The Importance of Inventory Planning
Inventory Planning, as defined by BusinessDictionary.com, is “The process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity. Inventory planning has a direct impact on a company's cash flow and profit margins especially for smaller businesses that rely upon a quick turnover of goods or materials.”
For many fashion entrepreneurs like yourself, the vision of your products comes easily to you. You know what products you want to create, who your target market is, and how you want your products presented. Inventory planning on the other hand can sound overwhelming, especially if you’re entering the retail business for the first time. Even if you’ve done inventory planning before, do you feel confident that your strategy and calculations will maximize cash flow and profit margins? Let’s explore inventory planning as a business strategy by focusing on 3 best practices: optimizing inventory quantities, creating timelines, and aligning inventory to profit.
1. Optimizing Inventory Quantities
If you’re starting from scratch with a new brand, your inventory plan will most likely be dictated by your minimum production quantities. These minimums can feel limiting and may not align with your brand’s launch vision. Obviously, this is a constraint you need to work within, but keeping your units as small as possible is the key to minimizing risk. Until you have the sales data to lay the foundation for growth, it’s best to stay in test mode with small production units gaining insights and refining your product assortment over time.
As you begin to sell and grow, your customers will evolve the framework for your inventory plan through how they purchase. You will be able to determine how your product sells by size, color, product category, price point, etc. Sales data is the key to profitable and strategic growth. By using these sales trends, you can formulate product inventory quantities that align with your sales.
2. Creating Timelines
Creating timelines for product development and production is essential to keeping products in stock and fresh looks for your customers. As you probably know, there are many steps to the development and production process so getting a handle on what needs to happen when is imperative.
Whether you plan to bring in collections seasonally or introduce new key pieces into a season less assortment you will need to be thinking ahead. I always suggest to my clients that they have a 12-month production plan in place. Of course, business needs change and what you learn from customer sales will drive variations, but having a long term plan will keep you on track to hit your goals and achieve domestic or international lead times.
Another essential aspect of inventory planning is creating a timeline for pre-planning liquidation. Creating a 12-month promotional calendar is a great way for you address aged inventory. This best practice triggers you to regularly review and liquidate older styles freeing up cash for more of your best-selling products. You can mark down goods regularly, align promotional activity with holidays or create brand-specific promotional events.
3. Aligning Inventory to Profit
One of the easiest ways to measure your profit is by calculating and tracking your Gross Margin Rate (GM%). This data point tells you how much profit you’re making by comparing the cost to the price in which you sell it. Your GM% will vary throughout a product’s lifecycle from full price, to promotional to liquidation. If you’re tracking your GM% regularly, you won’t be caught off guard by inventory issues and poor sellers.
Pay attention to your best-selling styles and make a plan for how to re-incorporate them in the future by repeating the styles or adding in more variations of them. Also pay attention to your worst-sellers. Identify those slow-selling styles, colors and sizes and make adjustments accordingly to future assortments. Knowing and reacting to your best and worst-selling styles will optimize your inventory turn and increase profit.
I also encourage my clients to read between the lines of their sales data. What are the things you are not offering that could be beneficial for your customer? Are the majority of your sales in smaller sizes? Maybe your customer would react positively to petite sizes or vice versa for plus sizes. Maybe you notice your best-selling styles are the highest price points you offer. This may suggest that you offer more premium styles and focus on marketing to high-end consumers.
Inventory planning can seem daunting but it is absolutely necessary for running a successful and profitable business. Start small and evolve by listening to your customer through what they purchase. Plan ahead by creating and maintaining timelines and align the products you produce with profit.
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