CLASS NOTES OF UNIT-4 FOR APPAREL PRODUCT MARKETING AND MERCHANDISING

UNIT 4:

Budgeting– concept and definition; importance of budgeting process; classification of budget; various steps and
aspects involved in budgeting process, dollar and unit planning and contour system; inventory value planning;
integrated dollar and unit planning; concept and calculation of reorder point and economic order quantity at
fashion product retail level.

Development of financial and analysis modules using Python libraries

1. Budgeting– concept and definition

A budget (from old French bougette, purse) is generally a list of

all planned expenses and revenues.

It is a plan for saving and spending.

A budget is an important concept in microeconomics, which

uses a budget line to illustrate the trade-offs between two or
more goods.

In other terms, a budget is an organizational plan stated in

monetary terms.

Benefits of budget
 
Budget plan helps one to achieve ones spending and financial goals, other
benefits are as follows
 
Keeping Track : Budgeting allows one to track ones monthly expenditures so
 

that one can plan key savings strategies for important short- and long-term
goals.
 
Limits one's spending : A budget will identify expenses that can be cut so that
 

one can set goals on making important long-term savings.

 
Discipline oneself : Ones goal is to rid oneself of instant gratification (the
 

symptom of credit card use). The budget sets guidelines on what and when
items can be purchased.
 
Setting Goals : Budgeting supports ones financial goals, which may include:
 

saving for one's first home, paying down debt, preparing to go to school,

planning for retirement
 
Good budgeting skills add these goals into the budget.
 

Budget planning
 
� Overview : Sitting down and making a family budget may not be the most
fun activity one ever do. However, the effort and thought one put into ones
budget can help relieve stress and enable one to manage ones money more
efficiently. Learning to budget for one family of four is the first step toward
smart financial management. If one have attempted family budgeting before but
have experienced difficulty staying on track, try once more to set one family on
the right financial path.
 
Step 1 : List one fixed monthly expenses. Include mortgage or rent payments,
electricity, cable, food, phone, insurance, loan payments and transportation
costs. If our children are in child care or a private school, add those costs as
well. To ensure accuracy, use past bank statements to make a complete list.
 
Step 2 : Look through one's past 12 months of expenses. Write down any
expenses that are paid annually. Magazine subscriptions, pest control fees, car
registration fees, membership dues and school supplies for children and other
such expenses. Add these together and divide by 12 to obtain the average
monthly cost of these annual fixed expenses. List this result on one's monthly
budget sheet.
 
Step 3 : Write down one variable monthly expenses on one sheet. List the cost
of clothing, entertainment, restaurant meals and other variable expenses for both
adults and children. Remember to look over the past year and include expenses
that do not occur every month, such as school lab fees, sports or music lessons,
and the purchasing of gifts.
 
Step 4 : Compare the total monthly expenses to monthly take-home income.
Note whether the expenses are greater or less than the income. Examine each
budgeted category and decide if one needs to reduce that expense. Involve
children in the discussion if they are old enough.
 
Step 5 : Rewrite monthly budget with adjusted figures. Prepare for unexpected
expenses by setting up an automatic transfer system with one bank to establish
or build a savings account. Budgeting helps establish the habit of saving money.
Encourage children to save part of any money that they receive.
 
Step 6 : Decide the person responsible for keeping track of monthly budget.
Rotate the responsibilities occasionally to ensure that both of them understands
the income and expenditure pattern, frequent communication will enlighten the
budget plan.
 
Step 7 : Set up an envelope system to break any credit card habit one may have.
Commit to paying cash for as many expenses as possible. Pay the fixed
expenses before calculating how much money one have left for variable
expenses. Put the budgeted amount of cash in an envelope designated for each
variable category expense, such as entertainment, clothes, restaurant meals,
coffee and gifts. Once the money in that envelope is gone, do not make any
additional purchases for the month in that category.
 
� Tips and Warnings : Use budgeting software to streamline the process.
Consider automating loan payments through the financial institution. Stop using
credit cards and pay off any outstanding balances. Establish savings accounts
for children. Open a vacation or holiday fund to help save for those expenses.
Consult with a trusted friend or adviser concerning any financial
difficulties.Beware of consolidation loans if one has credit card debt. Analyze
any fees and expenses associated with savings plans.
 

Clothing budget for a family

 
Clothing the family can be an expensive endeavor, especially with the
growth spurts that children go through so often when they are younger.
 
Restrict oneself from impulse buying. Hold oneself to the rule of buying
clothes only if one or one family absolutely needs them. Purchase new items of
clothing, wisely. It is best to invest in a few staple pieces that match existing
pieces in one's wardrobe and can be worn in a variety of styles.
 
Take advantage of end-of-season clearance and buy out specials, especially
on big ticket items such as winter coats. One can easily find discounts of 75% or
more on winter clothing at the end of March or April, and summer clothing at
the beginning of August and September. This can be a bit trickier for younger
children because they outgrow things so quickly, but for teenagers and older
children one can find significant savings.
 
Consider setting up a schedule for purchasing new clothes, and make sure
children are aware of the new ruling. It makes sense to shop in the late summer
for new school clothes and proper fitting shoes for the fall- repeat the process in
the spring. Before going shopping for new clothes, have one family go through
their closets and remove clothing that they no longer wear or outgrown.
 
Creative thinking and flexibility are the keys to keeping one family budget
intact. These tips will help one stick to a strict clothing budget and save money
for more important things. And with a family-there is always something (or
someone) that needs money!
 

Clothing expenditures for the family

 
The family consists of the father, the mother, and the two children sixteen
years, and eleven. The father sets aside part of his income for life insurance and
savings with the hope that he is providing for future emergencies. Because well-
balanced meals are required for health and physical growth, a large part of the
family's income must be spent for food.
 
In addition there are such items as operating expenses for the home,
church/temple and charity contributions, doctor's bills, recreation, and education
which a normal family included in its spending. If these are provided for, this
family on a moderate income cannot afford to spend more than approximately
eight to ten percent, on clothes. In some instances the father spends more for
clothes than the mother. In others the reverse is true. In this case let us assume
that the mother spends more. Most girls of high-school age need more clothes
than boys of eleven.
 

The divisions of a clothing budget

 
The largest division of the budget is outer clothing, which includes wraps and
dresses. Shoes and hose generally rank next. This is not difficult to understand
at a time when stockings are so sheer that they do not last long. The following
figures compiled from the clothing expenditures of several hundred higher
secondary school girls show one how the expenditures may vary in the different
divisions of the clothing budget:
 
          Per cent
Outer garments--------    48 to 54
Undergarments and sleeping garments  --------     8 to 13
Shoes and hose--------    18 to 27
Accessories-------- 4        to      8
Sport clothes--------        0        to      4
`Determine the percentages of ones own wardrobe costs and see how they
compare with the ranges shown above.

