How to reduce overstock with inventory planning software
Inventory planning is an essential part of supply chain management and operating a successful brand. It helps companies make sure they stock the right products at the right time to meet market demand. Forecasting future sales and planning inventory is however not an easy task.
Especially in recent years, the changes in the market have been swift and frequent. The current downturn economy has affected demand across several markets, resulting in a widespread problem with overstock inventory for many brands.
The importance of efficient inventory planning processes
Inventory planning concerns the forecasting, planning, distribution, and reporting of the goods a brand sells. How these processes perform has a direct impact on a brand's top and bottom lines. Getting it right is key to ensuring balanced inventory levels, a healthy cash flow, and continuous growth.
In this article, we zoom in on the common pitfalls that lead to overstocking, its implications, and how efficient inventory planning processes and software can help you combat it.
A complex task
As many as 32% of businesses in the consumer goods industry reports difficulty forecasting demand as one of the most vulnerable parts of their value chain. As a company grows so does the complexity. New warehouses, sales locations, and a larger assortment all add additional data streams to process and analyze for sales and inventory planning. This puts a lot of pressure on the processes and systems to handle vast amounts of data and advanced calculations to forecast sales.
How software can help
An inventory planning software that can integrate to all of your different systems and tools allows you to view and work with real-time and historical sales and inventory data for forecasting and planning without needing continuous updates. Planning software will provide advanced models to help you forecast and plan more accurately taking into account seasonal demands, historical sales data, and historical stockouts. This enables you to flexibly plan and re-plan as needed to meet shifts in demand.
It will bring automation to, and simplify complex processes as well as reduce risk from human errors and faulty data. This not only helps you plan inventory more accurately and flexibly, it saves heaps of time and resources as you do it. Later on, we will take a look at how inventory planning software can help you reduce stock levels and what to look for when choosing a provider.
The rising concern of overstock
Overstocking is not a new phenomenon. It has been a common occurrence since the dawn of merchandising. Reports have shown that the funds tied up in excess inventory for many brands equal 20%, 30%, or even 40% of its annual turnover. Oftentimes companies are more concerned with avoiding stockouts than overstock in order to maximize turnover. It is a common practice to keep safety stock to cover unexpected spikes in demand. Depending on your business goals, this is not necessarily wrong.
However, in a downturn economy, many brands now find they need to tighten the purse strings. At the same time, not having foreseen the drastic drop in demand, many overordered at the beginning of the year, resulting in unwanted excess inventory.
The implications of overstocking
The implications of tying up your capital in overstock are not to be understated. It effectively keeps you from investing in other areas of your business and hinders your growth. It means you cannot restock products that sell better or release new products that attract customers. In turn, this can also have consequences for your brand perception and customer loyalty and be even more costly in the long run.
Other than hurting your cash flow, stocking products beyond the levels of demand can be costly in many more ways. It takes up space in your warehouse, increases the risk of waste, and comes with additional personnel costs to handle.
This article provides calculations to help you identify and quantify any overstock you might have.
What causes overstock?
Other than safety stocking and difficulty forecasting demand, there are many reasons a brand can be sitting on excess inventory, such as:
Poor inventory planning processes
Lacking competence and human errors
Ineffective marketing and sales
Overcompensation for other supply chain issues
Neglecting size curve planning (overstocking the wrong sizes)
Short shelf life (overstocking expiring products)
The bad news is that some of these are hard to foresee. The good news is that working on efficient processes for inventory planning and employing the help of dedicated inventory planning software will go a long way in preventing or at least mitigating many of them.
Planning actively to keep healthy stock levels
First off, good processes for inventory planning aren't created in silos. To accurately forecast demand requires a holistic approach taking other areas of the business into consideration. What campaigns are marketing planning and how will they affect sales? In this article, Madden Analytics talks about how to improve marketing and supply chain collaboration for better performance.
Aside from cross-functional collaboration, there are a few key aspects that all businesses would benefit from paying more attention to.
The prerequisite for balanced inventory levels is good sales forecasting. Improving your forecasting accuracy is arguably the most impactful thing you can do to improve your stock levels. To accurately forecast true demand it is not enough to add your estimated year-on-year growth to last year's sales numbers. You need to take historical sales data, historical stockouts, seasonal trends, and planned marketing campaigns into account. These calculations can be quite complicated, however, they are needed to get a better understanding of a product's actual demand.
A helpful inventory planning technique that ABC analysis. The Pareto principle implies that 80 percent of your sales come from only 20 percent of your goods. Identifying and categorizing your products based on their level of importance to your sales performance will help you prioritize your purchases. A for items that are a top priority to keep in stock, B for medium performers, and C for items that do regular business and good to have in the assortment, but aren’t urgent to restock. Prioritize and plan your purchases thereafter.
Other best practices for healthy stock levels:
Use a single source or program for managing data and planning inventory
Audit inventory regularly
Distribute inventory accurately between sales locations to match demand
Set minimum and maximum trigger levels for stock
Depending on the nature of your business, these will be more or less applicable. Either way, actively monitoring market demand and inventory levels is key to identifying overstock in time to take needed action.
