Inventory forecasting involves predicting the future demand for products based on historical data, market trends, and other relevant factors. The goal is to optimize inventory levels, minimize stockouts and overstocks, and improve overall supply chain efficiency.
Precise inventory forecasting is vital in order to maintain cost-effectiveness and customer satisfaction. This is particularly important in the current era, characterized by swift changes in supply chains and consumer demands, where reliable predictions can mean the difference between maximizing profits and losing potential customers due to insufficient stock.
In this article, we will explore inventory forecasting best practices, methods, and strategies, as well as how inventory forecasting tools like Inventory Planner can help optimize your inventory management processes and ensure smooth operations.
What is inventory forecasting?
Inventory forecasting involves using past data, patterns, anticipated upcoming events, and other relevant data points to predict future sales for your business. The primary aim of precise forecasting is to maintain enough stock to meet customer demand while simultaneously preventing excessive expenses that could impede your cash flow.
Retail, wholesale, and e-commerce businesses often struggle with dynamic circumstances like the emergence of new competitors and fluctuations in supply costs. Accurate inventory demand forecasting safeguards against the consequences of holding excessive or insufficient stock, which can adversely affect your financial performance.
Benefits of inventory forecasting
Inventory planning is a crucial aspect of supply chain management, offering several significant benefits to businesses. Let’s take a look at some of the benefits effective inventory forecasting can provide.
Optimized Inventory Levels
Inventory forecasting helps balance having enough stock to meet demand and avoiding excess inventory that ties up capital and storage space. By accurately predicting demand, businesses can optimize their inventory levels, reducing the risk of stockouts or overstock situations.
Cost reduction
With improved inventory demand forecasting, businesses can reduce unnecessary costs associated with excess inventory, such as warehousing, carrying, and holding costs. By accurately predicting demand, companies can order the correct quantity of products, reducing the need for rush orders and associated expediting fees.
Customer Satisfaction
Accurate inventory forecasting ensures that products are available when customers want them. This helps prevent stockouts and backorders, improving customer satisfaction and loyalty. Satisfied customers are more likely to return for repeat purchases and recommend the business to others.
Supply Chain Management
With a clearer understanding of demand, businesses can use that information to streamline their supply chain operations, reducing lead times and improving overall efficiency.
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Inventory forecasting methods
There are different inventory demand forecasting methods that can help during demand planning. Depending on your needs and expected results, you can mix and match, as each inventory forecasting type has a different use case or focus. Let’s explore four common inventory forecasting methods:
Qualitative forecasting
Qualitative forecasting is adopted when historical data is not useful, relevant, or available. This is a great choice for a startup or a business with a new product offering. This method relies on external factors like market intelligence, economic climate, seasonality, and other macro-level shifts to create forecasting models. Qualitative forecasting uses a variety of metrics and advanced data analytics to produce accurate predictions without historical sales data.
Quantitative forecasting
The quantitative forecasting model produces a snapshot of your future demand using past sales data. This forecasting method is better for established businesses that have been around for a while. The more data that exists, the more accurate the forecast.
Although this method is data-based, it often fails to account for broader market conditions, such as product seasonality, viral social media exposure, or other unexpected spikes in demand.
Trending Forecasts
The trending forecast method is centered on vigilant monitoring of sales trends within your product line, offering insights into significant shifts in consumer purchasing behavior beyond the scope of seasonal variations. Although predicting the next disruptive product or category might be challenging, the following strategies can keep you well-prepared:
- Tracking social media trends on TikTok Trends, Instagram, and Twitter.
- Observing ongoing investment trends to take advantage of emerging markets.
- Keeping an eye on changes in purchasing preferences, especially as younger generations gain more buying power.
- Understanding how your customers’ shipping destinations change over time and how purchasing habits vary at various geographic levels (country, state, city).
- Integrating customer lifetime value (LTV) into your analysis allows for a more granular examination of SKU combinations.
Graphical Forecasting
Graphical forecasting is a method that involves visualizing historical data to identify market trends and sales patterns. This method is useful for identifying patterns and relationships between variables. By creating a graphical forecast, businesses can get a clearer picture of the data trend as a whole, making it easier to develop inventory management procedures.
Inventory forecasting best practices
Here are some practical steps for improving your inventory forecasting:
Analyze your historical data
For most inventory forecasting methods, historical data is foundational. Analyzing your sales data to find demand trends, seasonal fluctuations, and pertinent metrics is a best practice that will help you recognize trends and formulate well-informed projections.
Additionally, leveraging historical data alongside real-time insights makes it possible to modify sales estimates, thereby preventing inventory deficiencies or surpluses caused by unforeseen changes in demand.
Select the right forecasting method
There are several forecasting techniques out there, depending on your data availability, business needs, and the complexity of your portfolio. With these factors in mind, you can decide on one or two forecasting methods for your business.
Larger businesses can benefit from using quantitative methods such as exponential smoothing, time series analysis, and regression analysis to forecast sales. These methods can handle complex data patterns while balancing accuracy and simplicity to provide more accurate forecasts, particularly when multiple factors influence demand.
