Inventory Forecasting: Best Practices, Methods, and Benefits
Supply chains and consumer demand are fluctuating more rapidly than ever before. With the right sales and inventory data at your fingertips, you can create models that predict factors that may cause a spike or dip in future demand—making accurate inventory forecasts invaluable.
Inventory forecasting is also known as demand planning. You use past trends, data, and known upcoming events to predict optimal stock levels when forecasting inventory. With proper inventory forecasting, you can ensure that you don’t spend too little or too much on merchandise and have enough on hand to fulfill orders.
Forecasting inventory allows you to calculate the inventory levels necessary for future periods accurately and includes factoring in replenishment data such as availability, delivery speed, and timing. Keep reading to learn more about the benefits of inventory forecasting for retailers, the available methods, and what you need to get started.
Benefits of Inventory Forecasting for Retailers
If you can forecast inventory correctly, it can mean the difference between making a profit and sitting on piles of dead stock. Get this right, and you can save money on storage, keep your customers satisfied, and better plan for potential trends.
A forecasting initiative takes a lot of work upfront, but once you’ve gathered the necessary data, it can pay off in more ways than one.
First, you could enjoy substantial cost savings. When you can order the right amount of product at the right time, you’re able to keep safety stock at a realistic threshold. In turn, you’ll have less money tied up in unsold inventory.
You can also improve the customer experience by minimizing the number of out-of-stock items shown online. Customers are happier when they know they can count on you to have the newest and most in-demand products in stock. Offering this level of planning is also essential to maintaining supplier relationships, as they’ll appreciate fewer frantic calls for resupply.
Other payoffs of inventory forecasting include enhanced strategic insights that allow you to achieve more accurate inventory data and reporting and improve your margins and profitability. Fewer surprises along the way lead to stock levels that more closely align with business goals and your company’s mission.
Finally, with the right inventory forecasting tools and data in place, you can experience back-end improvements that decrease the need for manual labor and allow you to manage your supply chain better.
Inventory Forecasting Terms to Know
If you’re new to inventory forecasting, there are some terms to familiarize yourself with before getting started, including stock-outs, reorder point, safety stock, and lead-time demands.
The stock level that triggers replenishment is called the reorder point. Your reorder point is not a static number but a formula. It’s based on your company’s purchase and sales cycles and will vary by product. However, once you’ve discovered the patterns of a particular product, you can begin to put the variables together:
(Average daily unit sales x Delivery lead time) + Safety stock
Once you’ve calculated your reorder point for a product, you’ll want to check and adjust it at specified intervals.
When customer demand exceeds the inventory you have on hand, this is called a stock-out. Selling items that are out of stock can lead to poor customer experiences, which could cost you loyal customers.
To avoid stock-outs, it’s best to keep extra inventory in storage as a buffer. However, you don’t want too much unsold inventory lying around, so you must be strategic here, too. You can calculate the right safety stock level by subtracting historical data on maximum usage and average daily usage.
The time it takes for suppliers to deliver products compared to when you order it is called lead-time demand. You’ll want to account for this delay from the lead time when using your reorder point formula.
Tools for Inventory Forecasting
Tools that make inventory forecasting easier include inventory management software and spreadsheets. What you choose to use depends solely on your business’s needs and goals.
Here are a few tools you can use to help you forecast inventory:
Basic spreadsheets are an option for businesses with few products. You can use simple spreadsheets to load assumptions and formulas and perform basic calculations. However, as your business expands, you may outgrow this method quickly.
If you’re visually oriented, you’ll appreciate inventory forecasting graphs with time-series data that clearly shows future projections.
Many logistics companies employ statistical modeling experts that you can call on to meet the needs of your growing business.
When inventory forecasting, you’ll create a model that works for your business. Then, you can compute new scenarios and data into your model to determine how stock levels should change.
Inventory Management Software
If you’re looking for an in-house solution, consider implementing an inventory management platform. It’s hard to be successful in the ecommerce space without a platform that provides a dashboard view of your inventory data.
Inventory Forecasting Methods
Sure, some forecasting is determined by your gut—especially with experience. However, you’ll want to use formulas for successful inventory forecasting and management. There are several methods to choose from, so how do you know which to use?
The main methods used are geographical, trend, qualitative, and quantitative inventory forecasting. You’ll choose the best type by looking at personal insights, stocking issues, customer input, sales feedback, market research, and mathematical analysis.
Graphical Inventory Forecasting
It’s possible to graph relevant sales and inventory data that will show clear peaks and valleys, which is why visual inventory managers prefer this method. On a graph, it’s easier to add sloped trends and discern patterns from data points to examine possible directions that you may have missed otherwise.
Trend Inventory Forecasting
Trends show the changes in product demand over time. The trend forecasting method excludes seasonal effects and irregularities to project possible trends based on past sales data.
If you have very granular sales and growth data, this technique is preferred because it shows how and when specific customers are likely to purchase in the future. Trend inventory forecasting is a popular tool for analysts looking for new ways to market and offer sales.
Qualitative Inventory Forecasting
If you lack historical inventory and sales data, you can go straight to your customers. This method involves complex data collection, including market research and focus groups. Experienced forecasters can then use this data to create applicable models.
Quantitative Inventory Forecasting
Quantitative inventory forecasting involves past numerical data, so it’s considered more accurate than the qualitative approach. The more data you have, the more precise you can forecast.
Time-series forecasting is one example of quantitative forecasting. Analysts make a model out of temporal quantitative data which can predict future trends.
Choosing the Right Inventory Forecasting Method
To decide which method is suitable for your business, consider the data you have on hand and what you can collect. Keep in mind that this process will vary among organizations.
For example, established companies would benefit from the quantitative approach because they’ll have more historical data. Newer companies should collect qualitative market data.
The best inventory forecasting reflects a mix of data types and methods, and this is something you’ll perfect for your business over time. Quantitative data may give you a place to start, but qualitative data helps flesh out the final model. To complete forecasting, you can use industry-specific data inputs.
Automating Your Inventory Forecasting Processes
To create successful inventory forecasting processes, you need access to the right data. Once you have it, you can automate many aspects of inventory management by having the correct tools in place.
With Flxpoint, you gain insight into your stock levels and order data that will help you make better inventory decisions. If you’re interested in learning more about Flxpoint’s array of inventory and order management features, talk with an expert today.
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