Accuracy is one of the most empowering factors you can equip your inventory management strategy with. If you manage to pull off accurate inventory forecasts regularly, there is little left for you to do in terms of making your inventory better.
It’s simple: if you want to keep up with the ever-changing needs of the world and ensure that your business is not left behind in the competition, you will need to incorporate regular and accurate inventory management in your system.
However, it’s easier said than done. In actuality, forecasting is a mix of analysis, prediction, and data collection – and this mix can only be achieved with a software solution that takes into regard the particular and ever changing needs of your business.
The purpose of this guide is to cover everything that you need to know about inventory forecasting and planning. We will not only be analysing these terms to understand the definition and meaning, but also understanding how they relate to the overall success of a business.
Before you learn the role of inventory forecasting and inventory projection in your business operations, it is necessary to understand what inventory forecasting is. It’s not rocket science, but understanding inventory forecasting requires appreciation of the fact that it is not a one-dimensional concept. In actuality, it combines multiple elements and hence requires effort from you in multiple areas.
First things first: what is inventory forecasting? Inventory forecasting is a core business operation; both as a part of inventory management in general as well as on its own. Another name for inventory forecasting is demand planning, and from this term it can be understood that forecasting is inherently connected to a) customer demand, preferences, and behaviour and b) planning, prediction, and preparation.
In that regard, forecasting is simply planning the organisation of your inventory in accordance with customer demand and preferences. This is usually done through data collection – you collect data throughout your sales cycle to understand how the customer perceives your products, what the major shopping patterns are, and what trends are the most prominent. You adjust your inventory levels accordingly, and that’s how you kind of “plan” the trajectory of your business.
This might sound like you are setting a certain way of managing your inventory levels, and it’s true to a certain extent. However, on a deeper level, inventory forecasting is one of the best ways you can make use of the data you collect over time. It is also a productive way to connect to your audience and really try and figure out what it is that they want from you. In the long run, it is inventory forecasting alone that will help you impress your customers better than anything else!
Additionally, inventory forecasting is all about improving your decision-making skills. In other areas of your life, you can get away with making decisions without proper planning. However, doing something like that in your business is more or less setting yourself up for failure – in order to succeed, you should plan each and every aspect of your operations. When it comes to inventory management, it is even more important to do so.
With the help of inventory forecasting methods, you can make sure that the decisions you make for your inventory and business in general are backed with data, based on research, and fits the trends that actually work with your business. You start by looking at how many products you have sold over time and using it to understand overall customer demand. But that’s just the first step – after that, you start looking at other important factors such as seasonality, trends, and consumer behaviour. So, in some sense, inventory forecasting and inventory projection helps you prepare your business for a better in the ever changing business environment.
Adequate forecasting is all about accuracy! This is one of the biggest reasons why data plays such a huge part in forming your forecasting and planning procedures. The best kind of forecasting, therefore, uses data in efficient ways by engaging different formulas and considering the progress of your business holistically.
In fact, the best answer to how to forecast inventory lies in the types of inventory forecasting. So, in this section, we will discuss 4 prominent types of forecasting methods – namely:
As the name suggests, trend forecasting is an effort to understand trends. The demand of customers is likely to change frequently over time, this change is known as a trend. Trend forecasting, therefore, is the process to predict changes/trends in regards to customer behaviour and purchasing choices. This particular method of forecasting does not take into account any external factors such as season surges or any unanticipated events.
Trend forecasting is deeply connected to what your customer wants. Therefore, the best way to incorporate trend forecasting into your business is to collect data that gives you an insight into how your customers act, what they prefer, and what they expect from your business. This kind of data is very easily collected with the help of inventory and sales software, so it’s not hard to achieve trend forecasting if you are spending the right amount of time, resources, and effort in doing so.
Graphical forecasting is a term that is more descriptive of a certain format of forecasting rather than the nature. In simple words, no matter what aspect of forecasting you are planning to focus on, graphical forecasting relates to the arrangement of it in graphs. The graphs are designed to reflect peaks and valleys in trends and patterns, and can help you grasp the overall progress of your business.
