What Is Inventory Planning? A Retail Expert Breaks Down What Every Independent Store Owner Needs to Know
Summary:
Inventory planning isn't just about reordering what's selling—it’s about strategically deciding how much to buy, when to buy it, and how long it should stay on the floor. In this deep-dive conversation with Paul Erickson, Executive Director at Management One, we explore what inventory planning actually is. From defining open-to-buy budgets to the psychology of customer engagement, Paul shares his insights from 40+ years as a retail educator along with real-world examples that show how inventory planning can turn struggling stores into growth engines.
What is Inventory Planning?
Many retailers often think inventory planning is simply tracking what’s in stock, making sure you reorder bestsellers or what you do when the product arrives, but it is actually two strategic processes that work together:
First, it involves setting a budget for how much to buy, known as an “open-to-buy” budget. This is based on your projected sales and margin.
Second—and often overlooked—is planning how much inventory to carry at any given time. This should be based on metrics like inventory turnover or return on inventory investment. If you don’t have those numbers, a simple proxy is to calculate your inventory at retail as a percentage of sales. For example, if you have $400,000 in inventory at retail and $1,000,000 in sales, your inventory turnover is 2.5x.
Inventory Plan = Open-to-Buy Budget + Inventory Turnover Goal
Think of your open-to-buy as the financial guardrail for your inventory. If you want to do $100,000 in seasonal sales with a 55% margin, you should plan to invest no more than $45,000 in inventory (the remaining 45%). But that’s only part of the picture. Knowing how much to spend doesn’t help if you don’t know how much product to keep on the floor—or how fast it should move.
Holding too much inventory slows your cash flow. Holding too little caps your sales. This is why retailers need to ask themselves: How much inventory should I have at any given moment? That answer is driven by your inventory turnover goals and the return on investment of your inventory. For example, many of our apparel and fashion retail customers aim for an inventory turnover of 5x. This aligns with studies showing that 90% of sales come from inventory that’s less than 10 weeks old. Since there are 52 weeks in a year, turning inventory every 10 weeks equals about 5 turns annually (52 ÷ 10 = 5). As Paul puts it, “You don’t just want to know what to buy—you need to know how quickly it’s moving, and whether it’s helping or hurting your business.”
Good inventory planning is not about spreadsheets alone. It’s about strategy and confidence - focusing your buys on a few vendors, a few silhouettes, and trusting your read on the customer rather than trying to please everyone. Giving customers too many options can paralyze them. The best retailers plan narrow and deep, not wide and shallow. And yes, that takes guts.
Keeping Inventory New and Fresh Drives Sales
Here’s where psychology meets retail. Humans are drawn to newness—it triggers dopamine and keeps customers coming back. So if your store looks the same month after month, it feels stale and your inventory will not sell.
Paul points to Zara as the gold standard: their inventory turns over every 6 weeks, and even bestsellers aren’t restocked. Why? Because scarcity creates urgency. When customers know items won’t be available later, they’re more likely to act now.
In fact, a study Paul led showed 50% of monthly sales in fashion stores come from items that arrive and sell within the same month. Newness isn’t just a bonus—it’s the backbone of success.
Inventory Pitfalls to Avoid: Overbuying, Underbuying, and the Fear of Markdowns
Retailers often get stuck by holding onto old inventory, hoping it’ll eventually sell. Or they under-buy to play it safe. Both are dangerous:
Overbuying ties up capital, prevents fresh buying, and slows turnover.
Underbuying limits sales and leads to quick failure.
Avoiding markdowns based on poor advice (usually from an accountant) keeps stale products on the floor longer than it should.
A markdown isn’t a loss—it’s a tool to reset, free up capital, and bring in fresh products that will perform better. “In retail,” Paul says, “you’ve got to lean into the hill, not away from it.”
The biggest mistakes a retailer can make is to underbuy and avoid markdowns.
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Inventory planning is part science, part strategy, part mindset. Without it, independent retailers risk tying up cash in products that won’t move—or missing out on sales entirely because they didn’t buy enough. As Paul Erickson says, “Retail is like skiing—you’ve got to lean into the hill to stay in control.”
Ready to see the impact of inventory planning on your business? Schedule a demo with Management One.
