costs.

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