Many businesses and forecasters actually prefer graphical forecasting over other forms of forecasting since it helps one gauge and understand data visually, instead of having to tread through piles upon piles of monotonous numbers. Graphical forecasting also makes it more convenient for you to understand patterns and how they evolve over time, and hence may even lead to better and more effective decision-making for your business.
Qualitative forecasting is a forecasting method that is directly linked with interacting with your customers. Instead of trend forecasting that is more focused towards interpreting data collected from sales, qualitative forecasting aims to actively interact with customers in order to understand demand, behaviour, and preferences.
So, think of focus groups, surveys, and market research. All of these are ways to collect data for qualitative forecasting. Qualitative forecasting is a unique approach in the world of forecasting and can really help you get a look into the mind of the consumer. Depending on the kind of method you employ, qualitative forecasting can make a tangible improvement to your inventory management solutions.
When it comes to quantitative forecasting, numbers are the main player. For this reason, and especially in comparison to qualitative forecasting and planning, this type of a forecast is considered to be a lot more accurate.
However, for quantitative forecasting to work properly and lead to more precise forecasts, you need to get your hands on a lot of data. In this regard, quantitative forecasting is not something you can get done and dusted in a day or two – it is a forecasting method that is usually meant to be set over a long period of time and collect data periodically. Patience is key with quantitative forecasting, but it definitely pays off if you are using the right mechanisms to not only collect the data but also make sense of it.
If you are wondering which method is right for your business, look inward! A careful analysis of the current operations can help you understand what exactly it is that you need to fix in order to achieve the right forecasting and planning for your inventory. However, understanding which type works the best for you is quite important since it is this aspect that you will be basing other important inventory management related aspects on: for example the kind of inventory management software you should be using.
To ensure that you are making the right choice while choosing the right forecasting method, do the following:
But why worry about inventory forecasting to begin with?
Inventory forecasting is necessary if you plan on outshining your competitors and ensuring that your inventory management strategy is at par with industry standards. But that’s not where the list ends! In fact, there are many other benefits that inventory forecasting and planning can equip you with as a business.
Let’s have a look at some of these:
Whether you are a large corporation or a small business, your main concern is money. Every business wants to make more money than they spend, because this is how you increase your profit margins. Luckily, this is exactly what the right forecasting methods help you achieve.
Since forecasting helps you bring efficiency and accuracy at the front of your inventory management methods, it helps you save money. With the help of forecasting, you can organise your inventory levels strictly in accordance with your needs. This helps you prevent over/under stocking which in turn helps you manage your overhead costs a lot better.
With the help of forecasting you also ensure that you never miss an order again! This means that there is considerably less loss in that regard as well. All in all, robust inventory forecasting means that you are saving a considerable amount of money.
The number one way to ensure that your business stays afloat and grows over time is to ensure that your customers are happy with you. Forecasting helps you with this as well. Since the main point of inventory forecasting is to align your stock and inventory with customer demand, it helps you make sure that you are providing your customers with exactly what they need.
By investing in forecasting, you are also essentially investing in a mechanism that brings you repeat business. When your customers observe that you always have what they like and need in stock, they are likely to gravitate towards you over other businesses. And this is just one example of how forecasting empowers your business in a way that helps you resonate better with your customers – there are many other aspects that inventory forecasting improves in this regard.
Inventory management forecasting methods have a strong impact on the rest of your business, and when it comes to inventory management, there are many aspects that need to be streamlined. Inventory forecasting and planning, when done right, can help you with many of these aspects.
One example is manual labour. Due to the fact that forecasting enables you to only focus on the amount of inventory you need to meet customer demand, it minimises the need for manual labour and takes off quite a burden on your workers’ heads. Forecasting also means that you are automating many of the important points in the fulfilment journey, which again can help you take the load off your manual labour.
Forecasting is based on data collection, which is essentially what helps you manage your inventory. But that’s not it; the data you collect for forecasting can also be used in other areas for your business.