Use the right tools and software
Your forecasting process can be made simpler and more accurate by using dynamic tools such as Inventory Planner. Inventory planning software will automate your data gathering and integration from several sources, including your POS system, CRM, warehouse management system, e-commerce platform, and suppliers. You can apply your data to a variety of forecasting techniques and algorithms, producing forecasts custom-tailored to your business.
With Inventory Planner’s reporting features, you can track performance, spot abnormalities, and compare scenarios with graphical and interactive reports and dashboards. You can also easily share projections and insights with team members, managers, and stakeholders.
There are plenty of manual forecasting tools out there. However, spreadsheet-based solutions like Excel are some of the least dynamic ways to manage and forecast inventory, as they typically represent a static snapshot in time, require manual implementation, and are not linked to other tools or updated in real-time.
Inventory forecasting must encompass a wide range of data to be effective, collecting and synthesizing information from multiple sources for the most up-to-date information. That’s what you get with Inventory Planner.
Carry out market research and get customer input
Performing regular market research and gathering customer feedback can provide valuable insights into changing consumer preferences. You can use this information to adjust your inventory forecasting strategies and ensure that the products you carry align with current market demands, reducing the risk of overstocking or stockouts.
Account for seasonal variations and trends
Seasonality significantly impacts demand for many products and services, especially in retail and e-commerce markets. Businesses should account for seasonal variations and trends in their inventory forecasting models and adjust inventory levels accordingly.
By understanding seasonal patterns and trends, businesses can optimize inventory management and avoid excess inventory during off-peak months or stock-outs during the busy season.
Regularly evaluate and adjust
Inventory demand forecasting is not a one-time formula with a single answer. Reliable forecasting requires continuously evaluating a variety of factors and making adjustments to adapt to changes.
Businesses should regularly review their forecasting models, analyze their accuracy, and make necessary adjustments based on changing market conditions and business dynamics. By consistently evaluating and refining their forecasting strategies, businesses can improve the accuracy of their inventory forecasts and enhance overall operational efficiency.
How to forecast sales
To calculate inventory forecasting, you’ll need to determine a variety of other metrics first, including your minimum stock, reorder points, lead times, and more. There are multiple steps to this process:
Measure sales trends
Measuring sales trends involves analyzing historical sales data over specific periods to identify patterns and fluctuations in consumer purchasing behavior. Sales trends serve as a crucial foundation for accurate inventory forecasting, enabling businesses to prevent overstocking or stockouts, optimize supply chains, minimize carrying costs, and enhance customer satisfaction.
To gain insight into purchasing habits, you can evaluate this data at the micro (one product over a short period, such as a few weeks) or macro (a range of products over a longer period, such as a quarter). Forecasting timescales are typically 30 days, 90 days, or 12 months.
Calculate lead time demand
Lead time is the time interval between placing an order with a supplier and receiving the ordered items in inventory. Lead time demand is the total number of expected sales during the lead time for a particular product.
To calculate lead time demand, businesses typically multiply the average demand rate (usually expressed as units sold per day, week, or month) by the lead time duration. The formula for lead-time demand is:
Average lead time in days x average daily sales = lead time demand
So, for example, if it takes an e-commerce business that sells jewelry 10 days to get a new order in and the company has average daily sales of five gold necklaces and twelve rings, it wants to have 50 gold necklaces and 120 rings available to satisfy demand without running out of stock before new inventory arrives.
Figure out how much safety stock you need
Once you’ve calculated the lead-time demand, the next step in inventory demand forecasting involves determining how much safety stock is needed. Safety stock is a buffer quantity of inventory held in addition to the expected demand during the lead time. To determine safety stock, use the following formula:
Maximum daily sales x maximum lead time in days minus lead time demand = safety stock
For example, if the hypothetical jewelry company sold, at most, 50 gold necklaces daily last year, and it took a maximum of 25 days to get a new shipment in, their safety stock would be 100 gold necklaces (50 x 25 – 600 = 650).
Determine reorder points
Implementing optimal reorder points is the final step in effective inventory forecasting. The reorder point is the inventory level at which a new order should be placed to replenish stock before it runs out during the lead time. To calculate the reorder point, businesses typically consider the lead-time demand and the safety stock. The formula is:
Lead time demand + safety stock = reorder point
If the jewelry company has a lead-time demand of 100 gold necklaces and a safety stock of 150, they’d want to reorder when their inventory dwindles to 250 pieces.
Automate inventory forecasting with Inventory Planner
Feeling overwhelmed by the complexities of manual inventory calculations?
Don’t let the challenges of predicting demand and managing stock levels slow down your business. Manual methods often lead to errors, missed opportunities, and unnecessary costs. Take the leap towards streamlined inventory management by automating your forecasting process with Inventory Planner.
With our intuitive inventory planning software, you can effortlessly calculate lead time demand, determine safety stock, and set the perfect reorder points—all at the click of a button. Say goodbye to stockouts and excess inventory. Embrace precision, save time, and boost your profitability. Seize the opportunity—automate your inventory forecasting now!