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Inventory Forecasting How to Accurately Plan Your Stock Needs

Dec 20

It is crucial to the financial success of your business to plan your inventory, whether you have an eCommerce site or a brick and mortar store. If you don't have enough inventory on hand, you lose sales opportunities. It leaves you with too much inventory on your shelves, which ties up cash you could be investing in other ways to build your business.

To maximize stock levels while managing cash flow, how do you strike a balance? In order to achieve that, the inventory forecasting method can be very helpful.

Why do you need inventory forecasting?

Making an informed projection about how much inventory will be necessary over a specified period of time constitutes inventory forecasting. The process starts with a simple demand forecast and then plans how much inventory is needed in the future based on what is already in stock.

Remember that forecasts are always based on educated guesswork. Forecasts are never guaranteed to be accurate, and seasonality as well as sales history are factors that can influence accuracy. In order to predict demand and inventory efficiently, forecasts must take into account these factors, while being flexible enough to adjust as circumstances change. Getting control over your stock levels relies heavily on forecasting.

Setting forecast boundaries

Creating a simple forecast of your expected sales is the first step towards predicting your inventory requirements. Set some forecast boundaries as a first step.

  •  Forecasting period

Forecasts attempt to predict what will happen in the future based on a given time period. For forecasting, at least the following three periods should be considered

  1. One year
  2. 90 Days
  3. 30 Days

Afterwards, each month's findings should be evaluated. The upcoming sales forecasts can be adjusted if actual market trends or sales performance differ from expectations.

  • Base demand

In the case of a forecast, the base demand simply represents the existing level of demand for the specific product at the beginning of forecasting. Suppose a company is forecasting Adidas shoes for the next 30 days, based on the sales over the past 30 days, the base demand is 37.

In preparing our forecast, this just gives us a starting point. We must take into account any trends and variables that may influence demand if we wish to increase accuracy.

Incorporating trends and variables

In order to accurately forecast inventory, current demand alone is not enough. Data will be impacted by a broad range of factors in the future. In order to achieve the most accurate inventory forecasting, businesses must take into account a variety of trends and variables.

  •  The sales velocity

There should never be any stock-outs, but unfortunately they still happen sometimes. In order to forecast inventory based on past sales performance, your sales velocity must take this into account. Considering all things equal, sales velocity is an indication of how much a product should sell over the course of 30 days if it remains in stock. Using this information to forecast inventory needs in the future is valuable.

  • Marketing activity

When it comes to forecasting inventory, you should also consider marketing and advertising strategies. The following factors need to be taken into account:

  1. Taking a look at sales history, we can see past marketing activity.
  2. When planning for future sales, marketing activity should be planned.

In the context of marketing activity, the major factor to watch is whether it changes from past activity or is enlarged/decreased.

  1. Seasonality

Forecasting your stock requirements is absolutely dependent on the season. During the summer months, winter coats are less likely to sell, around the holidays, people tend to buy good gifts. If you discount items, they may go through the roof on Black Friday. Nevertheless, certain products may be in high demand for more subtle, less obvious reasons.

Data from 12 months can be extremely useful in this case, in order to find out which particular months and periods certain items occurred during the previous year, you need to review the prior year's records.

  1. Start to trend up.
  2. Plateau.
  3. Start to trend down.

Using this method, you can begin to calculate how much inventory you will need during different periods of the year based on historical data.

  1.   Publicity that was unexpected

It is unlikely that you will receive unexpected media attention. If it does happen, you would still have to forecast for it.

For example, you'll probably need to forecast an uptrend in sales if Tom Cruise is pictured using your merchandise. You may have to prepare for a downward trend if you get some bad press in a national publication. Unexpected publicity should definitely be taken into account when making forecasts, no matter how it occurred.

  1. Industry-specific effects

Demand for products can also be affected by events and happenings in your industry and marketplace in general.

These could include a variety of things, such as:

  1. One of the company's major competitors has gone out of business.
  2. Your niche is being diversified by a large company.
  3. There are major changes to pillar marketing channels (for example, your Ad account is banned on Facebook or Google due to new policies which you violate).
  4. You operate in a state/country where the law changes, and it can affect your business activities. 

Inventory planning and replenishment

While it's one thing to forecast sales and demand, real inventory forecasting includes planning how you're going to replenish stock moving forward.

Consider the following:

  1. Current stock levels. What is the current stock level? When you already have 27 units on hand, buying 40 units to cover 40 forecasted sales would be pointless.
  2. Pipeline inventory. Are there already any units on order and en route as pipeline inventory? Avoid double-buying.
  3. Lead time. Is there a timeframe for receiving the new stock, receiving it into inventory, and making it available for sale?

Use inventory forecasting management tool 

Developing demand forecasts, sales forecasts, and inventory forecasts can be extremely challenging. The inventory management, forecasting and supply chain management features offered by inventooly can help you meet your business demands. 

Inventooly is an inventory management software specifically designed to help you in managing your inventory stock and provide valuable insights and forecasting data for your business future needs.