Introduction
Inventory forecasting addresses the problem of inventory mismanagement that costs retailers worldwide trillions in lost sales and costs. This article covers the basics of inventory forecasting, including inventory forecasting definitions, methods, and examples. It helps improve inventory forecasting, so you don’t have to worry about out-of-stock or overstock.
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Inventory forecasting plays an important role in inventory management. If you can accurately forecast market demand, you can take steps to ensure proper inventory levels to maximize sales and profits. However, creating an accurate inventory demand forecast is not an easy task. In this post, we will cover all about inventory forecasting and best practices that will help take your business performance to the next level.
Article Content-
- Meaning of inventory forecasting
- Types of inventory forecasting techniques
- Points to keep in mind while forecasting demand
- Inventory forecasting to keep in mind
- How SWIL product helps you predict product demand for your business accurately
- Bottom line
Meaning of inventory forecasting
Inventory forecasting refers to the process of forecasting inventory levels for a specific period of time in the future. Accurately forecasting inventory gives you insight into how much inventory you need to fulfill customer orders. It helps you avoid tying up large amounts of cash in inventory. Inventory forecasting is the process that gives businesses insight into future customer demand so that they can make informed decisions about their inventory.
These forecasts are generated through a combination of analysis of sales data, examination of trends and patterns in customer buying behavior. It also involves the evaluation of historical inventory level performance at various levels of demand. Inventory forecasting also includes analysis of data outside the organization, such as industry trends and media coverage.
Forecast data helps businesses make informed decisions when managing purchases, including those that manufacture their own inventory. It helps manage supply chains and logistics and helps businesses know the exact amount of resources needed to move goods and services. There are three main types of inventory forecasting, i.e. qualitative , quantitative and trend.
Types of inventory forecasting techniques
Quantitative forecasting
Quantitative forecasting involves using historical data to predict future demand. For example, an analyst looks at sales history to predict required inventory levels for a particular future period. The larger amount of data available, the more highly accurate they are. Quantitative inventory forecasting means to analyze historical sales data to estimate the probable customer demand.
Analysts often look at sales history at different timelines and need accurate estimates of inventory levels. The more data analyzed, the more accurate predictions can be made, especially if the quality of the processed data is high. Quantitative inventory forecasts are primarily based on historical sales data found in his POS system. The longer you track your sales data, the larger your dataset and the more accurate your forecasts. For example, sales data for several years reveals seasonal trends.
In a pre-COVID world where we could rely on the past to predict the future, quantitative inventory forecasts alone could tell us how to meet seasonal or otherwise consumer demand.
Qualitative forecasting
Qualitative forecasting is a method of forecasting inventory needs based on a ton of information. It takes into account social, economic, political and other factors in the macro environment that may affect consumer demand. Unlike quantitative forecasting, which uses numbers and statistics to make forecasts, this inventory forecasting technique is primarily based on the opinion and judgment of the forecaster.
Qualitative forecasting is typically used when historical data is not available. Qualitative inventory forecasting forecasts demand based on a broader view of the industries and economies in which a company operates. Macro factors such as current industry performance, regulatory changes, technological shifts and evolving customer demands are rigorously evaluated by experts to determine future outcomes.
Qualitative inventory forecasts are not based on historical data. If you can’t get a lot of sales data to make an accurate forecast, you may need to use qualitative forecasting. It’s also helpful to see qualitative information when external factors have significantly changed consumer buying behavior. Rather than sales data, qualitative forecasts are based on broader market trends, expert opinion, and both primary and secondary research. Where quantitative forecasting uses data to get measurable answers, qualitative forecasting uses available information to make educated guesses.
Trend forecasting
Trend forecasting analyzes past sales patterns and market growth trends to predict the future sales performance of a product. It helps you know when the ups and downs of your business cycle and improve your inventory and marketing strategies to make the most of your high and low seasons. Example: Your Company sells reference books to college students.