How to reduce overstock
Even with everything done right, you might still find your business carrying overstock in some part of the assortment at one point or another. So, what do you do? Hopefully, you have managed to get some of the above-mentioned points down and caught it early.
Depending on the severity of the overstock and the urgency to reduce it you can look at different tactics to reduce the stock levels like:
Additional marketing campaigns
Increased online and offline exposure
Exposure in new channels and cross-merchandizing
Redistribution to other sales locations
Sell through wholesale or other external channels
Markdowns and sales
The resources at your disposal will determine which approach to take. In this article, Madden Analytics outlines a five-step approach to reduce overstock.
How to reduce overstock with the help of inventory planning software
With or without software, you need access to historical sales data, current inventory data, and lead times of your suppliers to forecast future sales. With software that integrates into your payment systems, warehouse management systems, and other tools, you can access these data in real time. The calculations can be done manually but are as we have pointed out usually time-consuming and quite complicated. The software will offer you the convenience and accuracy of powerful models to forecast your sales and draft purchase orders based on the ideal inventory levels for your demand.
Over time, with better accuracy in your forecasting and planning, your inventory levels will reach better levels. Software that offers business analytics will give you better control and help you monitor your sales and stock levels and detect inventory that risks becoming overstocked in good time.
In those cases where you are already sitting on overstock that you need to reduce urgently, inventory planning software will offer you recommendations and prompts on needed actions. In Madden Analytics, you will get reallocation prompts for stock that makes financial sense to move, recommendations to activate products that are not selling according to plan as well as deadstock prompts.
Benefits of using inventory software to reduce the risk of overstock:
Cloud access across the organization to track and plan inventory and sales
Direct integrations to other systems and up-to-date data reports
Easily navigated cross-channel inventory reporting
Readily available recommendations on re-stocks, re-allocations, and what articles need to be activated
Set budgets and forecasts bottom-up and top-down across the assortment, from category to SKU level
Multiple forecasting models optimized for different types of products
Flexibility in analysis and planning with up-to-date sales and inventory data
With this said, not all inventory planning systems are created equal. They focus on different features and helping users with inventory planning. However, having a dedicated system allowing you to overview and plan based on all your different data streams in real-time is key for flexibly managing and responding to inventory needs. When choosing a dedicated system for inventory planning make sure it:
Integrates into your other systems and tools
Offers analytics dashboards and reports with real-time data
Offers powerful models to help you forecast
Allows you to tweak forecasts and plans based on your insights and expertise
Provides stock distribution analysis if you have or plan to have more than one sales location
Has stock lifecycle visibility
Scalability - make sure it can handle large volumes of data as you grow and that their sales forecasts and purchase recommendations scale
How modern brands use inventory planning software to keep balanced inventory levels
Flattered is a Swedish consumer goods brand offering high-quality footwear and accessories worldwide. They operate an impressive supply chain with a webshop, 100+ wholesalers, four warehouses, and lead times of around 8-10 weeks. Using inventory planning software allows them to process the vast amounts of data needed and to flexibly forecast and plan inventory to keep optimum stock levels. Using an inventory planning tool is important for Flattered to lower the risk of human errors and black box syndrome and to support their growth trajectory.
Eytys is a fashion brand based in Stockholm, Sweden. In only eight years, it’s become one of the most renowned Swedish brands internationally. The brand is represented in their own web store, their concept stores in Stockholm and London, and at top-tier retailers around the world.
Eytys use inventory planning software to track and follow up on product performance and inventory in all channels and to analyze longer-term historical trends and forecasts for assortment and buying decisions. It allows them to move away from complex Excel analysis and to improve sales, cash flow, and profitability.
Grandpa is a Swedish retailer offering fashion and curated lifestyle products. They operate five stores in Sweden's largest cities Stockholm, Gothenburg, and Malmö as well as their own website.
Grandpa employed inventory planning software to help them accelerate growth and find new ways of working. With a dedicated tool, the entire organization can stay on top of analytics, inventory planning, and buying. This enables them to make smarter and earlier decisions to enable continuous growth.
Jeanerica is a European denim house founded in Stockholm in 2018. They make contemporary premium denim products, constructed to last. Jeanericas pieces are made from sustainable high-quality fabrics and finished using the best techniques available.
Jeanerica puts great emphasis on sustainability in production and throughout their entire supply chain. Using an inventory planning tool to plan and sales forecast for both their D2C and B2B businesses helps them make sure they produce and order based on true demand. The software allows them to forecast and plan more accurately to avoid overstock, saving on both spend and the environment.
Keeping balanced inventory levels is no easy feat. Nurturing good inventory planning processes will greatly improve your chances of avoiding overstock and mitigating it if it does. A dedicated inventory planning system will offer you relief in continuously updating your data and analyzing your inventory health. It will give you well-founded recommendations on managing it.