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Once you’ve started your inventory management journey, you can begin to branch out and improve your processes in other ways that ensure capability and accurate measurement to support steady growth.
This article breaks into more advanced demand planning and forecasting elements. We recommend checking out our introduction and getting started articles on the subject if you aren't already familiar with these concepts in inventory management and purchasing.
Below are our recommendations for advanced dispensary inventory management you should consider.
Invest in Technology
Using a Point of Sale (POS) system isn’t just a no-brainer, it's a requirement.
Aside from regulatory necessity, you need a POS to ensure you have access to the data that informs your business of volume, velocity, and revenue. However, standard POS data only gets you started on the journey.
You need real-time visibility of daily fluctuations to draw the right conclusions. Otherwise, you are making assumptions based on a wider range of data that lacks critical nuance, where you could be missing essential knowledge.
Our own head of marketing, Brad Bogus, made a great post on this exact issue that dispensaries overlook all too often as part of annual planning:
“...WEEKLY data will show you that you sold 7 units of Wyld gummies in a week.
Naturally, you'll probably restock another 7-10 units to keep from going out of stock next week.
DAILY data will show you that you sold 3 units on Sunday, 4 units on Monday, and were out of stock for the remainder of the week.
DAILY data will show you that you sell ~3.5 units a day, and your reorder should actually be another 25 packs for the week to keep from going out of stock and to fulfill demand.
Keeping that daily average in mind helps you monitor for fluctuations like seasonality, weekend upticks, discounts on a brand, consumer holidays, or even supplier problems…”
This is just one simple example to consider.
After you’ve accounted for those critical details, incorporating specialized inventory management and analytics tools will further refine and enhance your results. Leading you to draw the right conclusions for the benefit of your business. Keep in mind, this is not a one-and-done approach.
You need to regularly visit these reports, update these systems to utilize new features and capabilities, as well as train staff on its use to get the most out of your investment.
Categorize Products
Classify products by category based on importance and sales velocity. This way, you can ensure resources are prioritized for your highest in-demand items. As time goes on, you can improve categorization based on how each SKU performs and where new product introductions fit best among existing inventory.
You can then establish mechanisms like safety stock as a buffer for seasonal fluctuations when SKUs may be more in-demand.
If you want to take things a step further, once you’ve identified your top-performers, set periodic automatic replenishment (PAR) levels to ensure that when the quantity approaches the minimum level, the item will be reordered and you don’t find yourself suffering from stockouts.
To calculate PAR levels for inventory, use the this formula:
PAR level = (amount of a SKU sold each week + safety stock) ÷ (number of deliveries each week)
Define Key Performance Indicators (KPIs)
If you want to measure performance, you have to know what to look at in terms of numbers.
Establish KPIs such as forecast accuracy, inventory turnover, and stockout rates to accurately measure your performance over time.
Here are some common examples:
- Forecast Accuracy
This KPI measures how well the forecasted demand aligns with the actual sales. A higher percentage indicates better accuracy.
Formula: ((Actual Sales - Forecasted Sales) / Actual Sales) * 100
- Inventory Turnover
Inventory turnover measures how many times the dispensary sells and replaces its entire inventory within a specific period. Higher turnover indicates efficient inventory management.
Formula: Cost of Goods Sold (COGS) / Average Inventory
Average inventory = (starting inventory + ending inventory) / 2
- Stockout Rate
This KPI calculates the percentage of time products are out of stock. A lower stockout rate indicates better demand planning and inventory management.
Formula: (Number of Stockouts / Total Demand) * 100
- Fill Rate
Fill rate is the percentage of demand that a dispensary can fulfill from its available inventory. A higher fill rate reveals better service levels.
Formula: (1 - Stockout Rate) * 100
- Lead Time Forecast Accuracy
This KPI assesses the accuracy of forecasting lead times for product replenishment. It helps ensure timely restocking of inventory.
Formula: ((Actual Lead Time - Forecasted Lead Time) / Actual Lead Time) * 100
- Demand Variability
Demand variability measures the consistency of demand over time. Higher variability may require more robust forecasting and inventory management strategies.
Formula: Standard Deviation of Demand / Average Demand
- Backorder Rate
Backorder rate is the percentage of orders that cannot be fulfilled immediately due to insufficient inventory. A lower backorder rate is what you should be pursuing.
Formula: (Number of Backorders / Total Demand) * 100
- Customer Satisfaction Index
Customer satisfaction is an indirect but crucial indicator of effective demand planning. Satisfied customers are more likely to consistently return and buy your products.
Formula: (Number of Satisfied Customers / Total Customers) * 100
- Forecast Bias
Forecast bias measures the tendency of forecasts to consistently overestimate or underestimate actual demand. Ideally, the result should be close to zero for an unbiased forecast.
Formula: Σ (Actual - Forecast) / Number of Observations
- On-Time Delivery Performance
For dispensaries that offer delivery services, on-time delivery performance is crucial. It reflects the ability to meet customer expectations for timely order fulfillment.
Formula: (Number of On-Time Deliveries / Total Deliveries) * 100
Train Your Team
None of this happens in a vacuum and you have to be able to trust the people “with their hands in the dirt”. Provide (ongoing) training to staff on data collection, analysis tools, and how to interpret forecasting insights.
Establish failsafes to ensure continuity of business, such as thorough documentation of SOPs and training additional personnel to step up in the event of illness, turnover, or other unforeseen circumstances. In other words, cover all your bases.
