Long Term Inventory Planning: Identifying the Path to Optimal Inventory Through Modeling

Long Term Inventory Planning: Identifying the Path to Optimal Inventory Through Modeling

As increasingly advanced tools become available, optimal inventory planning is becoming not only possible, but essential for retailers. Even today, many retailers rely on a merchandise planner’s past experience and gut feel to determine not only the rate at which a product will sell, but also the rate at which they will buy. Driven by top-down, growth-focused forecasts, this frequently results in bloated inventory levels and deep discounting to move unwanted product.

This method can be drastically improved by understanding, and accounting for, the unique business constraints faced. TCS has helped a number of retailers do precisely this, resulting in decreased costs, increased margins and increased total sales. Remember selling generates revenues, but proper buying generates profit.

Understanding the “Optimal” Inventory Level

Retailers strive to deliver an optimal level of service to their customers. However, “optimal” does not always mean “best” when it comes to in-stock percentage. Typically, the higher the service level is targeted to be, the higher the associated inventory level will be. Raising inventory levels offers decreasing returns to in-stock percentage, with 100% in-stock being enormously inefficient, if not impossible, to achieve.

The desire to keep inventories as low as possible is compounded by the high carrying cost of inventory. Inventory carrying costs are often estimated to be as high as 30-40% of the total inventory value. The capital used to purchase this inventory is unnecessarily tied up, and could be better leveraged in higher return initiatives. While surplus inventory is costly, low in-stock rates can be even more damaging. They result not only in the short term loss of sales, but the company’s reputation may also be damaged in the long term, creating lost sales opportunities. This means that the business must balance a number of factors when determining the “optimal” level of service for any given product. Striking the best balance between inventory and customer satisfaction will result in the “optimal” inventory level for each product.

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