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 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.
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:
Conversely, replenishment focuses solely on reordering the amount of product needed to meet the forecasted demand. So, replenishment is the result of 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 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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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).
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.
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.
This is the average amount of inventory in stock in a specific time period. Keeping track of this helps avoid stockouts.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
