Key Factors To Consider for inventory forecasting

Jan 6

No matter what kind of retail store you own or how you operate your online store, inventory forecasting can help you:

Ensure customer orders are met on time.
Take advantage of resources - storage space, staff, and budget - to their fullest extent.
A rise in product demand is always to be expected.
Meet your financial goals consistently and predictably.

It's easy to understand why inventory management and forecasting is significant. You may lose out on potential sales if you don't maintain sufficient inventory levels. If your inventory is overstocked, you will be strapped for cash, which will negatively impact your liquidity. In order to efficiently manage cash flow, inventory levels must be optimized and cash flow levels managed. A forecasting process helps to accomplish this.

As part of this blog post, we will explain what inventory forecasting is and why it is essential in regard to fulfilling e-commerce orders. And how inventory management software like Inventooly can solve all of your forecasting problems.

What is inventory forecasting?

Inventory forecasts help maintain stocks so that customer orders can be filled. One way to estimate this is to calculate the number of products that will be sold in a given period. In addition to considering future promotional campaigns and external factors, managers estimate optimal inventory levels based on historical sales data.

Inventory forecasting offers several benefits for e-commerce businesses:

Stocks must be kept at a minimum. You won't make any money by storing large volumes of goods in warehousing facilities. You can maximize your cash flow and re-invest more capital in your business (such as marketing) by estimating how much inventory you will require over a defined period of time.

Stocks are less likely to run out. Since you can complete customer orders as soon as they are received, inventory forecasting means you never have to worry about running out of stock. With this method, you can effectively minimize lead times.

Automation instead of manual labor. Hiring workers and acquiring storage space can be minimized with inventory forecasting.

What's the reason? As a result, you will be able to predict demand more accurately and to adapt to it more quickly. By automating the reordering process, you can predict labor requirements better.

More efficient product cycles. Managing inventory in the supply chain is easier when you have accurate inventory forecasts. You can improve productivity and gain a better understanding of product cycles by knowing the lead times. And also receiving schedules of your warehouse and knowing how many items you will need for new purchase orders.

Factors affecting inventory forecasting

Effective inventory forecasting requires a lot of work. Maintaining a constant awareness of trends, determining when to reorder products, and a host of other things are critical. As we dive deeper into the different aspects of forecasting inventory, we will cover more details.

It is important to select a forecasting period

You calculate inventory levels over forecast periods to determine what you would need to order. Depending on how quickly your inventory is changed over and how long your manufacturer or supplier's production cycle lasts, you should determine your inventory retention period.

You'll be able to replenish new inventory more frequently if you sell out more of your inventory quickly. E-commerce companies selling apparel might have a shorter forecast period than companies selling furniture.

Examine seasonal trends and purchasing patterns

Seasonal trends refer to the increase or decrease of product demand over a specific timeframe. Sales of sports gear may increase in the summer months for a business selling sports equipment. As the season winds down, the business can then decrease its inventory levels and increase them again as the summer season approaches.

Establish your reorder point

With each order completed, your inventory levels start to decline. Restocking will be necessary when they reach a certain threshold. Reorder point indicates the number you send to the manufacturer when you reorder something.

An indicator that you'll soon run out of stock isn't a "red alert" but rather acts as an indicator that takes several factors into account. Specifically, it is determined by the following formula:

Your warehouse's lead time for receiving stock from the manufacturer.
Turnaround time for receiving stock at your warehouse or fulfillment center.
Safety stock days are the number of days that the manufacturer has in case of a sudden increase in order demands.

Lead time and safety stock should be calculated

When you place a purchase order and then receive the stock, you're taking a lead time. Make sure this lead time is long enough to allow for adequate supply. This is the amount of inventory you anticipate will sell before a purchase order arrives, i.e., the volume of sales during a purchase order's lead time.

You can calculate your lead time demand using the following formula:

Lead Time Demand = Lead Time x Predicted Number of Sales on a daily basis

Keeping safety stock with your business prevents out-of-stocks before restocking is possible. You could potentially lose customers if your inventory is low, and you are unable to fulfill their orders.

Best practices for inventory forecasting

For a proactive approach to inventory management, keep these forecasting best practices in mind.

Engage key stakeholders

Different departments contribute to inventory forecasting. As part of your inventory planning process, the marketing, operations, product development, and finance teams should all provide suggestions. To forecast inventory levels accurately, departments will provide different inputs that can be combined.

Making notes will help you plan better in the future

Inventory levels can be managed more effectively by monitoring order volume. Other factors and events that may lead to order demand changes need to be considered as well. A new marketing campaign, upcoming holidays, or another event can cause a change to the production cycle or cause a decrease in sales.

The demand forecasting process should avoid taking into account unpredictable events (such as a sudden surge intent demand after a natural disaster). This type of activity is unlikely to repeat, so you shouldn't include it in your forecast.

Incorporate inventory management software like Inventooly

It may seem difficult to restock inventory in a timely fashion. Investing in inventory management software for your business is a good way to overcome this problem. Bringing all your data from different sales channels onto one platform is the best place to start.

To make sure your software is able to handle the size, processes, and types of products your business sells, you should look at the features it has. If you are looking for inventory management software for your E-commerce store, please check out Inventooly.

Conclusion

In order to manage inventories effectively, one must pay attention to numerous factors that can potentially affect sales. You will be able to better manage your inventory if you carefully plan and learn different forecasting techniques to enable you to avoid running out of stock or overstocking. This article provides a comprehensive overview of inventory forecasting, its definition, best practices and key factors. If you need any further help, check us out at Inventooly.