What is Inventory Forecasting?
If deciding what to order for your eCommerce store feels like gazing into a crystal ball, fear not! There is a better way. Sales and inventory forecasting can reduce some of the uncertainty that comes with managing your inventory.
Inventory forecasting is the key to cost-effective operations and increased customer satisfaction. When you have the right amounts of inventory at all times, you can reduce lost sales due to stockouts while freeing up cash for use in other areas of the business.
For many years, businesses have been trying to minimize inventory costs while providing what their customers need in a timely fashion. Maintaining a lean and responsive inventory can be challenging without using accurate forecasting techniques. The following are tangible ways through which your business can benefit from inventory forecasting.
Reducing inventory costs
Businesses that use accurate inventory forecasting techniques are able to maintain lean and responsive inventory models. This means that they only purchase and store what they know they will sell. Forecasting enables warehouses to keep track of sales and anticipated demand, so they can ensure that the available stock is adequate to meet customer needs.
In this way, the business doesn’t need to order more than it will sell, and customers can enjoy accurate and timely delivery of their products.
Know Your Goals
Know what your goals are for your inventory and make sure they are realistic. Most businesses have a lot of variables in their stock, and you have to consider these when setting goals. If you don't have some reasonable idea of what will be needed, you are unnecessarily tying up your capital. Unnecessary inventory means you have spent money that will not earn you an immediate return.
What is the cost of being out of stock?
There are two facets here to keep in mind. First, what is the forecasted lost revenue of missing a sale? If the potential lost sales are $100, then that carries different urgency for reorder than an item that loses $10,000 for every day it is out of stock. The forecasted lost revenue will vary by product and variant.
Second, what is the cost to your brand when you are out of stock? Will customers find the item to buy elsewhere? Or, does an occasional stockout contribute to a sense of scarcity for your customers that will increase demand in the future? This is a tricky balancing act. Think through your risk tolerance for being out of stock versus erring toward spending too much money on overstocked items. Is the greater value having products always available to customers or having money not tied up in overstock so that you can use it elsewhere in your business?
Do you allow overselling?
Do you make items unavailable for purchase when they are out of stock? Or do you continue selling and fulfill items once they are available again? If you continue to sell during a stockout, keep that in mind with your forecast to make sure you’re ordering a sufficient amount in the future.
Consider the following example:you sell 10 units per day, have a lead time of 5 days, and are currently out of stock. Forecasting customer demands shows that you should order 300 units to cover the next 30 days. If you allow overselling, you’ll need to order 350units total to cover your lead time in addition to the ordered amount to cover your days of stock. If you don’t allow overselling, then you only need to order300 units.
Inventory forecasting also makes it easier for businesses to project their anticipated margins in advance. You can determine how much you expect to sell, what revenue you anticipate to receive, and how much profit you will eventually make.
In this way, critical business decisions can be made from the inventory forecasting data. For example, decisions regarding business expansion, cutting costs, or requesting for outside funding can be made based on projected inventory and expected sales.
Knowing more information about your current stock
Forecasting provides a framework for accessing detailed information about your current inventory.
If you manage multiple warehouse locations, you can track the demand and availability of a particular product in order to determine the quantity you will need moving forward.Forecasting allows you to plan for the condition, pricing, and movement of specific products well in advance. A product that sells well on the east coast might not sell as well on the west coast. Demand forecasting helps to optimize your stock so that the right products are in the right place.
Forecasting gives you nearly real-time visibility over your current inventory so you can make better-informed and strategic decisions. By seeing demand trends by category or product option, you’ll have more information to decide which new products to add to your catalog. For example, if red dresses show increased sales month over month for the last year, you can forecast that demand will continue to grow.
Ordering the right items at the right time
Inventory forecasting allows your business to determine which products will be available and in which quantities. In this way, you can ensure that you order items only when they’re needed, saving on inventory costs.
Forecasting also allows you to tie the ordering process to your sales. How does this work? Orders will be triggered when a certain amount of sales are achieved. This more efficient ordering system enables your business to order only the right items at the right time for customers.
The value of inventory forecasting spans across multiple areas of the business. Indeed, it is the key to effective cost management and continuous growth.