Inventory planning in supply chain management

Holding inventory is important as it allows organizations to operate continuously. However, having too much inventory could affect your business’s cash flow and hinder growth as the money tied up in excessive inventory can’t be invested in other areas.

Whatever your business looks like right now, developing a successful inventory plan and management strategy is essential for its future security and success.

Let’s take a closer look at the inventory planning process in supply chain management and how technologies like simulation can help make the most of it.

What is inventory planning

Supply chain inventory planning involves forecasting demand and deciding exactly how much inventory is needed and when to order it. It helps companies meet demand while reducing expenses.

By having just the right amount of inventory in the right place at the right time, you can reduce the overall cost of storing products, optimize inventory allocation routes, and ensure that there is always the right amount of stock to meet customer demand.

Inventory process flow

In any business, be it retail, manufacturing, or other, a typical inventory process flow includes these stages:

Purchasing

Companies buy inventory based on either their estimate of what’s needed or, in the best-case scenario, on preliminary inventory planning research. Although excess inventory is generally undesirable, businesses may overstock when making their first purchases.

Storage

Companies must store inventory in a clean, secure area. They will incur holding costs to cover lighting and heating or refrigeration.

Usage

Organizations take stock items from inventory for their intended purpose as sales items, raw materials, or repair parts.

Tracking

Tracking stock as organizations retrieve or consume is essential to maintaining production flow, cash flow, and satisfied customers. Only by tracking what’s in stock can you know what and when to reorder.

Reordering

You can reorder or replenish inventory automatically or manually. Mathematical, management, and strategy models help you understand the optimal stock level to maintain, as well as the number of items to order and how often to order them.

Forecasting

Established enterprises and newer organizations that have experienced a few inventory cycles can anticipate, or forecast, inventory needs and timing. Forecasting helps to ensure you maintain optimal stock levels throughout the year.

Objectives of inventory planning

A business's goal of profitability is achieved through customer satisfaction. In terms of inventory, a company risks losing customer loyalty if the right product is unavailable at the right time. Customer loyalty can affect profits because getting new customers is more costly than retaining old ones.

Other inventory planning objectives:

Preparing for the future

Using past data, trends, and known upcoming events to predict needed inventory levels for a future period.

Controlling costs

Inventory costs, or holding and storage costs, can total 20-30% of your business costs. The goal of inventory planning is to reduce all of them.

Efficient storage

This goal’s key point is to arrange high-demand items to reduce travel time.

Simulation for supply chain inventory planning

Simulating inventory control allows analytical calculation results to come to life in a virtual model, which can be checked and verified, showing how to implement the recommendations in a real-world supply chain. This enables planners to continue supply chain fine-tuning for sustained profitability improvements.

Why use simulation for inventory planning?

Simulation delivers the most accurate estimations for detailed inventory policy planning on four main points:

1. Capturing operations over time, allowing analysts to gradually study changes in a system and to examine inventory levels at any given moment.
2. Accounting for real-world randomness. Variable factors such as delivery time and volume of demand can affect supply chain resilience. Simulation software can take this variability into account for more precise forecasts.
3. Providing analysts with all the statistics they need to evaluate the supply chain performance from multiple angles when deciding on an inventory policy.
4. Capturing the uniqueness of any supply chain, representing the complexity and special traits of a company’s business.

In addition, there are four main issues that simulation can help analysts within inventory planning and management:

• Inventory policy testing – defining the right one and finding the best-performing parameter sets for these policies.
• Safety stock estimation – taking into account operational and disruptive risks.
• Multi-echelon inventory planning – considering stocks across the whole supply chain, including multi-tier demand.
• Bullwhip effect quantification – caused by demand variability and a lack of visibility across echelons.

Learn more about the benefits simulation brings to supply chain inventory planning in our white paper

In today’s supply chains, analysts need to consider all network complexities when making strategic managerial decisions on inventory policies. The technology employed for inventory planning and management should be able to analyze and reflect all the unique traits in a company’s supply chain network, including whether the planners are aiming for a lean or agile supply chain.

Simulation is a go-to technology when needing to analyze a multi-tier supply chain in operation, verify new inventory policies before implementation, define safety stock volumes, or estimate the bullwhip effect.