Any retail business that wants to succeed needs forecasting in inventory management. Ultimately, it ensures that a balance is achieved between sinking too much money into inventory at once and keeping inventory available to meet customer demand at all times.
That said, it's also one of the most challenging things to get right with inventory management. As such, this article outlines all the methods and best practices that retailers can use to understand and optimize their inventory management forecasting strategies.
What is Forecasting in Inventory Management?
Forecasting in inventory management just means making an informed projection about how much inventory will be needed over a long period of time. A simple demand forecast is used to determine the amount of inventory required. Once this is complete, inventory is calculated based on what is already in stock.
Despite the fact that forecasting can never be completely accurate, there is always some degree of uncertainty. There can never be any guarantee that any forecast will be accurate. Seasonality and previous sales performance can affect accuracies. Consequently, it should be obvious to anyone who is competent at forecasting demand and inventory levels. In the event that circumstances change, adjustments can be made if these factors are taken into account. In order to have a good handle on your business, it is vital to keep track of your stock levels.
Inventory management relies on forecasting, so why is it important?
It is essential that manufacturers and suppliers forecast inventory accurately if they are to be successful. It is essential to remember that too little may prevent you from continuing production or fulfilling consumer demands. Excess supplies will present many problems for your company. In some cases, you may not be able to move it all, you will have an increased storage expense, or you may be asked to sell the items below their cost, or you may be required to discard them.
As a result, if you do not prepare correctly for inventory management, it will cost a great deal of money for your business. Consequently, inventory forecasts, as part of inventory management, can also be characterized as business forecasts. An organization's budgets and allocation of resources are based upon the development of growth strategies as well as the assignment of workforce personnel and the provision of adequate cash flow.
Accurate forecasting in inventory management has the following advantages:
- Reducing the risk of sales being lost due to the unavailability of the product.
- Perishable stocks are less likely to spoil before being sold, which is a good thing.
- The optimal workforce capability is to not have either too few or too many employees than what is necessary for the business.
- A better profit margin is achieved if the product is not oversupplied.
- The use of quality fulfillment through distribution centers and warehouses will help to reduce pressure on storage facilities.
Forecasting The Boundaries Of The Forecast
First of all, creating a simple forecast of your expected sales will assist you in predicting how much inventory you will need. It is necessary to establish forecast limits for this purpose. In this respect, you need to define two distinct boundaries:
- The period of forecasting
A forecast period is the duration of time that is being predicted by a forecast and is the amount of time we are forecasting into the future. There are many experts who suggest forecasting for a minimum of three periods.
- Each year.
- The 90-day period.
- The 30-day period.
The monthly reviews should then be conducted. The upcoming sales forecasts can be adjusted if other factors such as market trends or actual sales performance differ from expectations.
- Base demand
Whether a forecast is to begin from the current state of the market for a product, the base demand simply refers to the current conditions of the market. The company could, for example, be forecasting the sale of white Nike sneakers on a 30-day basis. A demand of 37 would be derived in the case where the company sold 37 units over the previous 30 days.
In order to begin working on our forecast, we will simply start with this information. Increasing accuracy requires us to take into account all trends, as well as variables, that may affect the demand.
What Are The Types Of Forecasting In Inventory Management?
Inventories forecasting is divided into four basic categories, each with its own way of predicting demand. Based on the nature of your business, you will choose the type of forecasting inventory management you need.
- Demand forecasting
There are several ways of forecasting inventory levels, and one of the most common methods is demand forecasting. When estimating customer demand, this type of forecasting takes into account a number of factors that are similar to the following:
- A seasonal pattern. Throughout the year, what are the peaks and troughs of demand?
- Competitiveness. Is there a new entrant in the marketplace, or are there competitors withdrawing from the market?
- Geographical information. Can you supply goods where they are in demand based upon the location of your supply chain?
- Economics. What are the effects of the recession on the types and quantities of goods in demand?
- Goods of different types. For instance, are you offering a perishable product, meaning that you need to forecast your demands accurately? What are the chances of this type of product being a non-perishable item that comes with a longer shelf-life?
It is possible to divide demand forecasting into six types. In order to produce an accurate forecast, businesses can use more than one of these methods:
- Passive. Focused primarily on predicting future sales from past sales data.
- Active. Used primarily by startups and rapidly growing companies.
- Short-term. When a company prepares to launch a sale or promotional campaign.
- Long-term. This perspective allows for the identification of patterns of seasonality and annually over the next 12 months.
- Macro & micro. Analyzes external factors such as the economy and competition, as well as consumer demand for a particular industry.
- Internal. Forecasts how many resources, such as staff and equipment, are required for the project to be completed.
- Quantitative forecasting
In order to forecast future demand quantitatively, an analysis of recent sales performance is undertaken. For this type of forecasting, well-known calculations and methodologies are used in order to uncover patterns as well as helping to uncover trends. Generally speaking, there are two kinds of numerical forecasting, time series forecasting, and causal forecasting.
- Qualitative forecasting
In order to perform a quantitative forecast, a number of industry observers are asked to provide their opinions and insights.
Most qualitative forecasting is conducted using the Delphi method. A number of questionnaires will be mailed out to a panel of experts to obtain their opinions. A summary is provided after each round of questionnaires, and panel members provide feedback on the responses of the other participants. A consensus will be reached once an agreement has been reached.
Besides the use of qualitative research methods, other qualitative methods include consulting with experts in a specific industry and surveying them. While the use of historical data is essential for qualitative forecasting, it is equally important to take into account other factors that might disrupt the normal flow of events. Innovations or legal changes - or even a pandemic - can have an adverse effect on demand.
