Once you’ve opened your retail store in a thriving location, it is important to cater to the specific needs of your customer base while maintaining optimal stock levels.
Given that a location often caters to multiple demographic characteristics, it’s essential to develop an inventory strategy that balances customer demand with optimal stock levels.
Effective inventory planning begins with understanding the unique variables of your location, identifying the ideal product mix, minimizing stockouts, and more.
In this article, we’ll discuss the fundamentals of inventory planning and how you can effectively develop one tailored to your store’s location.
What is inventory planning in retail?
Inventory planning in retail involves managing stock levels to ensure that customer demand is met.
A comprehensive inventory planning would simplify what products should be in stock, as well as how much of each product to stock and when to reorder.
When it comes to inventory planning in retail, businesses face unique challenges such as seasonal demand fluctuations, fast-changing trends, styles, consumer preferences, and space constraints in stores.
These challenges can be easily mitigated by maintaining a balance between supply and demand from one store to another.
Purpose and why inventory planning is essential
1. Ensures product availability
Customers expect products to be readily available when they need them. A stockout not only leads to lost sales but can also harm a business’s reputation. With proper inventory planning, you can meet customer expectations consistently throughout the year.
2. Reduces stocking issues and expenditure
Overstocking increases holding costs – including storage, insurance, and potential spoilage. On the other hand, understocking results in missed sales and potential loss of market share. Both cases increase the spending cost and these can be avoided with proper inventory planning.
3. Improves cash flow
Maintaining optimal stock levels will ensure that capital isn’t unnecessarily tied up in inventory. Businesses can use the freed-up cash for retail expansion, marketing, or other critical operations.
4. Improves operational efficiency
A well-executed inventory plan would streamline supply chain processes. It also helps coordinate procurement processes better and reduces delays and inefficiencies.
3 Key elements of inventory planning
1. Demand forecasting
Accurate demand forecasting is the foundation of inventory planning.
It involves:
- Historical data analysis: Reviewing past sales trends, seasonal variations, and market conditions to predict future demand.
- Market research: Gathering external data such as competitor performance, economic indicators, and customer feedback to refine demand estimates.
- Advanced tools and technology: AI-driven analytics and machine learning models provide real-time insights into customer behavior, changing market dynamics and trends enabling precise forecasting.
For inventory planning, GeoIQ’s location data will help retail businesses forecast demand for a particular product SKU at the store level.
Pairing location data with existing store data and machine learning will enable retailerswith a better inventory plan and merch mix.
| Related: Read how GeoIQ recommended merch-mix strategy boosted sales by 45% for a leading brand!
2. Reorder Point (ROP) and Safety Stock
Reorder Point:
Reorder point is an inventory level at which a new order is triggered.
Calculating this ensures inventory is restocked just in time to avoid stockouts, and maintaining smooth operations and customer satisfaction.
Calculating the reorder point involves:
- Average daily usage rate.
- Supplier lead times.
- Buffer for unexpected delays or demand spikes.
Formula: Reorder Point = (Average Daily Usage × Lead Time) + Safety Stock
Safety stock:
Safety stock is the additional stock items held in the inventory, ready to use if the item becomes out of stock.
This acts as a buffer to mitigate risks such as supplier delays, sudden demand surges, or forecasting errors. An ideal safety stock level typically balances risk and cost.
3. Inventory turnover
Inventory turnover measures the efficiency of inventory management. It is calculated to see if a business holds excessive stocks in inventory as opposed to the sales trends.
- Formula: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory.
A high turnover indicates that stock is moving quickly, reducing holding costs. Conversely, a low turnover may signal overstocking or declining demand for certain products.
How to develop an inventory plan?
1. Analyze historical sales data
Businesses can utilize machine learning models to review past sales figures to identify demand patterns, seasonal fluctuations, and product performance.
This will turn help you segment products into categories based on sales frequency, profitability, and shelf life.
2. Set inventory goals
Define clear objectives, such as achieving a specific inventory turnover rate, reducing stockouts by a percentage, or lowering holding costs.
Then, align these goals with business priorities, such as growth, customer satisfaction, or cost reduction.
3. Determine key metrics
Metrics like reorder points, safety stock levels, and lead times are crucial for managing inventory effectively. Establish benchmarks to measure performance and adjust as necessary.
4. Leverage technology
Implement inventory management software or ERP systems to automate stock tracking and order processing.
These systems also provide real-time insights, allowing businesses to respond to changes in demand or supply quickly.
5. Implement and monitor
Implement and regularly review performance metrics, conduct audits, and adjust strategies based on feedback and market changes.
Role of location data & Machine Learning models in retail inventory planning
Location data is a powerful tool for optimising retail inventory planning. It provides actionable insights that enable you to tailor your inventory strategies to specific regions and customer segments.
Here’s how location data & ML models can help form a better inventory plan:
1. Understanding demand at store-level
Location intelligence platforms like GeoIQ analyze sales trends and customer preferences across different areas.
Multiple location characteristics, including changing market dynamics, consumer preferences, buying patterns, and varying market conditions across different stores, will ultimately determine what consumers want and what product assortment you should have in your inventory.
Since these are changing rapidly from one store to another, it is important to curate product mix at the store level rather than the regional level.
To mitigate this, location data and ML models help you identify high-demand regions and adjust inventory levels accordingly, ensuring popular products are always in stock.
2. Predicting market trends
Geospatial data helps you identify emerging trends in specific locations, such as seasonal demand for certain products or shifts in customer preferences.
3. Improving customer experience
Once you crack the balance by ensuring the right products are available in the right locations, you will be able to build goodwill amongst your customers.
This helps build brand image and also increases the likelihood of repeat business.
4. Identifying reasons behind the underperforming stores
Location data, paired up with existing store data highlights stores or regions with low sales or high inventory turnover.
This enables you to address issues such as poor product mix, ineffective promotions, or logistical inefficiencies.
Book a 15 minute discovery call with us to tailor your inventory planning for each store across India!
Conclusion
As we discussed, inventory planning is a critical component of retail success, enabling retailers to meet customer demand while optimizing costs and operations.
While in the process of inventory planning, leverage location data to align inventory with local demand patterns for maximum profitability and efficiency.