Article > Inventory Forecasting: What Model is Right for You?

Inventory Forecasting: What Model is Right for You?

Laptop computer angled to the side. with some numbers and letters representing inventory forecasting.

If you base your decisions on only how much of each product to order, the results will be disastrous throughout the supply chain. How much of each product should you order, and when should you reorder each item to ensure on-time delivery? If you approach this issue haphazardly, it will result in frustration for vendors, distributors, and customers. Instead, you need a data-driven formula to determine your reorder point and keep track of inventory levels.  In short, you need inventory management software.

What Is Inventory Forecasting?

Inventory forecasting, also known as inventory planning, demand planning, and inventory management, is how companies keep track of sales trends to know how much safety stock to keep and when to reorder which products, where to warehouse them, and when to place the replenishment orders. Unless it is a very small business that stores all of its inventory in stock, then inventory management requires complex formulas, more than you can accomplish with a basic spreadsheet.

Inventory Forecasting Explained

Businesses should base their decisions about stock levels and purchasing on computer models that measure trends in the markets in which these businesses operate. Many variables can affect the demand for the products your company sells, as well as how long it takes your retail company to convey the products to the customer. In some areas of the country, changes in weather can even affect how soon you need to reorder certain items from your inventory. The seasonality of products is also a factor; no amount of advertising will make customers order as many mittens in the summer as they do in the winter.

How Does Inventory Forecasting Work?

Businesses base their forecasts and predictions about how much stock to order and when to order it on previous sales data. Depending on the seasonality of their items and the capacity of their warehouses, they determine the number of materials and the number of units of each item to keep in stock. The aspect of inventory forecasting that deals with customer demand is called demand forecasting.

Benefits of Inventory Forecasting

Effective inventory forecasting enables you to determine reorder points and decide on the amount of safety stock you should keep in your warehouses. Avoiding stock outs is just one of the benefits of inventory forecasting. It also enables you to know when to send purchase orders to each supplier. This way, the suppliers can deliver merchandise to your warehouse on time.  You should account for the production time of each item when deciding when to reorder.

Inventory Forecasting vs. Replenishment

Replenishment is just one aspect of inventory forecasting. If you only focus on when to reorder things for your warehouse, your company’s profit margins will suffer as a result. You must take multiple steps to determine what inventory you need and where and when you need it. Using a detailed analysis of market forces for inventory forecasting will help your company maintain its cash flow. It will also reduce the risk of stockouts or having to discard unsold, expired merchandise. Customer demand plays a role, but so do promotions and discounts your company offers. Other factors are less predictable, such as force majeure events like natural disasters and labor strikes. Social media fads can also have a sudden and unexpected effect on the demand for your products.

What Are the Types of Inventory Forecasting?

The four types of inventory forecasting are trend forecasting, graphical forecasting, qualitative forecasting, and quantitative forecasting. To get an idea of which inventory forecasting model is right for you, you should consider how often and how predictably patterns in the demand for your products change. Likewise, different inventory models are appropriate for businesses of different sizes.

How Do You Calculate Inventory Forecasting

You can use a variety of formulas to calculate inventory forecasting. In the simplest cases, you can use a basic spreadsheet and have your employees enter sales data, shipping data, and reorder data into the spreadsheet manually. This only works for small businesses where inventory forecasting only requires simple calculations. Big businesses will need complex computer models and inventory forecasting software to crunch the numbers.

How to Choose the Right Inventory Forecasting Model

It might take some trial and error to choose the best inventory forecasting model for your company. Relying on computer-based data analysis from the beginning will make the task simpler and more streamlined, though. When software analyzes large bodies of data at one time, you can more quickly see where the problems in your supply chain management lie. If you choose qualitative forecasting, which relies on focus groups, you might need to increase the sample size in order to get a more accurate picture of how efficiently your products reach your customer base.

What Model is Right for You?

If you operate a small eCommerce business, then you can simply install an inventory forecasting app on your office computers and start making inventory forecasting spreadsheets whenever there is a pause in the action. If the company is big enough that you must store some inventory at a warehouse offsite, however, then you will probably need a more data-driven approach to inventory forecasting. You may even need to hire a market research group to conduct focus group studies.

Inventory Forecasting Examples

One of the four models of inventory forecasting is the graphical model. In this model, humans or computers compile data in the form of spreadsheets, and then the inventory forecasting software represents it in the form of a graph. It is easier to make decisions about replenishment when you see the sloping lines on the graphs, representing historical sales data and future projections about the demand for your products.

Best Practices for Inventory Forecasting

If you are engaging in any kind of inventory forecasting, you are on the right track. The worst thing you can do is play it by ear or make arbitrary or impulsive decisions about reordering stock for your warehouses. You should visit your inventory forecasting strategy periodically to see if you can adjust the formulas so that you can make more accurate sales predictions. This may mean using features of your inventory forecasting software that you have not previously used.

Automated Inventory Forecasting

Inventory forecasting was much more difficult in the days before computers. Inventory forecasting software, in its current form, can handle large volumes of data, interpret it from various perspectives, and make accurate predictions about sales trends. The developers of these software programs frequently issue updates, so inventory forecasting software is only becoming more sophisticated.

Key Takeaways

Your e-commerce business, no matter how big or how small, needs inventory forecasting.  It is the best way to protect your company from costly problems like stockouts, large volumes of unsold merchandise, or having to pay for more warehouse space than you need. The most efficient way to conduct the inventory forecasting process is with inventory forecasting software.

Inventory Forecasting FAQs

Embarking on an inventory forecasting strategy requires some assessment of market conditions and the needs of your company and its customers. These are some frequently asked questions about demand forecasting and inventory forecasting software:

How Do You Prepare an Inventory Forecast?

The best way to prepare for an inventory forecast is to compile sales data from previous quarters or, if possible, from previous years. If you have inventory forecasting software, have it represent the data in the form of a graph.

What Are the Types of Inventory Forecasting?

The four types of inventory forecasting are trend forecasting, graphical forecasting, qualitative forecasting, and quantitative forecasting. For best results, your company should use more than one type of forecasting.

What Is the Process of Forecasting?

The inventory forecasting process involves compiling historical data and analyzing it. Based on this analysis, your inventory forecasting software can help you make decisions about replenishment and other inventory-related matters.

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