Get the knowledge you need to grow your business, straight to your inbox.Subscribe
Your customers are the heart of your business, but if you don’t have the right product at the right time, you won’t get their purchase. Inventory tracking and forecasting are some of the most important aspects of any retail business. This guide to inventory forecasting will cover inventory tracking, common inventory forecasting methods, which method is best for your business and what benefits you can realize.
Inventory tracking helps avoid potential issues by tracking all products in all locations so you know exactly what’s available for customers and can replenish stock without losing out on sales. Inventory tracking helps you stay on top of changes in product availability, ensure customer orders are fulfilled and keep operations running smoothly.
When managed well, inventory tracking can help you save money when storing and ordering inventory, as well as reducing the labor hours involved with managing inventory. Due to the dispersed and time-consuming nature of inventory tracking, many companies choose to implement inventory management software to reduce time and potential human error.
Inventory forecasting, sometimes referred to as demand planning, is a process that determines the amount of inventory needed to meet customer demand based on sales forecasts for a specific period of time.
Inventory forecasting requires more than simply placing orders for replenishment. This process uses data-based decision-making, relying on patterns and trends to ensure that your business has accurate estimates. These estimates should provide your business with enough lead time to have products ready to move as soon as your customers place an order. Before making inventory forecasts, you need to understand how demand fluctuates so you can prevent issues such as overstocking or stockouts.
Your lead time is the time it takes products to arrive at your warehouse after you order them. This is one of the most important factors in inventory forecasting. In fact, the main purpose of inventory is to cover the lead times of your suppliers. Managing lead time with effective inventory forecasting enables you to minimize the time between your initial product investment and your return on that investment.
Like inventory tracking, inventory forecasting can be a time-intensive process that requires careful attention to details. Fortunately, inventory management software can help streamline this process. Such software can track low inventory levels and quickly identify reorder points for each of your products, which can also help prevent stockouts.
Qualitative forecasting considers external influences, such as political, economic or environmental factors that can’t be measured specifically. While it can be great for new businesses, this type of forecasting requires a high level of understanding of your business, customers, industry and other external factors that could affect your ability to meet demand. Qualitative forecasting, in combination with other resources, can provide enough information and context for you to predict future demand with an informed perspective.
These other resources include market research, opinion data and panel consensus. Opinion data involves asking a panel of specialists for their individual documented opinions, and panel consensus focuses on a panel’s collective opinion.
Qualitative forecasting can be invaluable when anticipating changes in the market, but take note that it isn’t based on real statistical sales trends or historical data. Qualitative forecasting used alone will likely result in inaccurate inventory forecasts.
Quantitative forecasting uses statistical data based on historical demand or relationships between variables over a period of time to create an accurate demand forecast. Typically, quantitative forecasting falls into two categories, time series forecasting and causal forecasting.
Time series forecasting can help identify cyclical patterns and growth rates, as well as identify irregularities or variations in data sets. Trends can be secular (occurring consistently over a long period of time), seasonal (variations of data over 12 months), or cyclical (recurring movement in product demand every few years). Numerous time series forecasting techniques are available, so review them to determine which is the best fit for your business.
Typically, quantitative forecasting works best for shorter predictions within the following year and can be useful for sales, inventory and margin forecasts. For seasonal forecasts, companies should have a minimum of two years of data for more accurate projections.
Trend forecasting predicts changes to demand over a period of time by analyzing patterns in sales and growth data. Trend forecasting can be top-down — focusing on products associated with the highest volume of revenue first — or bottom-up, which does the inverse. Inventory forecasting can also combine top-down and bottom-up forecasting, taking advantage of details garnered from more granular bottom-up data while leveraging broader insights from top sellers.
Graphical forecasting use a visual representation, such as a line graph or histogram, to represent peaks and troughs of demand. The visual nature of graphical forecasting can make it easier for visual learners to recognize patterns and trends in sales that might be overlooked in a typical data set.
Determining the right forecasting method can depend on your business goals, the available data and the quality of data. For example, established companies with existing data might choose an inventory analysis paired with quantitative forecasting because they provide an informed perspective and inform strategic inventory decisions through concrete metrics. Meanwhile, businesses with limited or no historical data can utilize qualitative forecasting to anticipate future demand.
Under the right circumstances, combining multiple methods and data types can give a more complete picture of your business needs and uncover additional insights. Regardless of the method or methods used, models should include room for updates or unpredictable changes to demand.
Your inventory is an extension of your business investment. When inventory is planned appropriately, businesses have more opportunities for growth. Tracking and forecasting inventory can have a direct benefit to your bottom line by saving valuable resources and providing a positive customer experience.
All organizations need to effectively manage cash flow, especially small businesses that are operating with limited financial resources and flexibility. Cash-flow improvements can be realized by purchasing the lowest-cost inventory available, while inventory forecasting and control procedures can help replace obsolete inventory with more valuable products.
Storage processes can also be streamlined as inventory is sold and replaced efficiently, leaving less unsold inventory on the shelves for long periods of time. Unfortunately, human error and intentional abuse are realities businesses face at one point or another. Even in those cases, proper inventory tracking and planning can help your company recognize potential issues, mitigate them and plan to avoid them going forward.
Beyond the benefits available to your business, your customers also reap the rewards of well-executed inventory planning. When you have a sufficient supply of inventory, products are available to ship directly to customers as soon as they order. This results in shorter wait times and higher levels of customer satisfaction. Sufficient inventory also means that overhead costs can be reduced and reallocated to improve business practices that directly affect your customers — lower-priced products, timely fulfillment, additional support staff and more.
There are additional factors that should be considered when forecasting inventory. Sales velocity is the rate of sales over a period of time that doesn’t include any days that you were out of stock of certain products. The metric is important to consider when creating accurate forecasts. Calculate sales velocity using the following formula:
Sales velocity (per month) = (365 day sales / # of days in stock across 365 days) x 30 days.
Even when you’re not explicitly creating a qualitative forecast, you should be tracking potential changes in the marketplace. When you are monitoring industry trends, product seasonality, fads and other elements that could affect sales, you can adjust demand forecasts as needed. You should also audit upcoming marketing activity to confirm that it aligns with your overall business goals and most recent forecasts.
Understanding what your competition is doing can also inform your inventory planning. As products enter or leave the market, competing product sales can change based on consumer perceptions and market conditions.
Even with the best preparation and execution, forecasting is imperfect. Your inventory forecasting can be inaccurate or fail to anticipate disruptions. Regularly review and update your forecasting models based on the latest reliable data.
Many aspects of inventory forecasting and tracking can technically be done manually. However, leading companies understand that inventory forecasting requires significant physical and financial commitment, with the difficulty increasing as companies scale. Meanwhile, errors caused by humans can be costly. To improve efficiency, effectiveness and accuracy, many organizations are bolstering their forecasting with inventory management software like Linnworks.
Speak to us to find out how Linnworks can connect and automate your commerce operations so you can capture every revenue opportunity.