Updated: Jun 23
As a business owner, you try to fulfill every order/demand to the best of your capabilities, to not lose out on important customer sales.
21% to 43% of customers will shop elsewhere when faced with a stockout.
If you’re out-of-stock, you are not only losing out on the potential sales, but you are driving business to your competitors and negatively impacting your brand image.
So, to avoid stock outs, you predict demand based on rough estimations of the trend you see or the historical sales, and you place a large order so that you are sufficiently stocked.
While this might seem like the obvious solution, it can, as you might have already witnessed, leave you with more inventory than you were able to sell and drive additional costs that you did not expect to spend. This can halt growth and put a dent in your bottom line.
72% of stock-outs result from inefficient ordering and replenishment and Inefficient replenishment process is almost always a result of a lack of or inaccurate inventory forecasting.
WHAT IS INVENTORY FORECASTING?
Inventory Forecasting is making an informed prediction of your future demand and calculating the inventory needed to fulfill demand over a period of time.
There are many factors that affect demand and therefore the quantity of inventory you need to order/manufacture. Inventory Forecasts are usually calculated by simply taking the historical sales into account, but this is not efficient.
An accurate inventory forecast takes into account all factors that affect demand such as seasonality, historical sales, trends, lead times, stock levels, market volatility, promotions etc. and constantly adjusts to any changes.
For efficient Inventory Planning, a forecast that goes into granular levels like estimating demand for product-sku level, or warehouse level and also for particular channels is essential.
BENEFITS OF ACCURATE INVENTORY FORECASTING
Global organizations spend millions of dollars in Inventory Planning teams and Inventory Management Softwares to balance inventory levels across their supply chain using various forecasting techniques and technology.
The goal of inventory planning and inventory management software is to ultimately ensure you are sufficiently stocked with optimized inventory levels across the supply chain. The foundation of a good inventory planning system is accurate Inventory Forecasting.
Accurate Inventory Forecasting is essential to grow your business in the hyper competitive and volatile market. Some of the benefits are:
- Improve Working Capital utilization and Increase cash flow
There are simple ways to get started with Inventory Forecasting and Planning without spending time and resources on an army of planners.
GETTING STARTED WITH INVENTORY FORECASTING
There are many factors that affect demand and predicting demand requires an understanding of these factors.
A basic quantitative inventory forecast uses historical sales data to anticipate future sales. To get started on this, you need to:
1. Decide on Forecast Period
Set a forecast period depending on your production cycle, your inventory turnover rate or your sell through rate. This period is the amount of time you will predict demand for. It can be annual, 90 days, or 30 days and should be adjusted to changing market trends and other conditions.
2. Set Base Demand
Take the demand of the product you want to predict demand for over a chosen period of time based on your forecast period. For example, if you want to predict for a product and you decide the forecast period to be 3 months, then the base demand will be how much that particular product sold over the last 3 months.
3. Consider Seasonality and trends
If your product has predictable patterns of demand trends over recurring seasonal events, taking this demand into consideration will yield you a much more accurate inventory forecast.
4. Monitor Stock Levels and Sales Velocity
Gauge your maximum stock level and your current stock levels.
The base demand for a SKU over the chosen forecast period might not give a full picture intro the actual demand as there could have been out-of-stock situations, where demand was not fulfilled.
The sales velocity formula for 30 days would be: (Yearly Sales/ No of Days in Stock)x 30 Sales velocity indicates the sales volume of SKU if it was continuously in stock for a 30 day period.
Getting a good understanding of the above mentioned factors and taking it into account for manually calculating inventory forecasts is a starting point.
BEST PRACTICES FOR SMARTER INVENTORY FORECASTING
The ultimate goal of inventory forecasting is to balance stock levels in an efficient manner to maximize profitability, growth and minimize costs. This requires a much more accurate, dynamic planning process. With technologies like AI and ML, companies can leverage Inventory Planning and Forecasting capabilities of the biggest global organizations, with very little resources spent.
Demand can be volatile, and relying on historical sales performance is not enough to accurately predict demand. As we’ve established, there are many factors constantly affecting demand, like Lead Times, Seasonality, Trends, logistical disruptions, Promotions, Competitor activity etc. Constantly monitoring all these factors, and planning inventory is inefficient.
Even after taking these inputs, predicting future demand for inventory can be affected by human bias, lack of visibility, and lack of agile adjustment of demand.
Here are some best practices essential to set up a dynamic, accurate inventory forecasting process that keeps up with ever changing demand.
Collect, compile and prepare Data
Your past sales, POS data, product attributes and all the other inventory data is the backbone of your inventory forecasting process and will guide the decisions you make regarding ordering inventory. Collecting and categorizing this Data is essential for future decision making.
Data can also have multiple irregularities, be incomplete, collected at multiple sources. Automated Data Preparation will not only save you time in collating and compiling the data, but will help you refine your historic data so that you are able to generate the best results out of your sales history.
Crest's Automated Data Preparation comes with feature engineering tools, from which qualitative insights can be extracted from your data such as Trends, Seasonality , Moving Average and many more. You can easily integrate with your OMS/ERP platform such as Shopify and Unicommerce and start automating your data preparation.
Inventory Forecasting is only beneficial when you can use the forecasts to plan replenishment of stocks. Your replenishment strategy can even determine how much you spend on fulfilling your orders and drastically bring down costs.
The ultimate goal of a good replenishment strategy should be to meet demand at all times without bleeding money by overstocking.
Replenishment can be quite tricky to accomplish manually, so an automated replenishment tool like Crest constantly monitors current stock levels, demand, and other variables to give insights on what to order, when to order and how much to order at the most granular level for every channel, so that you can proactively take decisions to accurately stock inventory, not lose out on any opportunities and make your replenishment planning quicker and more efficient.
Automated Inventory Forecasting
As we've seen, there are a number of factors affecting demand, and it can become a time consuming, complex task filled with error.
To take the manual processes, guesswork and human error out of the equation, a smarter, efficient way would be to adopt Automated Inventory Forecasting
Without any manual intervention, Crest dynamically predicts demand for all your inventory across any channel, taking into account real time market signals, trends, seasonality and stock availability to ensure you are always sufficiently stocked for any market volatility.
With a few simple clicks, you can automate your inventory forecasting and planning process and stay ahead of any market volatility, disruptions or trends.