Budgeting- Importance of Budgeting, Classification of Budget

Steps and aspects involved in Budgeting Process
Dollar and Unit Planning
Inventory Value Planning
Reorder point and Economic order quantity at Fashion Product Retail level
Budget: Definition, Classification and Types of Budgets

A budget is a quantitative plan for acquiring and using

resources over a specified period. Individuals often create
household budgets that balance their income and expenditures
for food, clothing, housing, and so on while providing for some
savings.

Once the budget is established, actual spending is compared to

the budget to make sure the plan is being followed. Companies
similarly use budgets, although the amount of work and
underlying details involved far exceed a personal budget.

In an organization, the term master budget refers to a summary

of a company’s plans including specific targets for sales,
production, and financing activities.

The master budget—which culminates in a cash budget, a

budgeted income statement, and a budgeted balance sheet—
formally lays out the financial aspects of management’s plans
for the future and assists in monitoring actual expenditures
relative to those plans.

Budgets are used for two distinct purposes planning and

control.

Planning involves developing goals and preparing various

budgets to achieve those goals.
Control involves the steps taken by management to increase
the likelihood that all parts of the organization are working
together to achieve the goals set down at the planning stage.

To be effective, a good budgeting system must provide for

both planning and control. Good planning without effective
control is a waste of time and effort.

One of the management major responsibilities is planning.

Planning is the process of establishing en wide objectives. A
successful organization makes both long term and short-term
plans. These plans s the objectives of the company and the
proposed way of accomplishing them.

A budget is a formal statement of management’s plans for a

specified method of communicating the agreed-upon objective
of the organization.

Companies usually propose a budget to plan for and their

control their revenues (inflows) expenses (outflows), failure to
prepare a budget could lead to significant cash flow problems
or even f disaster for a company.

Once adopted a budget becomes important in strong

instruments for performance. We consider the role of
budgeting as a control device.

A budget is a blueprint of the plan of action to be followed

during a specific time for attaining some decided objective.

According to CIMA Official Terminology, budget is “a plan

quantified in monetary terms prepared and approved before a
defined time usually showing planned income to be generated
and or expenditure to be incurred during that period and the
capital to be employed to attain a given objective.”
 The analysis of the above definition shows the following
elements in the budget:

1. It is a plan expressed in financial-terms for attaining some

objective.
2. It is prepared and approved before a defined time.
3. It shows the planned income to be generated.
4. It shows probable expenditure to be incurred.
5. It indicates the capital to be employed during the period.

Classification of Budget

Budgets classified according to 4 bases;

1. Based on Time;
2. Based on Condition;
3. Based on Functions; and,
4. Based on Flexibility.

These are explained below;

Types of Budget Based on Time

Based on time factor budgets can be classified into two types;
1. Long-term Budget, and
2. Short-term Budget.

Long-term Budget
This budget is related to the planning operations of an organization for a period of 5 to 10
years. The long-term budget may be adversely affected due to unpredictable factors.
Therefore, from a control point of view, the long-term budget should be supplemented by
short-term budgets.

Example: Research and Development Budget, Capital Expenditure Budget, etc.

Short-term Budget
This budget is drawn usually for one year. Sometimes a budget may be prepared for a
shorter period (like monthly budget, quarterly budget, etc.). Shortterm budgets are prepared
in detail and these budgets help to exercise control over day-to-day operations

Example: Material Consumption Budget, Labor Utilization Budget, Cash Budget, etc.

Types of Budget Based on Condition

Based on conditions prevailing, a budget can be classified into 2 types;

1. Basic Budget, and

2. Current Budget.

Basic Budget
A budget that is established for use as unaltered over a long period is called Basic Budget.

This budget does not take into consideration changes occurring from the external
environment which are beyond the control of management. This budget is more useful for
top-level management for formulating policies.

Current Budget
A budget that is established for use over a short period and is related to the current
conditions is called the Current Budget. This budget is adjusted to the current conditions
prevailing in the business.

Types of Budget Based on Functions

Based on activities or functions of a business, budgets can be classified into 2 types

1. Master Budget, and

2. Functional Budgets.

Master Budget
The final integration of all functional budgets by the Budget Officer provides the Master
Budget. When functional budgets have been completed, the Budget Officer prepares the
Master Budget.

Master Budget is the summary budget incorporating its component functional budgets,
which is finally approved, adopted and employed. [C. I. M. A. (London)l.

Master Budget shows the operating profit of the business for the budget period and
budgeted balance sheet at its close. This Budget portrays the overall plan for the budget
period.

The master budget consists of several separate but interdependent budgets. The first step in
the budgeting process is the preparation of the sales budget, which is a detailed schedule
showing the expected sales for the budget period. An accurate sales budget is the key to the
entire budgeting process.

If the sales budget is inaccurate, the rest of the budget will be inaccurate. The sales budget is
based on the company’s sales forecast, which may require the use of sophisticated
mathematical models and statistical tools.

The sales budget helps determine how many units need to be produced.

Thus, the production budget is prepared after the sales budget. The production budget, in
turn, is used to determine the budgets for manufacturing costs including the direct materials
budget, the direct labor budget, and the manufacturing overhead budget.

These budgets are then combined with data from the sales budget and the selling and
administrative expense budget to determine the cash budget.

A cash budget is a detailed plan showing how cash resources will be acquired and used.
After the cash budget is prepared, the budgeted income statement and then the budgeted
balance sheet can be prepared.

Functional Budgets
Functional Budgets relate to functions of the business such as product sales etc. In other
words, Functional Budgets are prepared in respect of various functions performed in a
business.

Functional Budgets which are commonly found in a business concern are as follows;

1. Sales Budget;
2. Production Budget;

3. Material Budget;
4. Labor Budget;

5. Production Overhead Budget;

6. Administration Overhead Budget;

7. Selling & Distribution Overhead Budget;

8. Plant Utilization Budget;

9. Cash Budget

10. Research & Development Budget and more.

Sales Budget
The sales budget is the starting point in preparing the master budget. The sales budget is
constructed by multiplying budgeted unit sales by the selling price.

A schedule of expected cash collections is prepared after the sales budget. This schedule will
be needed later to prepare the cash budget.