For example: marketing. The data you collect on consumer behaviour, preferences, and demand can be used to refine your marketing campaigns. This provides for a considerably more targeted approach, which in turn means that you can tap into your target audience way more effectively.
Your inventory forecasting and planning methods are only as good as the methods you employ to achieve them. Some important forecasting formulas include:
The EOQ formula helps you get your economic order quantity – which means that you can use it to calculate the best order quantity you should be getting to save money. The ultimate goal of the EOQ formula is to minimise costs on things like logistics and warehousing, as well as cut back on the chances of stockouts and overstocking.
The formula applied is:
EOQ = √2DS/H, where
A reorder point is another important formula used to ensure that you don’t have to unnecessarily deal with stock outs or overstocking. Essentially, you use this calculation to know exactly when to place an order so that you don’t run out of stock but also don’t get more stock on board than necessary.
Reorder point = (# units used daily x # days lead time) + # units safety stock
Your average inventory is basically the average amount of inventory available in stock over a specific period. The period of time you want to take into depends on your needs as a business, but usually this is done over a month.
Average inventory = (Beginning inventory + ending inventory) / 2
The purpose of the inventory turnover of formulas is to reflect how many times you have sold and replaced inventory during a period of time. This can then be used to divide the days in the period by inventory turnover, which should give you an exact figure of how much time it takes to sell the inventory you have in store.
Inventory Turnover Ratio = COGS / average inventory
Calculating lead time will show you the time taken between each order being placed to replenish your inventory and when it is finally received. Knowing this can help you know just how much stock you should have before the new order arrives, and which ultimately helps you prevent stockouts.
Lead time = Order process time + production lead time + delivery lead time
This is a forecast formula that will help you streamline your safety stock storage. This will ensure that you don’t run out of stock completely before the next replenishment, and hence is important if you want to make sure that you never miss an order again.
Safety stock = (Maximum number of units sold in a day X maximum lead time for stock replenishment) — (average daily usage X average lead time in days)
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Now that you have a better idea of the different components that feed into inventory forecasting, the next important step is to understand how inventory forecasting can be used within your business operations.
Before we dive into how inventory forecasting can be leveraged in your operations, let’s discuss a few reasons behind the importance of forecasting in your business.
If you are planning to expand your target audience and make your business more attractive for people from different demographics, forecasting is important. It is only by collecting data on consumer behaviour and interpreting that data correctly that you can actually create processes that appeal to customers from different backgrounds.
For any business wanting to accommodate a larger and more diverse segment of their audience, forecasting really helps you get insights and then apply those insights to your business for maximum effectiveness.
A continuous flow of money should be your top priority – after all, if you don’t have things sorted on the money end, it is unlikely that you will be able to sustain your operations for long. To make sure that you are not wasting your money in the wrong places, you can turn to forecasting.
Because forecasting helps you identify trends and patterns of success, it is easier to realise what works for your business and what doesn’t. For example, with forecasting, you can see which of your products do the best with the customers and as a result, you can choose to spend most of your resources on these products rather than wasting on products that have the potential of becoming deadstock.
As a business, you are probably already all too familiar with setting goals that don’t translate into reality. This can be disheartening and often times, leaves a business grasping at straws in regards with what to do. However, with forecasting in the picture, you won’t get to this point.
Forecasting helps you understand your business better than anything else. You know exactly what you are signing yourself up for in terms of impressing your customers, so it will not be hard to set goals that you can achieve.
So, let’s say, your business tends to slow down during the summer season. Forecasting will help you realise this, and you can set your sales target to be lower for the summer months. This can save you from disappointment, but it will also help you organise your inventory management forecasting methods accordingly.
Forecasting is inherently connected to your customer base. It is the best way to understand your customer and predict what they want. This is very important for a business to achieve in the 21st century, since the customer today is empowered and hence, expects nothing short of perfection when it comes to their shopping experiences.
Understanding customer behaviour beforehand and shaping the rest of your process in accordance with that will give you a competitive edge and can really help you retain your customers. If you see yourself struggling with the task of making your customers happy, you need to employ forecasting methods that will not only show you where you are going wrong, but will also help you improve these areas properly.
