Effective stock planning: how to avoid empty shelves and overstock. Inventory planning, also called stock planning, is one of the central challenges businesses face. Here's everything you need to manage your warehouse and prevent bottlenecks.
Inventory planning in your own warehouse — also called stock planning — is one of the most important and trickiest tasks a business faces.
What happens when forecasts go wrong and the market is misjudged is something we all experienced firsthand a while back: in 2020, people fighting over the last roll of toilet paper in German supermarkets is probably burned into our collective memory.
To prevent similar crises in the future and help you keep your warehouse at optimal levels, we've pulled together all the key information on stock planning for you in this post.
Practical experience shows that stock planning is a topic many companies happily duck. Too dry, not exciting enough. If all orders can be filled within a more or less acceptable timeframe, the matter has gotten enough attention — right? Not at all! Good stock planning delivers some tangible benefits for your business:
On average, every business has 25 to 50 percent of its total company value sitting in the warehouse as inventory. That capital is initially inactive and always at risk of losing value when market conditions shift. Smart stock planning, on the other hand, frees up money and opens the door to new investments.
Warehouse space, logistics, and the work that goes with them all cost money — that's a given. But these line items are often accepted as a necessary evil, and the optimization potential hiding there gets overlooked. Good inventory planning helps cut costs and minimize the workload.
Right stock planning isn't just about never having too much of an item in stock — it's also about never having too little. When it's dialed in, your customers don't have to wait weeks for their order or face the dreaded out-of-stock message. Overall, you create a better customer experience and, in turn, more revenue.
Finally, thoughtful stock planning lets you put the relationship with your suppliers and production partners on solid footing. When you're able to consistently order the optimal quantities for you, nasty surprises like canceled orders or midnight emergency orders disappear.
Optimized inventory planning should be high on your to-do list. Here's how to go about it:
First, you need to decide how big the optimal stock level for an item should actually be. There are two schools of thought here that couldn't be more different:
Safety Stock: Defenders of the safety stock principle play it safe and would rather have too much of every item in stock than too little. That hedges against unexpectedly high demand, but it also drives up running costs and ties up more capital.
Minimum Stock: Advocates of the minimum stock approach argue you should only keep as much of each item in stock as you currently need. That cuts warehousing costs, but leaves a business looking flat-footed when unexpected problems hit (like supply shortages from a pandemic).
So there are pros and cons on both sides. What's the right path for your business?
As is so often the case, the truth doesn't sit at the extreme — it's a compromise between the two. Good stock planning leans on the so-called Goldilocks principle: just like in the fairy tale, the porridge should be neither too hot nor too cold.
Applied to inventory, that means: you should never have so little of an item in your warehouse that it can't be shipped under heavy demand, but never so much that it eventually becomes bargain-bin stock. The goal is to find the sweet spot.
But where is it?
To find the optimal stock level, you need to look into the future and predict the actual quantity of an item you'll need — a method internationally known as inventory forecasting.
As pros, we don't use a crystal ball but key metrics and mathematical formulas. The most important ones are these:
The turnover rate shows how quickly an item sells. From it, you can read both how profitable an item is and how often it needs to be reordered. The formula is usually calculated on an annual basis:
Sales ÷ Inventory = Turnover Rate
If an item generated €100,000 in sales over the year and you had goods worth €50,000 in stock during that same period, the turnover rate is 2. That means: twice a year, you fully convert tied-up capital for that product into revenue.
Values close to 1 typically mark slow movers and unprofitable items that drive high warehousing costs. Values above 4, on the other hand, mark goods that sell quickly but need to be reordered often, leading to delivery delays and extra work for logistics.
Both extremes call for stock planning optimization. Rates between 2 and 4 have proven ideal.
Once we've identified which items need attention, the next step is to estimate the optimal stock quantity. As a rule of thumb, supply chain experts use this equation:
SAFETY STOCK = 1.65 × √Lead Time Demand
You'll find the exact meaning of Lead Time Demand in the next formula; for now, it's enough to know that this factor accounts for both the average lead time from your producer to your warehouse and your daily sales — because the longer the lead time and the higher the sales, the bigger your safety stock has to be.
The 1.65 coefficient, in turn, is just a guideline value and can vary across product categories. Generally: the higher the turnover rate, the bigger this number.
The Lead Time Demand value represents total demand for an item between the moment a reorder is placed and the estimated time for the next-but-one delivery.
Put another way: Lead Time Demand tells you how much of a product you need to order when factoring in both delivery time and your sales. It's calculated like this:
Lead Time Demand = Lead Time · Average Daily Sales
Lead time here is the span between placing an order and the goods arriving in your warehouse. Don't just trust your supplier's numbers — always plan in a bit of extra time for internal steps like unpacking, sorting, and booking in.
Average daily sales should come from your own books. The more data you have on a given item, the better.
Now that we can calculate how an item's stock planning is doing, how much we need to order, and what our safety stock should be, it'd be helpful to know exactly when to place an order — the reorder point.
This also comes from a formula:
Reorder Point = Lead Time Demand + Safety Stock
The result isn't a date, of course, but the minimum stock level that needs to be reached before the next order should be placed.
Of course, our selection of formulas is far from complete and primarily delivers ballpark numbers for an initial stock-planning assessment. On top of that, your assortment likely covers more than a handful of items, and calculating each one by hand would eat up huge amounts of time. A digital solution is the way to go.
Stock planning in Excel — please cross that off your mental list of options right away. The spreadsheet tool might still work for early-stage startups and small shops; for established businesses, it quickly hits its limits in features, scope, and scalability.
Less limited is SAP's Supply Chain Management solution (SAP SCM); but alongside the supply chain itself, it focuses mainly on safety stock planning. Steps that sit between retailer and end customer get little attention.
For your stock planning process, we recommend a dedicated platform that grows with your business and, alongside warehousing, can ideally take on additional tasks across fulfillment, order processing, and shipping.
In the short term, this step means an investment for you, but long term it holds so much optimization and savings potential that, in our experience, it always pays off.
The right time to find a solution for your stock planning is right now. The benefits are too many: lower operating costs, less tied-up capital, optimized supply processes, and happy customers.
If you don't want to drown in a tangle of tables and formulas, there are platforms that take most of the work off your hands. That way, you make sure 2020-style scenes don't repeat themselves.
Cover image by Kelly Sikkema.
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