Cash collections consist of collections on credit sales made to customers in prior periods plus
collections on sales made in the current budget period.

Production Budget
The production budget is prepared after the sales budget. The production budget lists the
number of units that must be produced to satisfy sales needs and to provide for the desired
ending inventory.

Production needs can be determined as follows:

Budgeted unit sales……………… XXXX

Add the desired ending inventory… XXXX

Total needs………………………….. XXXX

Less beginning inventory……….. XXXX

Required production……………… XXXX

Note that production requirements are influenced by the desired level of the ending
inventory. Inventories should be carefully planned. Excessive inventories tie up funds and
create storage problems.

Insufficient inventories can lead to lost sales or last-minute, high-cost production efforts. At
Hampton Freeze, management believes that an ending inventory equal to 20% of the next
quarter’s sales strikes the appropriate balance.
 Cash Budget
The cash budget is composed of four major sections:

1. The receipts section.

2. The disbursements section

3. The cash excess or deficiency section.

4. The financing section.

The receipts section lists all of the cash inflows, except for financing, expected during the
budget period. Generally, the major source of receipts is from sales.

The disbursements section summarizes all cash payments that are planned for the budget
period.

These payments include raw materials purchases, direct labor payments, manufacturing
overhead costs, and so on, as contained in their respective budgets.

Also, other cash disbursements such as equipment purchases and dividends are listed.

The budget is the forecast of expected cash receipts and cash disbursement during the
budget period. The importance of cash budget need not be overemphasized. Cash is the
lifeblood of the business. Without sufficient cash, a business can not be run smoothly.

Cash is required for the purchase of raw material, payment of wages and other expenses,
acquisition of assets, fulfillment of commitment to investors and so on.

The preparation of functional budgets will be a useless job unless the requisite amount of
cash is made available to implement them.

That is why; the cash budget has assumed enormous importance. It reflects possible receipts
of cash from various sources and the expected requirement of cash for meeting various
obligations.

In this way, it highlights well in advance neither the need for taking necessary measures to
streamline the cash flows so that there is neither any cash shortage nor the surplus of cash.

A cash budget is prepared for the budget period, however, for effective cash management, it
is generally divided monthly, weekly or even daily.

Purpose of Cash Budget

The principal purposes of the cash budget may be outlined as follows:

 It indicates the probable cash position as a result of planned operations.

 Indicates cash excess or shortages.
 It indicates the need to arrange for short-term borrowing, or the availability of idle
cash for investment.

 It makes provision for the co-ordination of cash about (i) total working capital (ii)
sales, (iii) investment, and debt.

 It establishes a sound basis for obtaining credit.

 It establishes a sound basis for current control of the cash position.

Difference Between Cash Budget and Cash Flow Statement

A cash flow analysis may be made based on past data or estimated data of a forthcoming
period. When the cash flow analysis is done based on past data the statement of such
analysis is usually called the cash flow statement.

On the other hand, if the cash flow analysis is done based on estimated data about a
forthcoming period, it is called the cash budget. The differences between the cash budget and
cash flow statement are discussed as:

Point of
Cash Budget Cash Flow Statement
Difference

The cash budget is futuristic. It The cash flow statement is a

reflects expected receipts and post-mortem analysis revealing
1. Nature payments of cash under inflows and outflows of cash
different heads during the having taken” place during a
budget period. past period.

The purpose of the cash budget

The purpose of the cash flow
is to indicate whether there will
2. Purpose statement is to indicate how the
be any deficiency or surplus of
cash position of the firm.
cash.

A cash budget can be prepared

The cash flow statement is
for a short period says,
prepared for a longer period
3. Period monthly, weekly, or even daily
usually coinciding with the past
and also for a long period says,
accounting year.
half-yearly, yearly.

4. Uses Exercise control over important It helps management and

 external parties like
activities
shareholders, bankers, auditors.

The cash flow statement helps

With the help of cash budget the management as well as
5. Uses management exercises control external parties like
over important activities. shareholders, bankers, auditors,
etc.

Difference between Budget and Forecast

The terms ‘budget’ and forecast’ are often used interchangeably. But they are not the one
and same things. The difference can be discussed as follows:

Types of Budget based on Flexibility

Based on flexibility budgets can be classified into two types;

1. Fixed Budget, and

2. Flexible Budget.

Fixed Budget (or Static Budget)

Fixed Budget is a budget which is designed to remain unchanged irrespective of the level of
activity attained. This type of budget is most suited for Fixed expenses, which have no
relation to the volume of output. Fixed -Budget is ineffective as a tool for cost control. Fixed
Budget is based on the assumption that the volume of output and sales can be anticipated
with a fair degree of accuracy.

Flexible Budget (or Sliding Scale Budget)

Flexible Budget is a budget which is designed to change by the level of activity attained.

This budget recognizes the difference in behavior between fixed and variable costs about
fluctuations in output. This budget serves as a useful tool for controlling costs. It is more
realistic, practical and useful than Fixed Budget.

A flexible budget that can be used to estimate what costs should be for any level of activity
within a specified range. A flexible budget shows what costs should be for various levels of
activity.

The flexible budget amount for a specific level of activity is determined differently depending
on whether a cost is variable or fixed.
If a cost is variable, the flexible budget amount is computed by multiplying the cost per unit
of activity by the level of activity specified for the flexible budget. If a cost is fixed, the
original total budgeted fixed cost is used as the flexible budget amount.

Characteristics of a Flexible Budget

Flexible budgets take into account how changes in activity affect costs. A flexible budget
makes it easy to estimate what costs should be for any level of activity within a specified
range.

When a flexible budget is used in performance evaluation, actual costs are compared to what
the costs should have been for the actual level of activity during the period rather than to
the budgeted costs from the original budget.

This is a very important distinction— particularly for variable costs. If adjustments for the
level of activity are not made, it is very difficult to interpret discrepancies between budgeted
and actual costs.

Budgeting
The tactical implementation of a business plan

What is Budgeting?
Budgeting is the tactical implementation of a business plan. To achieve the goals in a
business’s strategic plan, we need a detailed descriptive roadmap of the business plan that
sets measures and indicators of performance. We can then make changes along the way to
ensure that we arrive at the desired goals.

 
 

Translating Strategy into Targets and Budgets

There are four dimensions to consider when translating high-level strategy, such as mission,
vision, and goals, into budgets.

1. Objectives are basically your goals, e.g., increasing the amount each customer
spends at your retail store.
2. Then, you develop one or more strategies to achieve your goals. The company can
increase customer spending by expanding product offerings, sourcing new
suppliers, promotion, etc.

