How to Effectively Forecast Inventory Levels

What is Inventory Forecasting?

Inventory forecasting is the process used to calculate the inventory required for future customer purchases. Inventory forecasting uses past sales data to predict future sales over a specified time period and is a crucial component of sales forecasting.

External factors and historical sales data must be taken into consideration when forecasting inventory levels. Savvy business professionals also factor in any planned promotions or anticipated sales demand fluctuations such as a Black Friday or holiday sale into their forecasting process.

There are various inventory forecast methods available for business owners to choose from. Some businesses choose to incorporate multiple inventory forecasting method types for optimal accuracy.

Quantitative forecasting and qualitative forecasting are two main forecasting methods. While qualitative forecasting concentrates on immeasurable information quantitative forecasting concentrates on historical data heavily.

Graphical forecasting and trend forecasting are commonly used, quantitative forecasting models. Converting historical sales data into a graph format using the graphical forecasting model provides an outstanding visual tool for pinpointing sales trends.

Trend forecasting utilizes market growth data or past sales to forecast demand and predict future trends. Trend forecasting is especially helpful when formulating or revising your business's inventory managementstrategy.

The ability to accurately predict future sales produces both short term and long term advantages

Prominent Benefits of Inventory Forecasting

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1. Better customer service and employee experience- Whether your business experiences stock-outs as a result of inaccurate demand forecasting or supply chain issues, proper inventory forecasting can be used to decrease the occurrence of out of stock items.

Both customer service and employee experience are greatly improved when stock levels are optimized. Employees do not have to navigate the uncomfortable situation of having to inform a customer that an item is not available, and customers are reassured that your business will always provide them with customer service that is top-notch.

Whenever a customer attempts to place an order and order fulfillment is not possible, that shopper is less likely to visit your store again, which can lead to decreased customer retention rates. Rather than investing in a safety stock surplus to avoid this, your business can forecast appropriate inventory levels.

2. Increased efficiency- Inventory control including order management is enhanced when proper forecasting techniques are used. Understanding the specific time period required for suppliers to replenish your inventory levels allows your business to reorder products with enough time for them to arrive at your storefront.

3. Decreased labor costs- Warehouse management labor costs are decreased when there is enough inventory but not too much inventory present. Software programs can further decrease labor costs by automating various inventory management processes.

4. Optimized space- The need to rent an unnecessarily large storage facility can eat up your bottom line profits. Using inventory forecasting, ordering enough inventory stock for a specific time period is easy, and excessive safety stock surpluses are no longer necessary.

With the money that your business saves on labor and rent costs, you can focus on more important business operations, like developing new products or opening new storefront locations.

The employee time that is freed up as a result of automating basic inventory management processes provides opportunities for innovation and collaboration.

Tips to Forecast Inventory Levels

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Best practices for forecasting inventory levels include-

1. Team involvement- Whether you are a small business or a large corporation, team collaboration is necessary for the inventory forecasting process. Whoever leads the inventory forecasting process should make sure to include other departments, including marketing and product development.

2. Preparation- Performing an inventory forecast requires analysis of multiple factors simultaneously. While forecasting, incorporate proper annotations as needed to serve as future reminders.

3. Data utilization- Long term historical sales data is primarily used to forecast future sales and sales trends with heightened accuracy. Using pertinent data available proactively decreases reactivity and enables the forecast process to be easily repeated in the future.

4. Software investment- With so many data points to consider during the inventory forecasting process, many businesses choose to invest in management software programs. Inventory management is streamlined and simplified with proper software utilization.

With just a few clicks, business professionals can access real-time data on their inventory management software including-

  • Inventory levels
  • Lead times
  • Historical sales
  • Stockouts
  • Inventory turnover rates
  • Reorder points
  • Safety stock levels
  • Sales data including average daily sales
  • Sales trends
  • Sales velocity
Inventory management software learns from available data and increases its accuracy over time. With an outstanding management software program in place, inventory forecasting is much easier and effective.

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