Inventory Forecasting : Unearth Secrets of Success for Improving Performance of Inventory Management in Your Industry!

Abstract

Inventory forecasting is a method used to predict inventory levels for a future time period. It also helps keep track of sales and demand so you can better manage your purchase orders. It is a great inventory management tool that can increase your company's revenue and decrease unnecessary costs.

Inventory forecasting gives you the information you need to manage your supply chain and have the stock your customers want when they want it. Creating accurate forecasts and updating them regularly becomes an essential aspect of operational management as your business grows.

An accurate inventory forecast is invaluable, especially in times when supply chains and consumer demand are changing rapidly. Getting forecasts right requires a mix of data analysis, experience in the industry and customer insights to metaphorically peer into the crystal ball and predict future demand.

Essential data elements required for accurate inventory forecasting include the following:

• Current inventory levels
• Outstanding purchase orders
• Historical trendlines
• Forecasting period requirements
• Expected demand and seasonality
• Maximum possible stock levels
• Sales trends and velocity
• Customer response to specific products

Keywords

Forecasting, Sales Trends, Customer Response, Stock Levels, Expected Demand, Inventory Levels

Learning Outcomes 

After undergoing this article you will be able to understand the following

1. What Is exactly Inventory Forecasting?

2. Why Inventory Forecasting is essential?

3. What's the factors of inventory forecasting?

4. How many types are there for inventory forecasting?

5. What's the methods of inventory forecasting?

6. What's the advantages of inventory forecasting?

7. What's the disadvantages of inventory forecasting?

8. Which method of inventory forecasting is better ?

9. Conclusions

10. FAQs

References

1. What Is exactly Inventory Forecasting?

Inventory forecasting is everything to direct-to-consumer businesses. But 7 common forecasting mistakes leave many DTC brands with under- or overstocked.

If there’s one thing retail brands want to know, it’s what will happen in the future – especially regarding their business. That’s where inventory forecasting comes in.

Inventory forecasting attempts predict:

• Whether customers will want your new products
• How many items will sell in a particular month
• What products should you stock up on
• If you ordered enough inventory
• How much inventory risk can your brand take on

With these answers in hand, retailers can theoretically prepare for future sales and control the environment their brand operates within. But not every retailer gets their forecasts right.

2. Why Inventory Forecasting is essential?

The goal for best-in-class retail brands is operational excellence. But establishing operational excellence depends on maintaining optimal inventory levels with the help of precise inventory forecasting. Doing so can minimize stocks, reduce holding costs, and increase customer satisfaction.

Minimize stockouts

When items go out of stock, not only do retailers miss out on sales opportunities, but it puts customer retention at risk when these folks seek the same products elsewhere.

To compensate for stockouts, most brands order more than they need. However, all of these endeavors tie up capital. And if not informed by a reliable inventory forecast, they can lead to cash flow problems down the line.

There are, of course, measures to alleviate the challenges that come with stockouts, like selling on backorder.

Anticipate trends

Brands are in uncharted territory when it comes to predicting what demand will look like next year.

Between a fluctuating market, quick-shifting consumer interest, and evolving DTC trends, anticipating trends is the differentiator between the Nikes and the Pelotons of the world.

Sure, Peloton was on top of the consumer world for part of the pandemic. But it didn’t last. 

Reduce holding costs

Inventory holding costs are anything you spend to store and protect unsold stock. The longer you hold onto inventory, the higher your carrying costs and, consequently, the lower your profit margins.

Luckily, brands can avoid unnecessary holding costs (and increase their profit margins) by ordering just enough inventory at just the right time. Nothing more, nothing less.

Reduce product waste

No retailer wants to waste resources on inventory that won’t ever sell (or don’t sell at a profit). Yes, we’re talking about dead stock.

Increase customer satisfaction

Which category you fall into (those that exceed customer expectations and those that don’t) depends largely on your CX philosophy.

Accurate inventory forecasting is just one way modern retailers do that.

That’s because when all your products are adequately stocked, customers can order the products they want, when they want them, and receive them quickly. 

3. What's the factors of inventory forecasting?

Factors Affecting Demand Forecasting

The Following factors influence demand forecasting. 

Let’s learn:

1. Economic Conditions:

Economic conditions such as GDP, unemployment rate, inflation rate, and consumer confidence are key factors that affect the level of demand for products or services.

