Demand planning is an exercise in calculating unconstrained demand — if there were no limitations on the delivery and production side, how much could you sell in the marketplace? Supply is at the opposite end of the spectrum, defining how much is actually available to fill demand given constraints like labor, lead time, shelf life and so on. Demand says, “We can sell 100 units!” Supply counters, saying, “Maybe 80 units is a more realistic number.”
Inventory planning sits squarely in the middle of the two. It’s the mathematical formula that determines how much stock you should have on hand to meet demand while acknowledging forecast and supply-side variables.
Like other elements of supply chain planning, the path to effective inventory planning isn’t a simple, step-by-step process. It’s about getting a firm grasp on the basic elements and applying them to your business.
- Remember that counting counts. A lot.
Given that inventory planning boils down to an equation, the quality of inputs is vital — and none more so than accurate inventory counts. Depending on your industry, getting an accurate picture of on-hand inventory might not be as easy as it seems. Nevertheless, you need a regimented process to determine how inventory is counted. Many businesses regularly estimate inventory on past levels and sales numbers and extrapolate to determine what they have at any given time, supplemented by periodic physical inventory counts. However you approach it, institute a process that lets you trust the numbers you’re operating from, even if they aren’t 100% perfect. - Check the shelf life of your data.
Another aspect of input quality to consider is how current your data is. Changing trends and unexpected disruptions – like a global pandemic or a shipping carrier strike – can cause data to become stale, turning that eight-day lead time you’re counting on into a 10-day lead time without you noticing it. And, unfortunately, it’s rarely anyone’s job to validate these inputs. Modern software, like Arkieva inventory management solutions, automate this process. It looks at purchase order transactions over say the course of a year – when orders are placed and when they are delivered to you – and compares that to the enterprise resource planning (ERP) data to determine if reality remained within the expected range. Using this information, you can better determine whether variations are anomalies or part of a new trend and adjust your numbers accordingly. - Update your stocking policies (from time to time).
This isn’t something you have to do every day or every month, but it warrants periodic attention. As products change through their life cycles and customer needs and expectations evolve, stocking policies and service levels must be updated accordingly. Integrating inventory parameter updates to your existing life cycle management and customer review process is crucial to keeping your data up to date and your inventory planning on the right track. - Strive for a higher echelon.
There are two ways to approach inventory optimization: single echelon and multi-echelon. Single echelon treats suppliers and every warehouse in your network as individual, isolated silos. Each warehouse has its own target and safety stock levels that don’t take into account stock levels at other warehouses in the network. Mutli-echelon inventory optimization, on the other hand, looks at your entire network as one interconnected entity. Using this model, target and safety stock levels consider what’s available at all locations throughout the network when determining stock levels and fulfilment times. This level of visibility and interconnectedness is not easy to achieve — but organizations that make the leap from single echelon to multi-echelon can achieve about a 30% reduction in total inventory. - Keep your eyes on your OTIF.
If you haven’t gotten the gist by now, inventory planning is all about the numbers – and that includes having KPIs in place to measure your success (or lack thereof). On-time in-full (OTIF) – which gives you a service level view of the percentage of orders your organization delivered complete and on-time to customers – is one of the most useful. Looking at orders that are not OTIF can give you insight into potential flaws in your inventory planning strategy, but only if you can drill down and see why orders aren’t OTIF. Delivery problems, quality control or customer service issues, vendors that didn’t get supplies in on time – any of these problems could be a factor. Having the capability to look into how your OTIF is being disrupted and being able to track that over time is one of the most meaningful ways that you can improve your inventory planning processes.
Adding the Right Tools to Your Inventory
Inventory planning is an equation — and a complex one at that. With so much data from so many sources, accurately determining what, where and how much to stock can be a daunting process. Adopting these best practices is a great start. But successful inventory planning today means having a reliable system in place that can analyze your inventory, break it down by type and optimize inventory to maintain the right target and safety stock levels based on demand, desired service levels, and lead time across your enterprise. At Arkieva, we offer a single solution that does just that.