3. You need to track and evaluate the effectiveness of the strategies, using
relevant measures. For example, you can measure the average weekly spending per
customer and average price changes as inputs.

4. Finally, you should set targets that you would like to reach by the end of a certain
period. The targets should be quantifiable and time-based, such as an increase in the
volume of sales or an increase in the number of products sold by a certain time.

 
 

Goals of the Budgeting Process

Budgeting is a critical process for any business in several ways.

1. Aids in the planning of actual operations

The process gets managers to consider how conditions may change and what steps they
need to take, while also allowing managers to understand how to address problems when
they arise.

2. Coordinates the activities of the organization

Budgeting encourages managers to build relationships with the other parts of the operation
and understand how the various departments and teams interact with each other and how
they all support the overall organization.

 
3. Communicating plans to various managers

Communicating plans to managers is an important social aspect of the process, which

ensures that everyone gets a clear understanding of how they support the organization. It
encourages communication of individual goals, plans, and initiatives, which all roll up
together to support the growth of the business. It also ensures appropriate individuals are
made accountable for implementing the budget.

4. Motivates managers to strive to achieve the budget goals

Budgeting gets managers to focus on participation in the budget process. It provides a

challenge or target for individuals and managers by linking their compensation and
performance relative to the budget.

5. Control activities

Managers can compare actual spending with the budget to control financial activities.

6. Evaluate the performance of managers

Budgeting provides a means of informing managers of how well they are performing in
meeting targets they have set.

Types of Budgets

A robust budget framework is built around a master budget consisting of operating budgets,
capital expenditure budgets, and cash budgets. The combined budgets generate a budgeted
income statement, balance sheet, and cash flow statement.

1. Operating budget

Revenues and associated expenses in day-to-day operations are budgeted in detail and are
divided into major categories such as revenues, salaries, benefits, and non-salary expenses.

 
2. Capital budget

Capital budgets are typically requests for purchases of large assets such as property,
equipment, or IT systems that create major demands on an organization’s cash flow. The
purposes of capital budgets are to allocate funds, control risks in decision-making, and set
priorities.

3. Cash budget

Cash budgets tie the other two budgets together and take into account the timing of
payments and the timing of receipt of cash from revenues. Cash budgets help management
track and manage the company’s cash flow effectively by assessing whether additional
capital is required, whether the company needs to raise money, or if there is excess capital.

Budgeting Process – Steps and

Importance of Budget
What is a budget and budgeting process?
A budget is a tool for planning, implementing, and controlling activities for optimum
utilization of scarce resources in a business. It explains the company’s objectives and the
course of action it will choose to achieve its goals in detail. Also, it mentions the controls
to be put in place for achieving its successful implementation. The budgeting process is
the process of putting a budget in place. This process involves planning and forecasting,
implementing, monitoring and controlling, and finally evaluating the performance of the
budget.

A budget is essential for any organization. It helps to keep track of its income and
expenditure. Performance evaluation becomes easy as there is a set target or goal to
achieve in the budget for the pre-determined period. The management can question any
deviation from the set goals. The budgeting process helps to take corrective action
timely in cases of under-achievement of income or excessive expenditure. Thus, the
budget helps to ascertain that business money is being spent and invested correctly, and
the financial goals of the business are achieved.

What are the approaches to the budgeting

process?
There are two main approaches to the budgeting process. These are:
Top-down approach
This budgeting process involves preparing the budget by the company’s senior
management based on the company’s objectives. The departmental managers are
assigned the responsibility for its successful implementation. Every department can opt
to create its own budget based on the company’s broader budget allocation and goals.

This approach’s advantage is that the lower management saves a lot of time and gets a
readymade budget to be followed. They hardly participate in the preparation of the
central budget. The senior managers’ experience, coupled with past-performance
figures, comes in handy in such budgeting processes.

Bottom-up approach
This budgeting process starts at the departmental level and moves up to higher levels.
Every department within the company is required to prepare plans for its proposed
activities for the next budget period and estimate the costs it will incur. These individual
budgets are combined to create a bigger all-inclusive budget.

The budgeting process with this approach can be lengthy and time-consuming. However,
employees and managers are more motivated to achieve the budget goals since they
have prepared it. They have the complete knowledge of what the budget actually
expects them to do and how to achieve that. Such budgets tend to be more accurate and
closer to the actual situation on the ground.

What are the steps in the budgeting process?

Preparing the base for the budget according to funding:
The first step in preparing a budget is to identify the budget goals and how they will be
achieved. Factors such as the business’s socio-economic surroundings, sales trends, etc.
have to be taken into consideration for setting the goals. Also, these goals have to be set
according to the economic resources available to the company. A budget will be of no
use without proper funding.

Creating a cost buffer:

The next step in a budget is to scrutinize the costing for the business. Also, evaluating
factors that can affect input costs during the budget period has to be done. Revision of
the compensation plans of the employees takes place every year in most of the
companies. Proper provisions should be created for variations in these costs and
compensation plans to make the budget realistic and achievable.

Preparation of revenue and expenditure budgets:

The next important step is to prepare different types of subsidiary budgets for the
organization. Proper and realistic forecasts for the different types of budgets such as
sales, production, cash, purchase, labor and overheads, selling, general and
administrative expenses have to be made. A realistic plan for the sources of revenue is
the need for the budget period. Planning of expenditure should be accordingly as the
company cannot spend more than what it earns. Thus, the revenue target decides and
dictates the expected quantum of expenses to achieve these revenue targets.

Incorporating departmental budgets:

Smaller departments prepare their own budget in many companies. In such cases, their
collection and integration, along with the master budget, is a pre-requisite.

Incorporating bonuses:
Most of the companies have the policy of declaring bonuses for their employees at the
end of the financial year as per its financial results. Many may declare mid-year bonuses
in case of exceptional performances. Such expenses can become significant in the case
of big companies. Hence, due provisions have to be made in the budget for such
unplanned giveaways.

Provision for capital expenditure:

A company may plan to incur a capital expenditure or invest in a fixed asset during the
budget period. These expenses are quite heavy and considerable by nature. Hence, after
consultation from the top management, their inclusion should be done in the budget.

Changes in the budget model and review:

After finalizing all the above steps, a review of the assumptions as per the budget model
should be done. Also, a thorough review of the entire budget is essential. If there is a
need for any changes in the budget, it can be done now.