2. Competition:

The level of competition in a market can influence the demand for a product or service. There may be less demand for a good or service if there is greater competition.

3. Consumer Trends:

Consumer trends can have a major impact on the demand for a product or service. If consumers are gravitating towards certain products or services, it can have an effect on the demand for other products or services.

4. Price:

Price is a major factor affecting demand. The demand for a good or service may decline if its price rises.

5. Availability:

Demand may also be impacted by a product or service's availability. The demand for a good or service may rise if it is unavailable or in short supply.

6. Advertising:

Advertising can also have a major impact on demand. A product or service's demand may rise if it receives extensive advertising.

From the above factors  summarily, we find that Inventory forecasting uses factors such as 

sales history and trends, average lead time, demand, 

, and 

 to predict inventory levels.

4. How many types are there for inventory forecasting?

Types of inventory forecasting

Let us have a look at the types of inventory forecasting:

1. Trend forecasting 

The method to determine possible sales trends in the future by using past sales and market growth data. It indicates bigger picture changes and broader shifts in customers’ purchase behavior.

2. Graphical forecasting 

This type of inventory forecasting helps visualize data to identify patterns and generate trend lines, find discrepancies, compare variables, and more. You can add slopped trend lines to identify possible insights that don’t have a visual representation. 

3. Qualitative forecasting 

This method focuses on market research, focus groups, economic demand, environmental change, and other macro-level factors such as pandemics, inflation, etc. Inventory planners run this forecast method repeatedly using sales feedback and panel consensus. 

4. Quantitative forecasting 

Annual sales reports and patterns can help you forecast future sales of products. If the product has been in the market for a long time, it will lead to better datasets and sound analysis. 

Quantitative forecasting is the best method to predict the demand levels for a product with substantial sales history, as it can be a key indicator of seasonal patterns. 

5. What's the methods of inventory forecasting?

Inventory forecasting methods can be broadly categorized into four types. 

The following are four inventory forecasting techniques :

Quantitative forecasting: Reviewing historical data to predict future inventory needs.

Qualitative forecasting: 

Using non-measurable information to project future demand.

Trend forecasting: 

Analyzing past trends and patterns to inform future strategy and demand planning.

Graphical forecasting: Turning numerical data into graphical formats for easier reading and interpretation.

In another way of terming four of the main forecast methodologies are: 

the straight-line method, 

using moving averages, 

simple linear regression and multiple linear regression. 

Both the straight-line and moving average methods assume the company's historical results will generally be consistent with future results.

6. What's the advantages of inventory forecasting?

Demand forecasting can enable companies to make well-informed, data-driven decisions and help reduce costs to improve their overall performance. Here are some major benefits of demand forecasting.

1. Optimal Inventory ManagementInventory management is critical for any business that wants to maximize its profits and minimize its waste. The accuracy of demand forecasting helps in successful stock optimization as it helps accurately determine the amount of materials required to fulfill the customers’ expectations. 
2. Better Production Planning Businesses with accurate data analysis can make informed decisions about production schedules by analyzing past sales data, upcoming trends in the market, and other relevant factors. By forecasting the demand accurately, organizations can schedule production cycles and allocate resources accordingly, reducing the risk of stockouts or excess manufacturing. 
3. Improved Resource AllocationDemand forecasting can help planners allocate resources more effectively, including personnel, equipment, and raw materials. 
4. Enhanced Sustainability One of the prominent benefits of demand forecasting is enhanced economic as well as environmental sustainability. 
5. Improved Sales and Revenue Forecasting demand can have a big impact on sales and revenue. Businesses may make educated decisions on production, inventory management, pricing, and marketing tactics by accurately anticipating how much customers want their products or services. 
6. Better Pricing Strategies Demand forecasting is important in pricing strategy since it gives critical information about consumer buying behavior, market trends, and sales potential. 
7. Increased Supply Chain Efficiency Accurate demand prediction helps planners plan every operation of the supply chains while focusing on the possible customer orders. 
8. Risk Management Demand forecasting is an important risk management strategy because it enables firms to predict and plan for variations in consumer requests. 
9. Competitive AdvantageAccurate prediction of demand enables businesses to ensure that they have enough stocks to fulfill those orders and never have to face stockouts. This helps them in enhancing the level of customer satisfaction. This creates trust and gives them added leverage over their competitors, allowing them to outperform their competition.
10. Improved Customer Satisfaction When businesses can give their customers the best quality products in the right quantity at the right time and place. It can help increase buyer loyalty and retention and attract new consumers through positive word-of-mouth recommendations.