The thing is, inventory forecasting and planning are two sides of the same coin. When you have effective forecasting mechanisms in place, you are more than likely to formulate better plans. In that case, forecasting is the basis on which your business plans stand, and hence is needed to provide a strong foundation if you are planning to achieve success.
Identifying important trends and patterns within the current operations of your business can help you create a plan that actually paves your way to success. It helps you take into account the current business environment, circumstances, and other factors which means that you can map out a holistic journey for your business to expand.
There are many reasons behind the importance of forecasting for a business. You need to remember that forecasting is a major force behind business in the 21st century – it is used not only to improve demand forecasting and inventory management, but also many other areas within the business. To go without it is to willingly put yourself behind your competitors in the race of success, and there is no business out there who wants that!
If you don’t have much experience with inventory forecasting, it can be hard to understand where to start with this core process. Luckily, however, the process is not too hard, and you can succeed at inventory forecasting and planning quite easily by following the simple steps listed below.
The first step is to decide a future forecast period. This is essentially a defined period of time in the future that is taken to make predictions or anticipate what’s going to happen. So, let’s say you go for a forecast period of 90 days. Your forecasting efforts will then be an effort to prepare yourself for the direction sales patterns and trends will take in the next 90 days.
You can pick a forecast period of any duration. Usually, businesses gravitate towards a forecast period of 30 or 90 days, or a year. Yet, it depends on you when it comes to this aspect.
Your forecasting model should employ base demand as its basis. Your base demand is the amount of inventory you sold in the last period. If you sold, say, 800 units of a certain product, then the forecasting model pertinent to that product should start with 800 units.
While establishing your sales model, it is also important to take into consideration the impact of external factors on your sales. For this step, therefore, it is important to identify trends and variables from the last period, and see if they apply to your model.
Other external factors that you should take into account, include new competitors, less expensive products, product substitutes, unexpected spikes, competitive rivalries, and basically anything that can impact your sales.
The next step is to review sales velocity, which, in simpler terms, means that you have to check how fast your sales move through the pipeline. The sales velocity formula is as follows:
Sales velocity (SV) = [(# of leads) x (average deal value) x (% conversion rate)] / (sales cycle length)
The forecasting model you create will automatically take shape when you adjust it in accordance with your business and sales. However, as the last step, make sure that you are regularly updating the model.
There are many events that may be taken into account and require you to make changes to the model. For example, if you are a fashion retailer, take this scenario: A very famous Instagram influencer just posted a picture of an outfit assembled with your products. You are likely to experience a surge in your sales in the face of such an event, so this is something that you will have to stay on the lookout for.
And obviously, reforecasting is something you should turn to every now and then to make sure that inventory forecasting is a recurring core process for your business operations and not a one time thing.
With these five steps, you can easily create an inventory forecasting model that actually contributes toward the success of your business and doesn’t derail your progress instead.
Worried about how to forecast inventory? Want more tips on how to better incorporate inventory forecasting into your business?
Have a look at the following pointers:
If you think that inventory forecasting is a one man job, you couldn’t be more wrong. Without communication between the different departments of your business, inventory forecasting can only remain a distant dream for you.
Not only will collaboration make demand forecasting and inventory management considerably easier, but it will also lead to more accuracy and efficiency within the team. So, make sure that main stakeholders from across different departments including but not limited to finance, marketing, and product development are included in the inventory forecasting process.
However, you should also include some other members from each of these teams, just so you can create a more holistic forecasting model that helps all areas of your business.
The more data you have on hand, the easier it is to take advantage of forecasting. So, you should be trying to gather data from as many sources as possible. Run surveys, interview your clients, do market research – anything and everything it takes for you to get your hands on valuable data! Collect data from your ad activity, competitor research, keyword ranking, and other aspects if you can as well.
The main idea behind this is to ensure that there is no area of your business that is not set up for data collection. A large amount of data will help you identify trends more conveniently, and hence will ensure that your forecasting efforts are not going to waste.