Start with Basic Forecasting Models
This isn’t a sprint. Begin with simple, industry-standard forecasting models based on your KPIs and gradually advance to more sophisticated ones as your team gains experience and expertise. Here are some to consider:
- Time Series Analysis:
Time series analysis involves analyzing historical sales data to identify patterns, trends, and seasonality.
For example: Look at monthly sales totals for the year (at a monthly frequency), then use that data to reach a somewhat reliable forecast of what next month's total sales volume will be.
- Simple Moving Average (SMA):
SMA is a straightforward model that calculates the average of a specified number of past data points. It helps smooth out short-term fluctuations and provides a simple estimate of future demand.
The simple moving average is useful in identifying broad trends and reduces short-term fluctuations’ impact on forecasts.
- Weighted Moving Average (WMA):
WMA is like SMA, only it assigns different weights to different historical data points, giving more recent data greater importance. This is useful when you want to prioritize your most recent sales data in forecasting.
- Exponential Smoothing (ES):
Exponential smoothing is a forecast model that gives more weight to recent data, while still incorporating historical data, only the older the data gets, the less weight it carries.
It's simple but effective when you’re required to react quickly to changes in demand.
- Moving Average with Seasonality (MA with Seasonality):
This time-series forecasting model combines overall trends with seasonality adjustments within your data, making it suitable for businesses with predictable seasonal variations in demand.
- Linear Regression:
Linear regression models examine the relationship between demand and various independent variables (e.g., marketing spend, promotions, external factors). This can be particularly useful when there are identifiable factors influencing demand.
- Causal Models:
Causal models incorporate external factors that may impact demand, such as marketing campaigns, economic indicators, or regulatory changes. These models can provide a more comprehensive understanding of what is driving changes in demand.
- Collaborative Filtering:
Collaborative filtering is a technique commonly used in recommendation systems. In a retail cannabis context, it involves analyzing customer purchasing behavior to identify patterns and make predictions based on the behavior of similar customers.
Collaborate Across Departments
Regular collaboration between purchasing, sales, marketing, and operations will ensure you are not missing important information and perspectives as you progress with dispensary demand planning and forecasting.
Conduct Regular Audits
Schedule regular physical counts and audits to ensure accuracy in inventory records and identify discrepancies quickly.
Implement cycle counting, an inventory management process in which you count a small amount of inventory at a specific interval, usually on a set day, without handling your entire stock all at once. This way, you can maintain ongoing accuracy and use audit findings to build stronger internal processes and systems.
Hold Forecasting Review Meetings
Regular review meetings contribute to refining and improving forecasting accuracy and make room for real time adjustments based on staff observations, emerging trends, changes in the market, or unexpected events.
Set up these meetings on a monthly or quarterly basis and involve staff from different departments, like sales, marketing, and operations. Use historical data as the basis of your meetings and build on lessons you learn as time goes on.
Using advanced analytics and forecasting tools can help you automate aspects of the review process and improve precision.
Establish Benchmarks
Benchmarks are a great way to compare forecast performance between time periods or industry averages. They allow dispensaries to compare their inventory management practices against industry standards and more specific values among your more localized peers.
Get started by conducting research in your region(s) of operation to identify benchmarks relevant to retail dispensaries. Not all inventory management processes are created equal, or are equally applicable across industries.
Some key performance indicators (KPIs) to benchmark include inventory turnover ratio, customer satisfaction, and accuracy of demand forecasts.
One of the most effective ways to incorporate best practices and surpass your benchmarks is to communicate with industry peers. Use networking to your advantage by participating in local industry events, forums, conferences, or just meet and greet events to learn from others in the industry and stay informed about emerging trends or changing best practices.
Test, Review, and Adjust
You should continuously review forecast accuracy and make adjustments based on actual sales performance. Again, avoid ‘gut-feeling’ your way through demand planning and forecasting. Let the data do the talking.
When it comes to changing up your measurement or introducing new products, do so in small amounts, rather than make big changes or many changes all at once. This way, you avoid over-committing on an order (understandably, there are minimum order quantities) or impacting forecasting across the board.
The result is being able to reach more accurate conclusions and be confident you are making decisions backed by good data.
Incorporate External Data
Widely surveyed industry data may not be the most relevant for a localized business, like a 1-3 dispensary operation. However, it can be beneficial to consider and incorporate external data sources, such as market reports and consumer surveys, to enhance your forecasts and understand wider market trends that may impact the supply chain and consumer preferences.
Continually Improve Your Processes
If change is the only constant, you can expect at some point the way you do business will be disrupted. Whether that’s due to new regulatory constraints, staffing shortages, knowledge gaps, or any other litany of factors, this may impact how you approach dispensary demand planning and forecasting.
Building a culture of continuous improvement, where feedback is regularly collected and processes are refined, will position your business for better outcomes because you know change is coming and you are ready for it with proven processes to support your decision-making.
Take a Deep Breath
Alright, that was a lot to cover.
Don’t be intimidated by the amount of information included here. You won’t be able to tackle it all at once. Nor should you try.
Take in what resonates the most with your business right now. Focus on that element of demand planning. Then, you can bring other elements of forecasting online as you get more comfortable with the standards and practices you are establishing at your dispensary.
Just remember, effective demand planning and forecasting are essential components of successful inventory management for retail cannabis dispensaries.
By implementing these strategies and processes, procurement and purchasing professionals in cannabis are better equipped to optimize inventory levels, reduce costs, and drive more revenue for the business with greater operational efficiency.
Want to see what real efficiency can look like? Couple your capability with the awesome power of our Happy Buyers platform to shave hours off your weekly workload and get answers to your purchasing queries in seconds. Book a demo today and see it in action.
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