Blog Inventory The complete guide to inventory forecasting: Benefits + best practices in 2024
13 March, 2024

The complete guide to inventory forecasting: Benefits + best practices in 2024

Inventory forecasting uses data-backed business and industry information to meet customer demand while eliminating inefficiencies and issues such as stockouts and overstocking.

Meteorologists often face a lot of backlash and vitriol –– because one bad forecast can really ruin a person’s plans. From rained-out wedding days to insufficient SPF, a wrong weather forecast can have lasting effects. The same can be said for inventory forecasting. 

Inventory forecasting is the process of using data-backed business insights to meet customer demand while avoiding inventory waste and inefficiency. From forecasting a new product to improving demand projections, doing it right can drive rapid growth — and doing it wrong can be a disaster for your business. 

Inventory forecasting plays a critical role in a business’s success. In this complete guide, you’ll learn what it is, why it matters, and how to do it correctly. 

Key takeaways: 

  • Inventory forecasting ensures you meet product demand and avoid overstock.
  • It also ensures real-time and accurate data
  • Several factors, such as industry trends, seasonality, and customer behaviors, impact forecasting. 

What is inventory forecasting?

Inventory forecasting is the process of predicting the amount of inventory needed to meet demand using past sales data and trends. Forecasting should also take into account any upcoming sales or promotions for the forecasting period. 

Also known as demand planning, inventory forecasting is a valuable tool in ensuring customer needs are met while avoiding overstock. 

To predict inventory needs accurately, retailers need to have inventory management systems in place that help track inventory trends. 

definition of inventory forecasting

The difference between inventory forecasting and replenishment

Inventory forecasting uses a wide range of information to create forecasts, which are then used to predict demand and inform supply decisions.

That information includes:

  • Sales data
  • Industry trends
  • Customer feedback
  • Market research

Conversely, replenishment focuses solely on reordering the amount of product needed to meet the forecasted demand. So, replenishment is the result of forecasting.

What are the different types of inventory forecasting?

There are many different types of inventory forecasting. Many small businesses will use a combination, but the exact type required will depend on your specific needs, inventory, and industry. Here are some of the various ways to forecast inventory.

Qualitative forecasting

Qualitative forecasting uses industry knowledge to inform ordering decisions. It focuses on marketing research, such as focus groups and customer feedback. Businesses then analyze the collected data to create models and predict trends.

Quantitative forecasting

This method of forecasting uses historical data to predict future sales. Ideally, retailers will have a minimum of one year of data to pull from for quantitative forecasting, but more is better. 

Generally, qualitative and quantitative forecasting are used together for better predictions.

Trend forecasting

Trend forecasting uses historical data to predict future product demand. By using data from at least the previous year, you will be able to see changes in product demand over time. The more data pulled, the easier it will be for you to see patterns. 

Seasonality is a common factor in trend forecasting, indicating which times of year consistently have more or less sales. However, it’s not the only factor considered; other factors include competitor trends and customer sentiment.

Graphical forecasting

With graphical forecasting, various data is used to create visual representations of trends. This method can create a very clear picture of sales and market trends, allowing for more accurate forecasting. With the visualization, small changes are more noticeable and can help with future trend predictions.

Seasonal forecasting

As the name implies, seasonal forecasting uses seasonal trends to predict future demand. This can include factors such as holidays, weather, sales, and big events. Seasonality should be examined at both the business and industry levels.

graphic listing the benefits of inventory forecasting

7 benefits of inventory forecasting

Inventory forecasting has numerous benefits. Accurate forecasts ensure you meet customer demand, help your business run more efficiently and at a lower cost, and reduce manufacturing waste and manual labor. Here’s a breakdown of the benefits of demand forecasting.

1. Better business insights

The data gathered through inventory forecasting can provide valuable insights into what is going on in your business. From sales trends and predictions to information from customers, forecasting can help you get a holistic understanding of your business and market forces, such as consumer behaviors and order fulfillment.

2. Increased efficiency

Forecasting is a valuable tool for finding process gaps, such as overstocking, stockouts, and supply or shipping issues. Forecasting also requires you to continually evaluate and improve processes to keep up with demand.

3. Cost savings

Inventory forecasting helps improve cash flow by reducing inefficiencies and identifying which products move well and which don’t. This means you’ll only order the product that is forecasted to do well and in the predicted amounts, avoiding overstock, which costs money to both order and store.

