Inventory Forecasting: Tips for Successful Planning
Inventory management is a vital aspect of running a successful business, especially for eCommerce companies that experience demand fluctuations. At any given time, you need enough inventory on hand to satisfy a demand surge, but not so much that it causes you to lose money on warehousing while also drying up the cash necessary to operate at full capacity.
Here, inventory forecasting can help you strive for an equilibrium—a perfect balance between cash flow and optimal stock level.
But what does that entail? And how can your business optimize its inventory demand forecasting practices? This is especially essential for Amazon FBA businesses and if you're looking to sell your Amazon FBA, it could help to have your inventory forecasting up to speed.
This is your guide.
What Is Inventory Forecasting?
Also known as demand forecasting, this is the practice of estimating how much inventory will be required to meet customer demand at a given point in the future. B2C product-based businesses leverage prediction modeling by looking at historical sales data, market research, and other factors that might cause stock levels to fluctuate.
The formula involves four steps:
- Calculating lead time demand
- Measuring historic sales trends
- Setting reorder points
- Determining safety stock
But this process isn’t about finding an exact number, so much as an optimal boundary range you’d like to have your inventory level exist within. Naturally, this habitable zone is subject to change according to both supply- and demand-side fluctuations.
Done regularly and properly, inventory forecasting can yield several benefits, including:
- Reduced stock outs – When an item runs out of stock, a business can lose revenue as ready-to buy customers are unable to complete the sale. Even if they’re willing to wait for restocking, the delay can result in lower customer satisfaction and repeat business rates. Inventory forecasting helps you prepare for demand surges or seasonal demand fluctuations.
- Lowered shelving and warehousing costs – When a product is sitting on the shelves accruing dust, you still have to pay for storage space. Therefore, having too much stock on hand can also have a negative impact on revenue and available cash flow. Forecasting inventory allows you to maintain optimal stock levels without wasting limited capital on space you don’t need.
- Reduced product waste – Inventory forecasting takes into account factors like perishability and seasonality. It also helps you identify products that sell well and those that don’t. Armed with this knowledge, you can adjust your strategies to account for those factors.
- Cost savings – When you operate more efficiently, you can maximize revenue. Operating at optimal inventory levels also frees up cash flow to take advantage of bulk ordering or unexpected opportunities.
Tips for Successful Inventory Forecasting and Planning
So, how can you leverage inventory forecasting to properly plan stocking levels?
Follow these tips:
#1 Start with a Data-Driven Approach
Inventory forecasting is part art, part science—but it always requires a data-driven and analytical approach that involves using multiple forecasting methods. These include:
- Qualitative inventory forecasting – Predicting future sales demand according to macroeconomic factors and market forces like seasonality, current economic conditions, and political influence.
- Quantitative inventory forecasting – Predicting future sales demand according to historical sales data. Quantitative forecasting is a forecasting method that’s more commonly used by established businesses with predictable growth and plenty of historical data to draw upon.
- Trend forecasting – Using historical data—namely, previous sales and market growth—to identify demand trends and predict what could happen down the road. Naturally, this forecasting method involves guesswork. As Small Business Chronicle points out, the further into the future a forecast goes, the more nebulous the results. All it takes is a simple market shock like a change in consumer behavior or technology to impact a pattern.
On their own, none of these provides enough context to accurately predict future demand. You need to leverage them all in combination to tell the entire story, especially if your goal is to prevent out-of-stock issues while optimizing order cost variance and supplier lead times.
#2 It Takes a Village
Successful inventory management and forecasting isn’t a one-man job. It requires collaboration and team effort. Whether your business is big or small, it’s important to include all the relevant parties across departments. Soliciting input from every key stakeholder will help paint a more holistic perspective. This results in richer information, which helps create a more accurate demand forecast. Understanding what is demand forecasting plays a vital role in inventory forecasting and how they depend on each other.
#3 Leverage Technology
With so many data points to consider, it becomes incredibly difficult and time-consuming to calculate these figures or identify demand trends manually. Modern inventory management systems can help you analyze historical data and market trends in order to evaluate how much inventory you need.
For instance, Crystal is one such program that creates three different forecasts—P90, P70, & P50—to account for a range of potential demand levels across a distribution curve.
#4 Wash and Repeat
Consumer behavior and market trends can change with the wind. The results of your forecasting may be accurate now, but wildly off-base in half a year’s time. Remember, the further out an inventory forecast goes, the less accurate it’s likely to be.
COVID is proof enough of this. No model could have possibly accounted for the impact it would have on supply chains, economies, and consumer demand. Because of this, it’s important to frequently repeat the process in order to maintain order accuracy and relevance to the most current conditions.
Forecasting Your Inventory
Inventory forecasting is the lynchpin of proper inventory management. Done right, it can help you manage the tricky balance between stocking levels and cash flow, which ties into your budget vs forecast, ensuring that you have neither too much of any given product, nor too little, but just the right amount.
Are you still seeking out a tool that can help you accurately forecast demand? Crystal is an Amazon-approved app that you can leverage to create a range of possible demand values, thus enabling you to account for demand uncertainty.
To learn more about Crystal, sign up today.
Small Business Chronicle. What Is Trend Forecasting?