Approval and implementation:

The budget will then go to the top management for approval. They will check if it is
proper. Makers will make any changes as per need. In case everything is fine with the
budget, they will give the go-ahead for implementation.

Budgetary controls:
The implementation of the budget is not the last step in the budgetary process. The
setting of proper budgetary controls comes next. This is necessary for the comparison of
the actual performance with the provisions and estimates of the budget. Continuous
reporting of variances has to be done. The management can take corrective actions
accordingly.

Importance of budgets
Proper funding according to targets
A budget sets targets for revenues and expenditure and helps to keep a check on both of
them. Also, the management can channelize funding in the right direction as per the
budget provisions. The formulation of proper strategies becomes possible as per the
budget provisions. The management can also decide whether to go for capital
expenditure or not as per the availability of financial resources looking at the budget.

Helps to set priorities

A budget helps to channelize resources across various departments as per the top
management’s priorities and goals. They are in the best position to decide which
department should get the maximum chunk of the budget allocation to grow. For
example, there are times when the top management will feel that the products of the
company have become obsolete and hence, are losing out to the competition. Hence,
they may prefer to allocate a bigger portion of the budget to the research and
development department to develop new and better products. This will help the company
get back on track and again be ahead of the competition.

Controlled expenditure with better harmony

A budget helps to control wasteful expenditure in an organization. Because resources are
scarce with any company. Hence, their allocation in the best possible manner is
necessary for maximum returns. The budget guides the best possible utilization and
allocation of resources. Moreover, it helps to maintain harmony between various
departments of the business. Each department has a pre-determined share of the
budget allocated to it. And it helps to take care of any daily arguments between them
because of resource allocation.

Dollar and Unit Open-to-Buy

Introduction

Open-to-buy (OTB) tells the buyer how much merchandise may be purchased for any given time.
Because purchases are not all made at one time, the buyer needs a means of determining the dollar
amount or units that may be purchased at any given time. The open-to-buy serves as a control device
to see that purchasing is kept in line with the figures outlined in the six-month merchandise plan.

An open-to-buy report is generally prepared on a weekly basis for a department and/or classification.
It summarizes the existing or projected relationship between inventory and sales. The open-to-buy
report indicates the amount of merchandise on hand at the beginning of the period, the amount
received, the amount sold, markdowns, current inventory, and merchandise on order.

KEY POINTS
1. Open-To-Buy (OTB) is used as a control device to see that purchasing is done according to
the merchandise plan. The OTB enables the buyer to determine the balance of purchases
remaining in dollars or in units for any given time period.
2. OTB cannot be determined unless the amount of stock on hand is known. This may be
obtained either by a physical inventory count or calculated through the retail method of
inventory (RIM).

3. Although dollar planning is the most basic type of planning, unit planning is another tool used
in balancing the merchandise assortment with customer demand.
 4. Assortment plans may be developed in two ways: (a) basic stock list and (b) model stock
plan. A basic stock list is used for basic items that remain consistent in demand, whereas a
model stock plan is used for fashion merchandise.

Economic Order Quantity (EOQ)

What Is Economic Order Quantity (EOQ)?

Economic order quantity (EOQ) is the ideal order quantity a company should
purchase to minimize inventory costs such as holding costs, shortage costs, and
order costs. This production-scheduling model was developed in 1913 by Ford W.
Harris and has been refined over time. 1

 The formula assumes that demand, ordering, and holding costs all remain constant.

 The EOQ is a company's optimal order quantity that minimizes its total costs
related to ordering, receiving, and holding inventory.
 The EOQ formula is best applied in situations where demand, ordering, and
holding costs remain constant over time.
 One of the important limitations of the economic order quantity is that it
assumes the demand for the company’s products is constant over time.

What the Economic Order Quantity Can Tell You

The goal of the EOQ formula is to identify the optimal number of product units to
order. If achieved, a company can minimize its costs for buying, delivering, and
storing units. The EOQ formula can be modified to determine different production
levels or order intervals, and corporations with large supply chains and high variable
costs use an algorithm in their computer software to determine EOQ.

EOQ is an important cash flow tool. The formula can help a company control the
amount of cash tied up in the inventory balance. For many companies, inventory is
its largest asset other than its human resources, and these businesses must carry
sufficient inventory to meet the needs of customers. If EOQ can help minimize the
level of inventory, the cash savings can be used for some other business purpose or
investment.

The EOQ formula determines a company's inventory reorder point. When inventory
falls to a certain level, the EOQ formula, if applied to business processes, triggers
the need to place an order for more units. By determining a reorder point, the
business avoids running out of inventory and can continue to fill customer orders. If
the company runs out of inventory, there is a shortage cost, which is
the revenue lost because the company has insufficient inventory to fill an order. An
inventory shortage may also mean the company loses the customer or the client will
order less in the future.

Example of How to Use EOQ

EOQ takes into account the timing of reordering, the cost incurred to place an order,
and the cost to store merchandise. If a company is constantly placing small orders
to maintain a specific inventory level, the ordering costs are higher, and there is a
need for additional storage space.

Assume, for example, a retail clothing shop carries a line of men’s jeans, and the
shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold
a pair of jeans in inventory, and the fixed cost to place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding
cost) or 28.3 with rounding. The ideal order size to minimize costs and meet
customer demand is slightly more than 28 pairs of jeans. A more complex portion of
the EOQ formula provides the reorder point.

Limitations of Using EOQ

The EOQ formula assumes that consumer demand is constant. The calculation also
assumes that both ordering and holding costs remain constant. This fact makes it
difficult or impossible for the formula to account for business events such as
changing consumer demand, seasonal changes in inventory costs, lost sales
revenue due to inventory shortages, or purchase discounts a company might realize
for buying inventory in larger quantities.
2

Frequently Asked Questions

What does economic order quantity mean?
Economic order quantity is a technique used in inventory management. It refers to
the optimal amount of inventory a company should purchase in order to meet its
demand while minimizing its holding and storage costs. The economic order
quantity is just one of many formulas used to help companies make more efficient
inventory management decisions. One of the important limitations of the economic
order quantity is that it assumes the demand for the company’s products is constant
over time.

How is economic order quantity understood?

Economic order quantity will be higher if the company’s setup costs or product
demand increases. On the other hand, it will be lower if the company’s holding costs
increase.

Why is economic order quantity important?

Economic order quantity is important because it helps companies manage their
inventory efficiently. Without inventory management techniques such as this,
companies will tend to hold too much inventory during periods of low demand, while
also holding too little inventory in periods of high demand.