When it comes to forecasting, it is of importance to ensure that you are vigilant and active throughout. As a rule of thumb, you should be keeping an eye on all the current trends taking the market by storm so that you can consider these for your forecasting model.
Not only that, but you should also keep an eye on your competitors. All successful businesses focus on what their competitors are doing, so that they can do that and do it better! This way, you can create a forecasting model that is aimed towards refining your operations in such a way that leaves your customers in awe and creates a much more satisfying shopping experience for them every time they engage with your brand.
A major chunk of forecasting is also dependent on how well you manage your current stock. In order to make sure that your inventory forecasting efforts are accurate and void of any discrepancies, a good thing would be to equip your inventory with real-time tracking.
Real-time tracking will allow you to stay in touch with your inventory throughout. You will not only receive regular updates on inventory levels, but it will also be easier to anticipate customer behaviour better if you have a well-rounded view of your inventory.
So, in order to make sure that your inventory forecasting methods actually contribute towards the progress of your business, you must supplement it with real-time inventory tracking. An inventory management system with robust inventory forecasting tools can help you achieve this.
Inventory forecasting and planning can never be adequately achieved without the help of the right demand forecasting and inventory management software and inventory forecasting tools. These solutions aim to equip your warehouse, inventory, labour force, and your business in general with end-to-end automation that steadily pushes you towards your goals and ensures that you succeed.
In that regard, it is also important for you to choose the right software that helps you handle all of this without demanding too much effort from your end – but more about that later.
In this section, let’s turn to some important tools you will need for inventory forecasting as well as inventory management:
The first important software you need to look into is, obviously, inventory management software. Without this, you are likely to be lost within the world of inventory forecasting.
What is an inventory management system?
An inventory management system is a software solution that is used to streamline different components of your inventory. It helps you refine your inventory management processes as well as cut down on costs and boost productivity. An inventory management system is considered to be an absolute must if you are planning to improve your stock handling and fix other inventory-related issues.
How does an inventory management system help inventory forecasting?
As mentioned earlier, inventory forecasting is executed in the best and the most effective way possible when it is supplemented with real-time inventory tracking. With the help of an inventory management system, you can automate your inventory which also means that you are getting real-time updates on inventory activity.
But that’s not it – an inventory management system employs inventory forecasting methods in other ways as well. For example, it helps gather important inventory data that can then be turned into comprehensive reports that help you evolve your business even further. Not only that, it presents a clear history of your sales, relationships with suppliers, lead time, which ultimately means that you can much more conveniently forecast your sales.
How to pick the right inventory management system?
When it comes to forecasting, the main thing to look for are features that will help you gather data, but also make sense of that data. A good inventory management software will offer analytical tools that can be used to make data more accessible and usable.
Other than that, try looking for a demand forecasting and inventory management system that comfortably fits your budget. For forecasting, you need a system that can work for you in the long run so there’s no point in choosing a software solution that is too hard on your pockets.
And lastly, look for an inventory management system that is not too complicated. If you are a larger establishment, you can afford using a technical, more advanced software solution. However, for smaller businesses, it is important to find a solution that is easy to understand and train your employees for.
Inventory forecasting can also be improved with the help of a warehouse management system.
What is a warehouse management system?
Whether you are a retailer or a manufacturer, your warehouse forms an important part of your supply chain. The job of a warehouse management system is to ensure that every aspect of your warehouse, including inventory and storage, is in working order and doesn’t cause unnecessary discrepancies in your overall fulfilment process. In that regard, a good warehouse management system doesn’t only improve your warehouse, but also helps you refine your inventory management process.
How does a warehouse management system help forecasting?
Similarly to an inventory management system, a warehouse management system also helps you stay in touch with your inventory and general warehouse activity, This means that you can understand the movement of products through the company’s pipeline a lot better. Once you know what is going on within your warehouse, it’s easier to mould the inventory forecasting models in accordance with the unique features of your business.
How to pick the right warehouse management system?
For this too, focus on a software solution that tackles inventory forecasting and helps you combine warehouse efficiency with inventory efficiency. So, a warehouse management system that gives you real-time updates would be the best option for forecasting inventory.
