Overview
Designing an efficient supply plan involves a four-step process: prioritizing inventory with an ABC analysis, defining an ordering strategy for each category, setting accurate system parameters and concentrating management efforts on high-priority ‘A’ items to prevent stockouts and reduce excess inventory .
Many planners, buyers and supply analysts often struggle with supply planning. But what does it really mean, and what does it involve?
In this article, we provide a comprehensive guide to what a supply plan is, how to manage it effectively, why it matters and the best practices for doing it correctly.
What is a supply plan?
Strictly speaking, a supply plan encompasses all the actions that anticipate the quantity of stock, goods or services required to manage (and guarantee) their availability, allowing the production or marketing process to proceed smoothly. However, it is far more complex than that.
A supply plan differs from demand planning. The former relates to distribution channels, inventory policies and the product life cycle, whereas demand planning focuses primarily on forecasting and everything that entails.
Furthermore, the planning horizons for supply and demand planning tend to differ significantly. Generally, supply planning is more operational in nature, addressing short- to medium-term needs, whether for a distribution centre, shop or branch.
Demand planning, on the other hand, typically covers a longer period, often determining sales plans for the next 12 months or more.
A key distinction lies in their objectives: demand planning aims to meet a sales budget, whereas a supply plan seeks to prevent stock shortages across all locations.
The importance of a supply plan
A well-structured supply plan offers numerous benefits, making it essential for organisations to have a clear framework in place.
A good supply plan enables:
- Improved communication across the organisation and enhanced proactivity, providing a strategic outlook that reduces emergencies and costly urgent purchases.
- Reduced inventory levels, achieved through better resource and working capital management. It also aligns supply strategy with tactical and operational processes.
Designing a supply plan that works
There are various ways to develop a supply plan, but several proven tactics can help ensure success.
The first step is to analyse the product assortment and identify the most important items for customers, prioritising them to determine the appropriate strategy. Once this is done, establish clear business rules to ensure the supply plan aligns with the organisation’s overall objectives.
One of the main causes of obsolescence, excess stock and reactive “firefighting” is that planners often focus on the wrong products. A carefully executed ABC analysis can help overcome this issue.
With the following four steps, you will be able to create a supply plan correctly and effectively:
Step 1: Perform an ABC analysis
An ABC analysis involves classifying all inventory items according to their contribution to overall revenue: by gross margin, cost price, turnover or another relevant metric.
Typically, 80–90% of total revenue is generated by just 10–20% of the assortment. An effective starting point is to analyse contribution by profit margin, for example.
The final ABC analysis should always use criteria most relevant to the company, those that yield clear, actionable results when determining which items are more important than others.
Step 2: Determine the appropriate strategy
An inventory strategy revolves around two key questions: when to order and how much to order. This strategy will depend largely on how urgent and/or important each item is.
To avoid costly stockouts, A items (high-priority products) are usually ordered more frequently than C items, as defined by the ABC classification. For each category, a balance must be struck between target service levels and inventory costs.
Step 3: Set the parameters
The chosen strategy must be translated into the correct parameter settings within your inventory management system. Key questions include:
- How should service levels be factored in?
- Should purchasing cycles follow fixed or variable intervals?
- How should order quantities be calculated?
These parameters ensure consistency and accuracy in procurement processes.
Step 4: Focus on A items
Once parameters are established, planners should concentrate their efforts on the most critical products.
Given the importance of A items, it’s vital to monitor sales forecasts closely and track demand fluctuations. Are there sudden spikes? Should estimates be adjusted in light of new market information or upcoming promotions?
Once the supply plan is defined, certain tools can further refine and optimise the strategy. Below, we outline several ways your company can take its operations to the next level.
How to optimise the supply plan
Many companies, in their pursuit of unique value propositions, have developed extensive assortments with thousands of SKUs. While this offers customers greater choice, it also introduces significant management challenges.
With such extensive assortments, many companies invest considerable resources in managing thousands of items that contribute little to overall profit yet hold significant value for the end customer. With this in mind, how can companies maximise the value of their assortment without compromising their ability to meet customer needs?
Refining the supply plan
Optimising a supply plan is not just about managing top-performing lines efficiently. To maximise profitability, inventory decisions must be made carefully, particularly for items that add the least value.
However, without a full understanding of the assortment, how can you be certain you’re making the right choices?
A low-turnover item may seem like wasted warehouse space, but for certain customers it might be the very reason they choose your business. Conversely, if a product yields minimal returns, is it truly worth the investment to keep it constantly available?
Managing low-value items requires balancing service levels with controlled inventory investment. To do this effectively, companies need clear visibility into how each item contributes to corporate objectives. Classifying items by strategic importance allows for a more tailored management approach.
Definition of a long-tail item
The long tail refers to items that contribute the least value to the assortment, typically the bottom 5% of turnover.
For many companies, identifying these items is challenging. However, a well-designed ABC analysis provides the clarity needed to pinpoint them. While conducting an ABC analysis offers valuable insight into the assortment, it is essential that the analysis parameters are closely aligned with the organisation’s overall business objectives.
If customer satisfaction is a primary focus, categorising items solely by margin will do little to help the business achieve its objectives. How you define the boundaries of your assortment will largely depend on which KPIs are most critical to the organisation.
Broadly, there are two main objectives that shape KPIs:
- A focus on profit margins or turnover; or
- A focus on customer satisfaction, measured through order lines or transaction data.
Reducing inventory levels for an effective supply plan
To refine the assortment and support better decision-making, companies can take three key steps to optimise inventory, improve cash flow and maximise long-tail profitability.
1. Stocking decisions
Certain long-tail items may not justify being stocked at all, as their margins fail to offset the investment. Yet, removing them might deter customers from purchasing high-margin items.
For example, while screws and nuts are unlikely to generate high margins, customers will not purchase more expensive components if they cannot obtain all the accompanying parts. Additionally, some items that are not currently stocked may be better kept in inventory at all times, particularly those with long lead times or low supplier reliability.
When making stocking decisions, companies should consider a range of factors:
- What margin does the product offer?
- Does it influence sales of other items?
- Are alternative products available?
- Does it affect supplier relationships?
- Is it important to key customers?
2. Re-evaluate inventory policy
Since many long-tail items tend to have volatile or erratic demand, it can be difficult to determine the appropriate inventory levels. Safety stock requirements will vary depending on the importance of each item, meaning that A-items typically require higher safety stock, as stockouts for these products can be very costly. By contrast, determining safety stock for long-tail items is often more challenging.
Maintaining excessive safety stock can unnecessarily tie up working capital in slow-moving inventory that risks becoming obsolete, while insufficient stock can hinder sales and disappoint customers. To avoid these scenarios, it is essential to ensure that inventory levels are appropriate. Achieving this requires careful consideration of a range of relevant factors.
3. Prioritise areas that require attention
A well-executed ABC analysis helps identify which areas of the assortment require the most focus. With clear insight into which items drive performance, companies can direct their efforts where they’ll have the greatest impact.
For instance, optimising long-tail items may involve renegotiating minimum order quantities, adjusting lead times or sourcing from new suppliers.
This approach not only balances inventory but also frees up working capital for redeployment elsewhere.
By continuously reviewing each category revealed by the ABC analysis, companies gain a clearer picture of overall performance, enabling them to identify and address potential problem areas before they escalate.
Final takeaway
A well-structured, data-driven supply plan is not just an operational necessity, it’s a strategic advantage. By focusing on the right products, setting smart parameters and continuously refining your approach, you can improve efficiency, enhance customer satisfaction, and drive sustainable profitability.