4. Increased customer satisfaction

Better forecasting means product is always in stock, creating an improved customer experience. With proper forecasting, not only will customers be able to get the product they want but they’ll likely spend less time waiting on orders, as their items will already be in stock or ready to arrive from the supplier.

5. Improved supplier relationships

Forecasting decreases the chance of last-minute ordering and miscommunication, improving supplier relationships. Part of forecasting is also better understanding supplier processes, such as knowing the average manufacturing lead time, so you can set realistic expectations. 

6. Decreased manual labor

With better insights, a business can improve processes –– meaning work is done only when it needs to be. Accurate forecasting helps identify areas where automation can help reduce the amount of labor needed and support better labor projections for given periods.

7. Reduced inventory waste

Accurate forecasting ensures inventory isn’t sitting in storage for long periods, which can lead to waste for perishable goods in particular. Stock that sits too long can also become deadstock for other reasons, such as clothing that goes out of style, tech that’s outdated, or other items that are out of season.

How to forecast inventory

There are many factors to consider when starting inventory forecasting. Having a clear procedure in place will ensure forecasts are accurate and easy to replicate. Here are 10 simple steps to take when forecasting inventory:


  1. Choose the forecasting period: Decide on the period you want to forecast for, making sure you’re able to pull data from the previous period to inform forecasts. You may choose to do an annual, quarterly, monthly, or even weekly forecast. 
  2. Review data from the previous period: Look at data from the previous period for the same amount of time. To forecast properly, data needs to be available from the previous period. 
  3. Identify trends: Using the data from the previous period — and others available — identify any persistent trends. This should include your business’s trends as well as competitor and industry trends.
  4. Calculate sales velocity: One of the key forecasting calculations is sales velocity, which is how quickly a prospective customer moves through the sales process. Sales velocity sets the standard for how long it takes to make a sale while also identifying areas for improvement.
  5. Identify promotions: Note any promotions or sales that may impact data. 
  6. Review industry changes: Be sure to evaluate any industry changes that could potentially impact forecasts, such as legislation around particular product sales or import fees. 
  7. Remove outlier data: Remove any data that is vastly different from average data but is not reflective of an actual trend to ensure accuracy. 
  8. Process data: Process the data by using formulas or inventory management software to create forecasts. 
  9. Validate and adjust data: Review the data to ensure accuracy. Once evaluated, make any necessary adjustments, including adding or removing data or changing your forecasting period. 
  10. Re-forecast: Once you’ve established the above procedure, you can now start forecasting at regular intervals. 

graphic listing the 10 steps of forecasting inventory

Inventory forecasting formulas

In order to properly forecast, you’ll need to use the data collected to calculate a variety of metrics, such as sales velocity, lead time, and inventory turnover. These formulas can help evaluate complex data and ensure your forecasts are accurate so business and retail KPIs are met.

Sales velocity

This indicates how quickly a customer moves through a sales pipeline, from prospect to order and fulfillment. Sales velocity can be used to predict future revenue. A low sales velocity can indicate issues in the sales process. 

Sales velocity = [ (# of sales opportunities) x ($ average sale size) x (% sales rate) ] / length of sales cycle

Economic order quantity (EOQ)

The economic order quantity (EOQ) formula calculates the amount of product needed on average. Essentially, the calculation will indicate the amount of minimum stock needed at any given time to meet demand. 

EOQ = √[ 2 x (unit demand) x (order cost) ] / holding costs

Lead time

Lead time is the amount of time it takes for a product to arrive from the supplier to the retailer (or to a customer, in the case of e-commerce). 

Lead time = the average number of days it takes to receive the product from the supplier

Reorder point

The reorder point (ROP) formula calculates the threshold at which more product should be ordered. To calculate ROP, you need to know the amount of stock you go through, the lead time, and have a safety stock level. 

ROP = (# of items sold per day x lead time in days) + safety stock level

Inventory turnover

Expressed as a ratio, inventory turnover looks at how often inventory is completely sold out and replaced within a given time period. The higher the ratio, the better. 

Inventory turnover = cost of goods sold / average inventory

Average inventory

This is the average amount of inventory in stock in a specific time period. Keeping track of this helps avoid stockouts. 

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

Safety stock

Knowing how much safety stock you need to have in order to meet demand is crucial to proper inventory forecasting. Safety stock is the extra inventory businesses keep to prevent stockouts. 