Either problem creates missed opportunities for companies: too much inventory
generally means too little cash on hand, while not holding enough inventory will lead
to missed sales. For investors, calculating the economic order quantity for a
company can help to assess how efficiently that company is managing its inventory.

What is Inventory Planning?

Inventory represents often the biggest part of a retail business’s assets – up to 80%
of cash is usually tied up in inventory. Holding inventory is unavoidable as it allows
organizations to operate continuously. However, having too much inventory is
damaging to a healthy cash flow and holds business growth as the money tied up in
excessive inventory can’t be invested in other areas of the business.  

Inventory planning is an integral part of a company’s supply chain management

strategy, alongside order management, accounting, warehouse operations, and
customer management. 

Inventory planning involves forecasting demand and deciding exactly how much

inventory and when to order. When done successfully, this helps companies meet
demand whilst reducing expenditure. 

In other words, by having just the right amount of inventory at the right time, in the
right location, businesses reduce the overall cost of storing merchandise, optimize
inventory allocation routes, and ensures that there is always the right amount of
stock to meet customer demand (whilst avoiding surplus stock in obsolescence or
overstocking).

Image: Shopify
 As a result inventory planning improves customer satisfaction rates by preventing
overselling. Consistent service levels also breed loyal customers.

In order to establish a reliable inventory planning, businesses and organizations

must do three things. These are:

1. Demand forecast: using historical sales data, KPIs and variables like seasonality, promotions and
market predicts to make data-driven forecasts. 
2. Control costs: considering things like choosing the right suppliers, automating purchase order
process, reducing cash tied up in slow-moving products etc.  –

3. Store efficiently: storing the right amount of products in the right place to optimize your order
fulfillment routes if you have multiple inventory locations 

When these three workflows exist in tandem, inventory flows continuously,

seamlessly, and efficiently. But, of course, maintaining such a complex operation
comes with some challenges.

4 Challenges of Inventory Planning

Inventory planning involves bringing together lots of different factors and variables.
Planning inventory accurately can be challenging even for businesses operating on
one sales channel.

When a business or organization relies on multiple channels, with multiple

warehouses, and possibly even multiple 3PL providers, things get even more
complex. Especially when demand fluctuation and seasonality are also added into
the mix.

Dealing with so many separate operations and variables at once poses some unique
challenges. Even small hiccups can spell disaster. Typical challenges include: 

 Disparate data

Effective inventory planning requires a lot of data from a lot of places. And bringing all this data together is
a complex task. Inventory planners will need to collate historical data and retail reports that may be
dispersed across many different legacy systems.

Planners will need to collate sales orders, accounting, fulfillment, suppliers and point-of-sale (POS) data.
 This is not only time consuming but, if done poorly, may result in biased demand forecasting leading to
over-stocking, under-stocking, or missed opportunities.

 Guesswork

Making predictions is never easy. If you don’t have the right KPIs in place to guide your inventory planning,
guesswork will always be there, even if you have analytics tools. Plus, unpredictable market variations can
make the forecasting even more complex. 

2020 was a testament to that very fact. 

 Multiple locations

Allocating inventory that is stored across multiple locations is challenging. Without a suitable inventory
tracking system, it’s difficult to know exactly where to allocate your merchandise all the time. 

Plus, storing merchandise in the wrong place could result in added shipping costs and longer wait times for
customer order fulfillment. A poor picking process will not only reduce productivity, but increase travel times
across the whole supply chain. 

 The human component

Technology is not the whole solution. Inventory planning is ultimately controlled by an inventory planner.
When the role is taken over by somebody else, there is a lot of historical knowledge that needs to be
transmitted to the new person in charge. 

The new planner will initially lack the brand awareness of the outgoing planner and may struggle to
understand the historical reasoning behind the current inventory management system. 

And the human component doesn’t just apply to senior staff. Even with the best inventory software in tow, if
staff aren’t sufficiently trained to use it, your business won’t see the best results possible. 

Poor training impacts management and breeds miscalculation. Likewise, poor communication between
procurement, production, and quality control departments will ultimately impede efficiency. 

Why Inventory Planning is Essential for Ecommerce

Inventory planning is the pillar of successful ecommerce. That’s because a business
without a solid inventory plan is significantly more vulnerable to overselling,
understocking, and delayed order fulfillment. At the end of the day, this all comes
crashing down on customer experience.

1. Avoid overselling
Overselling is harmful to customer experience and is often a cause of bad reviews.
Customers are less likely to return for repeat purchases and will take their custom to
your competitors.
2. Release cash
When too many slow-moving products accumulate in the warehouse, ecommerce
retailers are often forced to discount or liquidate in order to release this excess of
cash held in stagnating merchandise, in order to invest in more profitable products

3. Ecommerce is booming
78% of people are set to increase their online purchases over the next year. To meet
this increased demand, ecommerce retailers will need to scale their inventories with
effective and flexible planning.

4. Meet customer expectations

Customers’ expectations are always high on ecommerce brands, even during the
pandemic. Since the COVID-19 crisis, up to 36% of customers have reported being
let down by online orders. More and more customers are turning to online reviews
before buying, and more than three-quarters admit to leaving negative reviews
following a bad shopping experience. 

Dealing with negative reviews costs serious money. Money that could be easily
saved by avoiding these problems in the first place with robust inventory planning.  

Effective inventory planning can meet customer expectations by offering the right

products, speeding up the order processing time, eliminating avoidable mistakes that
cost a business time, money, and brand reputation.

By investing in appropriate software and experienced planners, retailers can avoid

these money-draining situations and boost their customers’ experiences. Effective,
data-oriented, planning helps retailers reduce time, scale, and optimize product
allocations and pricing. 

Considering the unexpected nature of the Pandemic, it is possible to understand why

retailers were taken by surprise. But the crisis has taught us all some valuable
lessons as well. 

Retailers with flexible, scalable, inventory management plans already in place were
able to meet accelerating customer demand head-on. Now there’s no longer any
excuse. 

Ask yourself, is my business post-pandemic proof? 

The Pandemic has shown us, first-hand, the importance of maintaining an inventory
plan that is robust enough to succeed through unforeseen events. 

In fact, according to a 2020 survey by Statista, roughly one-fifth of businesses plan

to have more inventory in the aftermath of the pandemic, whilst 27% state that they
will be making adjustments to their supply chain networks. 
 To sum up, inventory planning will help you:

 Reduce stockouts 
 Reduce overstocks 

 Optimize inventory locations

 Rotate stock faster

 Increase cash flow

 Increase profitability

 Easily retrieve items

 Reduce guesswork

 Prevent order processing delays

 Anticipate lead times  

Key Considerations When it Comes to Inventory

Planning
Given that proper inventory planning is so business-critical – now more than ever-
what can we actually do to ensure that our inventory plans are robust and ready to
go? 