Inventory forecasting ensures manufacturers have the proper inventory to meet customers' needs while minimizing excess inventory costs. It involves analyzing historical sales data and identifying patterns and trends to adapt to changing market conditions to meet customer demands.

7. What's the disadvantages of inventory forecasting?

Poor forecasting could lead to bad inventory, which may damage your organization's finances in multiple ways. You'll spend more on acquiring a bigger storage space and more employees to manage the extra stock. 

The products also need regular care or maintenance, and this means more expenses.

1. Unpredictable EventsThe accuracy of prediction can be greatly impacted by unexpected events, which include natural disasters, economic slowdowns, or any sudden change in consumer buying behavior. 
2. Limited Historical DataThe base of any forecast is data, and more data corresponds to higher accuracy. Predicting order requires a lot of high-quality info from different sources such as past year sales, marketing, and finances. 
3. Changes in Consumer Behavior Consumers are bombarded with new solutions, products, and services every day. This Impacts their buying behavior quickly, making the past demand forecast invalid and inaccurate.
4. Lack of Data on New Products Whenever a company launches a new product in the market, it is extremely difficult for analysts to forecast their demand. As the offerings are new in the market, there is limited data available from past sales. 
5. Model Limitations Forecasting models have several limitations, such as lack of accuracy, external factors, time consumption, limited scope, and assumption based. They should be regularly reviewed and updated to ensure that it is precise.
6. Human ErrorOne of the demand forecasting constraints is the lack of expertise in data analysis, data science, market research, and statistical analytics. If the people involved in the process do not have that expertise, it increases the possibility of human error impacting the accuracy of the forecast.
7. Data Inaccuracy The demand forecast is as accurate as the data used for analytics. 
8. SeasonalitySeasonality is cyclic fluctuations in demand because of different variables such as weather patterns, holidays, or cultural events. Seasonality can make forecasting more difficult, as historical data may not represent future patterns.
9. Market CompetitionWhen there is fierce competition in the market, many competitors offer more alternatives. 
10. Geopolitical and Economic Factors Geopolitical and economic changes can have various impacts on forecasting, including changes in trade policies, political instability, natural disasters, climate change, energy policies, and diplomatic relations. 

8. Which method of inventory forecasting is better ?

All methods of inventory forecasting are important but Graphical forecasting is more suitable due to the following

1. With an intuitive name, graphical forecasting helps visualize data to identify patterns that may have gone unnoticed as plain text. 

2. It can be used on any of the data sets above to generate trend lines

3. It is useful in finding discrepancies

4. The quick comparing of  variables are possible .

5. Many other advantages such as easy to understand, interpretation and retrieval of the records. 

9. Conclusions

Experts recommend using more than two years’ worth of historical sales and not trying to predict too far into the future. The longer the time horizon, the less accuracy you can achieve. All the sources of data you plan to use should be validated to ensure the most reliable predictions. Then you can incorporate various inventory forecasting methods.

10. FAQs

Q. What's to include in inventory forecasting

Ans.: 

The things to look at in your forecasting include:

• Overall market and industry trends.
• Last year’s seasonal, monthly and weekly sales performance.
• Economic conditions.
• Your current and expected yearly growth rate.
• Subscriptions, presales and contracted jobs that indicate inventory you know will be needed.
• Your upcoming promotions and planned marketing spend.

Q. How Reduce Overstocks can be taken care?

Ans :

You can also predict when demand will fall, letting you know you should reorder fewer products or less often. Overstocks can be just as costly because they take up valuable warehouse real estate that could go to in-demand items. Businesses often sell overstocked goods at a lower value, which creates more costs for the companies.

References

Materials and Logistics Management by L. C. Jhamb

Handbook Of Materials Management by Gopalkrishnan

Introduction To Materials Management reference book by Tony Arnold

Materials & Logistics Management reference book By Dr. Kasande

Materials Management: Procedures, Text & Cases by A. K. Datta

Purchasing & Materials Management by Gopalakrishnan

Materials and Logistics Management reference book by Saroj Kumar