An analysis of historical sales patterns shows that revenue is highest just before and during exam periods. For example, May and November, with semester break being off- season. Trend forecasts help you know when to stock up. For example, before peak season. These insights can also be used to set up your marketing strategy. Such as setting up promotional campaigns and back-to-school deals during off-peak months.
Graphical forecasting
The graphical forecasting method uses a graphical representation to interpret the data. It transforms numerical data into visual images, making data easier to read, analyze and interpret. If you use graphical forecasting techniques to support inventory planning, you can consider graphical representations in various forms. These include line graphs, pie charts and histograms.
Points to keep in mind while forecasting demand
1. Setting up clear goals and objectives
Before you can forecast demand for your company’s products and services, you should set clear goals. That way, you know what you’re trying to achieve and track your results along the way. When you set your goals and objectives, you choose the time period, the specific product or service you want to study, and whether you are forecasting demand for a specific subset of customers.
Write down exactly what you want to achieve. Also, make sure you have a clear understanding of your goals before you start forecasting demand. Collecting data just for the sake of collecting it won’t do you any good.
2. Browsing and collecting various data
Forecasting demand collects a lot more than just historical metrics. Collecting a variety of data can help you connect together the dotted lines and understand how to forecast demand. The data you collect depends on the forecasting method you choose. Generally, the more data you collect, the more beneficial it is.
Collect data internally and externally. For example, you may decide to look up internal data in your customer relationship management (CRM) platform and conduct market research on external data.
3. Data measurement and analysis
Once you have collected the data, you have to analyze it to draw some conclusions. Finally, finding patterns and trends can help predict the future. You can choose to manually measure and analyze your data by reviewing results, spreadsheets, notes, etc. Alternatively, you can also use automation such as a demand forecasting software to do the forecasting. Automate processes and get answers faster with demand forecasting software. Whatever you do, be sure to review and analyze your results as much as possible so you can better predict future trends and demand.
4. Make some necessary alterations
After reviewing the results, you can use them to make future adjustments. Suppose you expect an increase in demand for your product based on market trends. Based on our findings, consider stocking up on products to make sure you have enough on hand when you need them. Whatever you do, don’t waste insight or collect dust on your shelves. Use them to improve your business and anticipate future demand.
Inventory forecasting to keep in mind
Lead time during demand
Lead time equals the number of days present between when you placed the order with your manufacturer/supplier for the products and when you actually received the product. If your supplier resides in a place that is not your home country, the lead time will be longer. In order to find the demand during lead time, you need to multiply the lead time for the product by the average number of units sold on a daily basis.
(Lead time demand) = (Lead time) x (Average daily sales)
Safety stock
Solely depending on the average demand for a product is not sensible. Demand can fluctuate suddenly or any unforeseen problems can prevent you from restocking as expected. These include changes in weather, catastrophic events, sudden surge in demand, etc. Safety stock is the extra stock you keep in your warehouse just in case of any variability in the demand or supply ratio.
Safety stock = (Maximum daily orders X Maximum lead time) – (Average daily orders X average lead time)
Reorder point
A reorder point (ROP) is the minimum inventory level for a particular product that, when reached, will trigger a backorder of more inventory. When calculating reorder points for various SKUs, the lead time to replenish inventory is taken into account to avoid zero inventory levels. By setting accurate reorder points, businesses can avoid running out of products while waiting for new inventory.
Reorder point (ROP) = Demand during lead time + Safety stock
How SWIL product helps you predict product demand for your business accurately
There are many inventory management tools out there, but SWIL software is the most efficient of them all. It enables you to keep track of your inventory from time to time. It is programmed with highly technical and robust technology that helps your inventory and helps you stay in avoidable understock situations. Don’t forget to consider business size. With the help of an inventory management system, you can abate your demand planning process.
Bottom line
There is no certainty about anything in life. But this uncertainty can present significant opportunities for those who are prepared. Forecasts are based on data and logic, and models built from past performance. There are other factors that are refined over time and often supported by advanced technology. An inventory management software is critical for the success of one’s business. It ensures you have the right amount of product to meet customer demand without wasting money on unnecessary inventory.
