Whether a business sells its products through retail stores or online, lack of stocks to fulfill customers' orders or overstock more than the demand can lead to losses. Lack of inventory to fulfill orders damages the business's brand image apart from the losses incurred in issuing refunds. On the other hand, inventory levels exceed the demand locks in cash used to purchase or manufacture the inventory. There is a considerable risk of the inventory becoming dead stock.
The inventory levels and the cash flow must be well aligned. To this end, inventory forecasting is imperative for any business enterprise, especially those dealing with large inventory volumes.
What Is Inventory Forecasting?
Inventory forecasting is the process of estimating the future demand for a product and then calculating the necessary inventory to meet that demand.
There are a number of different factors that can be taken into account when forecasting inventory, including historical sales data, market trends, competitor activity, and expected changes in customer demand.
Once you have an idea of how much product will be needed in the future, you can begin to calculate how much inventory you will need to have on hand at all times in order to meet that demand. This can be done using a variety of methods, such as average lead time, safety stock levels, and reorder point calculations.
Many factors are taken into account to forecast inventory. These include current inventory levels, historical trends, maximum stock levels, outstanding purchase orders, expected demand, sales trend, period, the reaction of customers to specific products, and reorder point.
Benefits of Inventory Forecasting
There are multiple benefits of forecasting inventory management. Some of the significant benefits have been listed here.
Improved Inventory Management
This is because the business can stock the correct levels of merchandise that are likely to get sold, and the storage space in the warehouse is saved, which eliminates wasteful expenditure. The absence of excess stock means the investment is not tied down and can be utilized in other aspects of the business.
Stockout is a term that refers to loss of sales. It happens when there is not enough stock to fulfill orders. Inventory forecasting reduces stockouts because the business can predict future demands and maintain the required stock to fulfill customer orders at all times.
Inventory forecasting helps in optimizing the timelines of product manufacturing and shipments. This is because the business can predict the proper inventory levels required to take orders from the customers.
Products that are not likely to be sold or get fewer orders can be predicted by inventory forecasting. It helps the business identify the products that should be removed from the inventory as soon as possible by methods such as gifts or selling in combination with products getting high sales.
Related: How to Calculate Beginning Inventory
How To Forecast Inventory?
There are multiple inventory forecasting methods. Consumer demand is the mainstay of every way using different factors.
Graphical forecasting provides a visual insight into the sales trends of the products sold by the company. The graph is made using past sales data of the company. The trends and patterns are visible on the chart helps in making accurate predictions about the likely sales trends in the future.
Quantitative forecasting uses historical sales datasets to predict future demands. A minimum of 1 year of sales data is needed to identify seasonal trends. However, datasets of many years are even more helpful to locate annual patterns and other long-term trends. This method is more effective when the products have been in the market for a long time.
Qualitative forecasting uses external factors such as economic demand, market intelligence, and environmental factors to predict future needs. Thus, this method requires expert analysis of such elements, and the business's sales history does not hold much value. It is essential to hire an expert for this kind of inventory forecasting.
Time Series forecasting predicts the sales figures within a time frame in the future by using the sales figures in the same time frame in the past. This method can be applied to weekly, monthly and seasonal sales. This method allows the factoring of events that are not regular but are likely to affect sales during a particular period.
Data Mining is a mathematical analysis of the existing sales data of the business to identify trends and make predictions for sales. Data Mining algorithms explore the data and pick trends. Inventory forecasting is based on the insights of data mining.
Inventory Management Software
A business can purchase inventory management software with forecasting tools. The forecasting tools perform analysis and generate reports on sales and inventory figures based on tracking the inventory each day and reports of the products selling frequently. The tools can also provide data visualization in graphs and charts.
So, how do you forecast inventory? The answer is with the right tools in place. If you're an online seller looking for reliable fulfillment services, Simpl can help! Contact us today to learn more about our world-class order management and customer service solutions that will make your life so much easier - and your business run smoother than ever before.