What Is Inventory Forecasting?

Demand planning, or inventory forecasting, employs data on recent and past trends and developments to gauge upcoming circumstances and predict the required levels of inventory to meet future demand. Furthermore, accurate inventory forecasting ensures your business has enough stock to complete customer orders while not attaching too much money to the merchandise.

Furthermore, determining the reorder point of stock is only one aspect of inventory forecasting: so much more businesses have to do. Inventory forecasting also enables companies to track sales and manage purchase orders better. It’s a great inventory management tool to increase your business’ revenue and decrease unnecessary costs.

Inventory forecasting and its importance

How Does Inventory Forecasting work?

If done correctly, inventory forecasting can help your business balance having too much money tied up in inventory and having enough stock to meet customer demands. You must consider these three aspects while calculating the right amount of inventory for the future:
  • Forecast period
  • Base demand, and
  • Application of trends and other variables
The inventory forecasts can be less accurate than expected due to several factors, particularly when you go beyond the standard period for inventory forecasting. These factors include uncertainty due to market fluctuations, global events, other global phenomena, etc. The normal period for inventory forecasting comprises 30 days, 90 days, and one year. When forecasting inventory for a year, you have to consider seasonal fluctuations. Furthermore, base demand is the known customer demand for the period when you begin inventory forecasting. You can use the last 30 days of sales or any presales data. Determining the application of trends and other variables is challenging. You can consider local and global influences and other factors driving the market. These factors include supply chain challenges, sales velocity, and changes in customer demands due to seasonal variations. Variables differ with businesses in different industries, so you should consider them during inventory forecasting.

Inventory Forecasting Vs. Replenishment

Inventory forecasting and its importance

When you forecast inventory requirements, you calculate the number of other products required for meeting customer needs in the future. Factors influencing inventory forecasting can include replenishment data, availability of products, and the speed of delivery.
Furthermore, forecasting the demand for products based on the changing consumer behavior can help your business keep enough products on hand to fulfill customer orders on time. At the same time, you wouldn’t have to spend too much on overstocking and waste valuable storage space on surplus or unnecessary products.

Several approaches can help your business determine how much time parts or products take to arrive after placing an order, the right time for restocking products, and how much stock your business should currently have on hand to meet sudden spikes in customer demand.

A variety of factors might influence demand for your products. Some elements are external, including natural disasters that delay transportation, while others are internal, including a planned marketing effort that can increase demand.

With sophisticated inventory management software, you can automate the inventory forecasting process and other procedures like determining the reorder point of stock.

Inventory forecasting and its importance

Inventory Forecasting Explained

You would need extensive data to drive decision-making during inventory forecasting. Furthermore, you use information, data, and reasoning to predict how many products your business might need to fulfill custom orders without going overboard by stocking up too much and spending too much money. More complex techniques, such as advanced AI-based systems for accurate inventory accounting, are gaining momentum.

The process of inventory forecasting begins with an easy step of determining how many products your business has sold during a given period. Furthermore, you also ensure your company has enough products to continue selling that product in the future. Moving ahead, you analyze the challenges such as trend forecasting and seasonal variations. Have you witnessed the demand growing? Or is a particular season influencing the demand for specific products?

Lastly, consider other factors, like global and local events and planned marketing campaigns that might affect sales and the overall supply chain. A sophisticated inventory management software can also help you accurately forecast inventory requirements.

Inventory forecasting and its importance

What Are the Different Types of Inventory Forecasting?

The most effective and productive inventory forecasting depends on past data and information from analyzing current trends and predicting future conditions. However, there are various approaches and methods to inventory forecasting methods.

The most popular formulaic systems for successful and accurate inventory forecasting include trend, qualitative, quantitative, and graphical forecasting. You must choose the most suitable technique based on general stocking issues, data by analyzing sales trends, personal insights, mathematical analysis, customer input, and market research.

Trend inventory forecasting

Trends refer to the changes in demands for a particular product during a given period. Furthermore, this method of inventory forecasting projects probable patterns while excluding seasonal variations and inconsistencies using growth data and past sales. This method relies on more fine sales data and trends to determine how specific customers and different groups of customers are likely to purchase products in the future. Lastly, you can explore new ways of marketing your products and offering sales promotions.

Graphical inventory forecasting

The data you have used in the trend forecasting technique can also be used to create a graph to show ups and downs in sales. The graphical forecasting method is preferred over trend forecasting because the availability of insights and the visual representation also helps better understand the situation. Furthermore, you can anticipate patterns available from a series of factors and data points. Lastly, you can add dipped trend patterns to your graphs to analyze potential directions you might have otherwise left unnoticed.

Qualitative forecasting

Often, when businesses lack concrete historical data, they directly approach the source of data: their customers. Qualitative forecasting requires intricate data collection, including market research and focus groups.

