Inventory Planning: Basic Concept and Benefits

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08 min read.

Inventory represents a large portion of any business’s assets. Hence, placing proper control over inventory movement is essential for the success of any business organisation.

Meaning of inventory planning

Inventory planning is an essential aspect of any business model. It is a process that helps a business determine the optimal inventory level at any point in time to align with its production and sales capacity. Inventory planning directly impacts the cash flow and profitability of any business. Good inventory planning helps achieve business objectives such as customer satisfaction, supply chain efficiency, accurate forecasting, etc. 

Benefits of inventory planning

The management of any business needs to implement a robust inventory planning system to forecast how much it should produce and supply to its customers to meet market demand.

Some of the benefits of inventory planning are:

  1. Maintain appropriate inventory levels: Inventory planning helps to maintain an optimum quantity of inventory. It reduces the risk of overstocking or stockouts.
  2. Manage cash flow: To improve a company’s cash flow, its management should invest in the most effective and practical inventory system. It should invest in stocks that get converted to turnover within a short period. This will help to improve the cash flow in the organisation. Increased cash flow allows a business to achieve its goals.
  3. Increased profits: By proper inventory planning, a business can increase its profitability. Inventory planning includes the purchase of raw materials, production, and sale of goods in demand by the customer. If a company has an adequate stock of goods in demand by its customers, it can reap higher profits.
  4. Prevents stealing: Uncontrolled stocks often go missing. Inventory planning involves controlling goods from the production stage to the stage they are finally sold to the customer. If employees steal items from a business, a business will likely make a loss. But, if proper inventory control procedures are installed, then such instances will not take place. Eliminating stock shrinkage helps improve the profitability of a business.
  5. Gain business insights: Inventory planning helps a business gain insights into products that are slow-moving or fast-selling. This further helps them adjust their product line as well as make smarter business decisions.

Components of inventory planning

Inventory planning involves placing control over the entire lifecycle of an inventory. The components of inventory planning are:

  1. Forecasting: Forecasting is a systematic method of estimating future sales. Inventory planning involves a process of counting and maintaining appropriate levels of inventory to meet customer demands.
  2. Using technology: Inventory planning software provides historical data for forecasting current inventory levels. It helps avoid overstocking.
  3. Cost control: Higher inventory carrying costs will increase total business costs. Inventory carrying cost involves the purchase cost of raw materials, labour cost to receive and place the inventory, security, insurance, etc. Inventory planning aims at reducing such costs.
  4. Efficient warehousing: Well designed storage facilities enable proper inventory management. The ultimate goal is to arrange high demand items at a convenient place to be dispatched quickly.