Inventory forecasting is a team effort, which is why you will need to make sure that your team and you are on the same page. In this regard, a labour management system can help you.
What is a labour management system?
For any business, its most important asset is its workforce. This is because at the end of the day, it is your employees who carry the weight of all the operations on their shoulders! This remains true even when you are taking advantage of end-to-end automation – it is only your labour that can make sure that you are achieving your full potential with all the technology. A labour management system, then, helps you streamline your relationship with your labourforce, help you train them better, and make sure that their skills are better aligned with what you require.
Because forecasting is a team effort, it requires not just you but also your team to understand what forecasting is and how it should be instilled in the inventory management processes. For example, your warehouse operatives have to be technologically empowered in the sense that they have an accurate account of all the stock, and, in that regard, can help you with forecasting inventory.
How to pick the right labour management system?
Needless to say, you should pick a system that collaborates seamlessly with your inventory management processes. However, since a labour management system will directly involve the members of your team, you should also take into account the user-friendliness and accessibility of the software. The easier the software is to understand, the more effectively it can be used to help boost productivity within your team.
Adequate inventory forecasting means having a clear view of the current progress of your orders, and then using it to anticipate future orders. Adding an order management system in your supply chain can help you achieve this easily.
What is an order management system?
An order management system is a software solution that helps you bring efficiency at the front of your order processing. Since it is very important for you to complete your fulfilment processes as quickly as possible if you are planning to impress your customers, an order management system can really help you complete these operations on time. Not only that, it also helps you keep an eye on all your orders and track them in real-time.
How does an order management system help forecasting?
An order management system helps you track your orders in real time. In doing so, it provides you with an accurate record of how many sales you’ve made and in how much time. It also helps you gauge the amount of time taken for you to process orders. All of this can be taken into account when you are forecasting inventory, since these insights make your forecasting journey a lot more accurate.
Although the other software solutions are also great in terms of improving your inventory forecasting processes, the main tool that you must invest in if you are planning to transform your inventory management processes is an inventory management system.
Mainly, an inventory management system integrates your sales, customer analytics, and all other important elements across various marketplaces and sales channels, and makes all of this data more accessible. Without an inventory management system, getting your hands on this data would be long and tiring, if not possible. Therefore, an inventory management system is an absolute must when it comes to inventory forecasting.
By providing you with real-time visibility across your channels and equipping you to stay in track of your stock right until it leaves your inventory, an inventory management system brings accuracy and efficiency to your business operations, and these two elements help you with inventory forecasting as well. By incorporating inventory management forecasting methods into your operations, you will be bringing seamlessness to your business operations.
When it comes to picking the right inventory management and inventory forecasting software, you have to do a lot of research to decide which one is the best. Canary7 is a good option to look at because not only does it offer a robust inventory management solution, but it also provides you solutions to streamline your warehouse, labour, and order processes in general.
Canary7 is designed to help you manage your inventory, forecast demand, and empower your fulfilment processes with accurate data and reporting. It can help you create a cohesive plan, set achievable goals, and eradicate all major discrepancies from your inventory management processes.
If there is anything business owners have learned in the last few years, it is that nothing is certain. However, inventory forecasting and planning can help you prepare for the worst case scenario, and in times of uncertainty, be your guiding light.
With the help of inventory management forecasting methods, you can impress your customers better and provide them with services that are memorable. Inventory forecasting and inventory projection can also help you increase your sales, cut down on costs, and make the financial situation of your business better than anticipated. Not only that, but inventory forecasting can also help you improve other aspects of your business, namely inventory forecasting.
If you look at it in depth, inventory forecasting can seem to be overwhelming and tough. But a simple inventory management software can help you with inventory forecasting and ensure that there are little to no discrepancies in your planning whatsoever.
If you are looking for an inventory management system that can help you achieve precise and effective forecasting, look for a software that aligns properly with your needs. For example, Canary7 is equipped to help all businesses, regardless of their size, in terms of achieving better forecasting results. Sign up for a free 30 minute demo and see what we’re talking about!
Good luck for your inventory forecasting journey.