Ultimate Guide to Inventory Forecasting
When supply chains and consumer demands are rapidly changing, accurate inventory forecast is of great value. To get predictions right, you must look at a mix of statistical methods, math, and customer insights, as well as speculate about potential factors that could cause dips or spikes in demand.
There are major factors and peripheral factors. Some could last an entire season, while others have a more subtle impact. Forecasting accuracy requires several data elements: inventory levels, outstanding purchase orders, historical trends, forecasting period requirements, and expected demand and seasonality. Additionally, stock level maxima, sales trends and velocities, and response to specific products should be considered.
Human error in the account inventory management software is getting popular. For this, lets first understand Inventory forecasting in detail:
What Is Inventory Forecasting?
Forecasting inventory levels is a process of analyzing past data and trends to determine what inventory levels will be needed in the future based on known upcoming events. It is crucial to accurately forecast customer demand so that businesses do not fall under our overinvest in inventory.
Estimating the amount of inventory needed for the future is done through inventory forecasting. Data such as timing and availability contribute to lead time, also known as replenishment data. Your business can benefit from using inventory forecasting management software that does all the calculations and forecasting without you having to do the work. Inventooly is an ideal software that can take care of your forecasting requirements and provides several beneficial features related to your inventory management.
What Are the Different Types of Inventory Forecasting?
A forecasting model must consider both upward and downward trends in consumer demand. Your model's accuracy will affect profitability. For inventory planning and purchasing, the following forecasting techniques are commonly used:
Trend forecasting. A trend is a change in demand over time for a particular product. Past sales and growth data are used to project possible trends and eliminate seasonal effects. Detailed sales data helps forecasters indicate how specific customers and kinds of customers will likely behave in the future. The data can also open up possibilities for marketing and sales.
Graphical forecasting. Some forecasters prefer graphical forecasting since it is more visual. A forecaster's analysis of sales peaks and valleys can be visualized mathematically by graphing the same data for trend forecasting.
An analysis of graphs can show potential directions that might otherwise be missed if sloped trend lines are added to the chart.
Qualitative forecasting. Focus groups and market research are often used to collect qualitative data for forecasting. These data are then used to develop forecasting models. Some companies have resorted to using their customers' historical data when they lack previous data.
Quantitative forecasting. Qualitative research on its own is not considered accurate as quantitative forecasting. An organization's forecast is usually more precise the more data it has in the past. A time-series forecast is a quantitative forecasting method in which time-series data is used to create a model. With this model, future trends can be predicted.
Inventory forecasting formulas and methods
The safety stock formula
A business stores extra stock in case of an emergency or a supply chain breakdown to avoid running out of goods. Manufacturers and retailers maintain customer satisfaction and maximize profits by always supplying goods to their customers.
When daily usage levels and lead times are calculated for a given product, a safety stock level is calculated:
Total safety stock = (Maximum everyday use x Maximum lead time) – (Average everyday use of the product x Average lead time)
Reorder point and safety stock formulas are meant to work together, which we will discuss next.
The reorder point formula.
Your most important SKUs can be given reorder points so that you can determine when to replenish your stock, so neither too much nor too little is available. You can calculate the reorder point by multiplying the daily usage average by the lead time average in days.
To get the reorder point, you need to add the demand lead time (above) to safety stock:
Reorder point = (Average daily use x Average lead time in days) + Safety stock
The economic order quantity (EOQ) formula
The economic order quantity formula is used to determine the right amount of inventory to order. Using EOQ determines a minimum amount of inventory which is useful when fewer orders are made, and the business doesn't have to store excess stock, which is cost-effective.
EOQ formula is:
2DS/H
Economic Reorder Quantity formula
D: The product demand for the year
S: Cost of a purchase per order, including shipping and handling
H: Holding costs (the annual carrying costs) per unit
Best practices for inventory forecasting
Following best practices in inventory forecasting will yield better results than in any aspect of the business. The following steps will help you organize inventory forecasting efficiently for your business.
- Identify the forecast period that will be most beneficial to your business
Is a one-month forecast better than a 90-day forecast, or should you forecast for a year? If you don't consider this, you're likely to miss the boat when it comes to keeping the right stock levels at the right time.
- Choose the right software.
Getting an accurate inventory forecast is difficult without software designed for the job. Inventooly is the ideal inventory forecasting software you can find to fulfill your forecasting needs.
- Employ the right people
Forecasting inventory depends partly on analyzing data and making predictions by experienced personnel. You will need employees who are knowledgeable about forecasting methods and understanding of data to make the right business decisions.
- Fulfillment of ecommerce orders should be a priority
The emergence of the 'delivery economy' has been attributed to people shopping online more than ever. Can inventory forecasting be connected to this phenomenon? Everything. Your online sales will dip if you cannot meet your online customers' needs right away due to a lack of stock on hand.
- Determine your ideal point for reordering
You can determine the magic number for reordering by calculating your reorder points.
Why? You must have something in stock immediately to avoid losing business. To avoid wasting your cash flow, don't order stock too early. This will require you to store the inventory at cost instead.
Choosing the Right Forecasting Method
Consider what data you can collect and what information is available to you. Organizations with established histories should use the quantitative approach, while those with newer accounts should start with historical data. When creating a company, gather qualitative information about the market. Combining different data types and methods is best to forecast the market. Forecasters can start with quantitative information. Quantitative data is then added to flesh out the model. Inputs specific to each industry are then included.
A statistician should develop multiple models, possibly with scenario planning teams, to address more challenges, such as a global pandemic. To make the model accurate, it needs to reflect wild cards, the ever-changing and often unpredictable trends, and market upsets that can sway demand instantly. It can help supply a blip, such as a change in fads.
The benefits of inventory forecasting
Stockouts are minimized
Loss of sales revenue is a consequence of stockouts. By accurately forecasting demand in advance, you can avoid loss of income. You can then determine how many units to order and when to restock from this data.
Costs associated with holding inventory are reduced
Overall inventory management is made easier with inventory forecasting. Because only the products you need are purchased and stocked vs. ordering too many, it reduces inventory storage space. Therefore, less unnecessary storage space is created, resulting in lower storage costs.
Improves product quality and reduces waste
Inventory forecasting is done to find out which items are losing sales or selling more slowly. These items can then be repurposed or combined with more profitable items. The result is greater revenue and less warehouse space occupied.
Conclusion
Manufacturers and suppliers who wish to optimize stock holdings through inventory forecasting should invest in inventory management software. Rather than relying on tedious and inefficient manual processes, it allows you to manage your inventory electronically.
Management software aims to prevent stockouts and poor customer satisfaction by providing stock alerts. Using your inventory report, you can also check what is available, assigned to an order, and what is being ordered. Check Inventooly if you are searching for inventory management software for your store.