How Inventory Planning Supports Marketing Decisions

Mistakenly viewing inventory planning as a strictly operational process for reducing costs and improving efficiency is common. Many retailers are focused only on metrics such as in-stock rates, fulfillment percentages, back order rates and inventory turnover.

Many smaller retailers (say, under $10 million in annnual sales) simply don’t believe that improvements in inventory planning will provide enough incremental profit gain for a company its size to justify investing in staff, systems or processes. However, they may be overlooking a crucial piece of the puzzle: how inventory planners help marketing and merchandising teams grow sales and increase gross margin.

The Best-Laid Plans …
Multichannel retail planning typically has two phases: initial preseason planning and the in-season adjustments that follow. Marketers, merchants and inventory planners all work together to develop the best initial plan possible, then inventory is purchased to support that plan.

It's when consumers start buying that the scrambling begins. Customer response to the product selection and marketing message is always different than planned. Average forecast error — the amount of deviation from initial plans — typically runs at a whopping 30 percent to 40 percent industrywide.

The High Cost of Forecasting Error
Here’s the kicker: “average error” reflects both sides of the inventory ledger, meaning the plan is wrong in two directions at once. For example, you might have planned to sell 1,000 units of an item, but customer response prompts a reforecast to 1,400 units, a potential lost sales of 400 units. Meanwhile, another item pegged for 1,000 units proves to only sell 600 units, leaving an overstock of 400 units.

By extension, we see that for a $10 million business an average error rate of 40 percent could mean potential lost sales of $4 million, with simultaneous overstocks of $4 million (at retail)!