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What Are the Basics of Inventory Planning?

Food service businesses, such as bakeries, use perpetual inventory procedures.
Woman checking inventory.
Depending on their business operations, most companies choose to update inventory on a monthly or quarterly basis.
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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 02 December 2014
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Inventory planning is the method and procedures companies use to determine the amount of products they should have on hand for meeting consumer demand. This planning may involve several steps, depending on the company’s inventory management system and business operations. Inventory is often the second largest expense companies can have outside of payroll, making inventory management and planning an important business function.

The first step of inventory planning is to estimate future sales. This estimation analysis can be conducted by reviewing historical sales records to ascertain various sales trends for company products. Businesses often add a buffer amount to their sales estimates. This buffer amount can ensure that companies do not run out of various products if higher sales occur than previously estimated. Companies may also conduct an economic market analysis to assess consumer demand, behavior, and income. These economic factors can lead to higher consumer purchases and result in lower overall on-hand available inventory.

The next step in inventory planning is to purchase the necessary products for business locations. This process includes selecting the products, displays, receiving or verification methods, and reorder system. Many companies attempt to order consumer goods that coincide with holidays or seasons. Companies can also order popular products that will sell quickly and generate higher revenues. This inventory planning process often includes an accounting budget. This budget ensures that companies do not overspend on products that will result in sluggish sales and higher warehousing or other business costs.

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Companies may also make plans for moving inventory quickly before new items must be purchased for upcoming seasons. These methods include promotional sales, markdowns, and clearance or liquidation sales. These processes ensure that companies do not get stuck with old inventory that becomes unsellable. Unsellable inventory is commonly called obsolescence in the business environment. Obsolete inventory may require companies to write off the products as a loss against operational income. Depending on the amount of inventory on-hand, this loss can represent significant reductions to the company’s income.

An important consideration in inventory planning is keeping track of all physical products in the company’s inventory. Companies use one of two accounting methods: perpetual or periodic. A perpetual inventory system maintains an accurate count after every purchase or sale of products. The periodic inventory system only updates inventory numbers at specific time periods during the accounting year. Most companies choose to update inventory on a monthly or quarterly basis, depending on their business operations.

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anon280544
Post 4

@Emilski: It's all done through a lot of statistical analysis. It's not as simple as it sounds, and as per who needs them, any eCommerce company needs a team dedicated to do data analytics for them.

Emilski
Post 3

How do you end up with this type of job? Is someone typically hired to do this type of work, or is it just a small part of the daily work?

I think I would be very good at a job like this. I'm organized and think that I would be able to predict the types of products people would want. Does anyone here have any experience with this type of job, and are there other traits that would make a good inventory planner?

Thanks for any help, guys.

Izzy78
Post 2

I was a manager at a department store when I was younger. You wouldn't believe the amount of work that goes into making sure different products are sold to make room for the new things. It can be very difficult to predict what people will like and dislike.

Next time you are shopping, take a look at the different ways stores try to sell older products. Where I worked, we had a whole suite of tricks we used. My favorite was displaying the previous year's housewares next to the new stuff. When people are dissuaded by the price of the newer items, they will often by the much cheaper model next to it.

JimmyT
Post 1

As someone who runs his own business, inventory control is a huge part of my job.

The larger a business becomes, the less effect one product has in disrupting the overall profit margin. For me, each piece of lost inventory can play a huge role in my overall income.

Having an inventory control system in place for your business is critical no matter what the size. I've developed my own spreadsheet to keep track of my products, but I know small business inventory software exists.

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