Safety stock = (maximum inventory sold per day x maximum lead time needed) – (average daily usage x average lead time)
graphic listing the best practices of inventory forecasting

Inventory forecasting best practices

Once you’ve established forecasting procedures and figured out how to calculate various metrics, it’s important to re-evaluate and adjust processes to ensure continual accuracy. Here are seven best practices to follow.

1. Set clear parameters

Setting parameters includes the forecasting period and what specific data, trends, and other metrics you plan to pull and examine. You’ll also want to determine the high and low points for data so you can remove outliers that fall outside those points. This will also help identify metrics for success.

2. Use an inventory management system

To properly forecast inventory, all goods must be organized and accounted for. An inventory management system ensures all information about your inventory, from suppliers to stock and sales, is recorded in one place. Whether you use spreadsheets or inventory management software, it’s important to have a system set up.

3. Keep detailed records

While tracking inventory and using inventory management systems will provide valuable insights, it’s important to add context to those insights to see patterns more clearly. For up- or downticks in sales, note possible contributing factors so you have a clear record of what may be causing changes. This will help identify common denominators when forecasting.

4. Use real-time data

You can’t accurately forecast demand if you don’t have accurate data. Demand forecasting best practices revolve around access to up-to-date inventory, sales, raw materials, and finished goods data.

To make smart forecasts, you’ll need that data as close to real-time as possible so you don’t calculate demand with any missing data points and so you can continually forecast demand on a weekly or monthly basis with fresh information.

5. Collaborate across teams

It’s important to get insights from across your organization. When forecasting, look for input from sales, accounting, production, finances, marketing, and other critical departments. Each team will have a different –– and valuable –– perspective on trends they’ve observed.

6. Make time for planning

A big part of inventory forecasting is doing it continuously. Accurate demand forecasting requires a consistent and repeatable monthly process that systematically analyzes previous forecasts and compares them to actual sales results. Through this process, the data will show when your predictions were right or wrong and what actual market demand has been.

You can sort any “deviations” (when you were right or wrong) from highest to lowest and evaluate the top 20% to determine why you were wrong and how to be closer next time. By following a monthly process and evaluating your past successes and failures, you will minimize future errors.

7. Integrate data from all sales channels

If you are a seller with multiple sales channels –– a multichannel inventory management approach and e-commerce strategy –– then you should aggregate all the data from every sales channel for each individual product into a single data set.

Once you’ve done this for all of your SKUs, you’ll be able to see which channels offer the highest ROI for each product and what your shipping and order requirements will be — helping you make smarter decisions.

Choosing the right inventory forecasting method

The best method of inventory forecasting is one that’s accurate and easy to use. Evaluate multiple inventory forecasting tools to determine which works best and provides the highest degree of accuracy for your business. 

Interested in better trend predictions and inventory management? Learn how Cin7 can help.


What is required for inventory forecasting?

To accurately forecast inventory, you need access to past sales and supply data and a good understanding of past and future trends and events. Ideally, you can pull at least a year of sales data to see current trends and help predict future trends. Two or more years of data will provide more accurate forecasts and insights.

How often should you update your inventory forecasts?

This depends on the period you choose to forecast. You’ll want to look closer at your forecasting at the end of the forecast period and the beginning of a new one. Forecasts should be reviewed at least yearly, but they can be reviewed and updated as frequently as quarterly, monthly, or even weekly.

Why is forecasting important?

Forecasting ensures a business makes informed, strategic, and data-backed decisions about its inventory. Without forecasting, a retailer will not be prepared for demand and risks losing customers.

Can inventory forecasting be automated?

Yes, inventory forecasting can be automated. Automated inventory forecasting is a great way to streamline inventory management and get reliable data. Forecasting tools will allow you to create hundreds of different reports simultaneously with real-time data.

How do you choose the right inventory forecasting method for your business?

The right inventory forecasting method for you depends on a variety of factors, such as the amount of time available to forecast, how often you want to complete forecasts, what kind of data is available, and how accurate you need your forecasts to be.

What are the 4 types of inventory?

There are four main types of inventory: raw materials, work in progress (WIP) goods, finished goods, and maintenance, repair, and operation (MRO) inventory. All inventory will fall into one of these four categories.

About the Author

Name and Title

Andrew Cooper

VP of Business Operations, Cin7

In his role, Andrew oversees the internal systems, processes and insights to drive operational excellence and growth. He is also passionate about empowering customers to achieve more today than they could yesterday and brings this passion to Cin7 every day.

Stop managing your inventory.
Start connecting it.