How and Why to Start Inventory Planning with Data

Whether you’ve been in business or years or you’ve only been stocking up your store for the last few months, inventory planning is key to maintaining healthy profit margins. 

Taking the time to get the information you need for informed inventory decisions pays off—but you don’t need to be at it for hours on end. You can look to your point of sale (POS) system for some help gathering up the numbers. 

To help you get started with informed inventory planning, we’ll go over:

• What retail inventory planning is, and why it’s important
• How to plan inventory and calculate your time of supply

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What is retail inventory planning?

Retail inventory planning is determining the stock you intend to buy for your store. If you try to do this without the right information, you’ll end up with inventory plans that don’t account for the actual demand and value of your stock.

However, if you combine your inventory planning with inventory forecasting and a little data, you can count on better profit margins and more customer-pleasing shelves.

Inventory forecasting for planning can be qualitative, quantitative or, preferably, a mix of both. 

With qualitative forecasting, you make decisions based on market trends, expert opinion and consumer research. If you decided to order more yoga pants for your store because you saw a report on the increased popularity of yoga among your target demographic, you’d be using qualitative forecasting. 

On the other hand, with quantitative forecasting, you make decisions based on your historical sales data gathered by your point of sale system. You’re using quantitative forecasting whenever you increase the average quantity you keep on hand of a top-selling product. Your sales data says shoppers want that item, so it’s not a bad idea to have more of it around.

Planning your retail inventory around both quantitative data and qualitative speculation means you can make decisions based on hard facts, without being so tied to data points that you can’t add new brands to your store or act without years of data. 

Why is inventory planning important?

For many retailers, half—or more—of their budget is tied up in inventory. When you’re spending that much on your stock, it’s important to be making the right decisions. Careful inventory planning means your investment isn’t wasted. 

So, inventory planning means you can:

• Be smart about your investments. There’s no money in buying what shoppers don’t want—the stock will just become dusty. By planning your inventory carefully, you can buy more of what sells and cut what doesn’t, which will lead to more sales and more efficient inventory budgets.
• Avoid being bogged down by excess and unpopular stock. If you restock the same number of units for multiple items, you might end up with excess stock for one and not enough for the other. By using data for inventory planning, you can pinpoint the ideal stock level and keep from disappointing shoppers. 

Products with a high or low sell through rate need different approaches and average inventory levels. Planning your inventory ensures you know what those levels are.

How to plan inventory 

Planning your inventory is as simple as gathering the data you need, adjusting your purchasing plans as necessary and marking down any inventory that’s just holding you back.

A simple but effective inventory planning workflow might look like:

1. You calculate the time of supply for each category or subcategory in your store. This is your quantitative forecasting.
2. You set lower reorder points and higher desired inventory levels* for items in categories with significantly short times of supply.
3. If needed, you start arranging sales for items with too much time of supply. Knowing these items don’t sell as quickly, you decrease their desired inventory level*. 
4. You run a reorder list report in your point of sale system to identify all items below their reorder point.
5. Then, having read a credible report that shopper trends show a particular brand is gaining in popularity, you decide to stock up on some new items from that brand. This is your qualitative forecasting.
6. You order only the items you need, and don’t make any wasted investments in the stock that isn’t selling very fast.

Calculating time of supply

It’s likely you’re used to talking about inventory in terms of cost, retail selling price or SKU count, but for planning purposes, it’s easiest to think of your inventory in terms of time. When we view stock in terms of time, we can combine what we know about our sales and our assets in a way that shows us where we are significantly over-stocked or under-stocked.

To do this, we want to calculate what we call time of supply. Time of supply means the amount of time that your current inventory levels would last based on your average sales per month (assuming sales continue as expected). To get that, use the following formula:

Time of supply = Inventory value of category ($) / Average sales per month of category ($)

Let’s look at an example.

Sarah’s Boutique is a fictional store in rural Texas who currently has $30,000 worth of dresses in their inventory. The past few months, they’ve sold on average $5,000.

Using the formula, the calculation would be ($30,000/$5,000) bringing our time of supply to 6 months.

On the other hand, Sarah’s Boutique has around $10,000 in denim and has averaged $15,000 in denim sales over the last quarter. Using the same formula ($10000/$15000) we come to .66 months of supply.

You might see a problem there. Sarah’s Boutique is severely overstocked in dresses, and equally understocked in denim. With this information, they can increase their markdowns on dresses, and plan to purchase more denim as soon as possible.

How to use your point of sale system as retail inventory planning software

Knowing your time of supply per category—and if you have the time, per inventory item—is key to inventory planning. But in order to calculate time of supply, you need to know the component data points: the inventory value and sales. 

Luckily, your POS system can help you get those numbers without spending a prohibitive amount of hours on calculations.

When you set up your point of sale’s inventory, you likely sorted everything into categories. This could be things like tops or tables, depending on your industry. You potentially also sorted your inventory into subcategories—button-up and zipped tops, wood and plastic tables. 

Your categories should be consistent—if one category is tables, another should be chairs. But if one category is tables, it wouldn’t make sense for another to be wooden chairs instead of simply chairs—that’s where subcategories come in.

Having subcategories means you can get more granular data from your reports, so if you haven’t created a hierarchical category system, it’s worth the time now. Each top-level category—like tables—should have a maximum of ten subcategories. 

With your categories and subcategories sorted, you’ll be able to run reports on the data points you need for your time of supply formula. 

In Lightspeed, you’d use two built-in reports: Grouped Inventory Assets by Category and Sales by Category.

Grouped Inventory Assets by Category

Understanding what inventory you already have is important in creating a useful plan for what to do next. If you think about it, 25% of your revenue might come from a certain category of inventory, but if it makes up 50% of your assets, you’re still overstocked. 

To get the numbers you need for your time of supply formula, run your report by category or subcategory as needed. Keep the values on hand while you get your sales numbers. 

Sales by Category

To get the second part of the time of supply formula, run this report and make a note of the total sales for each category or subcategory you want to plan for. Plug the number into the formula and divide assets by sales, and you have your time of supply.

In addition to being useful for calculating time of supply, Sales by category shows you:

• What type of products are making up the largest chunks of your revenue?
• Which one of your categories are the most profitable and are fuelling your cash-flow?
• What categories of products aren’t moving as quickly?

With this information, you can make sure enough resources are set aside to invest in categories that are fueling your business both in terms of revenue and profit.

If you’re seeing low margins that you think should be higher, that’s a sign you should review your markup and markdown strategy to make sure you find the margin your business needs to succeed.

Get started with a point of sale system that makes inventory planning easier

Planning your inventory well means satisfying your shoppers, as you’ll always have what they want on hand, instead of boring them with stock they don’t want to buy. That translates into more capital on hand for further investments in inventory that performs even better. 

Spending the time getting the granular information you need doesn’t have to be daunting–and it doesn’t have to even take that much time at all. You just need a commerce platform that makes your point of sale data accessible through built-in reports.

That’s where Lightspeed can help. If you’re interested in learning about how you can run your business better with built-in reports and more, let’s talk.