To actualize and carry out a successful inventory plan, you’ll want to follow some
best practices and procedures. In order to do this it’s imperative that ecommerce
businesses familiarize themselves with the important steps involved when it comes
to planning inventory.

The important steps involved

There are many important steps involved in planning and executing a successful
inventory plan. In general, these roles can be thought of in three parts: context;
analytics; the planning. 

Context refers to your business’ data history. From micro details to macro level
planning. Everything from sales orders, customer knowledge to the competitor
landscape and current socio political events should go into informing your inventory
planning process. 

Analytics refers to inferring information from the data itself. Ensuring that the
inventory plan is based on the correct data, sufficient data, and (extremely important)
complete data. What does this data mean, and how will it inform a flexible, scalable
inventory plan? 
 Finally, the planning stage is absolutely critical in and of itself. 

The planning stage involves: 

 Gathering a comprehensive database of historical sales data 

 Understanding how stock keeping units (SKUs) have performed

 Using SKU performance to set expectations for upcoming seasons

 Analyzing the competition’s data  (pricing, promotions, & trends) 

 Setting tentative or strict receipt budgets by product category 

 Weekly performance recaps to assess product and category performance

 Setting markdowns and promotions based on weekly performance recaps 

 Reforecasting periodically based on weekly updates, trends, and current events

 Managing evergreen inventory with monthly sales forecasts and receipt projections

 Post-season hindsighting of financial and product performance to determine if targets were met
and make necessary changes to next season’s strategy 

Setting up best practices and procedures

Another key consideration when it comes to inventory planning is maintaining best
practices and procedures at all times. Getting inventory planning right is a balance
between human expertise (people), intelligent strategizing (process) and the right
tools for the job (technology). 

When starting to develop an inventory plan, it’s a good idea to ask yourself some
rudimentary questions that will inform your strategy going forward.

1. What is your product volume likely to be? 

To answer this, dedicate some time to look into your historical data to understand the
seasonality, coupling with trends data from tools like your own inventory planning
software or Google Trends.  Do this before scheduling any orders. 

You’ll be able to calculate your regular off-peak sales stock requirements as well as
factoring in any anticipated demand spikes. By determining your economic order
quantity you’ll identify the optimum quantity of stock to hold at one time and minimize
total ordering and holding costs accordingly.  

2. What might impact my inventory?

It’s important to anticipate any internal or external factors that might impact
consumer demand in the future. Consider variables such as upcoming advertising
campaigns, sales promotions, target market, seasonal demand spikes, and current
consumer trends. 
 3. Am I prioritizing efficiency?
Efficiency is the lifeblood of inventory planning. Ask yourself if your warehouse and
order process is streamlined for optimal performance. If not, what can you do to
make sure that it is? 

Think well-organized storage spaces for easy picking and retrieval, sufficient space
for extra stock (but not so much that you’re hemorrhaging money), optimal
warehouse locations for faster delivery fulfillment, and streamlined communications
between inventory and order management teams. 

4. Am I using the right KPIs? 

Consider whether you’ve been using metrics and key performance indicators (KPIs)
to your full advantage. These critical datasets help organizations gauge the success
of their inventory planning to date. Make sure that your inventory plan takes the
following factors and variables into account – and use KPIs to inform your future
strategy. 

 Orders delayed by stockouts 

 Storage capacity usage 

 Forecast accuracy 

 System accuracy 

 Daily sales 

 Movement of inventory 

 Customer satisfaction 

 Inventory turnover 

 Carrying cost of sales  

Inventory Planning Models

Inventory planning systems won’t look the same for every business. As such, there
are various different inventory planning models. In fact, there are three main
examples. 
 The models meet the needs of different types of companies. Primarily those dealing
in: 

1. Raw materials
2. Partially completed goods

3. Finished goods

The deterministic inventory model

The deterministic inventory model is most typically used by merchants dealing in raw
materials. The deterministic model uses a precautionary method to avoid stockouts.
One example is the Economic Order Quantity (EOQ) model. 

The EOQ model can be used to calculate an optimal order quantity to reduce
inventory costs and maximize value. This is an effective model as long as demand
stays relatively steady. But it does not account for seasonal change or external
fluctuations. The deterministic model, therefore, requires constant monitoring to be
successful. 

The work in progress model (WIP) 

This model is best suited to merchants dealing in partially completed goods, finished
goods, or goods-in-transit (GIT). This inventory model focuses on the holding of
inventory and there are three motives for doing so. 

The transaction motive posits that buying raw materials in bulk is cheaper and brings
down the per unit cost. The precautionary motive uses inventory as a protection
against demand uncertainties to prevent stockouts. The speculative model promotes
holding inventory to mitigate increases in the price of materials and/or labor. 

The perpetual inventory model 

The perpetual (or continuous) inventory model is also often used by companies
dealing with partial or finished goods. Continuous systems constantly track
quantities, and replenishment orders are made as soon as stock reaches below a set
cutoff point (the reorder point). 

This is the only system that cannot be maintained manually. The perpetual model
relies on specialized technology. But this model allows merchants to keep track of
current stock levels and avoid stockouts. 

The just in time (JIT) inventory model 

The just in time (or JIT) inventory model works by aligning orders of raw materials or
items from suppliers with production schedules directly. In other words, the company
will hold sufficient inventory to cover maximum market demand. 

The idea is to increase efficiency and decrease waste by ordering and receiving
goods as and when needed, and never in surplus. To achieve success with this
 model, therefore, retailers must make sure to forecast demand as accurately as
possible. 

Improving Inventory Planning With Technology

Inventory planning can be improved, aided, and enhanced with the right technology.
ERP inventory control systems offer users versatile control over various parts of the
product lifecycle. From production in the factory, to storage in the warehouse and
transit. However, implementing an ERP system is often a complex project that can
take up years, and usually requires customized ecommerce integrations at extra
cost. So it may not be the ideal option for ecommerce businesses that look to
expand quickly. 

Though small businesses might be perfectly fine using Excel to manage their
inventory, but can easily get overwhelmed by increasing order volumes and product
SKUs when their businesses start to grow. 

