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Planning Inventory: How to Protect Your Small Business from the Unforeseen

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“Someone's sitting in the shade today because someone planted a tree a long time ago”. This statement by Warren Buffett, one of the most successful investors in the world, is just the right metaphor describing a small business owner who prioritizes planning in inventory control. Playing by ear, going with your gut instinct or struggling to bring order into a scramble of documented transactions are weak efforts to plan replenishment ahead. A lack of inventory planning in an inventory-oriented business is a way to go down. Let me dwell on why and how you should bake a solid inventory planning process into your stock management.

Why inventory planning is key

 

  1. When your sales capacity is too often out of touch with inventory on hand, your business fails to respond to the demand and ends up missing out on profit. Proactive replenishment and calculation of safety stock minimize the guesswork and prepare you for fluctuating demand.
  2. Over- and under-ordering stock can lead to an unforeseen cash crunch. With overages your money sits on shelves. When understocked, you are not selling as much as you could.
  3. Promotions, peak periods and low seasons require adjustments to the usual inventory levels. But how can you plan for specific occasions without having an overall understanding of your current needs, an ability to analyze historical data and project things into the future?
  4. Having multiple warehouses complicates inventory management as target stock levels are individual for each warehouse. To be able to plan, you need to aggregate and access data across all storage sites and update it in real time.
  5. Letting your customers down is the worst it can go. Customer dissatisfaction is a by-product of inadequate stock planning.

 

How to forecast replenishment

 

You can find and learn different inventory planning and control models, reorder point formulas, or whatever techniques on the web. No doubt, it is instrumental knowledge. However, it becomes less so when applied in real life to a business with no centralized stock control per se.

 

Today’s inventory management technologies are continuously enhanced to create an information environment where inventory planning is rooted in data and strategy. They are designed to automate planning and replenishment tasks to unlock a business’ potential to grow without being dragged back by poor judgement and decision-making. This is exactly what HandiFox Online does.

 

The HandiFox Online system works in the cloud and integrates with QuickBooks Online through a two-way synchronization. To better manage inventory, the app uses data-driven inventory planning based on demand trends and historical data analysis. Let me do a quick walk-through of how you would use HandiFox for replenishment forecasting.

 

  • Introduce a hierarchy into your items by creating item categories. The taxonomy will let your filter by category and ensure a better understanding of optimal par levels by giving an insight into each item’s performance. You can go a year back and see how products did during a certain season or a promotion just to get an idea of what you might expect this time around.
  • You might want to keep an eye on sales reports every now and then as inventory levels are not stable. These reports reflect how many items have been sold, their average price and their percentage share in closed sales.
  • Determine ‘reorder points’ and ‘desired quantity on hand’ for each item across all warehouses. Reorder point is the minimum quantity that you would like to see on hand. When items hit this point, the system alerts the user and suggests including them on the next purchase order (PO). A replenishment PO would need to bring an item back to its Desired quantity on hand (Desired QOH) - the target level.
  • Let the app generate POs based on:

- sales information for a chosen period. The algorithm will consider the current quantities on hand, sales made since the selected date, existing open sales orders and purchase orders to compute the amount of items necessary to fulfill your current sales orders. You can also make the system Include Future Needs on the order, provided your average daily sales rate will not deviate significantly from the one during the chosen period.

- average weekly sales. Average quantities sold weekly will be calculated for every item based on the data for the last N weeks, and added to the order, so that the replenishment is enough to last the set number of weeks.

- Reorder Points and Desired QOH. Every item that is currently below its Reorder Point will be added to the order, with a quantity that will bring it up to its Desired QOH.

There are things that no machine can do better than a human. But there are those that you should not be afraid to delegate to software systems. You need to stop guessing and start planning your inventory now - automated stock management software will make it simple.