Quantitative forecasting

Since quantitative inventory forecasting uses numerical data from past years, it’s more accurate than qualitative forecasting. The accuracy of demand forecasts relies heavily on how much data an organization currently has.

Inventory forecasting and its importance

The Top 4 Benefits of Accurate Inventory Forecasting

Inventory forecasting is the thin line differentiating profitability from piles of goods using up valuable storage space in the warehouse. Doing inventory forecasting well benefits your business in these four ways:

Reduces stockouts and increases sales

Stockouts lead to loss of sales revenue. Inventory forecasting can help your business reduce and eventually eliminate stockouts by accurately forecasting future demand. With information from inventory forecasting, you can determine when you should restock your inventory and how much quantity.

Eventually, when your business has enough inventory on hand, you don’t have to worry about back orders. Furthermore, you can fulfill customer orders as soon as they are placed and at affordable costs. It increases customer satisfaction and loyalty to your brand. When you display an out-of-stock message on your online store, you are giving your customers an opportunity to look for an alternative.

Cost savings

You can benefit from placing bulk orders by ordering the optimum inventory quantity without tying too much cash with unnecessary products. Furthermore, those unwanted products are stocked up in the warehouse, adding extra storage costs. Thus, inventory forecasting helps manage your company’s inventory storage space.

Less inventory is needed on hand

Since inventory forecasting helps your business make informed decisions regarding how much inventory you require, you can improve inventory accounting, help your cash flow, and even set aside funds for other aspects of the business.

More efficient production cycle

With inventory forecasting, your business can manage inventory more efficiently across the supply chain network. Furthermore, you can work more efficiently with your supplier and manufacturers to better understand production cycles. Thus, you don’t just guess your way around when it’s time to restock your inventory.

Inventory Forecasting Formula

You have to calculate the following to forecast inventory demand:

Lead time

You can calculate the lead time demand by multiplying the average lead time in days with average daily sales.

Lead time demand = Average lead time in days x average daily sales

Reorder point

Reorder point accounts for stock replenishment.

Reorder point = (No. of units used daily X No. of lead time days ) + No. of units of safety stock

Average inventory

Average inventory is the measure of how much inventory you have on hand during a given period.

Average inventory = (Inventory at the beginning of the period + inventory at the end of the period) / 2

Safety stock

Is the reserve or buffer inventory you keep on hand to ensure the fulfillment of customer orders.

Safety stock = (Maximum number of units sold in a day X maximum lead time for stock replenishment) — (average daily usage X average lead time in days)

Economic order quantity (EOQ)

Is the ideal order quantity during regular times.

EOQ = √2DS/H
Where

D = Demand in units per year
S = Order cost per purchase
H = Holding cost per unit, per year

Inventory turnover ratio

helps you determine how many days it requires to sell your firm’s on-hand inventory. A higher inventory turnover ratio points to solid sales.

Inventory Turnover Ratio = COGS / average inventory

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What Do You Need to Know to Forecast Inventory?

Here are some aspects of short- and long-term inventory forecasting you should be familiar with for more accuracy.

Inventory forecast period

The forecast period is the length of time for which you will predict demand. It depends on the production cycle, inventory turnover ratio, and how fast you can sell the products to your customers.

Trends

A trend is a change in demand during a given period. The trend can be influenced by several factors, including customer behavior and global events.

Maximum stock level

The maximum stock level is the highest number of products a business can store to fulfill customer orders at the lowest possible cost.

Reorder points

The quantity at which you procure new products to maintain an optimum inventory level is the reorder point.

Inventory forecasting and its importance

Inputs You Need to Forecast Inventory

Below are crucial data points for accurate inventory forecasting include:

  • Current stock levels
  • Historical data and trendlines
  • Outstanding purchase orders
  • Forecasting period requirements
  • Maximum possible stock levels
  • Expected demand and seasonal variations
  • Customer response to specific products
  • Sales trends and velocity
Inventory forecasting and its importance

How to Choose the Right Forecasting Method?

Firstly, you should consider the available data, and what more you can collect. The requirements and processes from one organization to another. New businesses can start by collecting qualitative data and other market-related information. While established firms can begin with historical data, perform inventory analysis, and employ the quantitative approach.

You’ll have to use a mix of methods to reach the ideal inventory forecasting method. Furthermore, you can use industry-specific inputs to complete forecasting.

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FAQs

What are the best practices for inventory forecasting?

  • Use your data wisely
  • Choose the right software
  • View stock data in real-time
  • Exploit your data for future planning

It helps your business forecast optimum stock levels while considering your business goals and processes. Automating inventory forecasting can help reduce supply chain errors, reduce stockouts, and save costs.

  • Use the point of sale customer order data for short-term forecasting.
  • Analyze customer order history to perceive future demand.
  • Track macroeconomic indicators to improve inventory forecasts.
  • Track competitor promotional offers

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