Luckily, there are many inventory planning software options on the market today that
can be scaled for different business needs. In fact, many of these software
companies offer fully customizable enterprise-level software solutions, things like:

 Location management
 Sales tracking 

 Barcode & POS capability

 Barriers to oversell 

 Multi-channel management

 Data-driven demand forecasting 

 Fulfillment planning 

 Inventory, sales channel, supplier and customer reporting

 Retail business intelligence

Mobilizing technology and real-time data insights will remain key to managing
customer expectations in the years to come, coping with demand fluctuations and
surviving through any future supply-chain disruptions. 

Digitizing our supply chains will help us future-proof our ecommerce platforms by
speeding up business-critical processes and eliminating time-consuming manual
tasks and decision making.

Introducing Brightpearl
Brightpearl offers a retail-tailored Digital Operations Platform that is specifically built
for omnichannel merchants. 

In other words, for medium to large retailers managing multiple online sales
channels, Brightpearl’s inventory management software is designed to enhance
operational agility, boost sales, and meet (or rather, exceed) customer expectations
with data-driven inventory planning and workflow automation. 

You’ll be able to manage your inventory across marketplaces like Amazon, your web
stores like Shopify, BigCommerce, Magento , your physical stores and other major
ecommerce platforms – all from one place. 

In our fast-changing ecommerce ecosystem, you need to be armed with a system

that can boost your operational agility to adjust quickly to any sudden market shifts,
remain competitive and hold on to our customers throughout turbulent, fast-changing
markets. 

How to Calculate Reorder Points with the ROP Formula

Maintaining proper inventory levels is an elegant dance that must

balance consumer demand and supplier reliability. Storing too much
inventory eats up your budget in terms of warehousing costs and
available capital, but you also need enough inventory to account for
unexpected demand or supply problems.
How do you strike the middle ground? By calculating reorder points
for each product.

What is a reorder point (ROP)?

The reorder point (ROP) is the minimum inventory or stock level for
a specific product that triggers the reordering of more inventory when
reached. When calculating the reorder points for different SKUs, the
lead time it will take to replenish inventory is factored in to ensure
inventory levels don’t reach zero. Setting accurate reorder points
allows businesses to avoid having products out of stock while waiting
for new inventory.

Reorder point formula

Reorder point formula is the mathematical equation used
by businesses to calculate the minimum amount of inventory needed
to order more product to avoid running out of inventory. The reorder
point formula is as follows: 
Reorder Point (ROP) = Demand during lead time + safety stock

Why is the reorder point important?

Reorder points ensure that you don’t fall behind on your next batch of
inventory. With an accurate reorder point for each SKU, you’ll always
have enough stock on hand to satisfy customer demand — without
tying up excess capital in inventory.

Minimize costs
Storing more inventory than what can be sold in a timely fashion is
not a productive use of capital. Reorder points provide businesses
with greater financial flexibility by allowing them to keep minimum
amount of inventory on hand without running out of products.

Minimize stockouts
Too much inventory is expensive, but too little inventory can result in
stockouts, which are harmful for your business: Orders are delayed or
cancelled, your business loses customers, and your reputation can
suffer. Reorder points help prevent stockouts in the first place.
Better forecasting
Calculating reorder points goes hand in hand with having a clear idea
of purchasing trends over a given time period. The more you calculate
ROP for each product, the more accurately you can forecast
demand in the future and ensure you use the reorder quantity
formula correctly.

Reorder point formula

Ecommerce businesses can use a simple formula to calculate reorder

points for each product. This is the reorder point formula:
Reorder Point (ROP) = Demand during lead time + safety stock
How to calculate reorder points

So now you know the formula, but what is demand during lead time?
How about safety stock? In this section we break down ROP and tell
you exactly how to calculate it.

Demand during lead time

Lead time is the number of days between when you place a purchase
order with your manufacturer or supplier for a product and when you
receive the product. Your lead time will be longer if your supplier is
overseas as compared to a domestic or in-house production facility.
To find demand during lead time, just multiply the lead time (in days)
for a product by the average number of units sold daily:
Lead time demand = lead time x average daily sales
Safety stock
It’s not enough to know the average demand for a product, as that
demand can increase suddenly or problems with a supplier can
prevent you from restocking inventory as quickly as you
expected. Safety stock, as the name suggests, is the extra “just in
case” inventory you keep on hand to anticipate variability in demand
or supply.
Safety stock level = (Max daily orders x max lead time) – (average
daily orders x average lead time).
To find the proper safety stock level for a given product:

1. Multiply the maximum number of daily orders by the maximum

lead time that may be required in case of supplier delays.
2. Multiply the average number of daily orders by the average lead
time.
3. Subtract the result of Step 2 from the result of Step 1.

Now, back to our reorder point formula: Just add together the lead
time demand and safety stock calculation, and, voila — you’ve
calculated ROP.

ShipBob keeps reorder points simple

Calculating ROP for each product can be time-consuming and

challenging, especially if your inventory is patched together from
several suppliers or you sell lots of products. ShipBob’s cutting-
edge inventory management software and analytics tools make it
easier than ever.

Inventory management
ShipBob is an order fulfillment solution that features built-in
inventory management software, giving you precise control over your
inventory. You can check inventory counts at each fulfillment center
and set automatic reorder levels, so you are notified when stock is
running low.
“Off the bat, I liked that I would be able to control multiple
warehouses through one page with ShipBob. With my old 3PL, I could
never just open a page and get the info I wanted. I had to click several
times, then export it, and try to make sense of it. ShipBob lets you
manage your inventory while providing important data in a very
digestible way.”
Wes Brown, Head of Operations at Black Claw LLC
Demand forecasting
When you outsource fulfillment to ShipBob, all of your data is
centralized in one place: your dashboard. Our software tracks
purchasing trends over time to help you with inventory
forecasting based on seasonal trends and more.
“ShipBob’s analytics tool is also really cool. It helps us a lot with
planning inventory reorders, seeing when SKUs are going to run out,
and we can even set up email notifications so that we’re alerted when
a SKU has less than a certain quantity left. There is a lot of value in
their technology.”

Insightful reports
ShipBob’s platform doesn’t just help with inventory control and
forecasting, but generates powerful analytical reports covering all
areas of your business. You can get inside the numbers and find new
ways to improve supply chain efficiency.

Conclusion

Establishing reorder points frees up crucial capital and ensures your

business is operating at maximum efficiency across inbound and
outbound logistics. The most important and sometimes hardest part of
calculating reorder points accurately is that you need reliable data
for supply chain planning and provide an accurate picture of customer
demand. If the data is off, then the calculation will be inaccurate and
you may end up with too much or too little stock.