If you are a retailer, it is essential to forecast inventory demand to ensure that you always have enough stock on hand.
You may lose customers and sales if you run out of a popular item. Alternatively, if you have too much inventory, you may end up losing money. Worldwide, retailers are losing $1.75 trillion annually due to inadequate inventory levels.
The key to successful inventory management is ensuring you have the right amount of inventory without getting stuck with extra items that will go unused or scrapped.
Getting optimal inventory levels enables cost control and is a company’s overall health barometer.
What is Inventory Forecasting?
Inventory forecasting – also known as demand planning – is the process of estimating the future demand for a product or service.
It can be done using different methods, such as historical sales data, market trends, or known upcoming events.
Accurate demand forecasting is crucial in inventory management, allowing businesses to plan for future stock needs.
It ensures that companies have the right products in stock, at the right time, and in the right quantities.They can then fulfill customer orders while not tying up cash in unnecessary inventory.
Inventory forecasting is not just focused on setting a reorder point. Instead, it uses data analysis to identify trends to adapt to a dynamic market environment and meet customer demand.
Why is Inventory Forecasting Important?
Inventory forecasting is important because it helps businesses to make informed decisions about inventory levels.
For example, if you know that demand for your product will increase in the next month, you can order more inventory ahead of time. This can help you avoid stockouts, leading to lost sales and unhappy customers.
At the same time, forecasting demand can help you avoid having too much inventory. This can save you money on storage costs and reduce the risk of your inventory becoming obsolete.
There are many benefits that your businesses can gain from accurate inventory demand forecasting, including:
- Reduced stockouts:
By forecasting demand, you can avoid running out of stock. It can save you money and keep high customer satisfaction.
- Improved cash flow:
Having the right amount of inventory can help you avoid carrying too much stock. This can save you money on storage costs and reduce the risk of your inventory becoming obsolete.
- Better decision-making:
Forecasting demand can help you make informed decisions about inventory levels. It can help you to save money and improve your overall business operations.
- Better product cycles:
Forecasting demand can help you plan your ordering cycles. It can help you avoid disruptions and ensure you always have the products your customers want.
Inventory forecasting, when done right, can improve your operations and help you avoid disruptions.
Forecasting methods and techniques
There are many different methods and techniques that businesses can use to forecast inventory demand. The most common methods include:
1. Quantitative forecasting
Quantitative forecasting uses historical sales data to predict future demand. The more data available, the more accurate the forecasting will be. To identify seasonal trends, you need at least one year of insights.
2. Qualitative forecasting
Qualitative forecasting is based more on external factors such as market intelligence, environmental factors, and economic conditions. It’s a more complex form of inventory forecasting; therefore, it requires experience and an established forecasting system.
Inventory forecasting software is increasingly popular among retailers as businesses strive to improve their inventory management. There are many different systems available on the market.
However, they all share one common goal: to help enterprises forecast inventory demand more accurately.
How to Forecast Inventory Demand
There are many factors that contribute to effective inventory forecasting.
1. Know your Business and Product Types.
The type of products you sell is a major factor in forecasting inventory demand. When forecasting, consider factors like:
- Is it a one-time purchase?
- How frequently do they buy from you?
- What is the spending level per average purchase?
- What combination of products does your average customer commonly buy together?
Purchasing model is different for each product. For example, the buying cycle for bicycles is very different from the frequency customers purchase hygiene and safety products like rubber gloves.
2. Use Historical Sales Data to Create a Baseline.
Reviewing past sales data is a helpful way to establish a baseline for future demand forecasting. This will give you a starting point from which to make further predictions.
3. Identify Trends and Seasonality.
Once you have a baseline, you can begin identifying trends or seasonal patterns that may impact future demand.
For example, suppose you notice that your sales typically increase during the winter. In that case, you can adjust your forecast accordingly.
The drivers of seasonality include factors like national bank holidays, weather changes and activities related (like skiing in winter and sailing during the summer), and the festival season.
Typical seasonal products are school supplies or sunscreen products. However, periodic fluctuations in sales apply to many groups of articles.
4. Use Market Analysis to Understand Demand
Keeping tabs on industry trends will help you anticipate changes in demand for your products.
For example, the coronavirus pandemic has changed consumers’ shopping habits, including how often they visit the stores. Customer spending on some products also dropped while we saw massive growth in other categories.
5. Determine Your Reorder Point
Each time you fulfill a customer order, your inventory decreases. When it reaches a certain threshold, it has to be restocked.
The reorder point is the remaining stock level at which you must send a new purchase order to the supplier.
6. Make Adjustments to Plan.
When planning for future demand, take into account any new initiatives, promotions, or events that may influence your inventory demand.
Also, if new stores are opening nearby your location offering similar products, it will likely affect your demand forecast. In such a case, you must adjust your planning accordingly to maintain a healthy inventory level.
Technology can help you gather data, identify trends, and automate demand forecasting.
Planning and monitoring your inventory in Excel spreadsheets is highly prone to errors and time-consuming. Using inventory management software can help you forecast your inventory more efficiently.
Inventory forecasting is a critical part of demand planning for any retail business.
By understanding your product cycles, using historical sales data to create a baseline, and leveraging technology, you can more accurately predict future demand and avoid disruptions in your operations.
Forecasting inventory demand doesn’t have to be complicated.
By following the tips above, you can develop a system that works for your business. And with the right technology in place, you can automate the process and free up time to focus on other areas of your business.
Here at Nastah, we pride ourselves on being a company that can help your business succeed. We do this by providing efficient and effective glove manufacturing services for clients worldwide so they can serve their customers.
Get in touch with us if you’re interested in learning more about what we have to offer or would like some professional advice from one of our experts.