- Predicting the future using intelligent and machine-learning techniques
Throughout 2021 and into 2022, we will not be able to ignore the impact of AI and machine learning on our understanding of inventory forecasting. It is worth noting here that the companies are taking steps to ensure that their supply chains can withstand the fluctuations that market volatility is bound to bring.
As supply chains become more complex, AI and machine learning solutions are becoming increasingly important. Hence, supply chains can analyze and estimate hundreds of variables across many locations and large amounts of data. In the majority of cases, modern advanced tools can make predictions that are more accurate and more timely than those made by humans. Still, many things must go into making advanced forecasts. A properly implemented AI and machine learning system will take time and manpower to implement. Significant capital investment will also be needed to implement such a system properly.
Forecasting demand for inventory control has many benefits.
- Enhance your competitiveness.
When you keep an eye on your demand forecast, you can always be sure that your inventory will always be enough. By doing so, you minimize the possibility of a potential customer buying a similar product from your competitors. Forecasting techniques help you reach expected demand by optimizing your marketing strategies for future selling periods.
- Optimization of your inventory
Optimizing inventory management and stock control using demand forecasting techniques will save you a ton of money. By ensuring that the right amount of stock is always available, you are likely to see an increase in your inventory turnover rate and a decrease in your carrying costs as a result.
- Become more adept at budgeting
You have a better understanding of the upcoming cash flow if your sales forecasts are accurate, and you can therefore budget to pay your suppliers and shoulder any necessary operational costs. Furthermore, the more accurate your forecast of demand, the more creative your marketing campaigns can be. To increase sales when the market is slow or busy, it is possible to transition between paid marketing and organic marketing techniques.
Essentially, demand forecasting provides the opportunity to invest in the success of a company.
- Make sure that a bad business decision is not made
By providing accurate forecasts to your customers, markets, or products, you can reduce the likelihood of making bad choices in terms of products, markets, or customers. It is possible that you may lose business if you fail to utilize demand forecasting techniques. Because of inventory holding costs and poor customer service, you are likely to lose profitability.
- Calculate the required headcount based on demand.
Having a realistic forecast of demand can help you know when to hire more picking and packing staff (e.g., hire seasonal temps) at a particular time. Moreover, you have a clear vision of what sorts of additional resources will be required in order to make sure of your business's smooth run during periods of high sales. Essentially, by forecasting demand, you can manage your staffing effectively and avoid opportunities to understaff or overstaff. This is a major advantage as staffing is a major cost driver.
- Make sure the cash flow is steady
In order to better manage your cash flow, you should be able to identify the peaks and valleys of the demand for your products. Your manufacturer may not be able to pay you if you fail to manage your cash flow properly. If this occurs, you risk being cut off from your manufacturer. Understanding how demand works can enable you to negotiate credit terms with the banks, reserve cash for future needs, and renegotiate short-term loans in advance.
Inventory forecasting best practices
Good inventory management allows for accurate forecasting of inventory levels. The following are some fundamental concepts for establishing an inventory forecasting process for your business.
- Engage other teams
There is no such thing as a silo when it comes to inventory forecasting. If it is owned by somebody, all key stakeholders should be involved, including operational, financial, marketing, and product development personnel. The groups will contribute unique perspectives to the forecast in order for it to be as accurate as possible.
- Be sure to take notes for future planning
It's not always enough to track order volume. An annotation may be required to provide context or to ensure that you do not lose track of the reason for the change in demand. List out any flash sales, holidays, or other events that could slow or speed up your sales cycle. So that you may review your notes from previous years to prepare for the coming year, you should keep a file of your notes.
- Make the most of your data
Prior to determining when to reorder inventory, you must understand the historical performance of your inventory. In order to make informed decisions about future operations, you should use past sales and inventory data to guide you, not react to them. Thus, you can repeat the inventory forecasting process and utilize the same forecast period when you repeat the forecasting process.
- View stock levels in real-time
Data that is accurate and timely is crucial to predicting future demand. Keeping track of actual stock levels in real-time allows you to monitor any fluctuations in stock levels and determine if your estimates were accurate or significantly off. The root cause of any inaccurate estimates should be examined. Identifying the reasons for these events will allow you to learn from them and adjust your forecast over time.
- Select the appropriate software
It can be difficult to replenish inventory at the right time and in the right quantities when circumstances constantly change. Firstly, whatever information you have on a sales channel must be centralized before you can achieve this goal. If your data is stored in silos, you will not make much progress. Choose software that has all the features your business needs based on its size, catalog, and complexity. You may need either a standalone inventory forecasting tool or a complete fulfillment solution, depending on the needs of your organization
- Make sure your staff is qualified
It is essential for stock forecasting to have experienced personnel who can evaluate data and come up with predictions.
A good forecast will depend on your staff's ability to understand and implement the right forecasting methodologies. Most importantly, you should have the ability to interpret the data, so you can make informed decisions.
- Be prepared for the unexpected
A major event like Covid-19 has taught us that the demand for certain products can become drastically fluctuated - examples include toilet paper, hand sanitizer, and face masks. Demand can be impacted by numerous other external factors on a smaller scale. It is as simple as something going viral online, creating a new fad, or having paid publicity impact the popularity of a product.
Therefore, manufacturers, suppliers, and retailers cannot rely solely on the past to predict the future. The impact of rapid changes in demand can at least be mitigated to a certain extent through an inventory forecasting process that is more robust.
Your business can establish what products will be available and in what quantity through inventory forecasting. By doing so, you will be able to ensure that you only order items as they are required, thereby reducing inventory costs. In addition, forecasting allows you to tie order cycles to sales cycles, thereby further decreasing costs.
Those of you who own an online store will understand how important forecasting is for your business after reading this article. We have listed several benefits of forecasting and practices to guide you on forecasting in inventory management and clear any confusion you might have.