The last thing you, as a seller, want is to run out of inventory, especially if there’s demand for that inventory. With that in mind, it’s important to spend some time thinking about your restock plan and inventory control. There are a lot of factors to consider when crafting a restock plan, but the benefits of being well-prepared will result in more profit for you and your business.
Before we jump into the nitty gritty, here are a couple of terms that are important in the restocking world:
A reorder point is an inventory quantity that, once your inventory reaches this point, alerts you that it’s time to create purchase order(s) to restock the inventory. For instance, if your reorder point is 50 and you have 55 gadgets in your inventory, if a customer orders 7 gadgets, your inventory quantity then falls below the reorder point, which means it’s time for you to purchase more inventory from your vendor.
When you restock, it’s important to consider the amount of inventory you have on backorder. You most likely want to fulfill those backordered quantities as quickly as possible, and you also want to plan ahead to hopefully avoid putting inventory on backorder again.
Minimum Order Quantity
A minimum order quantity is the minimum amount of inventory you want to purchase at a time. Shipping costs can be a big factor in determining this quantity, as some vendors will offer shipping discounts once certain quantities have been exceeded.
Maximum Order Quantity
A maximum order quantity is the maximum amount of inventory you want to purchase at a time. Shipping costs can again be a factor, as can warehouse costs, or simply physical space. You don’t want to start stacking stuff in the aisles (probably).
Now that you’ve got the terminology down, here are 5 steps to take when creating a restock plan:
1. Conduct some sales analysis
They’re selling like hotcakes (hopefully)! But how many hotcakes are your customers consuming?
How quickly do you move inventory? It’s a good idea to put on those sales-analysis goggles and figure out the demand for each of your inventory items. If you only sell ten gidgets a year, but you sell ten gadgets a month, obviously you’re going to want to craft separate restock plans for your gidgets and gadgets.
P.S. When conducting sales analysis, don’t forget to consider that large orders might skew your numbers. That one buyer probably won’t be placing that huge, record-setting order every month.
2. Determine how much inventory you can afford to store
Like the judicious ant, you must plan ahead.
What is the minimum amount of inventory you want to have on-hand at all times? Maybe you normally only sell ten gadgets a month, but you want a “cushion” of five gadgets (also known as safety stock) in order to be prepared for the unexpected gadget craze that may hit any moment now. If you sell your last gadget on the 20th of the month, but your vendor doesn’t deliver the next batch until the first of the month, you’re running the risk of disappointing a potential customer.
If your products are seasonal, then your restock plan should be flexible enough to accommodate that as well.
One way to think about your inventory storage plan is to picture your inventory as a river flowing over a rocky bed. If inventory is too high (you’ve got too much), you can’t see the rocks, but if it’s too low, you can’t sail through without hitting the rocks. Your goal is to smoothly navigate the Rio Inventory while still being able to admire the river rocks below.
3. Factor in the vendor
How long does it take to receive inventory from your vendor? If your vendor lead time is ten days, you’ll want to make sure that you place your order at least ten days before your gidget supply dries up. Additionally, when reordering from a vendor, you’ll want to consider any shipping costs. For instance, it may be more cost-effective for you to order in bulk, rather than simply ordering the bare minimum of what your sales analysis indicates you should have on-hand. Determining your reorder point will be extremely helpful at this stage.
(By the way, if vendor lead time is a problem for you, dropshipping might be the answer you’re looking for.)
4. Evaluate any additional inventory storage costs
If you don’t own your own warehouse, you need to factor in any rental costs when determining your restocking strategy.
What are the costs of storing inventory that you haven’t sold yet? Do you own your own warehouse, or do you rent warehouse space? How much does it cost to store all those gadgets, and could you potentially make more money selling a higher volume of gidgets? Who deserves that shelf space more, and how much shelf space can you afford?
5. Make a plan, make a profit
A common formula for calculating a reorder point is:
Once you’ve determined a reorder point and considered the other factors outlined above, it’s time to implement! Depending on how your business operates and what your purchase order process is, your implementation plan might look very different from other companies’ plans.
The bottom line is that it’s very important to know how much you sell of each item, and how quickly you do so. Otherwise, you’ll just be guessing when you restock, and potentially wasting (a.k.a. losing) money.
If you need a little help, we know someone.
Beyond assisting you with creating restock plans for inventory items based on minimum/maximum purchase quantities, reorder points, and reorder quantities, SalesPad Cloud and SalesPad Desktop both offer a Purchase Advisor, which assists you in generating the purchase orders needed when it’s time to restock. Additionally, both softwares feature sales analysis functionality designed to give you detailed insight into how each of your inventory items are performing.
Basically, we’re here to help, and we do a pretty good job of it. Don’t hesitate to reach out in the comments below for more information- we love hearing from you!